Silver Miners’ Q3’16 Fundamentals

Silver Miners’ Q3’16 Fundamentals

The silver miners recently finished reporting their third-quarter results, offering a hard fundamental look into this sector. This reality check is valuable given the fierce winds of bearish sentiment buffeting silver stocks in recent months. Despite their huge correction, the elite silver miners’ fundamentals remain strong. They are producing at costs far below prevailing silver levels, with profits poised to soar as silver recovers.

Silver mining is a tough business both geologically and economically. Primary silver deposits, those with enough silver to generate over half their revenueswhen mined, are quite rare. Most of the world’s silver ore formed alongside base metals or gold, and their value usually well outweighs silver’s. According to the venerable Silver Institute, only 30% of 2015’s global mined supply came from primary silver mines!

Well over 2/3rds of the 886.7m ounces mined last year was simply a byproduct of base-metals and gold mining. And as scarce as silver-heavy deposits supporting primary silver mines are, primary silver miners are even rarer. Since silver is so much less valuable than gold, most silver miners need multiple mines. And these often include non-primary-silver ones, usually gold, to bolster the lower silver-mining cash flows.

So the universe of major silver miners is pretty small. The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. SIL dominates the silver-stock-ETF space, with net assets running 4.8x its next-largest competitor’s. Since ETF investing is becoming the new norm, inclusion in SIL is a major boon for silver-mining companies.

While there aren’t a ton of silver miners to pick from, major-ETF inclusion shows silver stocks have been vetted by elite analysts. It also ensures fund capital flowing into leading silver-stock ETFs benefits their components. The ETF managers shunt excess differential buying pressure on their shares directly into the underlying component silver miners held by these ETFs, bidding their individual stock prices higher.

As of mid-November when silver miners finished reporting their Q3 results, SIL included 24 major “silver miners”. This term is used somewhat loosely, as SIL includes plenty of companies that simply can’t be described as primary silver miners. Most generate well under half their revenues from silver, greatly limiting their stocks’ upside to silver-price increases. One is even a gold miner that doesn’t report any silver production!

I’ve been a silver-stock investor and speculator for decades, and my biggest reservation about SIL is its heavy weighting of metals other than silver. When traders buy a “Silver Miners ETF” which is what SIL advertises itself as, they expect to get silver miners with natural upside leverage to silver gains. While pure silver miners are nonexistent due to the geology and economics of silver mining, SIL could do better.

The greater the percentage of revenues any miner derives from silver, naturally the higher its silver-price exposure. If a company only earns 20%, 30%, or even 40% of its sales from silver mining, it’s definitely not a primary silver miner. Technically that designation should just apply to miners deriving at least half of their revenues from silver production. SIL’s managers could build a far-superior ETF if they stuck to that rule.

This leading silver-stock ETF has long been dominated by primary gold miners and even worse mining conglomerates. Because these non-primary-silver miners generate only relatively-minor fractions of their sales from silver, their stock prices aren’t very responsive to silver-price moves. SIL shareholders would be far better served by replacing these inappropriate components with smaller primary silver miners.

Nevertheless SIL is what we’ve got, so I’ve spent recent weeks digging into the Q3’16 10-Q reports filed by this ETF’s top 17 components. That number was chosen because that many stocks fit neatly into the table below. But as these silver miners command fully 95.5% of SIL’s weighting, they are essentially all that matters. Every quarter I collect a bunch of key data for each, and feed it into a spreadsheet for analysis.

Some of that data made it into the following table. If a field is blank, the company didn’t report that data for Q3. SIL includes foreign miners trading in Mexico and the UK, where publicly-traded companies are only required to report in half-year increments instead of quarterly. So they generally don’t release any detailed financial information for Q1s and Q3s. They do tend to report on production though, which is helpful.

The first couple columns show each SIL component’s symbol and weighting in SIL as of the middle of November when Q3 reporting finished. If you can’t find a symbol here in the States, it is a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q3 silver production, along with its quarter-on-quarter change from Q2. That’s probably more relevant than year-over-year today.

With a major new silver bull market underway in 2016, this year has proved radically different for silver miners than last year which was mired deep in a bear market. Thus traditional YoY comparisons are so distorted that sequential QoQ ones make more sense today. Bull years don’t compare well with bear years and vice versa. Once silver’s young bull is a couple years old, then we can switch back to YoY analysis.

Q3’16 silver production is followed by gold production. Every single top silver miner included in SIL also produces significant if not large amounts of gold! While gold stabilizes silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. Silver-stock investors and speculators need to know how pure silver miners really are. So I included another column showing each SIL component’s percentage of silver.

This is mostly calculated by taking a company’s Q3 silver production, multiplying it by the average silver price in Q3, and dividing that number by the company’s total quarterly sales. In a couple cases where miners didn’t report Q3 revenues, I approximated them by adding the silver sales to gold sales based on quarterly production and Q3’s average gold price. Either way, it reveals how focused on silver these companies are.

That’s followed by cash costs and all-in sustaining costs per ounce of silver produced. They reveal just how profitable silver miners are and how easily they can weather silver corrections. Finally operating cash flows generated in Q3 are shown, which are the best proxy for how silver miners are currently faring. Some of the elite silver miners included in SIL enjoyed amazing quarterly gains in operating profitability.

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