Silver Miners’ Q4’17 Fundamentals

Silver Miners’ Q4’17 Fundamentals by Adam Hamilton – Zeal, LLC

The silver miners’ stocks have really languished since mid-2016, relentlessly grinding sideways to lower.  With gold out of favor, silver and its miners have largely been left for dead and forgotten.  This sector is deeply mired in universal apathy and bearishness.  But since silver stocks can skyrocket when silver decisively rallies again, it’s important to keep an eye on silver miners’ fundamentals like their recent Q4’17 results.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports.  Required by securities regulators, these quarterly results are exceedingly important for investors and speculators.  They dispel all the sentimental distortions surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities.  They serve to re-anchor perceptions.

Normally quarterlies are due 45 calendar days after quarter-ends, in the form of 10-Qs required by the SEC for American companies.  But after the final quarter of fiscal years, which are calendar years for most silver miners, that deadline extends out up to 90 days depending on company size.  The 10-K annual reports required once a year are bigger, more complex, and need fully-audited numbers unlike 10-Qs.

So it takes companies more time to prepare full-year financials and then get them audited by CPAs right in the heart of their busy season.  The additional delay in releasing Q4 results is certainly frustrating, as that data is getting stale approaching the end of Q1.  While most silver miners report their Q4 and/or full-year results by 7 to 9 weeks after year-ends, some disrespect their investors by pushing that 13-week limit.

And some silver miners only publish full-year results without breaking out Q4, masking what happened in the latest quarter.  All this unfortunately makes Q4 results the hardest to analyze out of all quarterlies.  But delving into them is still well worth the challenge.  Quarterly results offer a very valuable true snapshot of what’s really going on, shattering all the misconceptions bred by the ever-shifting winds of sentiment.

Silver mining is a tough business both geologically and economically.  Primary silver deposits, those with enough silver to generate over half their revenues when 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.  So typically in any given year, less than a third of the global mined silver supply actually comes from primary silver mines!

The world authority on silver supply-and-demand fundamentals is the Silver Institute.  Back in mid-May it released its latest annual World Silver Survey, which covered 2016.  That year only 30% of silver mined came from primary silver mines, a slight increase.  The remaining 70% of silver produced was simply a byproduct.  35% of the total mined supply came from lead/zinc mines, 23% from copper, and 12% from gold.

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 in order to generate sufficient cash flows.  These often include non-primary-silver ones, usually gold.  More and more traditional elite silver miners are aggressively bolstering their gold production, often at silver’s expense.

So the universe of major silver miners is pretty small, and their purity is shrinking.  The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF.  This week its net assets are running 6.8x greater than its next-largest competitor’s, so SIL really dominates this space.  As investors buy SIL, it in turn buys shares in the companies it holds.

 

Back in mid-March as the major silver miners were finishing reporting their Q4’17 results, SIL included 25 “silver miners”.  This term is used loosely, as SIL holds plenty of companies which can’t be described as primary silver miners.  Most generate well under half their revenues from silver, which really limits their stock prices’ leverage to silver rallies.  Nevertheless, SIL is today’s leading silver-stock ETF and benchmark.

The higher the percentage of sales any miner derives from silver, naturally the greater its exposure to silver-price moves.  If a company only earns 20%, 30%, or even 40% of its revenues from silver, it’s not a primary silver miner and its stock price won’t be very responsive to silver itself.  But as silver miners are increasingly actively diversifying into gold, there aren’t enough big primary silver miners left to build an ETF alone.

Every quarter I dig into the latest results from the major silver miners of SIL to get a better understanding of how they and this industry are faring fundamentally.  I feed a bunch of data into a big spreadsheet, some of which made it into the table below.  It includes key data for the top 17 SIL component companies, an arbitrary number that fits in this table.  That’s a commanding sample at 94.6% of SIL’s total weighting.

While most of these top-17 SIL components had reported on Q4’17 by late March, not all had.  Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments.  If a field is left blank in this table, it means that data wasn’t available by the end of Q4’s earnings season.  Some of SIL’s components also report in gold-centric terms, excluding silver-specific data.

In this table the first couple columns show each SIL component’s symbol and weighting within this ETF as of mid-March.  While most of these silver stocks trade in the States, not all of them do.  So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange.  That’s followed by each company’s Q4’17 silver production in ounces, along with its absolute year-over-year change.

After that comes this same quarter’s gold production.  Pretty much every major silver miner in SIL also produces significant-if-not-large amounts of gold!  While gold stabilizes and augments the silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself.  Naturally investors and speculators buy silver stocks and their ETFs because they want leveraged upside exposure to silver’s price, not gold’s.

So the next column reveals how pure the elite SIL silver miners are.  This is mostly calculated by taking a company’s Q4 silver production, multiplying it by Q4’s average silver price, and then dividing that by the company’s total quarterly sales.  If miners didn’t report Q4 revenues, I approximated them by adding the silver sales to gold sales based on their quarterly production and these metals’ average fourth-quarter prices.

Then comes the most-important fundamental data for silver miners, cash costs and all-in sustaining costs per ounce mined.  The latter determines their profitability and hence ultimately stock prices.  Those are also followed by YoY changes.  Finally comes the YoY changes in cash flows generated from operations and GAAP profits.  But there are a couple exceptions where YoY changes just wouldn’t yield useful results.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers.  So in those cases I included raw underlying results instead of weird or misleading percentage changes.  This whole dataset offers a great high-level read on how the major silver miners are faring today as an industry.  They’re doing pretty well in this weak-silver-price environment.

That’s reassuring given silver’s serious underperformance relative to gold.  As a far-smaller market, silver usually amplifies gold’s advances by 2x to 3x.  Yet in 2017, silver only rallied 6.4% despite a much-bigger 13.2% gold rally.  That vexing trend has continued in 2018, with silver down 3.8% year-to-date while gold is 1.8% higher.  With silver itself really sucking wind, investors sure aren’t motivated to buy silver stocks.

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