Silver miners’ Q2 2022 fundamentals

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The silver miners’ stocks have been thrashed in recent months, battered back down to stock-panic prices. That dreadful technical action has left this sector abandoned and forgotten, traders avoiding it like the plague. But the greatest opportunities to buy low and multiply wealth come when sectors are the most-despised. The silver miners’ recent earnings season confirmed these levels are not fundamentally-righteous.

The silver-mining universe is tiny compared to broader stock markets, represented by only a handful of exchange-traded funds. The leading one remains the SIL Global X Silver Miners ETF, which is still small with just $754m in net assets mid-week. Launched way back in April 2010, SIL has become silver stocks’ primary sector benchmark. Their terrible performance lately explains today’s overpowering bearishness.

In just 4.6 months since mid-April, SIL has collapsed 40.9% as of this Wednesday! That has slammed silver-stock prices way back down to literal stock-panic levels. Closing at $23.31, SIL hadn’t been lower since late March 2020 in the dark heart of that pandemic-lockdown stock panic! Such extreme lows have scared away the vast majority of speculators and investors, the silver stocks are effectively left-for-dead.

But experienced contrarian traders know price and sentiment extremes never last for long. Markets have a powerful tendency to normalize after such anomalous episodes, mean-reverting and overshooting in the opposite direction. Out of those last-stock-panic lows, SIL skyrocketed a stupendous 176.9% in just 4.8 months! Today’s horrendous silver-stock prices could easily double or triple again out of this aberration.

Silver-stock prices have cratered in recent months in concert with the metal that drives their profits. Since mid-April, silver has plunged a brutal 30.3% to $17.98 as of mid-week! That in turn was driven by a parallel 13.5% gold correction. Since traders look to gold’s fortunes for their silver-trading cues, silver has long acted like a gold sentiment gauge. The white metal usually mirrors and amplifies the yellow one’s trends.

Gold fell hard because hyper-leveraged speculators violently dumped extreme amounts of gold futures. These guys watch the US dollar’s price action and do the opposite. The US Dollar Index shot parabolic since mid-April with a monster 9.1% surge at best on the most-extreme hawkish pivot ever done by the Federal Reserve. That catapulted the USDX to extreme unsustainable 20.2-year secular highs in late August!

Everything about recent months is either unprecedented or exceedingly-rare. The Fed has never before hiked rates so big and fast while simultaneously rapidly ramping quantitative-tightening monetary destruction to record levels! The US dollar has almost never launched so vertically to such lofty heights. Thus gold and silver have faced a unique extreme psychological headwind that isn’t sustainable for long.

Silver itself is overdue for a massive mean-reversion-overshoot rally, which will work wonders for silver-stock prices. That will be fueled by huge silver-futures buying. In mid-August, speculators’ total silver-futures longs collapsed to a 2.3-year low. After the last time that happened, silver rocketed an epic 88.2% higher in just 3.0 months on futures buying! Spec silver-futures shorts surged to a 3.0-year high in late July.

After that last time silver soared 29.9% in just 1.9 months on futures buying! The crucial lesson is after bearish extremes of speculator silver-futures positioning like today, those traders are soon forced to do huge buying to restore balance to their bets. So smart contrarian traders need to keep studying silver and its miners’ stocks even when it is deeply-out-of-favor. Big mean-reversion-overshoot rebounds are inevitable.

So though it was tempting to blow off this essay and head up to the glorious Colorado mountains early for an even-longer holiday weekend, I persevered and did the hard work. That extended my long streak of analyzing the latest operational and financial results from the top-15 SIL silver miners to 25 quarters in a row. These elite silver miners dominate this leading sector ETF, accounting for fully 85.8% of its weighting.

This table summarizes the operational and financial highlights from the SIL top 15 during Q2’22. These major silver miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within SIL over this past year. The shuffling in their ETF weightings reflects shifting market caps, which reveal both outperformers and underperformers since Q2’21. Those symbols are followed by current SIL weightings.

Next comes these miners’ Q2’22 silver and gold production in ounces, along with their year-over-year changes from the comparable Q2’21. Output is the lifeblood of this industry, with investors generally prizing production growth above everything else. After that is a measure of silver miners’ relative purity, their percentage of quarterly sales actually derived from silver. Most silver miners also produce gold or base metals.

Generally the more silver-centric a miner, the more responsive its stock price is to changing silver prices. So traders looking for leveraged silver exposure via its miners’ stocks should stick to the purer producers. Then the costs of wresting that silver from the bowels of the earth are shown in per-ounce terms, both cash costs and all-in sustaining costs. The latter subtracted from silver prices help illuminate profitability.

That is followed by these miners’ hard quarterly revenues and earnings reported to national securities regulators. Blank data fields mean companies hadn’t reported that particular data as of mid-August when Q2’s earnings season was winding down. The annual percentage changes are excluded if they would prove misleading, like comparing two negative numbers or data shifting from positive to negative or vice versa.

With silver prices smashed and inflation raging, the silver miners certainly had a challenging Q2. But it still proved considerably better than I expected, which was a pleasant surprise. While silver-mining costs did surge pinching profitability, those remained well under recent quarters’ highs! The major silver miners are faring quite well fundamentally considering these extreme anomalous circumstances, a very-bullish omen.

SIL remains dominated by a handful of well-known silver stocks, with Wheaton Precious Metals, Pan American Silver, and SSR Mining accounting for 41.2% of its total weighting in the middle of last month. But interestingly, it is becoming more-diversified. That 85.8% the SIL top 15 represented actually proved the lowest out of the last 25 quarters. Smaller silver miners gaining bigger weightings improves SIL’s utility.

The collective silver production from these elite silver miners in Q2’22 fell a sizable 11.6% year-over-year to just 75,146k ounces. And their gold output plunged a far-worse 30.1% YoY to just 1,074k ounces! That was the lowest quarterly gold production the SIL top 15 have yielded in the long span of this research thread. Much-lower precious-metals output is troubling, implying these companies’ mines are struggling.

Thankfully those production comparisons are heavily-distorted by a single major composition change. For years SIL’s second-largest component had been the Russian-owned UK-listed Polymetal International. But it was booted from SIL entirely earlier this year after Russia invaded Ukraine. Russian stocks were pummeled globally as outrage mounted over the Russian military’s cruel destruction inflicted on Ukrainian cities.

Polymetal’s plummeting market cap alone would’ve bludgeoned it out of the SIL-top-15 ranks, but another crisis sealed the deal. This company’s auditor Deloitte resigned in early April, warning it was no longer willing to audit Polymetal’s extensive Russian operations. Its stock even faced delisting in London if a new auditor couldn’t be found fast enough! Extensive sanctions against Russia are also affecting Polymetal.

A year ago in Q2’21, this company was SIL’s largest gold producer and a sizable silver one. The only way to make these two quarters more comparable is to exclude Polymetal’s big production from Q2’21 or add it back into Q2’22. Doing the former, the SIL top 15’s silver and gold output last quarter fell a much-milder 6.3% and 13.1% YoY. While still sizable production declines, they are far-less-ugly without Polymetal.

Silver fared much worse than gold in Q2’22, with quarterly-average silver prices plunging 15.4% YoY to $22.58 compared to gold’s actually climbing 3.2% YoY to $1,872! With much-weaker silver combined with slightly-stronger gold, the SIL top 15’s silver purity was going to suffer. And that was generally the case, with these miners’ percentages of Q2 revenues actually derived from silver nearly all retreating.

Their percentages of quarterly sales really coming from silver are implied. They are calculated by multiplying miners’ silver ounces produced by quarterly-average silver prices, then dividing that result by revenues. Overall the SIL top 15’s silver purity still surged 6.5% YoY to 45.3% in Q2’22, surprisingly proving the third-highest on record in the last 25 quarters! But that solely resulted from composition changes.

Aya Gold & Silver and Endeavour Silver edged into the SIL-top-15 ranks during this past year. While the former is small, silver is currently all it mines. That makes it a pure-play silver producer with 100% purity, really pushing up the overall average. And the latter produced way-more silver last quarter while its small gold production fell, forcing up its purity. So these two additions alone really skewed overall purity high.

Including them, fully five of these SIL-top-15 companies qualified as primary silver miners last quarter. Their purity percentages are highlighted in blue above. Overall SIL purity should improve as precious-metals sentiment recovers. Silver will amplify gold’s gains like usual in its next overdue upleg, with both driven way higher by massive futures buying to normalize speculators’ exceedingly-bearish positioning.

The silver miners’ biggest challenge now is managing the raging inflation unleashed by years of extreme central-bank money printing. In just 25.5 months into mid-April 2022 for example, the Fed ballooned its balance sheet an insane 115.6% or $4,807b higher! That effectively more than doubled the US monetary base in just a couple years, leaving far more money chasing and bidding up the prices of goods and services.

Cost inflation was extensive in the major gold miners’ Q2’22 results. Of course silver miners suffered these same pressures. In normal times, unit silver-mining costs are generally inversely-proportional to silver-production levels. That’s because silver mines’ total operating costs are largely fixed during pre-construction planning stages, when designed throughputs are determined for plants processing silver-bearing ores.

Their nameplate capacities don’t change quarter-to-quarter, requiring similar levels of infrastructure, equipment, and employees to keep running at full-speed. So the only real variable driving quarterly silver production is ore grades fed into these plants. Those vary widely even within individual silver deposits. Richer ores yield more ounces to spread mining’s big fixed costs across, lowering unit costs and boosting profitability.

But while fixed costs are the lion’s share of silver mining, there are also sizable variable costs. Energy is the biggest category, including electricity to power ore-processing plants like mills and diesel fuel to run excavators and dump trucks hauling raw ores to those facilities. Other smaller consumables range from explosives to blast out ores to chemical reagents necessary to process various ores to recover their silver.

The SIL top 15’s generally-lower outputs would’ve driven their costs higher last quarter regardless of consumables prices. Less ores processed through mills or lower-grade ores both reduce silver ounces produced, forcing each to bear more fixed costs. But these elite silver miners were also paying more for variable-cost consumables. That was a common theme through many of their latest quarterly reports.

There were plenty of examples, including SSR Mining warning it was “continuing to face increased cost pressures especially in fuel, electricity, and reagents across the business that have outpaced our various cost mitigation efforts this year.” Hecla Mining said it was “seeing the impact of inflationary pressures and labor constraints at all its operations.” Labor costs tend to be sticky, unlike dynamic markets such as energy.

On the other hand, rising mining prices are making the silver streamers’ businesses look more attractive. They buy fractions of future byproduct silver production from non-primary mines, in return for big upfront cash payments to help finance those mine-builds. The streamers buy that ongoing silver output at very-low contracted prices, which don’t change with mining costs. So inflation isn’t yet crimping the streamers at all.

That business remains dominated by Wheaton Precious Metals, which is also SIL’s largest component at fully 22.3% of its weighting. In the opening paragraph of its Q2 earnings release, WPM extolled the virtues of its stream contracts’ near-immunity to inflation. It said its results were “highlighting the resiliency of the streaming model to the inflationary pressures currently being felt across the global economy.”

Cash costs are the classic measure of silver-mining costs, including all cash expenses necessary to mine each ounce of silver. But they are misleading as a true cost measure, excluding the big capital needed to explore for silver deposits and build mines. So cash costs are best viewed as survivability acid-test levels for the major silver miners. They illuminate the minimum silver prices required to keep the mines running.

The SIL top 15’s average cash costs did surge a big 17.3% YoY to $10.17 per ounce in Q2’22. That is definitely on the high side, but still only the fourth-highest out of the last 25 quarters. Q1’22’s $10.55 was the peak. And impressively, the majority of these silver miners reporting cash costs actually saw them retreat last quarter! SSR Mining’s soaring 39.6% YoY on inflationary pressures skewed up the overall average.

All-in sustaining costs are far superior than cash costs, and were introduced by the World Gold Council in June 2013. They add on to cash costs everything else that is necessary to maintain and replenish silver-mining operations at current output tempos. AISCs give a much-better understanding of what it really costs to maintain silver mines as ongoing concerns, and reveal the major silver miners’ true operating profitability.

The SIL-top-15 silver miners’ average AISCs surged a similar big 19.0% YoY to $14.78. But again that was just the fourth-highest on record, well behind Q3’21’s all-time high of $15.78. That was surprising given the serious consumables inflation the mining industry is suffering. With all-in sustaining costs not blasting up to new highs, the major silver miners are outperforming both major and mid-tier gold miners!

In the last couple weeks I analyzed the new Q2 results reported by the top-25 GDX major gold miners and top-25 GDXJ mid-tier gold miners. In both cases their average cash costs and AISCs blasted up to new all-time-record heights last quarter. Though a couple extreme outliers skewed those way-high, the silver miners are faring better than the gold miners in that regard. The SIL top 15 are holding the line on costs.

But that didn’t help much on the profitability front with much-weaker silver. Again in Q2’22, its quarterly-average silver prices plunged 15.4% YoY to $22.58. Subtracting the SIL top 15’s average AISCs running $14.78 from that yields implied sector unit profits of $7.80 per ounce. That collapsed 45.3% YoY, pinched on both sides! Still those remain fairly-impressive silver-mining earnings considered in longer-term context.

In the previous seven quarters prior to Q2’22, this leading metric for sector unit profitability averaged a much-better $11.17. But in the ten quarters before that ending in Q2’20, the SIL top 15 merely saw $3.51 in per-ounce earnings. So last quarter’s $7.80 was a lot closer to the past couple years’ fat profits than the long lean years before that. Even an eight-quarter low of $7.80 remains fairly-high by historical standards.

On the hard-accounting front under Generally Accepted Accounting Principles or their equivalents in other countries, the SIL top 15’s Q2’22 results were definitely weaker with lower production and higher costs. These major silver miners’ overall revenues fell 13.5% YoY to $6,254m. But Polymetal getting booted distorted that. If its sales are excluded from the comparable Q2’21, total revenues retreated a way-milder 4.6%.

Bottom-line accounting earnings weren’t affected by Polymetal, as it is a half-year reporter only disclosing revenues quarterly. The SIL top 15’s overall profits plummeted 75.4% YoY to just $226m. But big one-off items skewed that, including Pan American Silver flushing a $99m mine writedown through its income statement and Coeur Mining losing $63m in “fair value adjustments” which were losses on equities it owned.

Without those unusual items, total SIL-top-15 net income plunged a still-big-yet-smaller 57.7% YoY to hit $388m. Lower silver prices combined with higher costs really do hit profitability, as silver miners’ earnings are highly leveraged to prevailing silver prices. As silver recovers fast with gold on their coming massive futures mean-reversion buying, silver-mining profits will explode higher again. They turn on a dime with silver.

These elite silver miners’ cashflows generated from operations also plunged a big 30.6% YoY to $916m, driven by the same factors. But their cash treasuries remained robust, edging up 0.1% YoY to $7,037m. Despite this challenging environment they are weathering, the SIL-top-15 companies are well-financed to ride it out and continue expanding their silver and gold mines. They are far from facing any cash-crunch.

So despite silver stocks getting bashed to anomalous stock-panic levels by the extreme futures-distorted gold and silver prices, these miners continue to fare pretty-well fundamentally. They are doing a solid job of holding the line on costs even with the biggest inflation super-spike since the 1970s raging. Earlier ones proved fantastically-bullish for gold and silver, fueling epic life-changing gains in their miners’ stocks.

Today’s radically-oversold silver-stock prices resulted from exceedingly-bearish sentiment, not collapsing fundamentals. As silver inevitably mean-reverts higher with gold amplifying its gains, these left-for-dead silver stocks will skyrocket again. They easily have the potential to double or triple in short order like after March 2020’s stock panic. So this unsustainable anomaly is a rare incredible buy-super-low opportunity!

The bottom line is silver miners are faring way-better fundamentally than their radically-oversold stock prices suggest. Last quarter was challenging, since they had to manage both much-lower average silver prices and surging inflationary cost pressures. While those did force overall mining costs higher, they collectively remained well under record highs. The silver miners outperformed the gold miners on that front!

That kept silver-mining earnings relatively-robust last quarter, and they will explode higher again as silver recovers with gold. Extreme futures selling has left both metals at anomalous unsustainable lows. As the leveraged futures speculators are forced to normalize their excessively-bearish positioning through huge buying, silver will surge amplifying gold’s gains like usual. The battered silver stocks will soar as silver rallies.

(By Adam Hamilton)

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