Silver Miners’ Q4’16 Fundamentals

The silver miners’ stocks have had a roller-coaster ride of a year so far. They surged, plunged, and then started surging again last week on a less-hawkish-than-expected Fed. Such big volatility has spawned similar outsized swings in sentiment, distorting investors’ perceptions of major silver miners. But their recently-reported fourth-quarter operating and financial results reveal the true underlying fundamental realities.

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 offer a clear snapshot of what’s really going on fundamentally, in individual silver miners and this small sector as a whole. There’s no silver-stock data I look forward to more.

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 require 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.  As a silver-stock trader this additional Q4 delay is irritating, since the data is getting stale by Q1’s end. But as a CPA and former Big Six auditor of mining companies, I have some understanding of just how much work goes into an SEC-mandated 10-K annual report.  It’s enormous!

This extended Q4-reporting window naturally delays the analysis of Q4 results. While I can start digging into the first three quarters’ results 5 or 6 weeks after those interim quarter-ends, I have to wait longer for the fiscal-year quarter-ends. Thankfully the majority of silver miners have reported by 9 or 10 weeks, so we don’t quite have to wait until early Q2 to analyze Q4 results. The silver miners’ Q4’16 proved fairly strong!

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. Thus around 2/3rds of all the silver mined worldwide is actually a byproduct of base-metals and gold mining.

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 5.4x greater than its next-largest competitor’s, so SIL really dominates this space. With ETF investing now the norm, SIL is a boon for its component miners.

While there aren’t many silver miners to pick from, major-ETF inclusion shows silver stocks have been vetted by elite analysts. Due to fund flows into top sector ETFs, being included in SIL is one of the important considerations for picking great silver stocks. When the vast pools of fund capital seek silver-stock exposure, their SIL inflows force it to buy shares in its underlying companies bidding their prices higher.

This week as the major silver miners finish reporting their Q4’16 results, SIL includes 24 “silver miners”. This term is used rather loosely, as SIL includes plenty of companies which simply can’t be described as primary silver miners.  Most generate well under half their revenues from silver, which greatly limits their stock prices’ leverage to silver rallies. Nevertheless, SIL is the leading silver-stock ETF and benchmark we have.

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 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 is a commanding sample at 95.6% of SIL’s total weighting.

While most of these top 17 SIL components have reported on Q4’16, not all have. Some of these major silver miners trade in Mexico and the UK, and only report half-year results. And plenty of companies lump their Q4 results into full-year-2016 numbers. If not explicitly broken out, most of the fourth-quarter results can’t simply be inferred. So if a field is left blank in this table, that data wasn’t available this week if ever.

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Disclaimer: At Zeal we’ve spent decades researching and trading silver stocks, with excellent results.  As of the end of Q3, all 851 stock trades recommended to our newsletter subscribers ...

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