Silver Miners’ Q3’20 Fundamentals

Again Hochschild Mining being edged out of the SIL top 15 played a role in this, as it produced 47.8k ounces of gold last quarter. Including it, the major silver miners’ overall gold output drop moderated a bit to 11.4% YoY. The silver miners’ operational struggles in Q3’20 were much worse than the major gold miners of their leading GDX ETF. The GDX top 25 actually saw their overall gold output grow 0.6% YoY in Q3!

Despite the major silver miners’ aggregate silver and gold production falling proportionally last quarter, their overall silver purity plunged considerably. The SIL top 15 averaged just 40.8% of their Q3 revenues from silver, down 11.3% from Q3’19’s 52.1%. That comparable quarter was a high-water mark though, the highest seen in the 18 quarters I’ve been doing this research. That entire span only averaged 38.8%.

Last quarter a relatively-high three silver miners out of the SIL top 15 qualified as primary ones deriving over half their sales from the white metal. They were First Majestic Silver at 61.2%, Fortuna Silver Mines at 62.2%, and Silvercorp Metals at 75.2%. These remain the most-leveraged stocks to silver uplegs, with the best potential to amplify their gains. Fundamentally-superior stocks far outperform deadweight-laden ETFs!

Remember that SIL soared 176.9% in its last mighty upleg between mid-March to early August. In this same short span, First Majestic, Fortuna, and Silvercorp saw their stock prices skyrocket 176.2%, 291.7%, and 278.8% higher! That averages out to 248.9% upleg gains, 1.4x better than SIL’s which these stocks also helped boost. These purest silver stocks far outperformed the other 12 major silver miners in the SIL top 15.

With the SIL top 15’s COVID-19-vexed silver output staying much lower than Q3’19’s levels, unit mining costs should’ve climbed. In silver mining, output and costs are inversely proportional. The more silver mined, the more ounces to spread this industry’s big fixed costs across. Those generally don’t change much from quarter to quarter, regardless of prevailing silver prices. That gives silver mining big leverage to silver.

Individual mines require the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills quarter after quarter. So lower outputs directly translate into higher unit costs. In Q3’19 in the idyllic pre-pandemic world, the SIL top 15’s cash costs and all-in sustaining costs had been running $6.61 and $10.74 per ounce. In Q3’20 those should’ve risen in proportion to the 13.9% shrinkage in silver output.

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 necessary to keep the mines running.

The SIL top 15’s reported cash costs averaged $6.99 per ounce last quarter, indeed rising but only by 5.7% YoY. And those were actually skewed high by Peru’s Buenaventura, which suffered COVID-19-related disruptions to many of its operations. Its resulting brutal 40.4% YoY silver-output plunge caused cash costs to skyrocket 58.9% YoY to $18.69!Excluding that crazy-extreme outlier, the average drops to $5.53.

The negative cash costs reported by Silvercorp are righteous, resulting from huge byproduct credits from its major lead and zinc production. Those aren’t an anomaly, this company has reported negative cash costs for years. Its market capitalization usually leaves it around the cutoff for the SIL top 15 after any given earnings season. So whether or not SVM is included really affects the major silver miners’ 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 run silver mines as ongoing concerns, and reveal the major silver miners’ true operating profitability.

Amazingly given their falling silver output, the SIL top 15 reported a big surprise last quarter on that front. Their average AISCs of just $9.62 per ounce not only shockingly fell 10.4% YoY but were the lowest seen out of the last 18 quarters! The major silver miners did fantastic controlling costs, despite all the additional COVID-19-related expenses they are facing. Plunging AISCs at two companies were mostly responsible.

Pan American Silver saw its AISCs collapse 31.7% YoY, while SSR Mining’s dropped an even-greater 39.7%! These sharply-lower costs moved hugely counter to these miners’ serious 38.7% and 23.1% craterings in silver outputs last quarter. Buried deep in PAAS’s report, its sharp AISC plunge was attributed to inventory adjustments. Unfortunately, that was a one-off anomaly related to COVID-19 production swings.

Pan American’s full-year-2020 guidance is forecasting AISCs at a midpoint or $11.50, almost double that super-low Q3 read!SSRM explained its own lower AISCs paradoxically arose from reduced costs due to lockdowns, not elaborating much. But it too warned that these low AISCs won’t last, guiding to this year’s averaging a much-higher $16.00. So overall SIL-top-15 AISCs are likely to climb back up near $12 or so.

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