Precious metals are either loved or hated by most investors. After a pop in 2020, both gold and silver prices have been falling in a stretching torture for two years now. But there seems to be a silver lining on the horizon. As long as sentiment is poor, it may be time to have a look at silver again. Especially since there are fundamental tailwinds…
Silver is known as “the small brother of gold” or the “poor mans’s gold”. An ounce of silver costs a fraction of what an ounce of gold does.
For investors active in the investing business for a longer time, it is no secret that silver is the way more volatile metal compared to gold. In bear markets silver loses disproportionately more. During bull markets it rises quicker and can even multiply several times. From the height of the global financial crisis in 2008, silver shot up 5x.
Gold on steroids, if you wish.
Whereas gold is endlessly and fanatically promoted by its devotees as being the ultimate store of value (is it?), silver is more of a niche product. My guess is, at the end of this article, most of my readers will agree that silver is not only more useful, but also has more upside potential.
Gold is mostly a yellowish-shiny metal that is either stored in wooden caskets, in bank vaults or in one’s oral cavities.
Silver, on the other hand, has somewhat of a dual function, as its special physical traits make it at least half a metal used in industrial applications.
The last two years have been unnerving for precious metals investors. After peaking in August 2020, both metals have fallen back into an area where they have spent most of the last decade. Silver lost ca. 40% in the last 25 months. Overall sentiment is poor.
That alone is not my pitch for silver today, however.
In this Weekly, I will share with you all the necessary information you need to understand the dynamics that are taking place before our eyes. I will make several arguments in favor of silver. There is a high probability that the price will go up in not too long. Or as I like to say, the odds are in our favor.
We will have a look at the biggest silver mining companies from an investment perspective. At the end, I am going to show you other practical alternative ways to think about when investing in silver.
Use cases and main characteristics of silver
Whereas gold is mainly being worshipped because of its color, history and a questionable quasi-religious belief, silver has special physical traits that make it predestined and unique for several industrial applications (here you can compare it to copper, but the price of copper is wrong).
Silver has the highest electrical and thermal conductivity of any metal (can transport electricity and warmth the fastest). Yes, even slightly better than copper that is said to be the metal for the electrical energy transition (“Energiewende”). The reasons copper is used way more often are price and abundance, but also to a lesser degree, weight.
Currently, silver costs around a whopping 80–85x more than copper on an equally weighted basis (silver is priced in ounces, copper in pounds – the conversion factor is 16x ounces = 1 pound).
Just one ounce of silver already costs 5–6x more than one kilogram of copper.
Copper is rather frequently found in the earth’s crust and around 750x as abundant as silver (copper ca. 50–60 ppm vs. silver ca. 0.07–0.08 ppm; parts per million; see here as they refer to several sources of estimates).
Interestingly, silver often is a by-product found in copper mines. Copper is a bit harder and has a higher melting point, while silver is around 15% heavier.
This alone shows silver’s top quality. But besides, silver has also the highest reflectivity of any metal and it is antibacterial.
In fact, around half of the yearly silver supply is used for different purposes, other than just storing, like:
- electronics (ca. 30%, still the single biggest demand source and +50% in the last ten years)
- solar (ca. 12%, doubled in the last ten years)
- photography (declining, but still ca. 2%)
- water purification (silver kills bacteria)
- window manufacturing
- and more
We haven’t mentioned any silver use for jewelry, investment purposes or storage bars as of yet. That’s the rest of the demand side. In total, it is estimated to be around 50%.
Hence, half of the silver is actively used and built into everyday products.
Gold on the other side, is mainly laying or hanging around somewhere:
According to what politics dictates, more silver will be necessary for the shift to more electrification. Solar panels, batteries in electric cars as well as for saving energy at home, faster networks, more mobile devices – all require silver to be used in larger quantities than it is today.
You don’t have to be a prophet to tell that the silver quantity needed in industry alone should go up with time.
But the silver use in the new world has to be covered by enough supply. As you know and read last week in my article about the hidden risk of ETF investing (see here), it is crucial to analyze the supply side, not the demand side.
In short, my arguments were: Demand can come and go more dynamically, while supply is structurally slow-moving and better to predict. At least the part of the supply without extraordinary risks.
Hence, what are the developments at this front?
Is silver an endangered metal?
Above, you already saw a rough number of the yearly demand for silver in the last year.
Here is now a good overview from the Silver Institute for the supply and the demand numbers over the last ten years:
Two things stand out immediately:
- Supply has gone sideways over the last ten years
- Demand has gone up 12–13% over the last ten years, with a massive uptick in the last two years only
Not quite two things, there is actually a third one. It is the most important:
In 2021, the demand for silver has overtaken supply.
For 2022 the gap is expected to widen even more as demand rises quicker than supply. Or should I say, supply continues going sideways?
Interestingly, the demand from the investment sector (“net investment in ETPs” = exchange traded products), fell 80% from 2020 to 2021 and is expected to fall another 62% this year. This means, there are practically no new investments into physical silver from investors at the moment. Were the investor sentiment good, money would be pouring in.
From here on, you should expect this imbalance to increase further, especially when the investors and speculators come back. They can easily kick this relatively tiny market higher. But that’s just as a bonus.
Visual Capitalist has a nice graphic where the topic was “endangered elements”. Do you find silver (symbol Ag)?
It is in the lower-right part of the picture and sits in an orange field.
This is the category of the most or “serious” endangered elements. They refer to the next 100 years, but I don’t think that it will take that long.
As a sidenote, according to Pan American Silver (ISIN: CA6979001089), one of the biggest silver miners (we will come back later to), around 82% of the silver supply comes from mining. The other 18% come from recycling.
Now you have a rough overview of the supply and demand numbers.
We have not answered the question where silver comes from. The answer covers the topic of geopolitical risks for silver, I would not downplay or underestimate.
Here you see the top ten silver producing countries, as of last year:
|Silver production in metric tons
|Silver production in ounces (*35,274)
|Top 10 total
|Rest of the world
There is not too low a risk of supply being taken abruptly from the market, due to:
- crisis between West and Russia / China (ca. 20% of yearly silver supply)
- many socialist-led Latin American countries (50% of yearly silver supply in the top ten alone)
- Western countries from the top ten (Poland, Australia, USA) contribute only 15% to the yearly supply
Of the remaining ca. 15%, I know of Thailand being a silver producing country. I would rate it neutral or at least not acutely risky.
Asking me, I would not be surprised to see here or there some “bottlenecks” in the future… At least one has to know about this risks being realistic.
Especially, as many of the Latin American countries recently experienced moves even more to the left. The risks are greater in these regions for more taxes or export restrictions any time.
The big picture is more or less the same when it gets to the estimated reserves per country. There are only a few countries positioned in a different order:
My interim summary so far is the following:
- demand should rise in the future (though I don’t like forecasting demand, but politics are pushing this without signs of stopping and irrelevant of “West vs. East”)
- supply currently under best conditions (no major disruptions on a geopolitical basis) lags demand by around 10%
- supply is very shaky and prone to disruptions any time (several countries of the top ten on a single basis can cause a supply shock)
Historically over the last 50 years, there has been a very reliable indicator of when silver was cheap in relation to gold. Let’s look at this barometer next.
The gold silver ratio at extremes, again
Maybe you already have heard of this ratio. Put the price of gold in relation to silver. The quotient or ratio tells you how many ounces of silver you need to buy one ounce of gold.
Currently, an ounce of silver costs around 20 USD. One ounce of gold costs 1,730 USD. Thus, the ratio is 87x.
The following chart shows you the gold silver ratio over the last 50 years.
Note: The whole chart goes over 100 years. But it is useless, because until the 1970’s the price of gold was fixed, whereas silver was allowed to float. I cut this artificial ratio out.
The gold silver ratio sits around the third highest point in the last 50 years. What follows usually such extremes, is an outperformance of silver compared to gold.
But it is not excluded that there could not be a final exaggeration where the ratio jumps over 100x again. A final sell-off, so to speak. This point could trigger a buying impulse in me.
The other extremes or worst relative valuations from the perspective of silver (you could say points of overvaluation of silver in relation to gold) were in 1980 at 16x or 2011 at slightly above 30x. In both cases silver had massive spikes, though due to different reason.
We are miles away from that, now.
The average of the gold silver ratio over the last 50 years sits at around 65x. According to this approach, silver would be 25% undervalued in relation to gold, without gold even moving a cent.
Even taking the higher average base of this ratio post 1980, the average sits somewhere in the middle 70’s.
Anyway, from this analysis alone, silver should trade on average somewhere from 25–30 USD at the minimum, just taking the relative undervaluation. Should silver rob closer to its extremes on the other side, prices between 40–50 USD on today’s basis alone are absolutely imaginable. All this without gold moving.
For the patient investors, investing according to this strategy has paid off in the past.
Now, let’s have a look at some ways of placing investments in the silver sector, starting with the biggest silver mining companies.
An overview of the industry heavy-weights
Because silver often is a by-product when mining copper, gold or other metals, there are hardly any pure-play silver producers. At least not among the big fish.
Below is an overview of the biggest silver miners and some important figures I researched for you (sorted by annual production per 2021):
|Total silver production (ounces)
|Total silver reserves (ounces)
|est. reserve life
|Production costs per ounce (AISCs)
|3.5 billion USD
|64.4 million ounces (Moz.)
|6.2 billion USD
|ca. 13 USD
|Pan American Silver
|3.3 billion USD
|2.3 billion USD
|First Majestic Silver
|2.1 billion USD
|ca. 15 USD
|0.86 billon USD
Note: I only included “proven and probable” reserves into this comparison. This is the most reliable category of estimated reserves and resources. Besides, there are also “measured and indicted”, as well as “inferred” categories of resources (they are not allowed to be called reserves technically). But with every step down, it gets more imprecise. The risks for impairments of previous estimates is higher. Thus, I only focused on the most resilient numbers. For those who want to delve deeper into the terminology, here is a useful glossary starting on p. 32.
Some of the companies above I know a little better because I’ve been following them for a while. Others are new to me, which I looked at for the first time while researching for this Weekly.
Here are some comments on my key findings as a starting point for further research (the only thing I do recommend is doing your own extensive research):
- Industrias Peñoles: This is a more than a century old company founded shortly after the Mexican independence. It is very complex and has focussed its operations on Mexico, but besides mining metals (gold, silver, lead and zinc), it also has a chemical subsidiary.
Silver has only a relatively low share of 29.9% of total sales. Gold brought slightly more with 34.2% of total revenues in 2021. Worth mentioning is zinc which had a share of 14.2% of total sales.
A big chunk of its metals production comes from a 74.99% stake in Fresnillo plc., which itself has seven mining operations (plus some development projects) and is listed on its own as a separate company and is also in over overview. Fresnillo contributed 62% to the total silver production.
Interestingly, the nearly 75% stake of Fresnillo alone is already valued by a third higher than the whole company of Industrias Peñoles including this shareholding (75% of 6.2 billion USD = 4.6 billion USD vs. 3.5 billion USD market capitalization of the stock of Industrias Peñoles)!
The last point above could be worth a deeper research. But personally, I don’t like the pure emerging markets exposure. The concentration in Mexico is a high, though not acute, risk, I would not like to be involved in.
Plus, I seldom am interested in such nested situations. At first glance, they often seem like bargains. But in practice, they do not materialize that often, especially when you have such exotic companies. What I don’t like either is the too low share of silver.
The last argument against it, is the very low trading volume in the US and OTC (over the counter) in Germany. You would need to trade it directly in Mexico.
- Fresnillo has a UK-listing besides being traded in Mexico. This already makes it more fungible and liquid enough. When cut out from its major shareholder above, Fresnillo is the biggest silver producer from the whole group by far.
Its operations are also concentrated only on Mexico (on the north-western part). Fresnillo has three primary silver mines, three primary gold mines and one silver/gold mine in operation. The oldest mine which has also the name “Fresnillo” is in operation since 1554 (!). The revenue share of gold (45.8%) and silver (40.9%) is higher than at its biggest shareholder.
What I absolutely don’t like to see is that production for gold and silver, as well as reserves for both have been declining since at least 2017. Silver reserves are down by 16% over the last four years. The estimated reserve life is also among the shorter ones in its peer group.
These are all points that already make me feel very uncomfortable. I would expect Fresnillo to be looking out for potential acquisitions to increase its reserve life again.
- Pan American Silver is the company I have been covering for the longest time. It is a Canadian company, but also has a very heavy focus on Latin American countries. Besides Mexico, Pan American Silver has active mining operations in Canada, Peru, Argentina and Bolivia.
What makes Pan American Silver more interesting is that it has two potentially very impactful catalysts that could propel the stock higher, though no immediate ignition should expected.
First there is a shut down production in Guatemala that was acquired in 2017. It ceased operations because of a conflict with an indigene tribe that is ongoing for years. Should an arrangement be made and this mine come back online, total production of Pan American Silver would directly double from nearly 20 Moz. to 40 Moz. I already included the reserves of the Guatemalan mine into the total reserves. Mine life would halve with double the production, but still on a high level.
The second and way more in the future lying catalyst is a silver deposit in Argentina, that is said to be the biggest one that is not in operation worldwide. They only disclose resources, not reserves, but if most could be converted into reserves, it would double the total reserves of Pan American Silver.
Pan American Silver as the only one from this group has a net cash position (more cash on the balance sheet than debt) which could be used to buy smaller companies to increase production or reserves further.
But it has also high risks due to especially its dependency on the Peruvian operations. Those in total have a share of 16% in the silver segment and 27.6% in the gold segment (or more than 43% of revenue in total).
Also rather negative are the relatively high production costs and thus lower margins. An ounce of silver costs them about 15 USD to produce and an ounce of gold more than 1,500 USD. You see, there is not that much of a margin compared to current prices.
- Hecla Mining is a completely different story. It only has two operations in the US plus one in Canada and is way smaller than the first three companies. This way, it is only shoveling in so-called Tier-1 jurisdictions with the highest legal security.
As a plus, Hecla is the biggest US silver miner (Alaska and Idaho) with a share of around 40% of total US silver production. Its production costs are the lowest in this peer group with just under 10 USD. Reserve life is also among the highest with 15 years where every mine has at least ten years of expected production.
Hecla also expects to increase production in the coming years, organically and with acquisitions. Recently, they bought a small Canadian exploring company that ran out of cash to develop its big reserves on its own. Hecla has the means to do so.
What I don’t like about Hecla are three things:
First, they are posting regularly losses, although they have such low production costs. Their cash flow profile is good. But they are investing aggressively. In some years even outpacing cash flow and relying on debt.
This Is the second point which should be watched closely. Hecla has around half a million USD in long-term debt on its books (and some cash). It would take them around three to four yearly operating cash flows (without investments) to pay it down. That is a rather high leverage.
Third, they are regularly diluting shareholders. The share count increased by nearly 70% over the last ten years.
Silver accounts for around 36% of total revenues, with gold having a share of 45%.
Hecla is worth watching, I would say. But it has its flaws, too…
- First Majestic Silver is one the darlings of novice investors and speculators. I truly don’t understand why this is the case, as it economics are not among the best. Revenue has nearly doubled over the last five years, but earnings and cash flows are not sufficient. It often posts losses. Share count has more than doubled over the last ten years.
It has a roughly 50/50 share between silver and gold production and this way a relatively high silver-leverage. Its operations are in Mexico (silver and gold) and a recently acquired US (gold).
But First Majestic has only less than five years in mine life. And there is a risk with a tax dispute with the Mexican government that is ongoing for years.
A very hot iron, if you ask me…
- Coeur Mining is the last company we look at and also by far the smallest. It is only operating in North America, though also in Mexico. The focus is, however, on the US (mainly gold) and a development project in Canada (some silver and mainly base metals).
70% of total revenues come from gold, the other 30% from silver. 62% of revenues are generated through its US operations. Interestingly, while currently most of the silver production (68%) comes from Mexico, the silver reserves in the US are way larger (2.5x).
It has nearly tripled its share count over the last ten years and regularly posts loses. In most years, investments were covered by operating cash flow. In 2021 however, Coeur started to massively invest into operations. If silver prices go up, this could be a well placed bet (though risky)!
Production costs are also among the higher ones. Mine life is very long, especially due to the large US silver reserves.
Coeur has a relatively high leverage profile, though the bonds outstanding only come due in 2029. This could be enough time to generate sufficient cash flow for a repayment.
My gut feeling tells me, that Coeur could be an acquisition target due to its small market capitalization, high silver reserves and relatively well balanced geographical exposure.
As you could read between the lines, there was no clear favorite and certainly no no-brainer among these companies discussed above.
There is a big problem affecting and squeezing the mining companies in general. They disproportionally suffer due to rising costs.
High-cost producers, like many of them above are, receive minimal margin expansion in an environment of high inflation due to escalating capital (interest rates are rising!) and operating costs.
The group and also other peers not discussed in today’s article have been on a rollercoaster ride over the last two and a half years:
- A brutal drawdown in the first half of 2020 (silver fell to under 15 USD) plus restrictions on the workers caused many silver miners to extremely tighten their expenses – many were simply loss-making and fighting for survival
- from mid-2020 to mid-2021 prices of gold and of silver recovered massively. Silver maintained in a range between 22 USD and 30 USD. This took pressure from many producers and they suddenly had healthy margins
- currently we are closer to the first point, though not this extreme – maybe a final dip to come and scare away many weak hands?
Factually, the silver price is not much above the production costs that many companies are expecting!
Here is an exemplary screenshot from Coeur Mining, but the other companies had similar ones with the same message: Costs are rising fast putting pressure on margins!
Oil respectively diesel is an obvious cost component. Currently it came down somewhat but I don’t believe that oil will stay at a lower price for too long. I am pretty sure that the powerful nations that can influence the price of oil will do so in their favor. Last week, Saudi-Arabia announced a small cut in output, but who says that there is not more to come to stabilize (or pull up) prices?
Besides, there is also cost pressure mounting up from labour as well as certain tools that are needed for mining operations.
The result for me is, even if metals prices should rise, the margins of the companies do not necessarily have to in the same proportion. Especially among the high-cost producers. Those are the companies you can watch, but I would be very cautious.
As they say, the higher the operating costs, the higher the prices of the underlying commodities over time. The weakest miners come under pressure first and unprofitable mines get closed. This tightens supply further and leads to rising prices.
Having low operating and production costs is key to survive the longest with depressed prices without diluting shareholders and to have the biggest margins in the bull market.
This is the loop. We just need time which is on the side of the patient investors who understand the cycle and the context.
I think silver stocks will finally rise with a higher silver price. But you have seen that there are many operational as well as geopolitical uncertainties and risks.
It would be wiser to play the safe way here and avoid unforced errors. Don’t forget risk management.
This is our last section for today.
A different approach: Silver ETFs
Depending on where you live, you could be restricted from investing in certain offerings. You must check on your own, if such investments are possible.
I know, last week I warned about investing in ETFs. But I didn’t warn per se of ETFs, more so of investing blindly without taking notice of what one is actually buying.
At the end of my last article, I even wrote, that it can be a good idea to investment in certain sectors via ETFs. This makes the more sense, the higher individual risks tend to be with direct investments as we have here with the silver producers. With ETFs, you can spread wisely and focus on a certain trend or sector.
One the one hand, you have ETFs that invest into several silver miners. On the other, you can invest into physical silver.
Here is an overview of ETFs containing silver miners: https://www.etf.com/channels/silver-miners-etfs.
Keep in mind though, that most of these ETFs have a relative unbalanced weighting towards the bigger companies listed above. You could read between the lines that there was no clear favorite for me because of different individual challenges every company has.
Personally, I would understand if one buys on such ETF to have a spread but risky bet on rising silver (and gold) prices. But there is one more (and less risky and volatile) way to participate in the case of rising silver prices.
There are also ETF offerings that investing directly into physical silver (no advertising, just examples).
- Rather for Americans, there is the SLV iShare Silver ETF (link) that has around 9 billion USD under management. According to the prospectus, most of the assets are held in physical silver by an external custodian
- If you prefer a Swiss provider, then the ZKB Silver ETF could be for you (if you are able to buy). You can even chose between EUR, USD or CHF as you reference currency. Here is a link, look on page 2.
- A third provider is WisdomTree. They also offer investments in ETFs with physical exposure. See here for more information.
Is there a silver lining on the horizon? You decide for yourself, whether my arguments were solid enough. Personally, I see currently an attractive risk/reward ratio in favor of silver. But I cannot exclude a final sell-off. My gut feeling even tells me that there will be one final wash-out, before we see better days again.
Silver has a history of reversing without warning, especially on geopolitical events. When it catches steam, the jumps are massive. As a bonus, silver is rather an uncorrelated asset class that is worth having in the portfolio at the right time.
The catalysts are clear: Bad sentiment, rising production costs, the supply and demand situation and the gold silver ratio. The industry already sits at a yearly supply deficit of around 10% compared to demand. And this is without investors or speculators entering the party.
Currently, I see rather a fair value for silver between 25–30 USD. In the next years, it is not unimaginable to see double of that.