Almost exactly a year ago I published a Weekly with the question whether it was the right time back then to buy silver. I rather referred to silver in physical form, respectively via ETFs which hold it in physical form, as I had difficulties in finding an investable stock of a producer that fit my strict quality filter. This industry is still a mess, as many miners are actively destroying shareholder value and / or are having difficulties with their costs, but also declining reserves.

Summary and key takeaways from today’s Weekly
– The price of silver is up by around 25% since I wrote about it last year, but there still has not been any bull market.
– Investing in silver miners, however, is a completely different game. While many think that all silver miners are automatically multi-baggers only when silver rises, the truth is that silver massively outperformed most silver miners over the last five years.
– I finally managed to find a silver miner that checks most of my requirements. The report will be sent to my members next Saturday.

Before I start with this Weekly, I’d like to remind you and highly recommend you to first be aware of what I wrote in three older Weeklies, namely:

• “Is now the perfect time to buy silver again?” (see here)
• “Why you should prefer low-cost commodity producers” (see here)
• “Invest in businesses with net cash or net debt?” (see here)

All the linked above Weeklies give you helpful background information that I won’t roll out again today in full detail.

In my first silver Weekly from 15 September 2022, when silver was surrounded by a rather bad sentiment and traded at spot prices around 20 USD, I thought it could be wise to load up, due to different reasons.

In the short term – until now – silver rallied by c. 25% (coincidentally in reach of the average performance of my closed stock ideas and clearly beating the market).

Besides the bad sentiment, many metals miners have been suffering from higher and still rising production costs. Likewise, overall yearly silver supply hasn’t increased over the last ten years, while demand did, with expectations for silver to be in even higher demand during this running decade.

What reads like a logic equation and no-brainer, “price of silver likely up = silver miners up, too”, might be a very costly investment mistake, however. The industry of silver producers, in contrast to gold or copper, as surprising or unbelievable as it might seem, had no investable, publicly listed companies as of a year ago, when I published my first silver article.

I just couldn’t find a stock that was presentable.

Maybe I am too strict or too demanding, but it is not my motivation to be happy with a second or even third best solution.

I am always looking for the best ideas that come as close as possible to my demands.

I my last year’s article, I discussed a few of the bigger silver miners.

Although I had a favorite, there was no clear case or no-brainer among them for me.

Today, I am going to re-discuss that favorite again, describing what I still don’t like, despite it being the by far biggest silver producer of the USA, active solely in the (for me) true Tier 1 jurisdictions USA and Canada which is a good starting point. It also has low production costs and high reserves.

But no, it does not cause any tingling in my stomach…

Hard to believe, but finally after a year I managed to find a Canadian stock. My Premium and Premium PLUS members will soon, namely next Saturday, 02 September 2023, hold my next research report in their hands.

Although this choice isn’t 100% perfect, either (which investment is?), it did convince me due to a favorable risk-reward ratio and several high-quality traits:

• successfully switching from an exploration company to a producer
• a proven management team with skin in the game that already successfully built and sold a silver producer in the last decade (even with a similar name)
• among the lowest production costs still, despite a hefty increase in costs, presented with their latest technical report
• net cash on the balance sheet (the last debt was paid back recently)
• as part of its capital allocation strategy, besides investing in the business, management is holding parts of its cash reserves in bullion (physical gold and silver)
• it announced a first share buyback program of the equivalent of 5% of stock outstanding which could happen in less than a year at current metals prices, thanks to strong free cash flow generation and no cost of debt to service, while competitors are diluting their shareholders, even at current prices
• and finally, a valuation that does not include a high premium anymore with an EV / free cash flow (!) of well less than 10x

Although there are also some negatives, I think the positives by far outweigh. The overall package is worth it for me to publish a report about this business.

For me, it is the only investable and interesting silver miner.

Since I have started this blog and my memberships, the average total return of my closed ideas is +19.6%, comfortably beating the S&P500 and the iShares MSCI World ETF.

I am also ahead “live”, looking at all my active and closed ideas.

If you struggle to find high-quality investment ideas that are not already “priced for perfection”, consider becoming a Premium or Premium PLUS Member, to receive my exclusive research reports with my best and market-beating stock ideas.

Silver update – the last twelve months

The first thing I already briefly talked about in the intro section, is the price of silver.

Below, you can see the picture over the last five years, with the dip in 2020 likely having been a panic low with prices way lower than 15 USD, even around 12 USD.

That would be akin to oil at 20 USD – killing almost all producers.

Though it is not impossible that another correction could occur, 15 USD for an ounce of silver for a longer period of time won’t happen. Especially with the inflationary wave of the last two–three years, many miners have been complaining about massively higher production costs.

It lies in the nature of things that when production costs are too high or sales prices are too low, respectively, that the weakest parts of the chain start to crack.

Those producers with the highest costs are the first to start decreasing their output or even entirely closing their operations in order to limit the losses.

That’s why I put such a high emphasis on low-cost production. We are not talking about 10% or 20% higher production costs, but often even 40% or more. Add to this that in many places there is still a shortage of qualified personnel. With costs, I mean costs only to sustain operations – exploration or growth comes even on top.

Even 18 USD would be hard to sustain for many miners. That’s why having low costs is important in order not to be forced into a capital raise at the bottom.

Since my respective Weekly last year, silver has risen by some 25%.

Back then, I wrote that the range between 25–30 USD was the fair value I saw on the assumption that the so-called gold-to-silver-ratio was at an extreme point and at the third-highest value of modern history, i.e. since gold was allowed to float again in 1971.

Since then, the ratio came down a bit, however, despite silver having outperformed gold over the last trailing year (c. 25% vs. 10%), we are nowhere near an overvaluation of silver, relative to gold. And because gold has risen, too, the 25–30 USD range should be upped, either.

All that has happened since is that the ratio came down from 87x to c. 80x.

Historically, in the shorter time frame a value of 70–75x was more of an average (leaving around 10% more upside). However, over the last 50 years, the average was somewhere in the 60’s and the extremes to the other direction, indicating an overvaluation of silver over gold, were well below 40x, with a high at 16x in 1980.

Just for reference, at today’s gold price and assuming a fair valuation of 60x, silver would need to trade today above 30 USD, maybe closer to 35 USD.

That would still not be an overreaction, historically!

What we can say for sure is that there hasn’t been any full-blown bull market, yet.

Neither in gold, nor in silver.

It is nice to see silver up, but there is certainly more to come. The above was just regarding the gold-to-silver-ratio. With more political and economical mess possible, it should be rather a question of time, until both metals push higher again.

It feels more like a repeated knock on the door.

There will come a time for higher prices. To sit it out, you don’t want to focus on silver miners with production costs around 20 USD, plus an indebted balance sheet. You need enough buffer in the form of low production costs.

To give you a number, low is below 15 USD per ounce for all-in sustaining costs (“AISCs”).

Everything above 15 USD is not interesting. Especially, when production costs continue to rise further.

As is well known, Mexico is by far the biggest silver producing country.

Compared to last year, its leading position even increased, due to itself having reported higher production volumes of +0.9%, while second and third places China as well as Peru had lower output (by –7% and –1%, respectively), however due to known reasons. 2023 should normalize again somewhat.

It is shocking to see, how dependent the world is on one country in this regard.

What is also true and I referred to it last year, is that every country of the top ten can cause a serious disruption in supply and thus a price shock. Some export restrictions here, new laws or taxes (or forced government changes) there, you name it.

New massive supply isn’t around the corner.

There are some bigger development projects in the making, but they are years from being shovel-ready. Plus, financing in the now high interest rate environment is another question explorers and developers have to answer.

Quite to the contrary as to supply, a very hotly debated topic was the new set of laws, implemented in Mexico (see here) which for example from now on only allows for shorter new mining permits from 50 to 30 years. Also, concessions can be terminated prematurely in the case of no work being conducted over a period of two years. You can see here, here or here for more information.

The latter is interesting, because especially small exploration companies are doing exactly that – searching for new discoveries and then waiting for a partner to join or to even sell the project entirely due to financing issues. While at first it was frightening and confusing, it seems as though already permitted projects are not affected. But on the other hand, taxes and royalties could be upped, the same with environmental rules.

All in all, the tone on Mexico has become very negative, especially when you also factor in the prior nationalization of its lithium reserves (see here). Just to remind you, for many analysts, Mexico has been a Tier 1 jurisdiction in silver mining. That’s why I wrote “true Tier 1” in the intro section, referring to the USA and Canada.

Below, we can see a confirmation of what I wrote last year.

Supply of silver hasn’t grown and isn’t growing meaningfully, while demand, though slightly down year-over-year, is pacing ahead, causing a supply deficit which is price-supportive.

For example, demand could be driven higher by technological improvements in the solar industry, like this article writes (see below the picture):

Where will higher demand and – at best – stable supply lead to?

Likewise interesting is the third row I highlighted – investment demand via exchange traded products in 2022 and so far in 2023 has been negative. The gamblers haven’t entered the game, yet, unlike in 2020 when the party was in full swing with silver shooting up towards 30 USD per ounce.

All in all, I can find more arguments in favor of higher silver prices to be expected with limited downside – a situation I feel comfortable to be in.

With this, let’s discuss the stock of a company that I wrote about briefly last year.

Why stock picking is so important + why Hecla Mining is not interesting for me

Before I write about the stock, I want to answer your question why the heck not just buy a silver miners ETFs and watch it go up when the time for silver comes.

Isn’t it obvious that silver miners are all multi-baggers when silver rises?

Here is the reason why you should choose your stocks wisely and why ETFs are not an option for me:

In plain English, over the last five years, the silver mining ETF has practically gone nowhere while the silver spot price is up by c. 70% (!!).

It’s the Global X Silver Miners ETF (ISIN: US37954Y8488, Ticker: SIL).

Especially since 2021, physical silver and this index have been showing a vast divergence. Obvious explanations have been inflation (massively higher production costs) and of course higher interest rates (higher costs of capital)!

Any questions left why stock picking and knowing what you own is so important?

And no, it has nothing to do with manipulation, conspiracy or the like. It is also not an unjustified market movement or Mr. Market overreacting like some metals evangelists and doom prophets are finding excuses for being wrong hopelessly preaching.

Many silver miners are simply not competitive and have weak leadership, meaning capital management that is often pro-cyclical and value destructive.

When production costs increase from say under 15 USD to 17 or 18 USD or even above 20 USD (i.e. by at least 30–40% as has happened), then a higher silver price, even if up by 30%, does not change the outcome for the business.

Why should the stock of a silver producer rise in such a scenario?

This index ETF has all the household names in its top ten, with Pan American Silver (ISIN: CA6979001089, Ticker: PAAS) even having a weight of close to 15% as the second biggest position. Number three with a weighting of more than 6% is the stock that I found the most interesting last year.

It is the stock of Hecla Mining (ISIN: US4227041062, Ticker: HL).

However, Hecla back then was not and today still is not a prime pick for me. There are some points that I simply don’t like about it.

As I don’t want bad compromises, but high conviction ideas, it was easy to pass on it.

Just to briefly recap, Hecla is the biggest American silver producer, alone responsible for an estimated 40% of total US silver production. It operates in the USA and Canada and thus is active only in true Tier 1 jurisdictions, while most other silver producers have at least some exposure to Latin America.

Many are pure-play Latin American exposed businesses.

Others like Pan American Silver are not even true silver producers like I’d like to see them, as the biggest junk of its sales comes from gold. I know this can change as they have a huge dormant silver mine in Guatemala, but it does not change the fact that one should check what a company is doing and how it is generating sales and cash flows.

Only because a company has the word “silver” in its name does not tell you the whole story!

Another important topic to lose a few words about are costs and profitability.

All-in sustaining costs are only half the truth and a misleading metric at best, because it sounds like “all costs”, maybe even suggesting profitability in many cases where it actually isn’t there.

AISC means, as written above, that under these costs operations can be sustained.

However, most miners have some sort of exploration work in order to find new resources and reserves to replace the depleted ones. Otherwise, it would be a countdown to finish for good.

So, while a company can report AISCs below the current silver spot price, the net results and free cash flows can still be negative.

And this is something that affects Hecla, too.

Although they have generated positive cash flows from operating activities over the last ten years (green line), their business needs lots of investment capital and lots of cash is used for debt holders (more below). In some years, free cash flow even was positive (blue column). But there is no consistency.

Sure, they are also investing for growth, but at a time an investor wants to see returns.

Why not pick a stock where management is really shareholder friendly, operating with tailwinds, as I will show to my members with my next exclusive report?

How has Hecla been financing its operations? Not in a shareholder friendly way…

Below, I created a chart that shows the development of total share count (blue line; with the latest quarterly results, share count climbed over 600 mn. shares) as well as net debt of Hecla over the last ten years.

Net debt is up by 50% and share count even by 85% (approaching a double):

If you look up again to the chart showing cash flows, you will see that operating cash flows are where they have been ten years ago. Lots of investments, lots of debt and dilution, but the results are improvable, to put it this way…

Although Hecla does acquisitions from time to time and despite it having grown its reserves, it is still heavily investing. The bottom line is, factoring in the high interest payments for the outstanding bond, common shareholders are not seeing anything tangible.

The dividend for common stockholders is only symbolic. Posted results are negative.

Over the last twelve months rolling, while generating 76 mn. USD in operating cash flows, Hecla paid 37 mn. USD in cash interest. This is the equivalent of a dividend yield of 1.3%. Not much, but not for shareholders, either.

In the last two conference calls, management was explicitly asked about their own definition of free cash flow which is different from what one usually understands of free cash flow, they responded with “free cash flow on a mine basis” – or something the like, but the context is correct.

This means, effectively, Hecla as a whole is burning cash.

Sure, you can argue that they are investing for the future to increase output. But at a point, there has to be profitability. And constant dilution is not what I like to see.

Numbers and figures seldom lie.

If this weren’t enough, the stock of Hecla is even pretty expensive likely due to being a blue chip in this industry and due to its tier 1 operations.

Its EV / operating cash flow is a lofty 32x, assuming 100 mn. USD in operating cash flows – operating, not free! Even taking its in the short-term non-replicable 220 mn. USD cash flow number from 2021 (due to higher costs), results in a multiple of still 15x. Again, for the operating cash flow.

Hard to believe, but finally after a year I managed to find a Canadian stock that outperforms on many of my points of criticism. My Premium and Premium PLUS members will soon, namely next Saturday, 02 September 2023, hold my next research report in their hands.

Although this choice isn’t 100% perfect, either (which investment is?), it did convince me due to a favorable risk-reward ratio and several high-quality traits:

• successfully switching from an exploration company to a producer
• a proven management team with skin in the game that already successfully built and sold a silver producer in the last decade (even with a similar name)
• among the lowest production costs still, despite a hefty increase in costs, presented with their latest technical report
• net cash on the balance sheet (the last debt was paid back recently)
• as part of its capital allocation strategy, besides investing in the business, management is holding parts of its cash reserves in bullion (physical gold and silver)
• it announced a first share buyback program of the equivalent of 5% of stock outstanding which could happen in less than a year at current metals prices, thanks to strong free cash flow generation and no cost of debt to service, while competitors are diluting their shareholders, even at current prices
• and finally, a valuation that does not include a high premium anymore with an EV / free cash flow (!) of well less than 10x

Although there are also some negatives, I think the positives by far outweigh. The overall package is worth it for me to publish a report about this business.

For me, it is the only investable and interesting silver miner.

Conclusion

The price of silver is up by around 25% since I wrote about it last year, but there still has not been any bull market.

Investing in silver miners, however, is a completely different game. While many think that all silver miners are automatically multi-baggers only when silver rises, the truth is that silver massively outperformed most silver miners over the last five years.

I finally managed to find a silver miner that checks most of my requirements. The report will be sent to my members next Saturday.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

Likewise, you qualify for eight, respectively three more exclusive reports with my best investment ideas plus updates on the featured businesses over the next twelve months.

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