Silver Stocks 3
Scott Wright, July 3rd, 2009
Page 1
When the words "precious metals" are spoken, gold is usually what comes to mind first. And in the universe of PM stocks it is indeed gold that most miners are after. The vast majority of PM mining companies explore for and ultimately seek to find the Ancient Metal of Kings. But gold is not the only precious metal.
Silver is next most popular in the PM realm. And the stocks that focus on this important metal have been great performers over the course of its secular bull. But the silver stock sector is far smaller than the gold stock sector, thus offering much less variety to investors and speculators.
Measured by both population and market capitalization, silver stocks are but a small minority of the greater PM stock sector. And as a PM stock analyst I'm able to experience this lopsidedness firsthand in my ongoing research. At Zeal we periodically publish research reports that profile our favorite stocks within a given sector. And in the process of uncovering what we consider to be the best-of-the-best, we survey the sector's entire universe of stocks.
The research that went into our previous 2 reports, gold-producing stocks and junior gold stocks, and our brand new silver stocks report really allowed me to quantify this gold/silver stock disparity. And the first thing that was apparent amidst this research was population concentration. Not surprisingly there are only about one-fifth as many silver stocks as there are gold stocks.
In scouring the markets for those companies that consider this shiny white metal to be their primary focus of exploration and/or source of revenue, I found close to 100 that had listings on the US and Canadian stock exchanges (where most of the world's mining stocks list). This is in contrast to well over 400 gold stocks. From early-stage explorers to the world's largest producers, silver stocks number many fewer than gold stocks.
This disparity is even more apparent when you consider market capitalization. In my initial screen of these nearly 100 stocks back in March their combined market cap was less than $7b. To put this number in context, at the time I performed this screen the 15 stocks that comprise the HUI gold-stock index had a combined market cap of $144b! To take it even farther, the S&P 500 index housed 220 individual companies that had market caps in excess of the entire contingent of silver stocks.
The silver stock sector is tiny, and to gain a better understanding of its diminutive nature the first place we can look to explain this is revenues. According to the US Geological Survey about 672m ounces of silver was mined in 2008. And with an average silver price of $14.94 per ounce, if all mined silver was sold at spot the entire supply chain would generate revenues of only about $10b.
And it must be noted that these revenues are based on the second highest annual average silver price in history. Only in 1980, when the Hunt brothers and their Arab counterparts succeeded in temporarily cornering the silver market, was the average price higher at nearly $21. This was an anomalous year that captured the famous spike to $50.
Interestingly the stocks that comprise the formal silver stock sector can only take claim to a small portion of this $10b in revenues. This sector is inclusive only of those mining companies that consider silver their primary metal and have mines/deposits that are silver-centric. As you will discover it is silver's subservient mineralized nature that limits the pool of silver stocks.
According to renowned PM-mining consultancy GFMS, about 73% of all silver mined is a byproduct of other metals mining. Silver is usually present in polymetallic deposits that are host to higher concentrations of base metals and gold. In fact, what may be considered high-volume silver production at a given mine may only represent a small chunk of revenues compared to the other metals within the same ore. Many of the world's largest silver mines aren't actually silver mines.
This reality is apparent when you look at GFMS's list of the world's top-20 largest silver producing companies. Provocatively only 5 of these companies consider themselves to be primary silver producers. Most in fact operate massive gold, zinc/lead, or copper mines that happen to have silver byproducts. And though measured by volume this silver byproduct is substantial, with millions of ounces of annual production, the revenue from the sale of this silver is only a fraction of total mine revenues.
And more often than not these silver revenues are accounted for simply as byproduct credits to mine operating expenses. You may not even be able to find them in the books of the larger mining companies. And if you do find anything on silver revenues they will likely be in the hedge-accounting section of the financials, as forward sales contracts. Many of these companies perform such deeds in order to better forecast revenues, which is vital in putting together mine operating plans and budgets.
So even though many mining companies actually produce silver and include this metal as part of exploration and development plans, not many rely on it to drive their businesses. Therefore when compiling the pool of primary silver stocks we have to discard those companies responsible for the great majority of the world's mined silver supply. After all, the purpose of investing and speculating in silver stocks is to gain exposure to this metal and leverage its gains.
