Silver Miners’ Dirty Little Secret

I like silver miners a lot. I strongly believe they could lead the next leg of the precious metals bull market. I laid out a bunch of reasons why on Tuesday, in "Silver is Poised to Take the Gold."

However, there is a dirty little secret in mining: Not all silver mines are really silver miners.

By that, I mean some produce more gold than silver. Some also get large amounts of revenue from copper, lead and other metals.

Now, that’s not necessarily a bad thing. But if you’re buying a "silver" miner, be aware of just how much of its production mix is actually that metal … and not something else.

Here’s a chart of five popular silver miners. It breaks down the company’s revenue contributions by metal.

There are two obvious leaders …

First Majestic Silver (AG) derives the highest percentage of its revenue from silver. Last year, about 70% of its revenue came from silver sales.

I’ve visited First Majestic projects multiple times. Those guys are sharpies. They have given their company the motto: "One metal, one country." That’s because they own six producing primary silver mines, all in Mexico.

Pan American Silver (PAAS) is the other leader. It gets about 51% of its revenue from silver. Pan American is also the second-largest primary silver producer in the world.

It has seven operating silver mines in Mexico, Peru, Bolivia and Argentina. Three of those mines produce more revenue from gold than silver. But the silver production at its other mines manage to make silver the biggest part of its revenue mix.

There’s also an honorable mention …

Silver Wheaton (SLW) isn’t on the chart, but it’s the No. 1 (whoo-hoo!) silver producer. The reason it’s not on the chart is Silver Wheaton isn’t a miner. It’s a streamer. That is, Silver Wheaton buys "streams," or production, from other mines. Lots of ’em. And that gigantic silver streamer is hard to beat.

Then there are the others in the chart …

  Tahoe Resources (TAHO) gets only 40% of its revenue from silver.

  Hecla (HL) gets 39% of its revenue from silver.

  And Coeur Mining (CDE) made only 37% of its revenue from silver in 2016.

But wait a minute! Isn’t Tahoe known for the richness of its Escobal silver mine in Guatemala? Yes, it is.

But it bought Lake Shore Gold, which was one of my favorite small gold producers before Tahoe acquired it. And then Tahoe acquired Rio Alto and its Shahuindo project, an open-pit heap leach gold mine.

That’s a lotta gold.

What’s in a Name?

Wait one more minute! I’m leaving a big silver producer off this list — Silver Standard Resources (SSRI). I mean, it has "Silver" in the name, right? It must be a primary silver producer. Right?

Nope. Only 33.9% of Silver Standard’s revenue comes from silver. It has three big mines, and two of them are primary gold producers.

So that’s the dirty little secret of some of the world’s top silver miners. They’re actually gold miners that also produce silver.

So why are silver miners buying and developing gold mines? It’s not just to make a buck. The fact is, new, good silver mines are as rare as hens’ teeth.

And in those that do exist, the grade of the ore mined is going lower. Here’s a chart of the average grade at the world’s top seven silver-producing companies, through 2015.

You can see that grades are going down. Not surprisingly, production at the big seven is also going down.

And that brings me to one last chart …

Yep, the world hit Peak Silver. In other words, production of silver from the world’s mines has peaked. That’s according to GFMS Thompson Reuters.

Silver production fell about 3% last year. And it should keep going down. It takes years — often more than a decade — to bring a new mine online.

So that’s why I’m bullish on silver, and silver miners.

And if you’re thinking there are some good little primary silver producers I haven’t mentioned in this article, you’re right. I’ll tell you about them later. When I roll out my new publication for Uncommon Wisdom Daily.

For now, you can do your own due diligence and buy individual miners. Or just buy the Global X Silver Miners ETF (SIL). It’s a basket of rock-solid companies.

Just be aware that many of the miners held in the SIL get more of their revenue from gold than silver. That limits their stock prices’ leverage to silver prices.

And that shows just how tough it is, when a silver-biased ETF ends up owning a lot of gold miners.

All the best,
Sean Brodrick

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Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit. Working on…