Silver stocks should still be a the focus of investors
Even after the recent silver price surge, most silver miners are still undervalued.
Silver miners' stocks have been on a year-long roller coaster ride, dragged into the March stock panic before skyrocketing in a massive climb. While the much higher prevailing silver prices radically improve silver stock fundamentals, the second quarter's national economic blockades to combat COVID-19 wreaked havoc in the sector. The latest quarterly results from the silver miners, released recently, revealed unprecedented challenges. The realm of silver stocks is tiny as there aren't many large silver mines in the world. Only a handful are primary silver producers i.e. Companies that generate over half of their revenue from silver. In mid-August, when the silver mines reported their latest Q220 operating and financial results, the leading reference and trading company in the sector had net assets of just $ 1.1 billion. It is the SIL Global X Silver Miners ETF. The 2020 silver stock price action has proven breakneck fierce. In just a few weeks through mid-March, the SIL plunged 43.8% as silver got entangled in this government-sparked stock panic. This culminated in a full-blown crash, with the SIL collapsing by 27.4% in the last few days of trading alone! Silver and its mining stocks had fallen extraordinarily out of favor, an exceptional buying opportunity for contrary traders. Silver left these extreme stock market panic lows with a violent V-blow and sent silver stocks into the stratosphere. In the next 4.8 months up to the beginning of August, the SIL shot up by 176.9%! While it's unbelievable that any sector has nearly tripled in such a short amount of time, silver holdings have actually underperformed. The metal they mined increased by 142.8% during this period, so that the upward lever of SIL was quite weak at 1.2x. In late July, silver began to shoot parabolically as stock traders poured into its leading SLV ETF. This overbought silver excessively and required a correction to ease the euphoria and rebalance the mood. It started with a bang: silver crumbled 15.2% in a single trading day! The SIL pounded 13.1% through mid-August, and silver stocks made their own correction when their second quarter results were released. And they sure weren't pretty! The national economic lockdown enacted last quarter to slow the spread of COVID-19 hit major silver-producing countries disproportionately hard. According to the most recent comprehensive data from the venerable Silver Institute, Mexico and Peru are the world's top two silver producing areas. In 2019 they accounted for 23% and 16% of the total silver production worldwide, i.e. 4/10! Unlike the Silver Institute, which only publishes global figures on silver supply and demand annually, the World Gold Council updates its best available fundamentals for gold on a quarterly basis. In its report on the development of gold demand in the second quarter, analysts at the WGC highlighted the astonishing extent of the nationwide lockdown measures imposed on Mexico and Peru. Their gold production collapsed in the 2nd quarter by a catastrophic 62% or 45% compared to the previous year! Mining in Mexico was suspended for a staggering 60 days last quarter! And since this leading silver-producing country is the primary target of American and Canadian silver miners, their forced production hits have been colossal. In addition to the unprecedented operational challenges of the second quarter, silver prices were relatively anemic. While the silver price rose by 30.7% in the actual second quarter, the quarterly average price rose by only 9.9% year-on-year. In this way, the enormous increase in the average gold price by 30.9% from Q2'19 to Q2'20 was undercut! The latest parabolic fireworks for silver did not begin until mid-July after the end of the quarter. Of the gigantic 142.8% rise in silver prices after the stock panic, only a quarter occurred in the second quarter. With silver averaging only $ 16.36 last quarter, it was with a lot of trepidation that I began my usual deep dive into the recent results of the major silver miners. This was my 17th quarter in a row analyzing how the world's largest and best silver mines are basically doing. While SIL comprised 27 component stocks in mid-August as the second quarter earnings season ended, I narrowed my investigation to the 15 most important stocks.