It's hard to believe that silver was trading at only $4 just 11
years ago. And amazingly it was only seven years ago that silver
had hit $10 for the first time in nearly two decades. Now at over
$30 and rising, silver is flexing its muscles as one of the
best-performing assets of the last decade.
There's no arguing that silver's secular bull run has been
spectacular. Since its 2001 low, silver had soared a staggering
to its 2011 high. And based on its structural fundamentals,
silver's bull runstill likely has plenty of room to run in the
years to come.
Investors who've been accumulating this precious metal over the
years have obviously fared quite nicely. But there's another silver
vehicle that in some cases has fared even better. Silver stocks,
leveraged plays on the underlying metal, have had quite the bull
market of their own.
Though there is no silver-stock index that has a long-enough
history to give us a direct comparable to silver over the course of
this bull, the next-best comparable is the performance of gold
stocks given their tight correlations. And the venerable HUI
gold-stock index is probably the most conservative metric (the HUI
is comprised of the world's largest gold stocks, along with a
couple of large silver stocks).
Considering their risks, mining stocks should exhibit positive
leverage to the metals. And with a bull-to-date gain of
to its 2011 high, the HUI has indeed easily outperformed its
underlying metal (+640%). And I suspect a primary silver-stock
index would have gains just as good, if not better, over this
Thankfully, there's a product that has come to market that does
offer investors some semblance of sector-level performance for
silver stocks, the Global X Silver Miners ETF (
). Global X Funds has been a huge innovator in the ETF realm in
recent years, especially when it comes to commodities stocks. Its
unique approach gives investors easy access to small commodities
sectors and subsectors. And the first-of-its-kind Silver Miners ETF
is a godsend to the tiny silver-stock sector.
SIL was conceived in April 2010, and like all ETFs its goal is
to closely mirror the performance of an underlying index. This
index is the Solactive Global Silver Miners Index, and it is
designed to generally reflect the performance of the silver-mining
industry. SIL ultimately comprises stocks that are actively engaged
in some aspect of this industry - whether it be mining, refining,
I see two major benefits to this ETF, and the first is the
overall benefit offered to investors. As with most ETFs, SIL is
easy to buy, easy to sell, and it even has a relatively liquid
options market. SIL's basket of silver stocks also greatly reduces
individual-company risk. And it even offers geographical
diversification, which is a big deal in the mining industry.
SIL also opens up the opportunity for institutional investment.
Since most individual silver stocks rank too small and/or illiquid
for institutional guidelines, most institutions couldn't or
wouldn't touch them. With the advent of SIL, many can and hopefully
will as this ETF grows in popularity (SIL's total assets are
currently about $366m).
Many folks, especially ETF haters, may look past these obvious
investor benefits. But they shouldn't.Since silver stocks are small
by market capitalization, thin in population, tend to be illiquid,
and are known to be hyper-volatile, they can be very intimidating
to potential investors who aren't attuned to the industry. I
guarantee you that a big chunk of the capital pouring into this ETF
wouldn't have found its way to silver stocks otherwise if it didn't
The second major benefit of this ETF piggybacks off the first.
And that is capital shunting directly into the underlying component
mining companies. This may not seem like a big deal, but
considering the size of these stocks, any buying is good buying.
This increases exposure, liquidity, and ultimately the stock prices
in a strong silver environment.
Speakingof a strong silver environment, this is exactly what
investors rely upon in order for silver stocks to move to the
upside. And as most folks who are interested in this sector are
likely aware, silver is in the midst of a
strong new upleg
. Since its late-June low, silver is up an impressive
to its high just last week.
This new silver upleg gives us an excellent chance to test the
resolve of the SIL ETF. And with a
gain since its own low in July not only has SIL kept up with
silver, it has indeed provided the positive leverage that is
essential to keeping investors interested in these types of
Returns like this over only about two months are certainly
attractive. And this will no doubt draw increased attention to
silver stocks. And for many of the first-timers into this realm,
the SIL ETF will be their first destination for capital.
These returns of course piqued my own interest, which prompted
me to do a little dissecting. It's always prudent to get more
intimate with an ETF than just its name, to find out if it truly is
the best proxy for a given sector. Even a high-level peek can speak
Click to enlarge
In the table above, you'll find a summary of SIL's holdings,
ranked by percentage of assets in descending order. In blue are the
stock symbols, followed by the market capitalizations in US
dollars, and then the stocks' flagship project location(s).
In total, SIL comprises 32 component stocks, which is actually a
significant portion of the world's population of silver stocks. By
our count, there are less than 125 primary silver stocks
(explorers, developers, and producers) with listings on the US and
Canadian exchanges. And it is well known that these exchanges are
host to the vast majority of resource stocks.
To put this listing concentration in context, of the 32 SIL
holdings all but five have primary listings in the US and/or
Canada. While there are a handful of silver companies that list
their stocks exclusively in London, Mexico, Australia, or
elsewhere, it is a minority. I'd say that SIL's 85% weighting
towards US and Canada stocks is a fair representation of the global
concentration of silver stocks.
Even if we are conservative and say there are 150 primary silver
stocks in the world, this is still an incredibly small number.
You'd think there'd be more companies scouring the planet for this
precious metal, especially considering its fortunes over the last
decade orso . There are however logical reasons for this
phenomenon, the most prevalent being silver's geological
Interestingly as measured by revenue, silver is usually a
of polymetallic deposits that hold strong concentrations of either
base metals (typically lead and zinc) or gold. For this reason,
less than one third
of total global mined silver production comes from
silver mines. And because of this, mining companies that explore
for and successfully develop
silver deposits are not as common.
Another attribute that comes with primary silver stocks is their
generally small size. The simple average market capitalization of
the 32 SIL components is only $2.6b. And if I exclude its big four,
the average goes way down to $873m. This is definitely small-cap
territory to say the least. And there are a few main reasons for
their pint-sized statures.
The first reason is simply the lower relative value of primary
silver deposits and/or operations. In general a
silver deposit contains resources in the neighborhood of 40m
ounces, with a
mining operation producing 4m ounces per year. Compared to gold (at
the current 1-to-52 ratio), a large silver deposit is equivalent in
value to a
gold deposit (769k ounces). And a very large silver-mining
operation is equivalent in value to a
gold-mining operation (77k ounces).
Another reason for the generally small size of silver stocks as
a group is the lack of producers. There is naturally a big drop-off
in market cap from producer to explorer since there is no guarantee
that a deposit will ever be developed into a profitable mine.
Amazingly there are
less than 30
publicly-listed primary silver producers in the world. And SIL
holds nearly all of them, with three-quarters of its components
actively mining the shiny-white metal.
Lastly, we can attribute silver stocks' small size to the fact
that many of them are woefully undervalued. There are a myriad of
fundamental and technical reasons supporting this assertion. But in
general this sector is still greatly lacking in the exposure it
deserves considering the performance to date and future promise of
its underlying asset.
As for SIL's percentage of assets, the weightings clearly
heavily favor the larger market-cap companies. Nowhere in its
prospectus can I find a reference to a strict adherence to the
conventional weighted-average market-capitalization formula that
most indices employ, but I assume its custodians run some kind of a
hybrid formula along those lines judging by the weightings.
As you can see, SIL's largest three holdings combine for 36%+ of
its total weighting. Silver Wheaton (
) is SIL's largest holding, and it of course lists on both the NYSE
and TSX. Known as a streaming company, SLW is somewhat of a hybrid
between a royalty company and a producer. I've long held the stance
that its brilliant business model makes it the
silver stock. SLW is thus the
company to anchor thisfund.
SIL's next two largest holdings are Mexican-based companies that
actually don't carry big-board listings in the US or Canada. And
they have quite an interesting interrelationship. Fresnillo PLC
(FRES, listed in London) ranks as the world's largest primary
silver producer, with the lion's share of its volume coming from
its massive namesake mine (30m+ ounces per annum) in Zacatecas.
Industrias Peñoles (PE&OLES, listed in Mexico) is more of a
conglomerate company that sports a broadly diversified portfolio of
operations. Peñoles has its hands in a wide variety of metals
mining, and also operates a robust downstream business (smelting,
refining, marketing, etc…). In fact, the only reason Peñoles is
considered a silver company is because of its 77% ownership of
Fresnillo (Peñoles spun off Fresnillo in 2008).
As you go down the list, the next 13 stocks combine to account
for 55% of SIL's weighting. And this brings the total weighting of
the top half of its holdings to
. It is quite clear that this ETF adheres to some sort of
Of these 13 stocks, there's a good mix of mid-tier and major
producers, along with a high-quality junior. On the producer front
Pan American Silver (
), Coeur d'Alene Mines (
), and Hochschild Mining (HOC, listed in London) are among the rare
10m+ ounce primary silver producers. And then we see First Majestic
), Hecla Mining (HL), Silver Standard (SSRI), Silvercorp (SVM), and
Endeavour Silver (EXK) as primary silver miners producing in the
neighborhood of 5m to 9m ounces annually.
In this group, we also find Polymetal International (POLY,
listed in London) and McEwen Mining (MUX). And interestingly these
companies tout themselves as primary
producers. POLY does own the third-largest primary silver mine in
the world (the Dukat mine in Russia), but it is just one spoke on a
wheel that is mainly filled with gold mines. And while MUX's
current operation in Argentina slightly favors silver over gold
measured by revenue, it is in the process of developing a
Lastly in this group of 13 is the lone junior, Tahoe Resources
(TAHO). Looking at its market cap, you wouldn't think this company
was a junior. And it only is in the sense that it hasn't yet
produced any silver. But it will soon be a
producer once its massive under-development high-grade mine in
Guatemala achieves commercial production in early 2014.
As for SIL's remaining 16 stocks, they cumulatively account for
only about 9% of its total assets. These smaller stocks have an
average market cap of just under $200m, which ranks in the
micro-cap category by definition. And of this group 10 are smaller
producers and 6 are explorers.
Overall, after a quick run-through of its holdings, I'd say that
the SIL Silver Miners ETF is a fantastic vehicle for gaining
exposure to silver stocks. And I would highly recommend it to
investors who are either just getting to know this sector and/or
have no interest in owning individual stocks.
But for investors who do have a bit higher risk tolerance and
are willing to learn, individual stock picking is where the real
gains are at. If a large basket of stocks heavily weighted to the
biggies is capable of positively leveraging silver's performance,
imagine what a smaller skillfully-selected portfolio of stocks
The bottom line is investors who've been buying the companies
that explore for, develop, and mine primary silver deposits have
been greatly rewarded over the course of silver's secular bull. And
thanks to the recent addition of the SIL Silver Miners ETF, this
sector is able to reach investors on an entirely new level.
After taking a closer look at SIL, a case can be made that this
ETF represents an excellent proxy for this high-risk high-reward
sector. And as a new wave of investors find their way to silver
stocks, SIL will be waiting with open arms. But by their nature
ETFs have their flaws. And for investors who seek better leverage
than what ETFs have to offer, nothing beats a skillfully-selected
hand-picked portfolio of elite silver stocks.
I am long [[TAHO]], [[AG]], [[EXK]], [[SLW]], [[HL]]. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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