A recent article here on Seeking Alpha made an interesting comparison between the performance of gold mining companies as represented in the AMEX Gold Bugs Index (^HUI) and the S&P 500 Index (^GSPC). The author concluded in a similar vein as the author of another article that excessive dilution has denied shareholders of gold mining companies greater gains closer to the performance of the underlying metal price during the past 10 years.
These findings made us curious, and prompted us to investigate U.S.-listed silver producers with regard to their value creation for shareholders versus dilution in their share structure. In the absence of a silver equivalent to the HUI, we had to take our own hand-picked sample of silver-producing companies to represent the sector. Our picks included the following 9 U.S.-listed companies: PanAmerican Silver (NASDAQ:PAAS), Hecla Mining (NYSE:HL), Coeur d'Alene (NYSE:CDE), Endeavour Silver (NYSE:EXK), First Majestic Silver (NYSE:AG), Silver Standard (NASDAQ:SSRI), Great Panther Silver (NYSEMKT:GPL), SilverCorp Metals (NYSE:SVM) and the streaming company Silver Wheaton (NYSE:SLW). The table below gives some basic data on these companies from Yahoo Finance on March 3, 2013:
When looking at the past 10 years, our small sample of silver mining companies dwindles to only four that have a long enough trading history (PAAS, HL, CDE, SSRI). The two diagrams below show, firstly a comparison of market capitalization and the silver price since January 1, 2003; and secondly, the same comparison, but this time, using the share price instead of market capitalization. All data for these and following comparisons was taken from ycharts with a cut-off date of March 2, 2013.
Three out of the four companies have managed to outperform the price of silver by market capitalization over a 10-year time frame; however, all of them have grossly underperformed when using the share price as a yard stick. The only explanation that comes to mind would be dilution that has translated into increasing market capitalization, but has not created value for shareholders.
In order to be able to work with a larger sample, we decided to consider a time frame starting on July 1, 2010. This time frame includes the latest sharp rise in silver price and the subsequent correction that is still ongoing. The diagram below illustrates the development of issued shares for the considered companies. The 9 silver mining companies can be split into three groups:
- 2 companies (EXK, PAAS) with a sharp increase (>40%) in the number of outstanding shares;
- 3 companies (AG, GPL, HL) with a moderate increase (10%-20%) in the number of outstanding shares; and
- 4 companies (CDE, SWL, SVM, SSRI) with little increase (<5%) in the number of outstanding shares.
Market capitalization, share price and silver price (+54%) since July 1, 2010 are illustrated in the bar chart below. Four out of the nine considered companies managed to outperform silver during this period of time in terms of share price appreciation: AG (+316%), EXK (+80%), GPL (+71%) and SLW (+68%). Interestingly, EXK has the highest increase in share count out of all the considered companies, AG and GPL belong to the group of companies with a medium increase in shares, and SLW hardly had any new shares issued during the considered time frame. There clearly is no correlation between dilution of the share structure and performance when considering the chosen time frame.
We repeated the exercise for an even narrower time frame, looking at the performance just during the recent silver price correction (let us call it that for now) starting on April 28, 2011, when the peak in silver price was recorded. The chart below shows the results. Silver fell by 41.54%, and only AG and SWL managed to outperform silver during this period of time when considering the share price and CDE replicated the silver performance almost to the dot.
When looking at dilution for this relatively short time frame, 3 companies stand out: PAAS (+41% increase in shares), EXK (-18%) and AG (-12%). While AG showed remarkable performance resisting the down trend, EXK and PAAS slightly underperformed silver prices. All other companies in our sample issued less than 5% new share capital. GPL represents a special case. It issued 4.6% new shares during the period of silver correction, but also issued an additional 8% just before our chosen starting date. The worst performance during this period of time was recorded for SVM (-74%), SSRI (-71%) and GPL (-68%). Of these three companies, SVM and SSRI hardly issued any shares at all during the time of the silver correction.
(click to enlarge)
The table below summarizes our findings for the three time periods and underpins our conclusions:
When considering the four silver companies with records going back at least 10 years, the performance in comparison to the silver price has been decidedly sub-par throughout with share dilution, taking away much of the profits that could have been expected when considering the performance of the underlying metal.
However, when looking at a shorter time frame, a different picture emerges, with companies delivering outstanding results despite increases in the number of shares. Some companies have managed to turn acquisitions or developments financed with new equity into value for shareholders. Other companies have issued new shares without generating that value.
Without pointing fingers at under-performers, the data indicates that First Majestic Silver has provided outstanding value creation for new shares in the past 3 years. To a lesser degree, this is also true for Endeavour Silver. The performance of Great Panther Silver is comparable to these companies up to the time of the peak in silver price, but falls behind thereafter.
Also remarkable in the context of this study is the performance of Silver Wheaton, which was achieved practically without issuing new shares at all in recent years.