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In this article I analyze the Global X Silver Miners ETF (SIL) in order to determine how much silver exposure its shareholders actually get. The goal of this ETF is to give investors exposure to a wide array of silver mining companies, so that they can benefit from rising silver prices without exposing themselves to the risks of owning individual mining companies.

When looking at the list of companies held by the fund, I immediately became concerned that it was not providing investors with the exposure and leverage to the silver price that they likely hoped for. Some of these concerns included:

  • Silver Wheaton (SLW) recently made a large deal to buy gold from Vale (VALE).
  • Hecla Mining (HL) recently purchased Aurizon Mines (AZK), which is a gold producer.
  • McEwen Mining (MUX) has a lot of estimated future gold and copper production.
  • SilverCrest Mines (SVLC) gets most of its revenues from gold.

There are others, but it led me to question how much silver exposure SIL investors were really getting.

Methodology

There is no straightforward way to state how much silver exposure a company has, or what impact the price of silver will have on individual companies given their unique situations. When compiling my list of SIL components I decided to calculate each company's silver exposure differently, depending on their individual situations. I decided that for established producers I would look at the percentage of revenues that came from silver. If the company was very clear in providing 2014 production guidance I used these figures. For companies that produce, but which will see the bulk of their production in a few years [e.g. Silver Standard Resources (SSRI) and McEwen Mining] I decided to look at resources rather than production. The same thing went for future producers [e.g. MAG Silver (MVG)]. I focus only on the top 15 components of the fund, which make up 90% of its holdings and should therefore be representative of the fund itself.

Findings

CompanyWeightingSilver Exposure
Fresnillo (OTCPK:FNLPF)12.9In 2012 the company produced 41 million silver ounces, but 69 million silver equivalent ounces. Thus revenues were about 60% from silver.
Silver Wheaton12.5The company gets 90% of its revenues from silver. But it recently made a large deal with Vale for gold streams, and it therefore estimates that its revenues from silver will decline to 76% of total revenues. I will compromise and say that revenues are 83% from silver.
Industrias Penoles (OTCPK:IPOAF)8.1%Industrias Penoles received about $650 million in revenues from silver during the first half of this year. With total revenues of $2.83 billion, revenues from silver were roughly 23%.
McEwen Mining5.6%Since McEwen Mining's production is, for the most part, in the future, I will look at resources instead of production. The company has 121 million ounces measured and indicated silver resources, but 950 million of equivalents in the form of copper and some gold. Thus McEwen's silver exposure is about 13%.
Tahoe Resources (TAHO)5.3%Tahoe Resources will begin production next year. About 84% of its resources are silver.
First Majestic Silver (AG)5.3%First Majestic Silver is one of the purest silver producers with 90% of its revenues coming from silver.
Silver Standard Resources5.3%Most of Silver Standard Resources production is in the future so I will look at resources, of which about 80% are silver.
SilverCorp (SVM)5.1%SilverCorp gets about 75% of its revenues from silver.
Hecla Mining4.7%Since Hecla Mining acquired Aurizon Mines it gets about 60% of its revenues from silver.
Hochschild Mining (OTCPK:HCHDF)4.6%Hochschild Mining gets about 70% of its revenues from silver.
Coeur d'Alene (CDE)4.4%Coeur d'Alene gets about 61% of its revenues from silver.
Fortuna Silver Mines (FSM)4.3%Fortuna Silver Mines gets about 74% of its revenues from silver.
Pan American Silver (PAAS)4.2%Pan American Silver gets about 70% of its revenues from Silver
Endeavour Silver (EXK)4.1%Endeavour Silver gets about 68% of its revenues from silver.
Mag Silver3%Mag Silver expects to get 71% of its revenues from silver once its Juanicipio Mine goes into production.

If we take the silver exposure for each company, multiply it by its weighting in the index, add them up, and then divide by 0.9 (since they make up 90% of the index), we find that the SIL has silver exposure of just 64.1%.

Conclusion

if you want exposure to the price of silver, SIL is a bad way to get it. That is not to say that there aren't some very good companies on this list: I think several of them are excellent investments. But if you want exposure to silver you will want to find a different strategy than simply buying SIL shares.

The simplest way to get silver exposure is to just buy silver. You can buy coins or bars, or you can buy an ETF if you want liquidity. Two of the most liquid are the iShares Silver Trust (SLV) and the Sprott Physical Silver Trust (PSLV). I highly recommend the latter, as it is given capital gains tax treatment, while SLV is given "collectibles" tax treatment, which means that you have to pay 28% instead of 20%.

For investors who like the idea of a silver miner ETF because mining companies offer leverage to the silver price one strategy I would suggest is to go through the above list and buy a basket of companies that have a high percentage of silver exposure. Given the nature of silver mining you are never going to find a "pure" silver mine: there will always be copper, gold, zinc, and lead by-products. But if you buy a basket of First Majestic Silver, Tahoe Resources, Silver Wheaton, Silver Standard Resources, SilverCorp, and Fortuna Silver, then you will get diversification and much more exposure to silver than if you buy the SIL. An equal weight basket of these six stocks will give you about 81% silver exposure, which is much better than the 64.1% offered by SIL. If you overweight those companies with the most silver exposure then this figure will slightly increase.

Source: The Global X Silver Miners ETF Doesn't Have As Much Silver Exposure As You Think It Does