SIL: Why Silver Miners ETF Has More Upside Potential Than SLV
Summary
- Global X Silver Miners ETF launched 100%+ off the lows in March alongside the resurgent silver.
- SIL's top holdings' earnings growth has been solid for the past years and is expected to continue next year.
- A strengthening Canadian dollar is supportive of further upside in SIL.
- SLV has mounted a comeback relative to GLD and plenty of upside remains based on long-term historical relationship.
- Both fundamental and macro factors point to further outperformance in SIL relative to SLV.
It has been quite a rollercoaster ride for silver (SLV) this year. After collapsing to 2009 levels and yet another record low relative to gold prices (GLD), a swift V-shaped recovery ensued in SLV which erased all year-to-date losses. Meanwhile, Global X Silver Miners ETF (NYSEARCA:SIL) has had a similar trajectory albeit with more beta and has notably outperformed SLV since the March bottom:
As of 6/4/2020. Source: WingCapital Investments
From a longer-term perspective, SIL's relative performance to SLV (i.e. SIL/SLV ratio) has been in a whipsaw for the past decade and recently bounced off multi-year lows to around the middle of the range:
Source: WingCapital Investments
Strong Fundamentals Point To New Bull Trend in SIL/SLV
Looking back, we observe that earnings growth in SIL's underlying holdings has been the key driver in SIL/SLV ratio. Using 2010 year-end as the starting point, below, we track the cumulative revenue growth of the top 9 holdings, which make up close to 80% of SIL's exposure. (Note the 10th name Korea Zinc Co Ltd was excluded due to lack of access to their financial statements).
| Symbol | Name | % Weight | 2010 YE (Starting Point) | 2012 YE | 2015 YE | 2019 YE | TTM |
| WPM | Wheaton Precious Metals Corp. | 23.68% | 1.00 | 1.95 | 1.34 | 1.58 | 1.63 |
| POLY | Polymetal International PLC (OTCPK:POYYF) | 14.83% | 1.00 | 1.89 | 1.33 | 1.84 | 1.84 |
| PAAS | Pan American Silver Corp. | 10.15% | 1.00 | 1.08 | 0.74 | 1.11 | 1.15 |
| AG | First Majestic Silver Corp. | 5.02% | 1.00 | 1.84 | 1.43 | 1.51 | 1.49 |
| HL | Hecla Mining Co. | 4.90% | 1.00 | 0.69 | 0.76 | 0.88 | 0.85 |
| SSRM | SSR Mining Inc. | 4.78% | 1.00 | 2.08 | 3.24 | 3.45 | 3.65 |
| BVN | Buenaventura Mining Co. Inc. ADR | 4.36% | 1.00 | 1.35 | 0.84 | 0.79 | 0.72 |
| FRES | Fresnillo PLC (OTCPK:FNLPF) | 4.23% | 1.00 | 1.53 | 1.00 | 1.46 | 1.46 |
| CDE | Coeur Mining Inc. | 3.57% | 1.00 | 1.69 | 0.73 | 0.55 | 0.54 |
| SIL Top 9 Holdings | Weighted Average | 75.52% | 1.00 | 1.67 | 1.27 | 1.54 | 1.56 |
Source: Seeking Alpha, WingCapital Investments
Plotting the 9 holdings' weighted average revenue growth against SIL/SLV ratio, we observe that the two have tracked each other closely over the past decade:
Source: Seeking Alpha, WingCapital Investments
The EBITDA growth vs. the SIL/SLV ratio paints a similar picture, particularly since 2016:
Source: Seeking Alpha, WingCapital Investments
In brief, the fundamental picture, based on both top and bottom-line growth, has been a key factor behind the cyclical trends in SIL/SLV over the past decade. The good news for SIL is that forward growth in both revenue and EBITDA is highly positive for majority of the top holdings, averaging 14% and 23% respectively for the coming year:
| Symbol | Name | % Weight | Revenue Per Share Growth | 10-Year | 5-Year | 1-Year | Forward 1-Year | EBITDA Per Share Growth | 10-Year | 5-Year | 1-Year | Forward 1 Year |
| WPM | Wheaton Precious Metals Corp | 23.68% | 62.82% | 21.42% | 11.23% | 11.86% | 43.03% | 20.51% | 16.43% | 18.50% | ||
| OTCPK:POYYF | Polymetal International PLC | 14.83% | 84.37% | 38.46% | 12.85% | -0.22% | 98.94% | 47.92% | 38.02% | -0.11% | ||
| PAAS | Pan American Silver Corp | 10.15% | 15.07% | 55.91% | 35.68% | 33.47% | -19.86% | 281.74% | 49.89% | 45.42% | ||
| AG | First Majestic Silver Corp | 5.02% | 48.62% | 4.25% | 8.16% | 19.95% | -14.81% | -4.43% | 64.66% | 46.64% | ||
| HL | Hecla Mining Co | 4.90% | -15.42% | 10.77% | 0.41% | 12.74% | -48.17% | 36.97% | -8.41% | 14.45% | ||
| SSRM | SSR Mining Inc | 4.78% | 265.26% | 12.64% | 50.98% | 63.07% | 4678.79% | 170.33% | 86.60% | 113.96% | ||
| BVN | Buenaventura Mining Co Inc ADR | 4.36% | -27.89% | -14.43% | -30.93% | -6.74% | -80.46% | -9.32% | -59.88% | -9.43% | ||
| OTCPK:FNLPF | Fresnillo PLC | 4.23% | 46.35% | 46.75% | 0.75% | -0.22% | -38.54% | 27.27% | -23.32% | -0.11% | ||
| CDE | Coeur Mining Inc | 3.57% | -45.93% | -26.20% | -3.68% | 14.83% | -48.29% | -38.66% | -14.78% | 18.22% | ||
| SIL Top 9 Holdings | Weighted Average | 75.52% | 56.13% | 24.11% | 12.72% | 14.62% | 313.20% | 65.75% | 23.10% | 23.45% |
Source: Seeking Alpha, WingCapital Investments
In other words, we anticipate silver miners to outperform the precious metal itself going forward based on their robust earnings outlook.
Turnaround In Canadian Dollar Is Supportive Of More Upside In SIL
Currency is another key determinant in SIL's outlook. Specifically, we notice that only around 8% of SIL's holdings are based in the United States. In other words, more than 90% of its exposure will be subject to currency fluctuations relative to the USD:
Source: Global X Factsheet
Another crucial observation is that more than 50% of SIL's pool trades on the Canadian stock exchange. That explains the high inverse correlation between SIL and USD/CAD:
Source: WingCapital Investments
As illustrated above, SIL and the Canadian dollar have been moving largely in sync with each other, as both remain in a persistent long-term downtrend. That said, the CAD is showing signs of life after rebounding off extremely oversold conditions (or extremely overbought in USD terms) based on the RSI indicator:
Source: WingCapital Investments
Based on the above chart, spikes above 75 in the weekly RSI had tended to be exhaustion moves and marked major tops in the USD/CAD. If history is any precedent, we would expect the snapback reversal in USD/CAD to continue towards the 200-week moving average. Based on their tight correlation, a strengthening Canadian dollar most likely will be a source of a positive tailwind for SIL.
Mean-Reversion In SLV/GLD: Long Way To Go
Last but not least, after collapsing to fresh all-time lows at the peak of the COVID 19-driven crash, SLV's relative performance to GLD (i.e. SLV/GLD ratio) has mounted a sharp turnaround reminiscent of the post-2008 GFC recovery:
As the above chart shows, while SLV/GLD, clearly, remains mired in a secular downtrend, a snapback rebound towards the linear trendline (about 11% upside) would be a realistic short-term projection in our opinion. In the long haul, a more substantial comeback in silver relative to gold ought to be expected on deep undervaluation and increased industrial demand as global economic recovery kicks into gear. For more extensive analysis on the long-term outlook for SLV/GLD ratio, we would defer to other SA authors such as:
To sum up, the recent turnaround in silver and silver miners is only just getting started. We reckon SIL is a more compelling buy vs. silver considering the solid earnings outlook in its holdings as well as renewed strength in the Canadian dollar.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SIL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
We may have options, futures or other derivative positions in the above tickers mentioned.
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