Shares of precious metals miner Coeur Mining (NYSE:CDE) rocketed 19% in the first few minutes of trading on Jan. 28. Hecla Mining‘s (NYSE:HL) stock did better, up 20%. Shares of Endeavour Silver (NYSE:EXK) and Fortuna Silver Mines (NYSE:FSM) did even better than that, with each rising as much as 25% or so. And at the top of the heap was First Majestic Silver (NYSE:AG), which was up a huge 38%. Compared with the above gains, Pan American Silver (NASDAQ:PAAS) and Silvercorp Metals (NYSE:SVM) were laggards, up just about 12% each.
All those gains showed up in less than half an hour, which isn’t all that shocking lately if you watch the Wall Street headlines. But, perhaps refreshingly, the big price advances among this collection of miners probably had nothing to do with the short squeeze mania swamping the market lately. It was likely much simpler than that.
The top and bottom lines at Coeur, Hecla, Endeavour, and the rest of the miners above are tied directly to the commodities they produce. That’s not shocking, given that they are miners. And today gold and silver prices were on the rise. So, as you would expect, these stocks went along for the ride. That said, silver tends to be more volatile than gold, and today this difference was on display, with silver rallying far more strongly. To put that in perspective, at roughly 10 a.m. EST, silver was up over 5% while gold was up a tad less than 1%.
Which brings the story around to this specific group of miners, which all tend to have more exposure to silver than other precious metals miners. Without getting into the entire list of names, some cherry-picked examples will show just how notable an issue this is. Coeur generated around 25% of its revenue from silver in 2020. That figure at Endeavour was roughly 50%. And Hecla Mining proudly estimates that it produces roughly a third of all the silver mined in the United States. Silver prices are important here.
The thing about precious metals miners that investors need to keep in mind is that they tend to be leveraged to the price moves of the metals they produce. For example, First Majestic Silver, which gets about 65% of its revenue from its namesake metal, is currently projecting silver equivalent all-in sustaining costs of roughly $16 per ounce in 2021, at the high end. All-in sustaining costs estimate what it costs to both mine for silver and invest in the business to maintain production.
Simplistically speaking, if silver trades at $16 an ounce, First Majestic makes no money. If silver goes to $17 per ounce, it makes a dollar for every ounce it sells. If silver goes to $18, its profit doubles because its costs are pretty static. In this example, however, the price of silver increased only 6%. In other words, a small price move in silver, so long as the metal is trading above the miner’s costs, can result in an outsize increase in profits. That’s why investors tend to get excited about precious metals stocks when gold and silver are on the rise.
The problem is that gold and silver don’t always go up. The simplified example above works in reverse fashion when prices are falling, which can, and does, lead to material stock declines. In fact, for most long-term investors, it’s probably better to look at silver- and gold-linked investments like miners as diversification tools, avoiding the temptation to try and time their ups and downs. The goal being to always have a small amount of precious metals exposure, which many on Wall Street view as a safe haven in troubled times — which, by the way, is likely why investors were buying the metals today.