Silver on the ASX – everything you need to know (and our #1 micro-cap pick)

Our thesis for silver is quite simple…

1. Solar panels

Up to 12oz of silver is used in an infrastructure-grade solar panel.

Solar panel demand has increased industrial silver usage by 330% from 48Moz to 160Moz since 2014.  Demand is forecast to continue to grow 15-20% per annum to 2030, as solar power continues to grow towards becoming the world’s dominant form of renewable energy by 2027, according to the International Energy Agency.  (For example, the US is targeting 30% of national electricity demand from solar energy by 2030, up from 3% currently.)

The mix shift from precious metal uses (silverware, jewellery, bar/coins) towards industrial applications is hitting a critical inflection point. In 2024, we expect industrial applications of silver to exceed other demand for the first time, up from 45% in 2022 (per Silver Institute). 

1. Solar panels are now the single largest industrial usage of silver.

Other industrial applications such as EV chargers, nuclear reactor rods and electrical componentry result from silver’s high electrical conductivity and are expected to also contribute to demand.

2. Silver is “cheap” relative to gold

Gold has seen an uptick in interest due to persistently high inflation expectations, central bank purchasing and geopolitical tensions. We think silver benefits from similar drivers but has the additional industrial demand kicker.

Silver tends to trade broadly in line with gold on a relative basis.  However, over the last couple of years, gold has materially outperformed.

Relative to gold, silver is typically more volatile than gold. The adage is that if gold doubles, silver triples. Silver is considered to be a beneficiary in the second half of a gold bull market.

What’s the catalyst? In the last 5 Fed rate cut cycles (2001, 2008, 2016, 2018, 2020), silver has outperformed gold by an average of 25.4%, and has outperformed the S&P500 by 37.5% (per SCP Research data), with the miners performing even better due to their leverage to commodity prices.

3. Limited supply response creates a looming silver deficit

Mined supply has been stagnant for the past 10 years. In 2013, production equated to 845Moz, vs 820Moz in 2023 (per Metals Focus).

The average age of the world’s 10 biggest silver mines is 31.5 years (source: World Silver Survey, Company Websites). High-quality silver deposits are rare.

Only 28.3% of silver production comes from dedicated precious metal mines. 71.7% of mined silver comes as a co-product of either zinc/lead, gold or copper mines.

Due to depressed prices for the primary metals (particularly zinc and lead), many of these mines have struggled to increase output.  As an example, Australian investors may be familiar with Galena Mining Ltd (ASX: G1A), a lead/silver mine in Western Australia’s Gascoyne region, that recently appointed administrators.  Supply is unlikely to catch up to demand in the short term.  

This shortfall in supply is exacerbating the existing structural deficit that the silver market has seen over the last 4 years with approximately 1.2 billion ounces of silver consumed, but only 1 billion ounces of silver produced, a 20% shortfall.  In 2023, supply revisions were -4% below forecasts and industrial demand revisions were +4% ahead of forecasts (per metals consultancy Metals Focus).

Silver physical is an illiquid market so is prone to volatile moves. Silver inventories (as measured by the LBMA free float) have been in decline ever since a period of higher prices a decade ago, masking the demand growth until recently.  At the current rate of growth, LBMA’s free-floating inventories of silver are set to be extinguished within 2 years. In April and May, there has been an uptick in COMEX futures contract holders requesting physical delivery of silver (rather than closing out the contract before maturity), which has squeezed an already tight market.

As a result, the silver price is on the move this year, gaining +6.7% in April, after rising +8.9% in March. Year-to-date the silver price has increased from US$24/oz to ~US$28/oz.

Like uranium in 2007, silver experienced a ‘false dawn’ in 2011 with the silver price spiking >100% to almost $50/oz (that’s US$180/oz adjusting for inflation). So it’s still well off all-time highs, unlike gold.

HOW TO PLAY SILVER ON THE ASX?

Unfortunately, the ASX has been a graveyard for silver companies, and pure-play silver companies are rare.

There’s South32 (ASX: S32) with its Cannington mine, but S32 is more of a diversified base metals play, rather than a leveraged silver play and has had its fair share of struggles.  Most recently, the company withdrew its Australian manganese production guidance following Cyclone Megan, ravaging its pipeline and manganese loading port.  While S32 does offer exposure to silver, the economics of its Hermosa Taylor zinc/lead/silver project look challenging, at least at current silver prices. 

Beyond S32, there’s Silver Mines (ASX: SVL) and its Bowdens asset in NSW – though in our view, that project is unlikely to get permitted.  Nonetheless, SVL trades at a hefty premium to peers by virtue of being the largest, most liquid pure-play silver mine on the ASX.

Adriatic Metals (ASX: ADT) is perhaps a more interesting proposition with its high-grade Vares polymetallic silver/zinc/lead/gold mine. The mine achieved its first production in February and is in the ramp-up phase. ADT shares have re-rated into this production catalyst and appear fully valued in our view, trading on ~1.0x NAV. With Adriatic recently removing its mining contractor (at a cost of US$11m), we have some concerns.

We foresee a similar situation emerging in silver, as we’ve seen in copper – a scarcity of viable investment options on the ASX. This scarcity saw copper-newcomer Metals Acquisition (ASX: MAC) debut on the ASX in February 2024, attracting significant interest from fund managers in what turned out to be a heavily oversubscribed IPO, eventually raising $325 million at the top end of the pricing range ($17 per CDI), before opening on day 1 at $19, and now trades at $21 per CDI. 

OUR TOP PICK – SUN SILVER (ASX: SS1)

Scheduled to IPO on the ASX on 15 May with a post-money IPO market cap of $25 million at a 20-cent share price, Sun Silver has acquired what appears to be an exceptional silver/gold resource in Nevada, USA.  

Nevada is responsible for 75% of the US silver and gold production with majors Coeur Mining, Blackrock, Kinross and Barrick operating in the area.

The Sun Silver Maverick Springs project has a JORC-compliant (inferred) resource of 292Moz AgEq at 72.4 g/t (176Moz of that is pure silver). The deposit is hosted in soft, limestone rocks and from c. 30m depth, the resource looks amenable to an open pit + underground-style operation.

The Maverick Springs project is located 85km away from the mining town of Elko along Nevada’s Carlin trend, where carbonate host rocks create favourable mining and processing for nearby peers. For the gold bugs, Sun Silver’s Resource equivalent is 4Moz at 1g/t gold. Deposits grading as low as 0.5g/t are mined on the Carlin trend.

The management team are focused on executing an infill and exploration drill program in Q2’24 to upgrade the resource from inferred to indicated, as well as potentially expand the scale.

The IPO has been well received by investors, with the Automic portal closing early (opened 18 April) after receiving the highest volume of bids on day 1 of any company to IPO via the Automic registry.

Sun Silver meets Seneca’s 6-step investment criteria when assessing an early-stage exploration/development company:

1. A COMMODITY WITH MOMENTUM

See above.

2. THE PROJECT IS IN A ‘TIER 1’ JURISDICTION

By our count, there are only 10 silver deposits globally with over 100 million ounces of contained silver in tier 1 jurisdictions. Those 10 include South32 (ASX: S32)’s Cannington and Hermosa assets, Hecla Mining Company (NYSE: HL), the largest silver producer in the US, and of course, Silver Mines (ASX: SVL) (with its permitting challenges).

Nevada just overtook WA as the most attractive mining jurisdiction globally, which bodes well for permitting at Sun Silver’s Maverick Springs project.

Silver supply is concentrated in three countries – Mexico, China, and Peru. 

Geopolitically, Peru hasn’t been a stable place to operate. Production has gone down 25% since 2015 and miners there have suffered from operational suspensions in recent years.

We don’t think you need to take jurisdictional risk at the moment to make money – silver equities in tier 1 jurisdictions are cheap enough.

3. MANAGEMENT IS KNOWN, ALIGNED AND TRUSTWORTHY

Sun Silver has a tight, escrowed, aligned existing register. Just over 50% of the register will be escrowed upon listing, including vendors and management.

Executive director Gerard O’Donovan started at Pilbara Minerals Ltd (ASX: PLS) before they were producing lithium, and was the project director that successfully (and profitably) integrated Altura into Pilbara’s flagship Pilgangoora operations. He also worked as an area manager during the development of Rio Tinto Ltd (ASX: RIO)’s Winu copper-gold project near(ish) to Port Hedland.

The SS1 board has successfully built several mines. Chair Dean Ercegovic of Primero Group fame (bought out by NRW Holdings Limited (ASX: NWH)) has delivered ~20 projects across North America, specialising in plant design. Nevada-based exploration manager (ex-Newmont ASX: NEM & Coeur NYSE: CDE) and Nathan Marr also bring relevant experience to the team.

We think the company could have raised more money at a higher valuation, but the founders/management wanted to keep dilution to a minimum and bet on themselves, to maximise the potential value of their shareholding. 

The vendors are also aligned, receiving 3.5 million shares worth ~$700k as part of the consideration (in addition to CA$4.4m cash) for the option payment.

4. THERE IS POTENTIAL FOR THE DISCOVERY OF A GLOBALLY SIGNIFICANT RESOURCE

Unlike a Greenfields explorer, Sun Silver has proven silver ounces in the ground at Maverick Springs, where money has already been spent to discover the deposit by previous owners. The project’s current resource base (defined from ~200 holes and ~60,000m drilling to date) is globally significant.

There are only 10 primary silver deposits globally with over 100 million ounces of contained silver, and Sun Silver has one of them.

The deposit has room to grow through extensional and infill drilling. The current mineralisation model covers less than a quarter of the project’s area, and the deposit is open along strike and at depth.

We think the company has scope to upgrade the existing resource (see below in yellow), which was defined when the silver price was 23% lower at US$21/oz.  Due to higher commodity prices (you can only quote a resource on what is ‘economically extractable’) there is scope to expand the resource to lower-grade areas as commodity prices rise (see below in blue).

5. A CLEAN, TIGHTLY HELD, UNENCUMBERED CAPITAL STRUCTURE

The total capital raise is only $13 million, with management and vendors contributing c. $5m to the IPO.  Management and vendors own just under 50% of the company and their holdings are escrowed for 12 months. There are no options, no convertible notes or other securities.

The company will list with a 2-year cash runway to undertake infill drilling to attempt to increase and upgrade the resource, as well as undertake metallurgical test work and assess the feasibility of producing a silver paste for solar panels.

6. ATTRACTIVELY PRICED

When assessing earlier-stage mining companies, we are looking for a sufficiently low price to appropriately compensate us for significant risk. Sun Silver is listing on a post-money, fully diluted market cap of $25m (110m shares on issue at 20c).

ASX-listed silver developers trade at A$0.40-$1.40 of enterprise value for every million oz of Ag Eq, or $0.72 on average. If you priced Sun Silver on this basis, it’s a >$200m market cap (~10x).

Silver Mines (ASX: SVL) has a similar size resource to Sun Silver and trades at over a $250m market cap.

Do we expect Sun Silver to get into production and become a miner?

No. With operating mines nearby, and several mills hungry for silver ore feedstock to maximise utilisation and profitability, we expect a nearby peer to take out Sun Silver in due course.

Kinross Gold Corporation (NYSE: KGC), a US-listed A$12.7 billion market cap gold/silver miner, owns the Bald Mountain mine in Nevada, just ~20km down the road from Sun Silver’s Maverick Springs project. With an estimated 4-5 years of remaining mine life, that mine and mill needs additional ore.

As with all early-stage investments, SS1 is speculative and carries a high degree of risk, including but not limited to development risk, funding risk (ability to raise further capital in future), and normal commodity market and price risk.

The Seneca Australian Small Companies Fund is participating in the Sun Silver (SS1) IPO and holds shares.