Silver rallies, but miners lag behind

Silver fever clashes with stagnant miners

An investor puts $50,000 into First Majestic at an average price of $5.77. The thesis: silver is worth more, the miner is worth 10. Markets fall, crude oil plunges, yet the stock remains unmoved. For months, this has been the summary of the market's love-hate relationship with silver miners: the metal rises, they stay put.

Behind the mirage of leverage lies a structural problem. Miners are not a clean beta of the silver price. They are affected by oil, exchange rates, operating costs and, above all, dilution.

The burden of dilution

In the case of First Majestic, the example is stark. At $5.87, the company had the same market capitalization as at the end of 2020, when it traded at $13.42. That is, the price did not fall due to the metal, but because of shares issued for the acquisition of Jerritt Canyon, a mine that had to be closed because it was unprofitable. Dilution is the tax shareholders pay when management buys high.

It is not the only one. Most major silver producers — Fresnillo, PAAS, CDE, HL — trade at a discount compared to their 2020-21 highs. The SIL ETF, the most used to bet on the sector, remains far from those levels while silver hovers around $32-35.

Correction days: the market dictates

There was one session that summed it all up: silver miners fell by an average of 7% while silver futures dropped only 1.36%. Discovery Silver lost 11.4%; Silvercorp, 6.87%. Gold fell below $2,900 and Bitcoin dropped more than 5%. The explanation was not the metal, but liquidity: money was draining into US Treasury bills. When the tide of liquidity recedes, miners are the first to feel it.

This behavior reinforces the old school that prefers physical silver or ETFs. Why take on the operational risk of a miner if the metal gives you direct exposure? The bulls' answer is leverage: when the metal takes off, miners will multiply the move. What they don't say is that when the metal corrects, the multiplication works against them.

The New Pacific case and political noise

Nothing like a junior miner to demonstrate that the sector lives on the edge. New Pacific Metals quintupled in value in a year, until it announced a CAD$35 million capital increase and dropped 14% in a single session. Silvercorp, its largest shareholder, confirmed it would participate in the operation, opening the door to a takeover bid. In between, the election result in Bolivia, where the incoming president, Rodrigo Paz, born in Galicia, was seen as favorable to mining. Politics matters more than the silver price.

The junior sector is full of these scares. Golden Tag — now Silver Storm —, Vizla Silver, ITRG: all promise, few produce. The big mergers have not yet arrived. There have been deals like First Majestic with Gatos Silver or PAAS with MAG Silver, but the small-cap miner index GDXJ remains far from its 2011 highs. While majors sell assets and juniors survive via capital raises, the promised consolidation remains on paper.

The big question: how long must we wait?

Some see an inevitable, even violent, correction, citing the precedent of 2008, when silver fell 50%. Others point out that the context is different: central banks are accumulating gold and selling debt, and FOMO will arrive when gold surpasses $4,000 and silver hits $50.

Meanwhile, an investor who entered First Majestic admits choosing that stock was a mistake, but refuses to back down. The 67-centimeter silver chain and the white gold crucifix someone claims to have bought to show off in the neighborhood are the physical version of the same optimism. The metal shines; the miners' spreadsheets, not yet.