Sotkamo Silver’s financial statements are now out. Q4 performed significantly weaker than our expectations in terms of numbers, as revenue did not grow despite an increase in production volume. Costs also accumulated significantly more than forecast. On the bottom line, the result was further weighed down by a write-down on exploration projects in Sweden and Norway, but this is irrelevant to the overall picture.
Operating cash flow was positive and the liquidity situation has improved, but a quick glance at the cash flow structure reveals room for improvement. Investments were also still made vigorously in Q4, which gives rise to some concern.
Furthermore, production guidance for the current year was not provided.
To the opener’s question, I would say that @Antti_Viljakainen, in my opinion, cannot really speculate on the price of raw materials. I would even prefer an analysis where the price is stable and the focus is purely on operational capability.
If I understand 1. the company’s cost structure very well + how costs change as volume changes, and 2. get a good picture of the management’s and the company’s operational capability, growth directions, etc., I can make the best possible decision whether to invest or not. Antti does this quite well, in my opinion.
An investor, believing that silver will, for example, rise to the $30 level, can relatively easily tweak the numbers and derive their own targets by utilizing the analyst’s groundwork.
However, in that so-called silver-rise scenario, I would at least make sure that the entire silver pot is not tied up in Sotkamo Silver, because then the primary goal is to expose oneself to the raw material (leveraged) and minimize operational risk, which all investors taking the same basket take.
Somehow, I’ve just been left with the feeling that the silver sector is mostly populated by dismal management teams and MEH companies. Very few pureplay games, and those that genuinely work, like MAG Silver etc., you have to pay handsomely for.
Good to see Mikko here too. I’ve been following your excellent analyses on Twitter. The sector is not the easiest, so additional insights are more than welcome on the forum.
Generally, I agree; however, two factors come to mind that should be considered as potentially affecting raw material prices. Firstly, changes in supply, such as the depletion or addition of significant mines, and secondly, changes in usage. For silver, this isn’t so much about the demand for jewelry and objects (which is probably impossible to predict reliably), but rather its use as a raw material in industrially manufactured products. For instance, if a new gadget with anticipated high demand requires a significant amount of silver in its manufacturing process, I believe that would be a notable industry driver to consider.
This is precisely what has been aimed for, and for this reason, a comprehensive report always includes a sensitivity analysis. Unfortunately, an analyst’s success is also measured quite straightforwardly in this case by the recommendation’s alignment with stock price development, so it is not possible to predict mere operational capability (and cost level).
Exactly. Those who only believe in the rise of silver prices should be very careful in choosing their instrument, and a junior mining company on the domestic stock exchange is certainly not the best/most suitable choice due to significant operational risks and/or company-specific risks.
I have observed the same, which has also made it difficult to assemble a peer group for Sotkamo Silver. The majority of silver supply indeed comes as a byproduct of other metals, which might explain the situation.
Our forecast for Sotkamo Silver for the current year was at the upper end of the range (silver production 2020 1.4-1.7 Moz, assuming a new environmental permit). However, the year-to-date performance and guidance confirm our belief that at least no major production problems have occurred in the early part of the year. At this level and with recent silver prices, the company should be able to generate healthy cash flow, provided that efficiency can be brought to at least the same level as estimated in the 2017 Technical Report.
It will also be interesting to see whether the company ultimately pushes through the planned share issue in the current market with the current valuation of the share. With the decline in the share price, the share issue has become a clearly less favorable financing option for current shareholders.
In the hustle and bustle of the past few days, I haven’t had a chance to comment here about the major change I had to make at Sotkamo Silver, as risks in the metal and financial markets have risen rapidly and significantly. I have now opened up our report, where we have justified the change, for everyone to read freely.
Sotkamo Silver gained flexibility in its financing when the company restructured the terms of its bond. This was a good move and the company will have time to improve its cash flow. More detailed comments can be found in the morning report.
The sharp volatility of silver has continued, but the price has recovered from its short-term lows (around 12.50 USD/ounce) to around 15 USD/ounce. Of course, the rise from the bottom is positive news for the company, but the level of 15 USD/ounce is not yet particularly good for Sotkamo Silver (especially since the price of zinc is also low and gold production has so far remained lower than expected). However, changes in the price of silver can be sharp, and a rapid price increase is not out of the question.
Next week will be interesting, as more information will be released about the company’s planned share issue for the spring!
The terms of Sotkamo Silver’s rights issue have now been confirmed, the subscription rights have been separated from the share, and trading in subscription rights has begun. Holders of these rights should act on them, as they will expire worthless around the turn of the month. More information on the terms and schedule of the share issue can be found in the news feed on Sotkamo Silver’s company page.
The company also published its results for January and February this week in connection with the issue. Volume and revenue developed in line with our forecasts, but the cost level remained unpleasantly high and the operating profit stayed low. As a result, cash flow generation was likely sluggish. This keeps us on our toes, as Sotkamo Silver has a significant net debt, and cash flow needs to improve in 2020-2021 to reduce it, even though we estimate that the share issue and other financing arrangements have reduced immediate financing risks.
The licensing authority will make a decision very soon on a significant increase in production capacity and permission to introduce pre-concentration. The Gold/Silver ratio is near all-time highs in human history, which, by all accounts, should support the price development of silver. The share issue has been completed, securing funding for the rest of the year. Small investors fear a new Talvivaara, and the Inderes discussion forum has abandoned the company.
Could this be a good time to make a speculative investment in a silver mine? There seems to be much more upside potential than downside, at least before 2021.
Somehow I was wondering about that rather excessive over-marking. I still have some of those over-marked ones without a label waiting for their fate. I also “hoarded” and, due to the price, tried to buy solid silver in small quantities. But still, Talvivaara is on my mind…
Couldn’t one deduce from this that if 81.3% of subscription rights were used and 39.0% were subscribed without rights, then 18.7%/39.0% ~=48% would be subscribed without rights?! Or am I off my rocker…
Unmarked slips without marking rights should be notified by mail, but only if shares have been received.
Those fearing Talvivaara should, in my opinion, note that the Sotkamo silver mine is a profitable mine in terms of its core business. The company’s most significant risks in the near future are related to indebtedness. Well, will the company get out of debt? Let’s quickly review the situation in the coming years:
Revenue side:
Business operations: ?
Share issue 2020Q2: ∽5.7 M€
Option issue 2021Q2: ∽2.1 M€
Debt side:
2021Q1-Q4 Bond covenant: ∽1.35 M€ per quarter, total ∽5.4 M€
2021Q2 Convertible bond: ∽-1.4 M€
2022Q3 Convertible bond: ∽-5 M€
2023Q1 Bond: ∽7.8 M€ (13.2 M€ - 5.4 M€)
As a quick glance shows, the company’s funds for the coming years will largely go to paying various debts.
The money received from the share issue will largely go to the continued ramp-up of production (pre-enrichment, increasing production, additional drilling).
The option issue will cover the 2021Q2 convertible bond (conditional on the share price being over 0.19€).
The rest should be covered by business cash flow, which I have marked with ?. This is because reaching the current production target (1.4 Moz silver) requires obtaining an updated environmental permit in the near future. The current environmental permit states, among other things, the following:
Dimension stone may be quarried and crushed from potential dimension stone quarries located in the mine area as presented in the application during the construction period from 1.9. - 30.4. on all days of the week and from 1.5. - 31.8. only on weekdays (Mon - Fri).
Quarrying and crushing of immediately usable dimension stone in an open pit may be carried out during the construction period of the mine from 1.9. - 31.5. on weekdays (Mon - Fri) from 7 AM to 10 PM.
Ore and waste rock may be quarried from the open pit after the concentrator operation has started for three consecutive years from 1.9. - 30.4. on weekdays (Mon - Fri).
In other words, current operations are already subject to summer restrictions, and an updated permit would already be starting to be urgent, at least for this year. In addition, the current environmental permit naturally also contains other restrictions undesirable for the mine’s operations.
In summary, I believe the mine has this year to try and refine production to a better state than currently, because production in 2021 simply must work. In my view, investors will therefore have an opportunity to jump in now and speculate on the positive news I mentioned in my earlier message. If these do not materialize, I believe that an investor reading Inderes will have time to jump out well before the 2021Q2 Option issue.
This is indeed an interesting situation, which has been puzzling for quite some time. The gold/silver ratio (now over 100:1) has been skewed towards gold for years compared to very long-term averages (something like 65-70:1), but that hasn’t prevented the trend from continuing. I also can’t quickly think of a realistic driver that would push the ratio towards its long-term average.
A good summary of Sotkamo Silver’s situation from Pohjolan Eka! Regarding production, I personally see the biggest problems in cost-effectiveness. The volume is quite okay and roughly what was specified in the preliminary reports, but so far, producing that output has cost far too much. This needs to change relatively quickly, or in a year, we’ll be thinking about the financial situation again.
The new environmental permit is also unlikely to bring a significant increase in volume; it is primarily a prerequisite for maintaining the current volume (see 2020 guidance). Gradually, it is, of course, possible to gain some momentum (including the commissioning of the pre-concentrator), but new reserves would naturally need to be found to ensure that the mine’s lifespan remains sufficiently long despite faster production. Finding new reserves, in turn, requires investments (i.e., money), which is conditional on improving cash flow (and reducing debt). The good thing, of course, is that a successful share issue and other arrangements give the company some time to improve its production run.
The Silver Institute’s 2020 Survey (which SoSI, by the way, somewhat questionably uses shareholder money to sponsor) forecasts 2020 production at 30,424 tons, demand at 29,967 tons, and a price of $15.70/oz.
Since coronavirus has hit consumer countries clearly before producer countries (e.g., Mexico ~6000 tons, Peru ~4500 tons), I would see this as an opportunity for a silver demand spike in the autumn if one believes in a rapid industrial recovery and that developing countries won’t be able to open their mines quickly as coronavirus shakes local healthcare.
Another realistic option, in my opinion, would be the escalation of the Eurozone debt crisis (Italy, ECB blunders, etc.), which would drive investors to seek a safe haven in silver as well. At the current gold price, a breakdown of the Gold/Silver ratio to, for example, 85:1 would already mean a silver price of $20/oz. Of course, in such a scenario, the price of gold would also rise, meaning the price of silver could be even higher. On the other hand, I have recently heard theories that silver is no longer a ‘precious metal’ because the number of instruments offered to investors has increased. Because of this, investors’ capital flows would no longer accumulate in “reserve gold” as before during a crisis, which would be a more unfortunate matter for SoSI.
Both of these are, of course, pure speculation, but in my opinion, at SoSI’s current low prices, there would be a clear opportunity for an investor seeking high risk/reward to make a short-term move that, if successful, would be very profitable.
I’ve also leaned in this direction when interpreting the widening price ratio. In other words, the direction of silver’s price may have been dominated particularly by industrial demand, whose decline has not been adequately offset by a relatively sluggish increase in investor demand, while gold, driven by investors/monetary policy, is climbing. If this were the case, the price ratio could be normalized by, for example, robust economic growth and, as a reflection of that, high industrial production, as well as, of course, inflation and rising interest rates (i.e., an increase in the opportunity cost of gold). A rather distant thought these days. The Eurozone debt crisis would certainly suit Sotkamo Silver, as precious metal prices would likely rise, and at the same time, the euro would likely weaken against the dollar. However, the euro crisis would not necessarily normalize the gold-to-silver price ratio, although a change in the ratio is certainly not a necessity for the company.
These are by no means impossible scenarios, and a rise in silver prices would likely support Sotkamo Silver’s stock with significant leverage. However, I personally somewhat shy away from investing specifically in junior mining companies if the idea is to merely capitalize on an expected increase in metal prices. The leverage is certainly large (and even the largest possible), but then you also get a bunch of company-specific risks related, for example, to production and financing, which is why the investment might partially or completely fail, even if the underlying idea of the investment materialized as expected. Thus, an investment in a junior mining company, in my opinion, also requires faith in the project/project portfolio itself and their competitiveness and development capability, whereas I would try to capture expectations of rising metal prices with other types of instruments that have fewer so-called “extra” risks (and, of course, also less leverage).
One can always speculate, but Sotkamo Silver’s analysis will, of course, still rely on consensus price forecasts. In connection with the previous update, consensus forecasts for the coming years were around USD 16-18, slightly above the current spot level.
Spot on!
Small mining companies are chronically risky, and many external factors also affect potential revenues. At any time, things can go south if no more silver is found with additional drilling, a buyer decides not to pay the invoices, or some event occurs that collapses production long-term. Investors generally seem to still undervalue the risk and overestimate the return, which is why I don’t see small mining companies as a very attractive investment for a long-term portfolio.
The reason I feel SoS is a meaningful instrument for silver speculation from a small investor’s perspective is precisely the high degree of leverage you mentioned and the ease of investing compared to alternative instruments. Of course, it is necessary to try to manage company risk by carefully reading company reports and analysis. However, the risk of an investment portfolio can always be reduced by decreasing the amount and number of risky investments.
I marked it in the secondary offering without subscription rights; no information yet if I’ll get any shares or if they’ll all be allocated to those who used subscription rights. I didn’t find it quickly in the prospectus, and the thickest bundle was only in Swedish.
I’ve followed Sotkamo Silver’s story for years, but in mining companies, I’ve focused more on Canada and Australia. The project has been a bit small for my taste; the grade isn’t particularly high, so it requires higher metal prices to operate. About half of the revenue seems to come from zinc and lead, which are often under pressure when precious metal prices rise. Good silver mines just aren’t easy to find cheaply.
Gold is in a bull market and at all-time high prices in major currencies except the dollar. The Gold:Silver ratio is around 120, though that ratio isn’t a reason why the price should rise or fall. However, I believe we are living in a new bull market where gold leads the rise, as is historically customary. Now the drivers are fear, but at some point, it will turn into greed and expectations of inflation, at which point it will be silver’s turn to catch up with gold.
