Silver Producers Shine as Solar Boom Drives Record Demand

• Silver demand is expected to significantly outpace supply in 2024, with the second-largest demand in recorded history
• Growing industrial usage, especially in solar panels, is a major driver of increased silver demand
• Silver prices above $25/oz are quite positive for producers; many are being approached directly by ETFs and traders looking to acquire physical silver
• Higher silver prices are allowing producers to expand exploration, make mine improvements, strengthen balance sheets, and potentially engage in M&A
• Fully permitted silver mines in stable jurisdictions with experienced management teams are well-positioned to benefit from robust silver fundamentals

Introduction

As we approach the mid-point of 2024, a compelling case is building for investing in silver. Surging industrial demand, chronic supply deficits, and strengthening prices are creating highly favorable conditions for silver producers. At the same time, increased cash flows are providing producers with opportunities to solidify their operations and potentially engage in value-enhancing M&A. For investors seeking exposure to a vital metal with significant upside potential, the silver industry warrants strong consideration.

Silver Supply-Demand Dynamics

The most fundamental reason to be bullish on silver is the growing imbalance between supply and demand. As Alex Langer, CEO of Sierra Madre Gold and Silver, notes:

"Moving forward, we're going to see a massive deficit, at least in the silver market, this year - close to 200 million ounces of silver, which is quite significant. It's projected to be the second largest demand for silver in recorded history, which is exciting."

On the demand side, the largest driver of growth is industrial usage - particularly photovoltaic solar panels.

"Solar panels, honestly, the number one driver is silver - there's just no way around it," explains Langer. "I think you're going to be close to 25% of all silver produced this year is going to go into solar panels, and they're not slowing down."

Once embedded in a solar panel, that silver is locked up for around 25 years, steadily removing supply from the market. This is happening at a time when investors and traders are aggressively seeking to acquire physical silver. Santa Cruz Silver Chairman and CEO Arturo Préstamo Elizondo shares:

"The last few weeks, we were contacted by an ETF who wanted to buy silver directly from us. It speaks about the interest that is around for silver and the momentum that is building."

Implications for Producers

For silver miners, this environment of rising demand and tightening supply is translating to higher realized prices. Anything above $25 per ounce is quite positive for producers from a cash flow perspective. In turn, those cash flows allow companies to strengthen their operations in multiple ways.

"We're now expanding our mines, we're preparing our mines for another cycle, whenever it comes," says Préstamo Elizondo. "We're making more developments...that will increase the mine production and also will bring costs down. So we're definitely taking advantage of these [prices] and preparing our minds to be more efficient in the coming years."

In addition to optimizing mines, producers are also taking steps to clean up their balance sheets and create flexibility. Santacruz Silver, for example, recently restructured its debt in a way that will allow it to keep building its treasury and investing in organic growth initiatives.

"I think if I'm a mid-tier producer, I'm doing well," Langer observes. "At that point I would look to add on companies and projects that are generating cash flow, that have a decent size reserve, and can just, through efficiencies and acquiring new companies, increase revenues and generate shareholder value, which is the whole point of this."

Potential for M&As producers continue realizing strong revenues, attention is turning to potential consolidation in the industry. While it may take a couple quarters of robust results for activity to pick up, the conditions are ripe for M&A.

Préstamo Elizondo concurs stating, "I think that we're going to see more consolidation in the industry - this is the nature of our industry...With today's metal prices, more activity is going to be on the markets and definitely on the corporate side - more M&A will be for sure by the end of or at least the third and fourth quarter of 2024. And not to say, in 2025, it's going to be an interesting moment for our industry."

Jurisdiction & Management

For investors evaluating silver producers, jurisdiction and management are two key considerations. Mexico is a major silver producing country, but the election of a new president, Claudia Sheinbaum, has raised some questions about the outlook for mining.

However, both Langer and Préstamo Elizondo express cautious optimism.

"My opinion is that I'm positive on the little I know about Claudia Sheinbaum," says Préstamo Elizondo. "Our new president is very cautious and inclined to take care of the foreign investment. So I think it's going to be positive and we'll be surprised with how she manages all the economic policies."

Langer notes that resources like mining are crucial to Mexico's economy, accounting for around 30% of output. While some uncertainty remains, he expects general continuity in mining policy, perhaps with some positive reforms related to international investment.

Just as important as jurisdiction is the management team running each producer. Investors should look for companies led by people with strong track records of creating value in the industry.

"Usually what happens is you'll see commodity run. The majors, they're going to be proxy to the price of silver, gold, whatever commodity you're talking about," explains Langer. "The next tier, the mid-tier producers, the smaller companies, the ones with large resources that are getting into production relatively quickly, they kind of move second. And then when you get into the third tier, the exploration, that usually takes a little bit longer."

The Investment Thesis for Silver

• Demand growth outpacing supply growth, leading to large deficits
• Price strength flowing through to producer revenues and cash flows
• Prudent producers using cash to de-risk by optimizing mines and cleaning up balance sheets
• Potential for smart M&A as the industry consolidates to take advantage of high prices
• Stabilizing policy in key jurisdictions like Mexico
• Opportunities to invest alongside proven management teams with value creation experience

Actionable Advice for Investors

• Identify producers with high-quality silver reserves in stable mining jurisdictions
• Focus on companies with experienced management and a history of efficient execution
• Monitor silver supply/demand data and price movements to spot inflection points
• Track producers' quarterly reports and cash flow metrics to gauge financial health
• Watch for M&A potential as smaller developers and single-asset producers become targets

The silver industry presents a highly compelling opportunity for investors in 2024. Rarely do the fundamentals align so favorably, with surging demand from critical industries like solar power, chronic supply deficits, rising prices, and strengthening producer financials.

While risks like policy changes in key jurisdictions must be monitored, on balance the rewards appear to strongly outweigh the risks. By focusing on proven management teams operating high-quality assets and taking prudent steps to capture the value of higher prices, investors can intelligently gain exposure to a metal that is central to the future of the global economy. The time to build positions is now, before the broader market realizes the full extent of the opportunity in silver.