Markets & Metals Navigator: WallStreetBets Executes the Silver Squeeze

Silver Catches the Reddit WallStreetBets Pump

Wall Street was pit against retail investors last week as the WallStreetBets reddit community executed a brilliant squeeze on short sellers of GameStop (NYSE:GME) sending the shares up 400% last week and 1,630% year-to-date.

The rise of the organized retail investor has caught Wall Street veteran hedge funds off guard, Melvin Capital Management was one of the biggest losers – down 53% in January and having to take  $2.75 billion in emergency from Citadel and Point72.

The Reddit retail investor army then turned their firepower to squeezing silver higher on Thursday of last week, by Sunday night silver had rallied 12.5% in 3 trading sessions reaching $28.57/oz.

As of Sunday several large silver bullion retail dealers (APMEX, JM Bullion & SD Bullion) are all sold out of silver to sell to customers on their websites (see tweet below).

In the 24 hours proceeding Friday market close, SD Bullion sold nearly 10x the number of silver ounces that they normally would sell in an entire weekend leading to the Sunday market open.

Traders Rally Around First Majestic

One of the biggest beneficiaries of the silver squeeze has been First Majestic (NYSE:AG, TSX:FR), the stock shot up 30% from last Wednesday’s close.

Capital 10X highlighted First Majestic as a silver miner that screened well versus peers in our Silver Insight Series on July, 2020; additionally we viewed Eric Sprott’s $78 million investment on September, 2020 as a catalyst for the company.

First Majestic’s silver peers however didn’t enjoy the same share price appreciation, the Global X Silver Miners ETF (NYSE:SIL) rallied 4.4% last week.

Screening for Winners Among the Silver Miners

In Volume 2 of Capital 10X’s Silver Insights Series we highlighted the key quantitative drivers for for the performance of silver miners.

Silver mining companies are an odd lot, it’s a sub-sector where most firms in the category don’t actually have a majority revenue/mining exposure (over 50%) to the underlying metal itself.

If the market is entering a raging bull market for silver, investors should want to own stocks that mine silver! Capital 10X ranked the silver mining ETF by exposure to silver, the top 5 companies had an average silver mining exposure of 58%.

That compares to the silver exposure in the overall ETF of 42%, a very big difference. Of greater interest, the enhanced silver exposure of the Top 5 names has the same P/CF as the ETF.

In terms of what screens the best, we identified Division 1 stocks (best value) and Division 2 stocks (second best value).

Division 1 – Silver Mining Stocks

• Mag Silver (NYSE:MAG, TSX:MAG):  Mag has the highest exposure to silver in the group, this is through it’s development asset in Mexico – Juanicipio, a joint venture with Fresnillo.
• SilverCrest Metals (NYSE:SILV, TSX:SIL): Silvercrest scores well due it’s mix of high silver exposure and development. The company has four development projects in Mexico, with their Las Chispas project in the most advanced stage.
• Fortuna Silver (NYSE:FSE, TSX:FVI): Fortuna is an established silver producer with mines in Peru and Mexico. The company had the lowest price-to-cashflow in the group.

Division 2 – Silver Mining Stocks

• First Majestic Silver (NYSE:AG, TSX:FR): First Majestic has the 2nd highest exposure to silver in the group (60%), the company has three producing silver mines in Mexico.
• Silvercorp Metals (NYSE:SVM, TSX:SVM): Silvercorp is a silver producer operating mines in China. The company has above average silver exposure, however trades at one of the highest multiples in the group.

Sierra Metals – Cusi Silver Mine in Play

The current short squeeze in silver is very timely for Sierra Metals (NYSE:SMTS, TSX:SMT), as the company announced in early January they were undertaking a strategic review that could result in the sale of some of their assets to unlock shareholder value.

We think this presents a unique opportunity for the company to highlight substantial underappreciated value of their Cusi Silver mine in Mexico.

In June 2020, Sierra Metals announced impressive drill results at their Cusi Mine, confirming the discovery of a new high-grade silver zone.

In December 2020 the company completed its preliminary economic assessment (PEA) of the Cusi mine. The PEA found the incremental benefit of doubling production (1,200 TPD to 2,400 TPD) would have an NPV of $28.1 million with a 46.8% associated IRR, and the total net asset value (NAV) of the mine at $81 million.

Cusi has a 13 year life with an associated silver grade of 4.1 oz/t and low operating cost of $8.83 per ounce of silver equivalent. The inferred mineral resource for the mine is 4.9M tonnes, an increase of +200% from the previous 2018 PEA.

Sierra Metals is a market awareness client of Capital 10X.