The bull market in gold (GLD) and silver (SLV) is the real deal. The price of gold at $ 1,844 per ounce is rapidly approaching its all-time high of $ 1,920 set in 2011. Similarly, silver has gained an upside momentum with a strong rally in recent weeks breaking above the important level. resistance at $ 20 / oz and now trading at $ 21.60. The combination of unprecedented levels of global fiscal and monetary stimulus coupled with record low interest rates is underpinning the outlook for precious metals as a store of value amid uncertain macroeconomic conditions.
The fundamentals of supply and demand are also positive with mining production pressured worldwide this year along with a wave of physical purchases. In fact, any bear that bets against the sector is in a difficult place trying to go against the trend. What we highlight below are several gold and silver mining stocks that, for various reasons, have attracted relatively high short interest. In an environment where the price of raw materials continues to rise, the actions of these miners may be backed by a bullish bullish wind. The possibility of shorts being forced to cover may lead to a new higher rally.
(Source: finviz.com)
Short interest among precious metal miners
The first point here is that short selling among gold and silver miners is not a widespread phenomenon this year. Our data shows that in a universe of approximately 180 gold and silver miners with a market capitalization greater than $ 50 million, the average short average interest as a percentage of total outstanding shares is only around 1%. The other dynamic is that for many small and microcap miners who only trade over-the-counter stocks, these stocks are not readily available for short and have no short interest data available.
(Data from YCharts / table BOOX Research)
The above list highlights the miners that we find to have the most significant short interest levels. For the context here, the world’s two largest gold mining companies in Newmont Corp. (NEM) and Barrick Gold Corp. (GOLD) have reported short-term interests of 1.3% and 0.8% of the outstanding shares, respectively, as reference. Also included is the days to cover metric that reflects the number of short reported shares relative to the average trading volume along with the number of short shares as a percentage of stock float.
We found that First Majestic Silver (AG) with a market capitalization of $ 2.5 billion is the most strongly short-circuited miner, with 17.7% of total outstanding shares reported as short. The stock underperformed in 2020, down 5.1% year-to-July 20, but has gained impressive momentum this month, up 17% in July. Similarly, McEwen Mining Inc. (MUX) with a market cap of $ 480 is also primarily a silver producer and has underperformed 6.3% this year. According to our data, MUX has a short-term interest of 12.9%.
Data by YChartsAn explanation for the bearish sentiment towards these names is related to their mining exposure to Latin America. During the early stages of the COVID-19 pandemic, several jurisdictions temporarily suspended mining operations, leading to significantly lower production in the quarter. In Mexico, all non-essential businesses were ordered to close local governments for much of April and May with similar measures taken in other countries such as Peru and Argentina and even South Africa.
Most mining companies faced challenges related to COVID-19, including additional efforts to deal with security that pressured productivity in the quarter. In general, a trend in the sector has been higher integral maintenance costs and weaker production in the second quarter. The good news is that the world’s most limited gold and silver production is a bullish issue for commodity prices.
First Majestic Silver reported that its second-quarter production fell 45% year-over-year, highlighting short-term weakness. McEwen also announced that second-quarter production decreased by more than 50% year-over-year, pressured by COVID-19 circumstances. The latest development is that operations are increasing at a more normal schedule.
(Source: finviz.com)
Essentially, traders have focused on these names with the expectation that weak short-term operating conditions may put pressure on cash flows and their financial profile. On the other hand, if we consider that the disruptions caused by the COVID-19 pandemic and mining shutdowns are only temporary, bullish investors can look to 2021 as these companies can normalize production. Favorably, the rise in the price of gold and silver may mitigate the weaker production results for the year.
In other cases, the higher short-term interest may simply reflect traders’ view that recent rallies have become too long and stocks have become expensive relative to fundamentals. That could be the case for Northern Dynasty Minerals Ltd. (NAK), which has risen 360% to date as one of the best performing stocks in the sector.
(Source: finviz.com)
NAK is an exploration and development mining company that currently has no producing mines or revenues. For these junior mines with limited or no income, stock valuation is based more on the long-term expected value of their asset base. A recent report that NAK’s Alaska “Pebble Mine” will receive approval to begin construction has increased bullish momentum. The higher price of gold makes the asset base more valuable.
Analysis and prospective comments
When investing in mining stocks, it is important to be selective. Trends in fundamentals like production estimates, operating margins, cash flow generation, profitability, and balance sheet strength often separate winners from losers. That said, in a scenario with a rise in the price of gold and silver commodities, the upside profit from income and asset valuation can often cover up some of the weaknesses.
By looking at the short interest data, we can identify some stocks that could gain with the potential for the shorts to begin to reevaluate the bearish case and close their positions. This dynamic is simply an incremental component of the upside potential.
We remain very optimistic about precious metals and related miners. While it is not likely to be a higher straight line, we believe falls should be bought and investors may consider increasing the allocation for days and weeks in case of weaknesses to improve the cost base. Our year-end price targets are $ 2,200 / oz for gold and $ 25.00 / oz for Silver, while related miners should have even more advantages in percentage terms.
Silver has lagged behind gold this year due to its more industrial demand aspect pressured by broader macro concerns. We highlight the ETFMG Prime Junior Silver ETF (SILJ) as a good option for investors to gain diversified exposure to small-cap silver miners, including many of the stocks in the list above. We previously covered SILJ in an article here on Seeking Alpha and reaffirmed our bullish thesis. The recent surge in silver, which is now beginning to catch up with gold earnings and represents a powerful tailwind that can further boost silver miners. We hope that the list will serve as a starting point for future research.
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Divulge: I am / we are long AG, GDX, SILJ, DRD, CDE, SSRM, USAS. I wrote this article myself and express my own opinions. I receive no compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
