Silver 2025

Monday, 27 January 2025 |  63 | 14:39

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. I'm pleased today to welcome back Maria Smirnova, Managing Partner and Senior Portfolio Manager at Sprott Asset Management. Maria, thank you for joining me once again today on Sprott Radio.

Maria Smirnova: Hi, Ed. Hi, everyone. Thank you for having me.

Ed Coyne: Maria, the last time we spoke was in April of 2024. Certainly, a lot has changed in the markets and silver. What key factors have you witnessed over the last 10 months or so that have driven the price of silver?

Maria Smirnova: That's a very broad subject, and let's just recap last year, if we will. Silver was on the verge of a breakout and a rally when we spoke in April. Overall, silver appreciated just over 21%, 21.5% last year. It underperformed gold a little bit. Gold was up 27% last year. Certainly, it was an exciting time in both gold and silver land. It's an interesting time because I use the words "breakout."

I believe that once silver went through that important level of $29 and $30, it's been recently consolidating around $30. It did hit a high of $35. Silver is still below its all-time high, believe it or not. This is despite the fact that we believe that silver has a very strong supply-demand picture. As you mentioned, multiple drivers are making us bullish on silver, specifically in the sea of other commodities and metals. A main driver is a very strong supply-demand picture.

Silver has been in a fundamental supply-demand deficit for at least four years. What drives that, broadly speaking, is a stagnant supply but growing demand. That's the big picture. In addition to that, last year, we saw interest rates fall. It wasn't just Canada and the U.S. that lowered interest rates last year. It was other countries as well. We were in a synchronized global interest rate reduction time. That is positive for both gold and silver. Those are the two main drivers; I'm sure we can drill into those.

Ed Coyne: Let's go back to the price for a second. You mentioned it's nowhere near its all-time high. For our listeners who may not follow silver that closely, what was roughly the high of silver, and when did that happen? I guess the third part of that question is, what was going on back then that drove silver so high?

Maria Smirnova: That was back in 2011, and we are not adjusting for inflation, by the way, right?

Ed Coyne: Yes.

Maria Smirnova: These are just nominal terms. Silver hit almost $50. I think the high was $48, $49 an ounce. Again, this was back in 2011. This resulted from everything that's occurred since the global financial crisis in 2008. Of course, banks failed, and then we had extreme liquidity injections, etc. That was the blow-off top on silver at close to $50. Since then, silver sold off down to $13, believe it or not, at the end of 2015. That was the low. Of course, it's been recovering ever since. That's the big picture.

Ed Coyne: Is it fair to say back then, silver was more just truly viewed as a monetary metal, much like gold where today, maybe it's the sky, not just the monetary aspect, but also has the industrial or critical material aspect of things like solar and other applications coming online?

Maria Smirnova: You hit the nail on the head. Back more than 10 years ago, we did not talk of silver as a critical material, and it's still not technically considered a critical material. I think it is a critical material, but it's technically not on the critical materials list of various countries. That's an aside. Certainly, we didn't consider it contributing to green energy, energy transition, and all the themes we talk about nowadays.

Back then, we would talk about silver having the industrial demand being what I call the backbone. In other words, the stable component of demand, and then the investment demand, was the swing factor, and it fluctuates quite a bit. If you think about people buying bars, coins, ETFs, and all of the investment-type products, that is much more volatile than the industrial side.

Ed Coyne: What are some of silver's unique uses or properties that it's not replaceable? You hear this all the time with solar. You can't build a solar panel without silver. Can you talk a little bit about that? What makes silver so unique, why are so many different applications being applied to silver, and is there a replacement for silver, or is it this or nothing?

Maria Smirnova: When thinking about this, you have to go back to the periodic table of the elements and think about the properties of silver. Silver is probably the greatest electricity conductor and is probably better than copper, as far as I know. It is also highly light-reflective. If you think about it, it's very shiny and has medicinal properties. Those two properties of electricity conductivity and light reflectivity are very important.

All the uses we talk about nowadays have to do with those two properties. If you think about solar panels, they need both of those properties. If you talk about AI, TVs, electronics, anything like that, cars, EVs, anything electronic or electric loves silver because it's very malleable. It can be used in very small quantities. You can make very small parts out of it. Those are all great qualities. That's what makes it so valuable in its various uses.

The interesting part about that is that it's used a lot of the time in smaller amounts but in many units, for example, a car, but very small connectors, heat transmitters, AC units, mirrors, and windows in very small amounts. You won't see silver on your back window, but it might be there. Therefore, you can't recycle silver out of it. Therefore, all these uses go in, and then that silver is never to be seen again.

Ed Coyne: Many of our interests from an investment thesis standpoint are on the demand side of things. Few people are talking about the supply. Do we have enough of it? Can we get more of it? Is recycling still a big part of silver? Can you talk a bit about the supply side of silver? What's happening out there? Has all the easy silver been found and discovered? What's going on in the world of silver today regarding supply?

Maria Smirnova: That's a great question because my job is to look and meet with companies that mine for silver. I always say I look for companies that are putting money into the ground, exploration, and development. We just haven't seen a lot of new discoveries in silver. Unfortunately, some companies have moved to buy gold projects because of the economics of silver trading from $80 to $1 to gold. The point is that there hasn't been a lot of focus on finding more silver deposits.

If you think about total supply, it's about a billion ounces a year, which has been stagnant for at least the last 10 years. In fact, by my math, in the previous 10 years, we lost 50 million ounces or 5% of the total supply in mine declines. It's a very interesting stat. If you think about it, 10 years is a long time. You’d think that in 10 years, you could grow the supply a little bit, but you would lose 50 million ounces.

The mine supply is about 800 million ounces in total. In addition to that, we have about 200. Let's say 170 to 200 million ounces in scrap supply. That's been stagnant in recent years as well. That is price-sensitive. The price hasn't been high enough for people to start bringing in more silver to recycle. That goes back to my original point that a lot of silver we use goes into small things and is never to be seen again.

Supply is stagnant, and we don't see that changing. What we see is companies doing M&As buying from each other. To grow, companies are resorting to buying their competitors. Now, that helps the price. That's what has created the supply-demand deficit. As an equity person, I would love to see some exciting new discoveries going forward. That's my long-winded answer on the supply side.

Ed Coyne: You mentioned the miners. If I'm sitting on the investor side of the table, what would you recommend someone look more closely at? Would it be just looking at owning physical silver itself, or would it be a combination of that and the equities, or do you like the stocks and underlying mining companies? Where would you try to help direct people if they want to participate in the silver market and silver opportunity, and what do you like as an investor?

Maria Smirnova: I cannot give financial advice as I'm not a financial advisor, and I'm not licensed to do so. I personally own silver equities in the product that I manage, but I like physical as well. If it were me, I would combine physical and equities because equities are more volatile. In recent times, for example, last year, equity still underperformed physical.

I think that will change because at the current prices and its slightly higher silver prices, let's say $30, $35, the miners are making good margins. They're making money. It's been nice to see free cash flow out of these companies and companies paying dividends, maybe not very big dividends, but still buying back stock. There have been some very interesting positive developments on the miner side.

Ed Coyne: You touched on M&A as well. I have to believe it's easier and cheaper to buy somebody than to go have a new discovery, go through the approval process, and build a new mine. Are you seeing the M&A market pick up? Is it stagnant? What's happening on that side of the market as people look to the equities?

Maria Smirnova: I think the M&A market has picked up. We've seen at least two transactions in the latter part of last year, material transactions where a silver company bought another silver company. This is something, let's say, a bigger miner buying a one-mine producer. Yes, to your point, buying something is faster than finding it, developing it, producing and demonstrating a track record. I guess the rationale there is you're saving on G&A. You're eliminating a CEO, a CFO. You're eliminating a layer of management, but you also have to be very careful. You have to do your due diligence to ensure it's not a lemon. The knife can cut both ways, but we're seeing a pickup in M&A activity.

Ed Coyne: I appreciate you lending your time today to educate us on silver. Are there any last things you want to leave our listeners with regarding silver, silver miners, or opportunities in the silver space?

Maria Smirnova: I think we've covered it well. I just wanted to reiterate why we're excited about silver miners and silvers. As we discussed, it's an integral component of our life nowadays. There's no turning back. There has not been a focus on increasing production in the last 10 years, which has left us at this stage. We're coming to a pinch point. That's my conclusion: we're coming to a pinch point. We're hoping that we can see that result translate to a higher silver price.

Ed Coyne: That's a great way to lead a conversation. Maria, as always, good to see you and talk to you. Thank you for your insight today on silver.

Maria Smirnova: Thank you very much.

Ed Coyne: Thank you all for listening once again to Sprott Radio.