Sun Silver (ASX:SS1) is the first. And we have chosen SS1 as our Small Cap Pick of the Year for 2024. SS1 commenced trading this week. SS1 has a 292,000,000 ounce silver equivalent JORC resource in the middle of the USA. SS1 is already up to 62c from the 20c IPO price. This Monday should be very interesting for SS1 given the silver price surged nearly 7% last night to new 13 year highs… and could keep going. … plus most IPO flippers (day one sellers) should be gone by now.
It's simply great luck to time a new Investment when a macro thematic is just turning positive.
Usually it's pretty hard to pick up good quality companies at good prices when the macro theme is too hot (think lithium in the middle of 2021).
We think the timing for SS1’s IPO was excellent with the silver price roaring just as it listed on Wednesday, and again overnight.
(Good luck on timing is not in anyone’s control, and while it’s all looking good right now, remember that things can and do go wrong in small cap investing, it’s high risk and good luck can be fleeting…
It does look like the macro planets are aligning on this one, and we hope the macro momentum just gets stronger and stronger.
SS1 launched its IPO on the 19th of April, closed it in a few days due to “overwhelming demand" and then listed early on Wednesday May 15th (initially it was targeting a June listing).
Here are events leading up to SS1’s IPO overlaid on the silver price chart:
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…and overnight the silver price smashed through $30, hit $31, and finished at $31.5. (The image above is from our launch note on Wednesday when silver was at $28.6… $31 doesn’t even show on the chart)
Now all we need is the silver price to continue on its tear and we get the recipe for a nice, sustained rerate in SS1 as project economics improve with a higher silver price.
So far so good, and we hope that as the company delivers catalysts over the coming months, the share price continues to appreciate.
See our launch note and the 11 key reasons why we Invested in SS1 here:
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Why we think the silver price could go even higher For a long time we believed the price of silver was trading unsustainably low.
We have been Investing in commodities companies for decades now and one way to gauge IF a commodity is likely to rally hard is to try and plot what is called “incentive prices” against the chart for that particular commodity. Incentive prices refer to the price for a commodity where companies see it as worthwhile to either explore for OR develop advanced assets.
I.e if the cost to produce a commodity is say $10, then the incentive price would need to be way above that number for it to be worth building a huge mine and taking on all the risks associated with that.
And for explorers the incentive price is usually even higher - where the price needs to be high enough to make it worthwhile spending money on high risk/high reward exploration.
When it comes to silver, we think the market traded well below incentive pricing for far too long.
That period of low prices resulted in mines being shut down or new mines not being built AND a complete lack of exploration looking for new discoveries.
Fresnillo plc is the world’s biggest silver producer.
Below is a slide taken from the Fresnillo 2023 results presentation which shows the All in sustaining cost (AISC) for two of its silver mines.
One is at US$21 per ounce and the other at US$14.5 per ounce.
(they must be a lot happier with silver at US$31.5)
Naturally their assets are in the lowest cost quartile for silver producers.
So US$14.50 to US$21 is as good as it gets when it comes to the cost of mining silver.
So the above numbers show us roughly how much it costs to mine silver.
The next thing to think about is how much a miner can sell its silver for.
For over a decade the silver price traded in a range between ~US$13 per ounce and ~US$22 per ounce. We think that those prices were nowhere near high enough to justify bringing new silver mines online AND especially not high enough to incentivise new exploration.
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Taking into consideration the time it takes to bring new projects online, the forward outlook for silver supply is relatively grim.
New mines can take up to ~17 years to come online following a discovery. Obviously projects at a more advanced stage in terms of development can come online quicker.
All in all, we think the silver market currently finds itself in a position where there is no new supply coming online and demand could be about to go exponential… Exponential silver demand growth projected to 2050By 2050 - 50% of silver demand is expected to come from the solar panel manufacturing market. This is a relatively recent development in the silver market.
The chart below shows how demand for silver is expected to rise by over 250% by 2050 due to solar alone .
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( Source ) Demand is growing, BUT global silver production is declining… Globally, silver production declined by 0.7% in 2023. ( Source ) Decreasing production isn't just a “2023 thing” either. Global silver production has been trending lower since 2016…( Source )
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( Source ) Production falls have led to deficits for 3 years straight… While the last three years have seen a significant large supply deficit emerge. ( Source )
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( Source ) We think the silver price is running largely as a result of the supply/demand imbalances the market is starting to price into the silver market.
Our view is that over the next 5-10 years, the silver price will need to go a lot higher then where it is today, to incentivise new exploration and new mine supply.
For the lithium market to incentivise new supply to come online, prices rallied over 10x in 2021… The silver market is a lot more mature than lithium - but even if we got a 2-3x move in the silver price, we think it will bode extremely well for our silver Investments.
