Energy’s Silver Lining: A Precious Metal Powering the Future

In this episode of Shifting Energy (Season 2), Thalia Hayden chats with Steven Schoffstall, Director, ETF Product Management at Sprott Asset Management about silver miners, investing in silver and how the silver market is tied to the global energy shift.

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Video Transcript

Steven Schoffstall: Silver is used significantly in artificial intelligence computer chips because it is highly conductive. These are high-growth areas that point to the overall changing landscape.

Thalia Hayden: Welcome to Shifting Energy. I'm Thalia Hayden with ETF Guide. We are so glad you're with us today. We're diving into Sprott’s new ETF, the Sprott Silver Miners & Physical Silver ETF (ticker: SLVR). Joining us now is Steve Schoffstall with Sprott Asset Management. Hi Steve, welcome back. Great to see you, as always.

Steven Schoffstall: It’s great to be back. Thanks for having me again.

Thalia Hayden: Steve, the Sprott Silver Miners & Physical Silver ETF (SLVR) draws on Sprott’s long legacy and precious metals, but silver is widely used in many applications and is critical to the energy sector. What role would you say silver plays in the shifting energy landscape?

Steven Schoffstall: That's a great question. The shifting energy sector boils down to the need for more electricity coming from diversified energy sources. The growth in electricity demand comes from three main areas. The first is if we look at developing countries as they start to urbanize and industrialize, surging electricity demand to keep up with that growth. In more developed countries, we see technological advances related to artificial intelligence, data centers, electrification, and a growing use of supply chain reshoring, which has become a priority in recent years. And finally, overarching everything is the global transition to cleaner energy. This is the move on a global scale to look at our energy sources and look for more renewable sources. Let's look at the energy demand and what will happen through 2050. Estimates by the International Energy Agency say that we could expect about a 170% increase in electricity demand relative to 2023. Silver ties into that because it has a number of uses, relating not only to electricity but also to clean energy. The first would be in solar panels and photovoltaic solar cells that are used. It's also used in control rods and nuclear energy. It makes up about 80% of the material in the control rods. Then, we see significant uses for silver within artificial intelligence computer chips because it is highly conductive. All of these areas are high-growth areas, and they all point to the overall changing landscape.

Thalia Hayden: Alright, got it. Well, there's another play on silver, of course. I'm talking about the monetary aspect and its relationship to gold. Can you tell us more about where silver fits into monetary considerations?

Steven Schoffstall: I think that's what most people are familiar with: silver as a precious metal right there next to gold, platinum, and palladium to a certain extent. It still keeps many of those traits even though we're starting to see its industrial uses increase. When we look at when precious metals do well, it is typically environments where you have things like currency, debasement inflation, geopolitical risks, and falling interest rates. Sometimes, you see it through periods of economic recovery. So those are a lot of the things that we see going on from a global perspective. Now, as it relates to falling interest rates, if you look at the Federal Reserve and it is a dual mandate to keep stable inflation and inflation and maximum employment, it is reasonable to expect that we could see some further cuts in the interest rates in the future, which could bode well for precious metals including silver.

If we were to look back at the last six precious metals bull markets, going back to the inflation era of the 1970s, you would see that silver has tended to do very well relative to gold. On average, it outperforms by about two to one. For the significant outperformance that we see from silver, of those six precious metals bull markets that we've seen, five have occurred this century, with the most recent being in the one that we believe to be in one now starting in 2023. That's largely as it relates to the geopolitical concerns and decreasing interest rates that we see on a global scale. When you look at the price of silver and how it's reacted through these bull markets, if we were to go back to the turn of the century, you would see silver somewhere around $5 per ounce.

It's increased an annualized rate of about 7% to where we're currently up around $31 per ounce as of the time of recording this. What we see in the precious metal space, I mentioned two times, is outperformance relative to gold. Still, in the current bull market that we see with precious metals, silver's underperforming gold is on a relative basis. So, while it's still up 1.4 times to gold, it's underperforming relative to its historical pattern. Another widely followed aspect of precious metals investing is the gold-to-silver ratio. This is a way for investors to know how many times gold is trading with silver. Typically, if we go back 35 years, we see that ratio running at about 70. Where we sit today, it's closer to 90. When you look at that and the relative performance of silver versus gold in this current bull market, it leads us to believe that there is some additional room for silver to catch up and get closer to this historical average. And so those higher silver prices are something that we foresee going not only over this bull cycle but many years into the future as we start to unpack the industrial uses of silver.

Thalia Hayden: Steve, can you tell us how SLVR differs from other funds that invest in silver miners? Would you say all silver mining companies are the same?

Steven Schoffstall: I think the short answer to your second question is no, not all silver mining companies are the same. And we will talk through that. One of the things that we do at Sprott is take great pride in our product development effort. We have expertise in metals and mining that goes back several decades, specifically focusing on precious metals and critical materials. So, when we look to bring a new ETF to market, we have a couple of things to look for. First, we want to find something that aligns with our expertise. That's the first stop of what we look for. Second, we also want to look for those trends that we think are long-term. We are not looking for a hot investment site or a hot theme at this moment. Finally, we scan the investment landscape and look at it based on the currently available offerings. Is there a way that we can improve investor outcomes?

It's through that lens that we worked with NASDAQ to co-develop the index that is tracked by SLVR, the Sprott Silver Miners & Physical Silver ETF. Our ETF launched in January, and we're excited about it. I'd say one common theme that we have amongst our ETF strategies is that we take a pure-play approach, which provides investors with focused exposure. What that looks like in the case of SLVR is that our focus is to provide exposure to pure-play companies. These companies have at least 50% of their revenue as assets tied to mining and the production exploration development of silver. We also have a physical silver component, which makes up about 17.5% of the index at every semi-annual index rebalance. We have a 25 to 50% revenue screen for liquidity purposes, though that only makes up about 15% of the index.

And we keep that at a minimal level to provide additional liquidity. To understand why pure-play is so important, there are a few things that we have to realize about the silver market. It is different than what we might see with copper or gold markets. The first is that 72% of the silver mined is mined as a byproduct of other metals. If you look at lead and zinc, for example, miners mining those two metals account for about 31% of overall silver production. The second aspect of the silver market is that when you look at the 10 largest silver producers, zero of them are predominantly silver miners, meaning they principally mine other metals. With that lens, we look at our silver offering and what that means for the market. If we look at comparable silver mining ETF strategies, we find that they tend to have a much lower bar than our pure-play approach.

Often, they may screen for companies that have an allocation to silver or generate some revenue from mining silver. Our pure-play approach is much higher. That results in a product with about twice the exposure to silver relative to other silver mining ETF strategies. To take that a bit further, if we look at the overlap, how similar are the portfolios from one to the next, and what are their strategies? The SLVR only has an overlap in the range of 25 to about 30% relative to other ETF strategies, meaning that SLVR is about 75% different from other offerings. That's a significant way to demonstrate how the pure-play approach plays out as it relates to the underlying constituents. And I think another piece is that if we're looking at the exposure of companies with less than 25% of their revenue tied to mine and silver in SLVR, we don't include those companies in our portfolios.

If you look at other silver mining ETF strategies, you can see that number is as high as 50%, and on the low side, it is 28%. That’s significant exposure to companies that aren't necessarily very much involved in mining silver as it relates to the firm's overall revenue. To summarize, SLVR provides the greatest allocation to silver while decreasing and providing the least amount of unintended commodity exposure. With that, it is our view when we look at investors trying to get exposure to that silver market that SLVR may be well positioned to help them reach those investment objectives.

Thalia Hayden: Steve, we've heard silver inventories are declining. Can you tell us more about how silver's industrial uses impact the supply and demand equation?

Steven Schoffstall: Absolutely. Silver as a precious metal is one of the oldest forms of currency, but we are seeing an increase in its use from an industrial standpoint as of 2023 when the most recent data is available. About 55% of all silver was used for industrial purposes. It's also the second most widely used commodity, behind only oil, with about 10,000 uses for silver. We see that in things like the medical field, where there are antimicrobial, antibiotic and antibacterial uses for silver. It is the most conductive element on earth. We do see it used a lot in electronics. We discussed uses like AI, computer chips, solar panels and nuclear energy. But overall, we've seen steady growth in industrial uses for silver industrial uses, which grew by about 11% in 2023. Once last year's data becomes available. We expect to see a growth rate of somewhere in the neighborhood of 8 to 9%.

When we start looking at solar panels, that's the aspect of the industrial demand we see pushing growth forward. In 2015, about 6% of silver demand came from solar panels. Where we sit today, that's increased to about 16% of overall industrial demand. There are two main reasons for that. One is just the growth and the acceptance of the usage of solar panels. The second is that technology is at a point where it's starting to evolve. We have the top solar panels, which are solar cells starting to roll out. We expect them to become the predominant solar cell moving forward. We expect the 2024 data to show that last year was a tipping point. That is important because this new solar cell technology uses 50% more silver than we've seen with past technologies.

Not only are we using more solar energy, but the solar energy that we are using requires more silver because of technological advancements. And then, if we look at the supply of silver, that's the demand side. If we look at supply, we see supply has remained relatively stagnant. It's dropped about 3% since 2015. So we don't have a lot of new silver being mined onto the market. And because most of that silver, that 72%, is being mined as a byproduct we mentioned earlier, that's what holds back supply. Suppose you're a miner and predominantly mining things like copper, lead, or zinc. In that case, you're not going to change your operations based on the price of silver because that's not a primary driver of the economics of each individual mine. What we're seeing is that those pure play miners, the ones that are focused on predominantly mining silver, are the ones that may be well positioned to benefit from not only increasing their supply but also taking advantage of higher prices.

Thalia Hayden: We see Sprott continuing to prepare investors and advisors for the critical materials megatrend by offering a full suite of critical materials ETFs. Why should investors consider adding exposure to silver miners and their critical materials exposure?

Steven Schoffstall: It comes down to the solar usage we see from silver and its importance to the solar industry. And if you're familiar with our lineup, we have a large suite of critical materials ETFs and our flagship fund, the Sprott Critical Materials ETF, which we launched about two years ago. Ticker SETM has about an 8 to 9% allocation to silver. So, this is very much needed to generate cleaner energy, and many view it as a critical material. That's why we look at it for precious metals' uses and critical materials' purposes. And we find that with funds like SLVR, investors appreciate the opportunity to get targeted exposure to just a single commodity. When we're talking about what makes SLVR different from other silver mining ETF strategies, that pure-play nature sticks out.

To walk through what that can mean to a portfolio, if you look at pure place silver miners, again, that 50% revenue test, their average sustaining cost to mine silver is about 17 and 18 cents an ounce. With silver prices currently trading around $31 an ounce, there's a fair degree of profitability within that group of pure-play miners. And given the demand dynamics that we see playing out, and when we start looking at things like currency debasement and inflation and geopolitical risks, those are all things that are lining up, we believe, to a market that may be pointing toward a period of longer-term growth in the silver market. From an investor standpoint, look at what that might mean for a portfolio. You have the growth aspect based on supply and demand characteristics and the profitability of the underlying miners.

On the other hand, you can also have some diversification benefits afforded through the precious metal side. If you look at silver miners as it relates to the S&P 500, for example, you'll see that the correlation between those two is about 0.47, meaning it's a moderate degree of correlation. If you look at the broader bond market, you see that the correlation dips below 0.4, which starts getting a little lower, and there is an inverse correlation to the U.S. dollar. It provides some diversification benefits from the monetary aspect, but the growth aspects we see from the critical material space.

Thalia Hayden: You've certainly given us a lot to think about. Thank you so much for your timely insights, Steve.

Steven Schoffstall: It's great to be here. Thanks.

Thalia Hayden: That will do it for today's episode of Shifting Energy. If you enjoyed the show, please let us know in the comments section below by hitting that like button. To learn more about the investment strategies and ETFs we've discussed on today's program, be sure to visit sprottetfs.com. I'm Thalia Hayden with ETF Guide. Thanks for watching, and we'll see you next time.