For hard-hit silver miners, gold is the silver lining

According to BMO Capital Markets, large primary silver miners have increased their gold output on average by 19.4 percent a year since 2009 to 2 million ounces.

That makes them faster-growing gold producers than gold miners themselves. In that same period, large gold producers increased their gold output by 2.8 percent on average annually.

Helping drive this trend is big gold miners' sales of smaller, non-core operations as they try to cut costs and debt. Although gold has outperformed silver, it is still down nearly 40 percent since 2011.

Mother nature is also a factor in the silver-to-gold shift. Large, high-grade silver deposits have always been scarce and are becoming more so. Already some 70 percent of silver is mined as a by-product from copper, gold, lead and zinc mines.

"I don't see enough discoveries for all the silver companies that exist right now to be able to maintain silver production and replace it. They are becoming precious metal producers because they kind of have to," said BMO analyst Andrew Kaip. "The days of the pure silver producers are behind us."

THE RIGHT MOVE

Recent gold mine acquisitions by silver producers include U.S.-based Coeur Mining Inc's purchase of South Dakota's Wharf mine from Goldcorp Inc and Silver Standard Resources Inc's purchase of Nevada's Marigold mine from Goldcorp and Barrick Gold Corp .

Mexico-headquartered Fresnillo Plc , the world's biggest primary silver producer, last year increased its gold exposure when it bought out Newmont Mining Corp's stake in their gold joint venture in Mexico.

"If we look for M&A in the future, we will consider both (silver and gold)," said John DeCooman, Silver Standard's vice-president of business development and strategy.

Largely due to the Marigold purchase, Silver Standard's proportion of revenue from silver dropped to 39 percent in 2014 from 91 percent in 2013, company data shows. Revenue from gold rose to 53 percent from zero.

BMO estimates that silver sales will make up only 51 percent of silver miners' revenue this year, down from 67 percent in 2011.

Silver demand has been steady in recent years as coin and bar buying by collectors and demand for electrical equipment waned while that for jewelry grew. Over the past ten years, the emergence of digital photography has eroded long-term demand in that area. Thomson Reuters GFMS expects physical consumption to reach 1.02 billion ounces this year, up from 1 billion last year.

Large fund managers have generally been sympathetic toward silver miners' move to spread their bets.

"It doesn't really matter to me whether they are mining silver, gold or both. It comes down to the quality of the mines and the quality of the company, not the commodity," said Joseph Foster, portfolio manager at Van Eck Global, one of the precious metals sector's biggest institutional investors.

Although silver prices generally move in tandem with gold, moves are more volatile because the silver market is much smaller.

As a result, silver often outperforms bullion when gold is rallying and underperforms when gold is weak. (for Graphic, please click on http://link.reuters.com/jec64w )

But not everyone agrees that miners' diversification makes sense.

Buying gold mines at a time when silver is near historic lows relative to gold is "ridiculous", said Keith Neumeyer, chief executive of Vancouver-based First Majestic Silver Corp , which owns five silver mines in Mexico.

"They should be buying silver companies. Or gold companies should be buying silver," Neumeyer said. "Wait until silver starts to move again. They will be regretting their decisions."