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The Complete Costs of Mining Silver
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Thread: The Complete Costs of Mining Silver

  1. #1
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    Post The Complete Costs of Mining Silver

    Subject:The Complete Costs of Mining Silver
    By: Steve St. Angelo

    Overview: The inspiration to write this post was to clarify some issues with the costs of mining silver. I believe many of the investing public has mistaken what is termed as the “CASH COST” as the real cost of mining silver. According to the Silver Institute in 2010, the cash cost from primary mine production was $5.27 an ounce. The Silver Institute gets their info from the World Silver Surveys produced by GFMS. I have had an email exchange over the past several months with one of their metal analysts on various topics. I recently asked permission to reproduce their Cash Cost graph for this post, and was told I could do so for $1,500.<br>

    Link: http://news.silverseek.com/SilverSeek/1312064021.php

  2. #2
    Join Date
    Jul 2011
    Location
    Gosford.Australia.
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    Default

    I found out this information the hard way.The gold/silver companies I'd invested in didn't plainly show their costs.I now hold the metals through a bullion company and feel less worried about the vagaries of the sharemarket.I wish I had read an article like this 5 years ago.Thankyou.

  3. #3
    Join Date
    Jul 2011
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    3

    Default The cheap silver is gone

    Steve,
    Great job compiling this article.
    Hecla is developing the deep extentions of the Lucky Friday. It is taking several years and $100's of Millions to reach the new ore. The shaft and stope development in any deep underground mine puts a drag on current earnings! US Silver has had the same issues, rehabilitating the old Coeur mine infrastructure. The fact is that there's very little 'greenfield' cheap silver left anywhere in North America... if there were; Coeur would still be mining in North America. $4 silver put their Galena/Couer/Caladay complex 'out of the money'; so dramatically they sold the whole complex to US Silver for $15M! There are marginal deposits with plenty of low grade silver too; but they will NOT be developed unless a Bankable Feasability Study can document a higher long term average silver price to make these deposits economic to develop.
    "Peak Silver" will likely be a constant factor in the supply equation no matter what the market price, however, because much of the total world silver produced is a byproduct...NOT from primary Silver mines. Perhaps this factor is why the market manipulators retreated to higher price points? As new investors enter the market, the excess silver sloshing around to cover the paper trade is dissappearing. If the managers of the price do not want an explosive disorderly price, they MUST allow the price to rise enough to encourage new production, period.

  4. #4
    Join Date
    Nov 2009
    Posts
    52

    Default silverseek 123...you took the words right out of my mouth

    PEAK OIL and the FALLING EROI will destroy the ability to mine marginal ore grades

    It's is truly amazing that your reply is something that I would have written myself. I wrote the PEAK SILVER AND MINING ARTICLE BY A FALLING EROI back in 2009. Many believed that if the price of oil went higher, we could bring more supply to market. This might be true for certain types of Unconventional oil like TAR SANDS and DEEP WATER, but besides that, we are not finding any more good ole high quality sweet crude in any numbers.

    It looks like the world will peak in total liquids within a year or so. Then the downside of the PEAK OIL GRAPH will more than likely be a lot harsher than most have predicted. This is due to the falling EROI. On the upside back in 1930 it took 1 barrel of oil to bring 100 barrels to market. The NET ENERGY was 99 barrels. Today its about 11-1 for the USA which means there is now only a tenth of the NET ENERGY or 10 barrels brought to market.

    Nate Hagens did a graph on how the US NET ENERGY OIL GRAPH would look going forward and according to his calculations, we hit 1:1 by 2025. That means we have bascially have a ZERO SUM GAME.

    I believe the great deal of so called "INFERRED RESOURCES" that the USGS and many mining companies have on their balance sheet will more than likely never be mined due to the fact there will not be the available energy to mine it.

    Thanks again for your replies.
    Last edited by SRSrocco; 31st July 2011 at 12:46.

  5. #5
    Join Date
    Aug 2011
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    2

    Default Flawed model

    Steve,
    I do not understand the logic/value of your calculations.
    Lets go back to your example with Hecla:
    2010 Net income 49MillUSD, sales 420MillUSD, Complete cost at 20USD per oz=17.8USD/oz
    Assume a silver price of 30USD/oz in 2010 and recalculate with production of 10Mill oz silver: Net income 149MillUSD, sales 520MillUSD, Complete cost at 30USD per oz=21.4USD/oz
    Let me understand why a higher price in silver aka higher profit margin translates into higher ‘Complete Costs per Ounce’. So, can you see your flawed model as opposed to the Cash Cost model?

  6. #6
    Join Date
    Dec 2009
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    5

    Default

    My post didn't get published from yesterday, so I have rewritten it in case it was lost. Forgive me if it gets repeated. This one is probably better thought out. As an investor in silver stocks and Hecla in particular, I have an interest in this issue. Here it is:

    SRSrocco, your analysis fails for several reasons. First, GAAP is probably not as accuate a measure of cost as compared to the non-GAAP calculation used by mining companies, at least in the short term you are looking at. For example, certain exploration and other expenses may have to be amortized over time even though necessary for proceeding with current minning operations. As a further example, depreciation (GAPP, US tax code) does not accurately reflect the true rates of depreciation of the particular assets.

    Second, you are comparing apples to oranges - the non-GAPP cash cost allocates costs to base metals so they are mined on a break even basis. Your analysis allocates costs to both base metals and silver based upon the percentage sale value of the commodity. Theirs is net of byproduct credits, yours is not.

    Third, the income number you used must be adjusted to be of any value in determining true costs. For example, in 2010 Hecla booked a loss of about $200 million for historic environmental liabilities in the Silver Valley. As a result, Hecla reported operating income as a loss of $52 million and income before tax as a loss of $75 million, resulting in an income tax liability of negative $124 million. The difference between the book loss and the income tax benefits therefrom resulted in a net income of $49 million on which you based your calculation. This number (based upon the inclusion of 100 years of costs associated with activities in the Silver Valley) bears little resemblence to the real performance of Hecla during 2010, when it accrued $198 million in cash from operations net of investment activities (i.e. dividends, hedging, etc.).

    Fourth, as illustrated by Q1 of 2011, Hecla's profit margin over the true cost of mining including depreciation, etc (pre-tax) is about 50% (allocated equally between base metals and silver as you do in your analysis). Only when you deduct the income tax liability resulting from such a profitable operation do you get the lower 31.8% number you quote. In Q1 2011, about 25% of costs deducted ($23 million) were taxes. While taxes are costs, they are reduced as the amount of cost approaches gross receipts. Since even an operation that had zero costs to mine would have a 38% corporate tax liability and could therefore never have more than a 62% net profit margin, break even (or a true cost analysis such as you are attempting) should be a pre-tax consideration.

  7. #7
    Join Date
    Jul 2011
    Posts
    3

    Default Silver will be in the eye of the coming storm over"What IS money?"

    If my memory was better, I could have referenced your article directly, which I recall reading via your prompt! My thoughts are just an amalgamation of Chris Martenson's site and dozens of other contributors in the resource world over the last several years... Eric King and Jim Paplava, and so many articles such as yours. I agree 100%: Our fundamental dilemma is unsolvable unless we view the present economic system through the lens of "peak oil and a declining EROI". Every endeavour in the economy is now dependent upon cheap resources, as the true cost and factoring of decline rates were suppressed to extend this massive debt and leverage pyramid monetary system. As it unwinds, the mispricing of the resource and the currency employed to control it must resolve towards a model of 'sustainable productivity' and end of 'growth at any cost' economics.
    The world has ventured unrestained via universal fiat for 40 years. The TBTFs in control today WILL fail, it is just a matter of whether we all go down with them. Silver( and gold) are inextricably entwined in this struggle, like it or not; and recognizing the true cost of supply is a critical step.

    Silver is struggling to find price equilibrium as the battle rages over recognition of its oldest and widest application: money; via the return of Gresham's Law. As the EROI of oil collapses towards 1:1; industrial and investment offtake of silver is simply going to crush anyone on the short side of this equation so long as the fundamental conditions persist. Based on the latest evidence, we might as well prepare for a very bumpy ride!

  8. #8
    Join Date
    Nov 2009
    Posts
    52

    Default Silverseek 123....another good post.

    THE HYPERINFLATIONARY DEPRESSION WILL BE VERY GOOD FOR SILVER OVER GOLD

    I will put together an article on just this topic. We will have a Depression at some point. This time it will be a Hyperinflationary one instead of deflationary. Homes, Cars, Boats, Commercial real estate and etc will plummet in value, while goods like Food, Energy, and commodites will go through the roof.

    Furthermore, because 70% of silver global supply comes from by-product mining, there will be a huge decrease in silver production due to mothballing of Base-metal mines due to the depression. Gold will not be affected as much as silver as it has more than double the primary mine supply to silver. This I will also explain.

    Lots of fun ahead
    Last edited by SRSrocco; 3rd August 2011 at 05:59.

  9. #9
    Join Date
    Nov 2009
    Posts
    52

    Default

    donprizzi.....you bring up a good point. I have done some work with someone in regards to coming up with a bettter model. He suggested we take the Net Income and divide it by the ounces produced and not the total revenue. Here is an example:

    Hecla 2010, $48,963,000 / 10,500,000 oz = $4.66 net income per oz of silver.

    Average price of silver 2010: $20.16

    Hecla Actual Cost of Mining Silver 2010 (net of all by-product metals): $20.16 - $4.66 = $15.50


    This seems to be more accurate as the Complete Cost for silver falls as the price of silver goes higher.

    If we use 2011 Q1 financials we get the following:


    $43.2 million / 2.5 million oz = $17.28 Net income per ounce

    $31.66 - $17.28 = $14.38 oz Complete Cost


    Here we can see that in fact the Complete Cost is falling as the price of silver heads higher. Again...this is not an exact science...as it was not meant to be one. It is a guide that to me is better than the CASH COST.

    comments??

  10. #10
    Join Date
    Nov 2009
    Posts
    52

    Default

    Kaliahk.....I totally understand what you are saying in your 4 points. I am looking in terms of profitabilty. When I talk with investors about the cost of mining silver, their kneejerk reaction is $5.00 an ounce. If that was the case, miners would be making huge profits. Your four points all have merit. My complete cost is not an exact science. Please check my reply to donprizzi above.

    On your second point about base metals I truly understand the implications. You might agree with me that there is no such thing as a PRIMARY MINE. All produce by-product credits. All most sell these to market. The price they get for their by-products must be competetive with other mines or else it would be an unwise busniess practice.

    Points 3 and 4 are indeed important and will change the TRUE COST. The $200 million one time hit over a 100 year period, is still a hit. I am more interested what the Complete Cost was for that year. If Hecla had been able to pay that $200 million over a 10 year period...sure it would have been a different bottom line in 2010. Again...my forumla is based an a yearly total cost. It may spike higher or lower due to these Hits...but...that hit is still a cost....and a cost in 2010.

    Your 4th point is something I considered. Any ideas would be greatly appreciated.

    Kaliahk...I am trying to get a better cost per ounce for the less sophisticated investor than yourself. If you have better ideas to offer....I am all ears. I understand the use of Cash Costs in mining firms...but it does nothing to show the overall profitablity of a mining company. Please check my reply to donPrizzi and you will see that the new forumla does account for by-product credits somewhat. As for the other points...again any ideas would be greatly appreciated.
    Last edited by SRSrocco; 3rd August 2011 at 15:27.

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