Warning: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in ..../includes/class_bootstrap.php(430) : eval()'d code on line 134

Warning: Function ereg() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 4

Warning: Function split() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 19

Warning: Function ereg() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 4

Warning: Function split() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 19

Warning: Function ereg() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 4

Warning: Function split() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 19

Warning: Function ereg() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 4

Warning: Function split() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 19

Warning: Function ereg() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 4

Warning: Function split() is deprecated in ..../includes/class_postbit.php(345) : eval()'d code on line 19
The Complete Costs of Mining Silver - Page 2
Page 2 of 2 FirstFirst 12
Results 11 to 15 of 15

Thread: The Complete Costs of Mining Silver

  1. #11
    Join Date
    Dec 2009
    Posts
    5

    Default

    I think I understand that your point is to illustrate whether or not silver is under or over-valued based upon actual costs to produce that silver, as you would perhaps corn or soybeans. Corn or soybeans are easy to understand - what is the cost of seed, fertilyzer, fuel, herbicide, labor, equipment depreciation, and perhaps interest or lease costs to acquire farm land. From this you could get a close approximation of what prices have to be for say, US farmers to break even in general terms if they choose to plant corn or soybeans. Mining is far more difficult, as costs for operating specific mines and mining companies are very different, because of the time and expense involved in bringing a new mine online to meet demand, and because there is silver produced by non-primary silver mines that will be produced regardless of the price of silver and will affect the supply and demand curves.
    To be reflective of the true cost to produce silver, I think you need to look at all the primary silver producers - Fresnillo, HL, CDE, PAAS, SVM, and maybe EXK and GPL - and combine their data. Maybe even use the last couple of years to get a more balanced look. Then you have to make about three adjustments to the data. One is that you have to deduct the extreme one-offs like HL's accounting entry for the Silver Valley liability (they actually didn't pay a dime in 2010, they just booked the loss - payment will be in cash and shares over the next few years if settlement is approved - fortunately they have about $500 million is cash and short term assets to pay with). Second, you need to deduct currently expensed exploration expenses and insert a SWAG number that represents the costs to find the silver they mine annually (this is the real wildcard in determining true costs to mine). I believe I have seen an industry-wide analysis of this somewhere - not sure of their methodology, but maybe you could take market caps of non-producing juniors and divide it by ounces in measured and indicated catergories. Or maybe look at price to acquire a non-producing junior by ounce of resources. Since exploration costs are "sunk costs" they could probably ignored for the purpose you are making this analysis - if a silver mining company can make money mining to cover current costs, although not sunk costs, they will probably continue to mine. Those exporation expenses have already been spent and the price of the mining shares will have already reflected this expenditure. This would avoid this problem of allocating exploration costs to determine the "true costs" of finding the silver that you are mining. Third, I think the number should avoid taxes because as you lower the price realized from silver to approach break even, the tax liability would theoretically diminish to zero.
    All together it is a thorny problem to figure out.
    Perhaps the better question is what does it mean to average investor in bullion or silver shares if "true cost" to mine silver is significantly higher that "cash cost" to mine?

  2. #12
    Join Date
    Jul 2011
    Posts
    3

    Default

    Kali,
    You make excellent specific points regarding Hecla's skewed numbers affected by the Silver Valley Settlement.
    Recall 2007 through 2009. We had a massive wash out in the capital markets and silver went from $20 or so to below $10. All the primary silver miners suspended drill and development and were living off their reserve base, and none of them posted more than a few cents profit. In fact, most were forced to sell cheap shares to sustain in-progress capital projects if they were so unlucky...
    Couer is another prime example. They abandoned 100 years in the Silver Valley when they sold their crown jewell mines to USSilver because $5-7 silver prices prevented development drilling and upkeep of the mines. I doubt they would be in Bolivia mining today if the silver price had been anywhere near the true cost during the 1990's...

    First Majestic is a primary silver producer and you could argue the company is one of the best run. They could not build or sustain their operations and show a profit of more than a few cents with $20 silver.

    Lastly, try to imagine financing a greenfield silver deposit in North America. Fact is, the few that are in the wings are dependant on high byproduct credits to get a bankable feasibility study. Silver MUST sustain higher prices for several years before we'll see any of these projects make it to a financed mine, and then the input costs discussed earlier could factor into whether the deposit remains economic.
    While the total silver production profile worldwide looks set to grow marginally over the next few years, I don't think it will hold a candle to the physical demand at these prices... Simply too many ounces can dissappear via a nominal trade. Heck, over 65 Million ounces in paper silver were traded just today on the SLV.

  3. #13
    Join Date
    Dec 2009
    Location
    Chicago
    Posts
    4,376

    Default

    Ummm. Silver comes out of the ground mostly as a byproduct of copper mining. Tell us about Peru's costs of copper mining. Primary Silver producers' costs are much less of a factor in the price of Silver. And, producers' costs are a remotely lower factor in the price than speculative interest.

    Matthew Shelley
    Commodity Broker

    As always: Trading in futures and options is very high risk investing. You can lose all or more of the money you invest. Only risk capital should be used.

  4. #14
    Join Date
    Aug 2011
    Posts
    2

    Default Flawed model

    Quote Originally Posted by SRSrocco View Post
    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??
    Steve,
    Your adapted model makes more sense and seems to yield a good relative comparison. Paired with the total number of ounces it provides a tool for quickly screening MD&As w/o going into extensive details. Worth including into my DD - thanks.

  5. #15
    Join Date
    Nov 2009
    Posts
    52

    Default

    Matthew Skelley....point well taken. I realize a major supply of by-product mining comes from copper mines approx 20%+ of the total siver supply. Zinc & Lead by-product silver supply account for more than copper. We can agree that these huge open pit copper mines are basically giving silver away. That being said, primary silver mines who can't make a profit on silver will shut down. So....if the world wants a certain amount of silver, they will not get it if the price of silver declines substancially.

    Furthermore....when the Hyperinflationary Depression finally hits when world central banks can't BAMBOOZLE the public any longer with Counterfit money printing.....Base Metal mine production will fall drastically. Thus, silver production will decline a great deal more in percentage...than gold. Gold primary production is more than twice of silver.

    We are hitting PEAK EVERYTHING....and I would suggest investors really consider investing in silver bullion...as it will be the cheapest silver one will be able to obtain in the next 1-3 years.
    Last edited by SRSrocco; 4th August 2011 at 16:59.

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •