Silver mining costs

jd1123 · Jan 21, 2013

To all you silver pros out there - I recently had a discussion with one of my friends who I consider to be one of the best minds in economic thinking. I explained to him that I was concerned about inflation and we discussed PMs as a potential hedge. Though he has bought gold, he is concerned that the marginal cost of bringing a new ozT to market is lower than the prevailing market price (his estimate cash costs about $700, all in somewhere around $1300) so if inflation does hit, you will likely not recoup your entire purchasing power if costs rise along with broader inflation.

This got me thinking, so I looked into silver. Some sources cite cash costs for mining the marginal ozT of silver around $5-$7, and all in costs anywhere from $20-$30. What are the real costs? Hard to determine for many reasons, chiefly because silver is a by-product of other mining. Some of these sources go on to say that pure silver mines are not incredibly profitable with silver around $30/ozT.

I can't find any data on WHY the mining costs are lower for silver. The by-product argument makes sense, but I can't quite figure out if mining silver requires less energy or the geological formations are more cost effective to mine. For instance, how much does it cost to mine PURE silver mines, and if they do exist why can it be done for so much less than gold?

Does anyone have any ideas or theories on this? Is it simply the that the other bid for metals are strong enough to support silver as a byproduct (like natural gas as a by-product for more liquid rich plays)?

MiningNut · Jan 21, 2013

Well I'm not an expert on silver per se, but I am an investor in miners and explorers. Your friend notes an average price of $700 a ton to mine gold, and is concerned that at today's prices, this average production cost is eating almost half an ounce of gold.

But that right there is another *very* bullish statistic for the price of gold; in a time when Bernanke (literally) cannot stop monetizing debt, the fed gov is running trillion dollar deficits, and every central bank in the world is full speed ahead on the printing presses, and the market for physical gold is getting tight--do you seriously believe it should still cost half an ounce of gold to produce the other half? The dollar price of gold hasn't even begun to move yet, it is nowhere near where it should be relative to the amount of dollars that have been printed. When global confidence in the dollar fades, gold is really going to shine.

Assuming his statistic is true, you still have to look at production costs (and in-ground resources) on a project-by-project, company-by-company basis. The production costs vary wildly, but most of the low hanging fruit has already been picked, which is another very bullish fact for gold. But if gold's production costs are indeed that much higher, on average, than silver, it is because dedicated gold projects are a completely different animal. With gold at $1600+, projects that were not economical ten years ago are suddenly looking better, but if they're low grade they might have to move millions of yards of dirt to produce anything, which make for high production costs. The price of diesel isn't helping either. But the moral of the story is, don't worry about gold; gold is where you want to be, don't let the chart fool you, gold IS different and it hasn't even begun to move yet.

Silver projects, on the other hand, are often a derivative production, as you note. But with silver so cheap, the dedicated silver projects have to be high grade stuff in order to be economical. Alexco is my favorite silver junior, they are sitting on a silver bonanza up in the Yukon, and Comstock Mining has boatloads of silver in the old Comstock lode. In the big picture, gold is superior but I like exposure to silver too.

pmbug · Jan 21, 2013

srsrocco has written extensively on this subject: http://www.pmbug.com/forum/tags/srsrocco/

jd1123 · Jan 22, 2013

Thanks for the help guys. I guess this answers my question.

MiningNut - while I agree with you about the monetary policy in this country, I'm more concerned about keeping the purchasing power of what I have right now. If we do enter a period of hyperinflation, it doesn't matter how many quatloos my gold is worth - just that one ounce is worth 1000 loaves of bread.

If you are truly buying a commodity at its marginal price with no risk or other premium in it, it should keep pace with broader inflation (obviously a generalization here). So basically I'm just getting my facts straight - which metal gives me the most bang for the buck. Where are the gaps in production cost - that sort of thing.

PMBug - appreciate the links.

On a similar note - I have been panic buying silver. I am truly concerned about the near future. A couple of my coworkers are on board and we are routinely splitting orders as large as we can handle.

EDIT: MiningNut - do you have any production cost information for those silver projects you mentioned?

MiningNut · Jan 22, 2013

Alexco and Comstock Mining are both juniors who are just moving into production. They are both working the bugs out of their systems while expanding their processing and production capacity, so at this point I think the extremely high grades they are sitting on are more important than what the final production cost will be (since it's so hard to tell at this point anyway).

But you could probably check their filings to see if they have anything detailed on production costs, with juniors my focus is on 1. ore grade and 2. political stability. High grade gold & silver anywhere in the US or Canada is the safest bet in mining stocks. But Mexico has made big strides in their conception of property rights (to attract foreign investment), and I would not lump them in with the rest of the South American countries (who I avoid like the plague).

Unobtanium · Feb 26, 2013

I just came across these two articles today:

http://seekingalpha.com/article/121...-silver-edition?source=email_rt_article_title

http://seekingalpha.com/article/120...-cost-what-does-it-really-cost-to-mine-silver

pmbug · Feb 27, 2013

...
The third quarter production of these companies incorporates 27 million equivalent ounces and comes out to about $26.54 per ounce of silver -- this should be shocking to investors who follow the "cash cost" number offered by silver companies.
...

Current spot of ~$29/ozt doesn't leave a lot of room for profit.

bushi · Feb 27, 2013

wooow! fantastic articles, thanks Unobtanium - great analysis, and it seems that current spot prices are SO close to the marginal production costs of silver! And when you add minting, distribution, dealer margins? I think it is still a firm "buy", after all !

Unobtanium · Mar 13, 2013

Video discussing why miners state an innaccurately low "cash cost" per ounce for mining silver.

He also comments further on the Silver Mining Costs article at Seeking Alpha posted earlier in this thread.

You can skip the first 1:30 without missing anything.

pmbug · Apr 15, 2013

* bump *

According to the analysis Unobtanium referenced, miners are in deep doo doo with spot bouncing around $22-24.

Unobtanium · Apr 16, 2013

Deep doo doo indeed. Cow manure rubber boots needed, please.

The price of silver "rubber band" gets stretched back further.

swissaustrian · Apr 16, 2013

This little book from 1980 explains a very simple commodities investment strategy. Buy what trades below production cost and wait until it is trading comfortably above costs.

That's what I've done in natural gas last year: http://www.pmbug.com/forum/f9/natural-gas-trading-below-average-production-cost-617/

[ame="http://www.amazon.com/You-Cant-Lose-Trading-Commodities/dp/0965111105"]Amazon.com: You Can't Lose Trading Commodities (9780965111102): Books@@AMEPARAM@@http://ecx.images-amazon.com/images/I/51ncJIZ3qyL.@@AMEPARAM@@51ncJIZ3qyL[/ame]

pmbug · Apr 16, 2013

Some mining talk here:

A few points:
* Barrick may go bankrupt over Pascua Lama / sales of unrealized production there
* Silver below cost of production - all miners in danger

bushi · Apr 17, 2013

For what it's worth, "Ranting" Andy Hoffman, is quite often talking things that are his mere opinions (and sometimes, not very coherent with what he said, in the same interview earlier), and assuming they have the same significance as FACTS. I would recommend caution before reading too much from what he have to say.

My humble opinion only, so no offence meant to anybody.

swissaustrian · Apr 17, 2013

A company called Hebba Investments has done a series on the "true cost of silver mining" for several pure silver miners which was published on seekingalpha. They've recently completed the series with an overall industry summary. Their article is available here, the second part requires "free" registration:
http://seekingalpha.com/article/1303691-the-true-cost-to-mine-silver-complete-2012-figures

If you're accessing the article from a smartphone, you can read the whole article without registration:
http://m.seekingalpha.com/article/1303691

Anyway, the main point is the following, summarised by another SA contributor:

Fellow Seeking Alpha author Hebba Investments has been writing a series of articles on the 'true cost' of mining gold and silver over the past weeks. His method is best described in his most recent offering and in most basic terms compares all costs incurred by a company in the course of a year with the ounces mined by this company during the same period of time. Hebba Investments does not distinguish between costs directly related to the actual process of mining and selling production, and other cost positions such as exploration, mine rehabilitation or expansion etc. His argument goes, that all these costs are ultimately necessary for a mining company to produce gold or silver in a sustainable manner. This line of thought has been discussed in much detail following most of his articles on various mining companies, and in conclusion we believe that his (or her) approach has its merits and gives valuable data points when researching precious metal companies. Before we continue we would like to recommend Hebba Investment's line of articles and the lively discussion they have attracted.

In his latest article Hebba Investments provided more food for thought when he presented the accumulated bottom line of his data on various silver producers. Averaged over all silver mining companies that Hebba Investments has analysed so far the 'true cost' of producing one ounce of silver is $23.68 for 2012 excluding write downs, up from $22.21 for 2011. Hebba Investments goes on to argue that this 'true cost' figure provides a floor under the price of silver (SLV), (SIVR), (CEF), (PSLV) since silver companies would stop producing if the price fell below this level.

http://seekingalpha.com/article/1305351-musings-about-the-floor-under-gold-and-silver-prices

This year, costs have likely continued to rise. We are trading below true costs of production.

pmbug · Apr 17, 2013

BTW, the second link works just fine on non-mobile devices (ie. desktop computers).

swissaustrian · Apr 17, 2013

Try to click next and access the second page, it requires registration for me.

pmbug · Apr 17, 2013

There is no "next" link/button on the "mobile" page ( http://m.seekingalpha.com/article/1303691 ).

swissaustrian · Apr 17, 2013

I'm automatically beeing redirected to the desktop version

pmbug · May 3, 2013

SRSrocco said:
...
Here we can see that PRODUCTION COSTS for Newmont increased from 40% of total revenues in Q1 2012 to 48% in Q1 2013. It cost more for Newmont to produce 200,000 less oz of gold in Q1 2013 compared to last year.

...

Furthermore, the PRIMARY SILVER MINERS are going to show NET INCOME LOSSES for the second quarter of 2013 if the price of silver stays below $27 an ounce. Look at what Endeavour is doing:

...

Endeavour Silver is cutting jobs to cut costs… and they are in the TOP 3 in PROFITABILITY of the 12 Primary Silver miners. ...

More: http://silverdoctors.com/srsrocco-the-world-is-run-by-energy-period/

Unobtanium · May 22, 2013

Here is the latest article in this series from Seeking Alpha:

http://seekingalpha.com/article/144...sources-edition?source=email_rt_article_title

Conclusion

SSRI is producing silver at significantly higher true all-in costs than most of its competitors. This situation is only going to be exacerbated with silver prices hovering in the $22 range, and we expect significant losses in the upcoming quarters if silver prices do not recover. But on the positive side, SSRI does have hoard of cash and investments to keep the company afloat for quite some time even if it is operating at a loss. Investors should look to see if SSRI can start significantly lowering costs and management may want to use the cash to purchase properties or finance cash-starved junior miners.

For those who invest in the silver ETFs (SLV) or silver as a commodity, it is important to note that another major silver producer is producing silver in the high $20s while the silver price languishes at $22 per ounce. SSRI also is on track to produce less silver in 2013 than in the previous year (and this was before the big silver price drop). Both of these are positives for those who hold silver as a commodity. It may be a little counter-intuitive, but the more the silver miners struggle to stay afloat and produce silver profitably, the lower the future supply picture becomes. SSRI's report just reinforces the fact that silver miners are struggling to produce silver at current spot prices. Investors should look to this as an opportunity to buy an asset that sells for below production costs - especially when the fundamental picture for precious metals remains bullish.

rblong2us · May 22, 2013

I understood that most silver was produced as a byproduct of lead or zinc mining.

So as long as they can cover the mining costs by producing other metals, the silver recovery operation could be parked and the tailings left unprocessed to either wait for it to become profitable, or sit in a tailing heap for ever ?

Unobtanium · May 22, 2013

rblong2us said:
I understood that most silver was produced as a byproduct of lead or zinc mining.

So as long as they can cover the mining costs by producing other metals, the silver recovery operation could be parked and the tailings left unprocessed to either wait for it to become profitable, or sit in a tailing heap for ever ?

My guess is that this might be a tougher question to answer than meets the eye. Silver prices have fallen over the past 6 months but there has also been a ~20% drop in zinc, lead and copper over the past half-year. So profits in mining are getting squeezed from even the base metals too. With profits down due to the base metals price decline, can a miner really afford to set aside silver and not at least take it to market for at least a some cash flow?

I am not sure what percentage of cash flow silver represents for a multi-metal mine, but perhaps they cannot afford to do without that cash flow, albeit at a loss?

From http://numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=26787

At some point, gold prices could fall so low that primary mines will not be able to operate, which would cut supplies. There are some large gold mining operations with cash costs now exceeding Monday’s $1,360.60 closing gold price. Most silver is produced as a co-product or by-product of other commodities. With declining copper prices this year, some mine operators have recently announced plans to trim output, which also means that new silver supplies will decline.

pmbug · Jul 10, 2013

srsrocco's latest (long and good read):

http://srsroccoreport.com/silver-mi...ilver-mining-costs-exposed-cash-cost-fallacy/

Potemkin · Jul 12, 2013

Interesting topic indeed. I'm researching to find out whether it's worth investing in silver right now. I was a bit nervous as it surpassed 20 $ now, but then it cam down below that level.

What I've read in news articles is that silver's total production is somewhere around the 17 $ level. So basically we're just above it. If that's true, it's going to skyrocket after a while.

pmbug · Jul 12, 2013

Potemkin said:
...
What I've read in news articles is that silver's total production is somewhere around the 17 $ level. ...

Where did you read that? Everything I've read says that number is way too low.

MasterQ · Jul 12, 2013

$23-25 on mining costs...last time I read and the variance is due to the different miners.

Never saw $17 so yeah...I'm curious too.

-Q

Potemkin · Jul 13, 2013

I read 17 $ in several sources, here's one predicting it for 2014:
http://business.financialpost.com/2013/06/25/determining-which-gold-miners-will-outperform/

And it literally circulates like a rumor. I honestly don't know what to believe.

I guess silver is very cheap now at 19-20 $ and it's a very good buy. It should climb slowly over time.

Unbeatable · Jul 17, 2013

Yukon's Bellekeno silver mine to shut down for winter

Alexco Resource Corp. will close its Bellekeno mine in Yukon this winter because of low silver prices.

About 100 employees will be affected by the September shutdown.

A press release from the company says it will reopen in spring 2014, "assuming the silver market has improved."

The company says silver prices are now so low, operation costs exceed revenues at Bellekeno.

http://www.cbc.ca/news/canada/north/...-shutdown.html

Unbeatable · Jul 17, 2013

WALLACE, Idaho (AP) — U.S. Silver & Gold Inc. has announced the layoff of just over one-third of its employees at its northern Idaho silver mine due to decreasing silver prices.

The company announced Tuesday that it was laying off 126 of 351 employees at the Galena Mine Complex near Wallace.

The layoffs at the Wallace mine come less than two months after the company announced it was shutting down its Drumlummon gold mine northwest of Helena, Mont., and laying off just over 100 workers because of falling gold prices and high production costs.

Producing an ounce of silver from the Galena mine costs about $16, while silver prices have dropped from $30 an ounce to about $20 this year, company officials said.

http://www.businessweek.com/ap/2013-...-126-employees

Unobtanium · Jul 17, 2013

Potemkin said:
Interesting topic indeed. I'm researching to find out whether it's worth investing in silver right now. I was a bit nervous as it surpassed 20 $ now, but then it cam down below that level.
.

Nervous? If I had dry powder right now I would be buying silver by the truckloads.

Jay · Jul 17, 2013

Unobtanium said:
Nervous? If I had dry powder right now I would be buying silver by the truckloads.

+1

Unbeatable · Aug 4, 2013

Mexico - largest silver producing country sees production fall by 10% YTD.

Mexico Silver Production Down a Stunning 10%

The reason attributed to the drop in silver production at Fresnillo and Penasquito was due to falling ore grades, however Penasquito had additional problems with water availability in treating its ore.

http://srsroccoreport.com/mexico-si.../mexico-silver-production-down-a-stunning-10/

ancona · Aug 4, 2013

Wait for it, because when the price suppression coupled with mine problems, labor problems and physical demand going off the chain, we will see rebound price spikes the likes of which none of us have ever seen.

Unobtanium · Aug 4, 2013

So true ancona.

Let's see:
1) India initiates measures to curb gold buying in their country.
2) People of India then start buying gold thru Pakistan
3) Pakistan puts "temporary" ban on gold buying.
4) Go figure..... Silver imports shoot through the roof in India. Yet still another stress on the silver supply chain.

http://www.mineweb.com/mineweb/content/en/mineweb-political-economy?oid=199685&sn=Detail

http://articles.timesofindia.indiat...ilver-imports-gold-imports-world-gold-council

July silver imports highest in 5 years
Piyush Mishra, TNN Aug 2, 2013, 02.29AM IST

AHMEDABAD: Silver imports recorded a staggering 258.65% growth at 857 metric tonnes (MT) in the first four months (April-July) of 2013-14 as compared to 239 MT by July 2012.

The imports of 274.922 MT in July are the highest in last five years in the first four months of a financial year. In fact, silver imports in July 2013 are the second highest in any month in the last five years.

pmbug · Aug 4, 2013

I'm feeling quite anxious these days. Want to buy more phyz before the lid pops off.

Jay · Aug 4, 2013

ancona said:
Wait for it, because when the price suppression coupled with mine problems, labor problems and physical demand going off the chain, we will see rebound price spikes the likes of which none of us have ever seen.

and then I'll be exonerated and then my wife and I can frolick again....:rotflmbo:

Jay · Aug 4, 2013

PMBug said:
I'm feeling quite anxious these days. Want to buy more phyz before the lid pops off.

and no dollars unless I want to borrow.

pmbug · Aug 4, 2013

Yeah, that was implied for me as well. Don't want to over extend myself.

Unobtanium · Aug 4, 2013

Unobtanium said:
So true ancona.

Let's see:
1) India initiates measures to curb gold buying in their country.
2) People of India then start buying gold thru Pakistan
3) Pakistan puts "temporary" ban on gold buying.
4) Go figure..... Silver imports shoot through the roof in India. Yet still another stress on the silver supply chain.

http://www.mineweb.com/mineweb/content/en/mineweb-political-economy?oid=199685&sn=Detail

http://articles.timesofindia.indiat...ilver-imports-gold-imports-world-gold-council

More news about India and silver:

http://www.24hgold.com/english/news...0&redirect=false&contributor=Charleston+Voice

Friday, August 02, 2013 by Eric Sprott & David Franklin
Eric Sprott

As India continues to wage war with gold, investors are seeking out the yellow metal through any means available.

Recent reports suggest that there is not enough room on commercial flights into Dubai for all those investors seeking to purchase gold.

“I cannot find a place for transporting gold on Emirates, on BA or Swiss Airlines this weekend,” lamented Tarek El Mdaka, the managing director of Kaloti Gold in Dubai adding he is shipping as much as 2 tonnes of gold every day.

As we had suspected, it would appear that the Indian gold trade has moved offshore to avoid the restrictions on imports and extra taxes imposed. However, this is not the biggest change in the Indian precious metals market – silver imports have exploded.

Silver has not been exposed to the same import restrictions that gold has and recent silver import figures confirm that investors have flocked to silver, likely as a substitute for their desire for gold. And why shouldn’t they?

With limited bank branches in the country, owning precious metals is synonymous with savings and security.

While it seems that the larger investors have moved their gold purchases offshore, we suspect that the majority of Indian investors have turned to silver as a substitute for gold. The recent import numbers are staggering.

While India imported 1,900 tonnes of silver in 2012, in the first five months of 2013 alone, imports have touched 2,400 tonnes. According to industry estimates, silver imports during the January-March quarter stood at 760 tonnes.

Imports shot up to 720 tonnes in April alone, and in May they further swelled by 920 tonnes.

Let’s put these numbers in perspective, according to the Silver Institute, the world produced 24,478 tonnes of silver in 2012, implying that Indians have imported almost 10% of world production so far this year.

If they continue to import at the same rate as they have in May, over the next 12 months India could import close to half of world silver production which is a truly staggering shift in demand for silver.

The next salvo in the war on gold occurs this Monday July 1st when “The All India Gems and Jewellery Trade Federation” (representing 90% of jewelers in India) declares a ban on its members selling gold bars and coins.

It’s almost unbelievable that this retail federation would impose an all-out ban on purchasing gold for investment purposes, but all is fair in love and war. However, Indians aren’t phased and are shrugging off this ban and investing their rupee’s in silver instead.

This new import data shows that the victor in India’s “War on Gold” – will be silver.

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