Silver miners costing data...At $9.73 AISC, the major silverAt $9.73 AISC, the major silver miners still earned big profits www.mining.com/web/silver-miners-q317-fundamentals/ There are two major ways to measure silver-mining costs, classic cash costs per ounce and the superior all-in sustaining costs. Both are useful metrics. Cash costs are the acid test of silver-miner survivability in lower-silver-price environments, revealing the worst-case silver levels necessary to keep the mines running. All-in sustaining costs show where silver needs to trade to maintain current mining tempos indefinitely.
Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q3’17, these top 17 SIL-component silver miners that reported cash costs averaged $4.86 per ounce. That plunged a whopping 13.6% YoY, making it look like silver miners are far more efficient.
But that too is misleading. This past quarter SIL’s 17th-largest component was Silvercorp Metals, which enjoys big lead and zinc byproducts at its China silver mines. These base metals are sold and used to offset the costs of silver mining. That forced SVM’s cash costs down to negative $5.16 per ounce, which dragged down SIL’s overall average. A year ago in Q3’16, SVM ranked 18th in SIL and missed the top-17 cutoff.
Still even ex-SVM, these top SIL silver miners reporting cash costs last quarter averaged just $6.54 per ounce. As long as silver prices stay above those extreme levels, the silver miners can keep the lights on. And there’s no way silver is going to plummet down under $7 in any conceivable scenario. So even at 2017’s vexingly-low gold-lagging silver prices, the major silver miners face no existential threats today.
Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain a silver mine as an ongoing concern. AISC include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver production levels.
These additional expenses include exploration for new silver to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee silver mines. All-in sustaining costs are the most-important silver-mining cost metric by far for investors, revealing silver miners’ true operating profitability.
In Q3’17, these top 17 SIL components reporting AISC averaged just $9.73 per ounce. That was down 3.9% YoY, and far below last quarter’s average silver price of $16.84. Again SVM’s incredible byproduct production dragged down the average though. Ex-Silvercorp, these top SIL silver miners’ AISC ran at an average of $10.98 in Q3. That’s still well below prevailing silver prices, generating nice operating profits.
All-in sustaining costs and production are inversely related. Lower silver production, which many of SIL’s top components suffered last quarter, leaves fewer ounces to spread the big fixed costs of mining across. Thus AISC surged at Pan American Silver, First Majestic Silver, and SSR Mining. PAAS discontinued mining at an older mine, while other mines processed lower-grade ore that was on the way to better rock later.
AG’s lower production was due to land-access issues and mine inspections necessary following Mexico’s big earthquakes in mid-September. And of course SSRM is winding down its lone primary silver mine. Yet even with lower production driving higher per-ounce costs, the major silver miners still enjoyed solid operating profits. That’s certainly not apparent based on silver miners’ super-low stock prices mired in bearishness.
At $9.73 AISC, the major silver miners still earned big profits in the third quarter. Once again silver averaged $16.84, implying fat profit margins of $7.11 per ounce or 42%! Most industries would kill for such margins, yet silver-stock investors are always worried silver prices are too low for miners to thrive. That’s why it’s so important to study fundamentals, because technical price action fuels misleading sentiment!
Today’s silver price remains really low relative to prevailing gold levels, which portends huge upside as it mean reverts higher. The long-term average Silver/Gold Ratio runs around 56, which means it takes 56 ounces of silver to equal the value of one ounce of gold. Silver is really under-performing gold so far in 2017, with the SGR averaging just 73.5 YTD as of mid-November. So silver is overdue to catch up with gold.