Due to the Fed policies of supporting the stock and bond markets, while allowing the competing Dollar currencies of gold and silver to tank, we are beginning to see the first casualties in the primary silver mining industry.
Unfortunately, I knew this was coming for these high-cost mines, but knowing it and seeing it happen in real life are two different things. I mentioned in a comment on TFmetals Report that I believed the high cost primary silver miners including U.S. Silver & Gold, Alexco Resources and Silver Standard were the most at risk:
The primary silver miners that will be in the biggest trouble first will be those who are what they call the “marginal” producers. All that word means is the HIGH COST producers.
Silver Standard, Alexco, and U.S. Silver, have production costs nearly $30 an ounce. Coeur, Pan American Silver and Great Panther are somewhere in the $25-26 range. Now that the price of silver is below, $20, these miners are losing money.
So, the next few days, two silver companies just announced huge cut backs and a planned mine closure.
U.S Silver & Gold: The First Casualty
U.S. Silver and Gold (should be just U.S. Silver again as they closed their only gold mine down earlier this year) announced that they will be laying off a third of their employees at their Galena Mine Complex as well as other cuts.
According to their news release:
Small Mine Plan
The Small Mine Plan focuses on increasing the grade mined to be profitable at current silver prices. Increasing grade will reduce the Company’s operations. The SMP will be implemented immediately, target both fixed and variable costs and entail the following actions:
- The number of operating stopes will be reduced from current levels to approximately fifteen;
- Staff at the Galena Mine Complex will be reduced from 351 to 225;
- The Coeur Shaft and Coeur Mill will be put on care and maintenance;
- Further capital development and exploration reductions will be made;
- Levels 2800, 3000, 3200, 4300 and 5500 will be put on care and maintenance;
- Milling of both silver/copper and silver/lead ore will be campaigned through the Galena Mill.
So, here we can see already that a HIGH-GRADE silver miner will be cutting a third of its staff and putting its Coeur Shaft & Mill on care and maintenance. They will be doing this while the average price of silver was in the $25 range in the second quarter even though the current price is $20.
I have to laugh at the analysts who said that these miners could survive at their cash costs before they would have to make big cuts. Of course they could cut back on exploration and drilling, but laying off a third of their staff when their CASH COST was $16.41 for Q2 2013??
Here is a table of U.S. Silver Galena Mine’s Highlights for Q2 2013:
Here we can see that U.S. Silver’s cash cost declined to $16.41 which is still $3.00 below the current spot price of $19.50. So why are they making such drastic cuts if their cash cost is still several dollars below the current spot price?
The reason is that their net income break-even is about $30 an ounce. Cash costs are not indicative of the profitability or sustainability of production. Hence, U.S. Silver & Gold are now losing $10 an ounce net income… that’s the real story.
Alexco Resources Plans for Shut-down this Winter
Like U.S. Silver, Alexco is another high-grade miner. Alexco produced silver at a staggering yield of 22.4 oz per tonne. Actually this was more than double U.S. Silver’s yield.
According to Alexco’s news release:
Alexco has developed a contingency plan to operate through the summer while beginning preparations to undergo a temporary and orderly suspension of operations at the Bellekeno mine and mill prior to the onset of winter. This avoids selling silver at current or weaker market prices, and positions the mine and mill for a re-opening after the winter, assuming the silver market has improved from current levels and underlying fixed costs have been reduced.
Now, why on earth would Alexco shut its mine if it is producing silver at a 22 oz per tonne with a low cash cost of $16 just like U.S. Silver?? Below, is their cash cost break-down for Q1 2013, as they have not released their current figures:
In the highlighted yellow, you will see their Q1 2013 cash cost. Because they produced so much less silver in Q1 compared to Q2 2013, I would imagine their cash costs will be even lower than that $16 figure.
Alexco’s big problem is highlighted in the blue. They have 25% of their silver production to be sold to Silver Wheaton for something like $4 an ounce. This is very damaging to a small miner who needs every bit of revenue to survive.
Furthermore, Alexco’s net income break-even is higher than U.S. Silver at $32-34 (according to my calculations). Alexco is really bleeding by showing a net income loss of $12-14 an ounce at the current spot price. Again, the silver-stream agreement with Silver Wheaton is really making a bad situation worse for them.
Now, I don’t know what this means for their contractual agreement with Silver Wheaton while they plan to close their mine this winter. And… we don’t know if they are going to reopen the mine in the spring unless prices have moved up substantially from here.
The Fed is To Blame For the Silver Miners Ills
I have listened to several analysts talk calmly & detached about how lower silver prices will cause some problems for producers while others may have to put mines on care and maintenance. You see its easy for a mining analyst to say these sort of things because they are have NO BLOOD TO LOSE. Sure, maybe a few bucks… but they still have their job putting out forecasts on how prices will impact miners in the future.
On the other hand, what is happening to these miners as well as more in the future, is simply appalling to me. I don’t follow the Jeff Christian CPM Group line of thinking on the precious metals or the mining industry. Christian views the precious metals as if they were mere commodities and gadfly investment vehicles… which of course are not manipulated.
Christian and many others view the world through the same eyes as the Federal Reserve. They seem impartial and callous to the real working men and woman in the world. They fail to understand the real physical economy and the fundamental value of money. Well, anyhow, that is my opinion.
The gold and silver miners are now heading for a great deal of pain because the Fed & Central Banks of the world are flooding the world with worthless fiat currency while propping up the broader stock indices and creating artificial demand in their worthless Bond markets.
The only real money creators we have today are the Gold and Silver miners. The Fed’s policies have put a temporary blow on these mining companies, but I believe they will come back much stronger than ever. At some point in time, investors will have to forgo earning a lousy low-interest rate on increasingly worthless paper assets, and move into physical assets to really protect their wealth.