Fed Policies Impact Silver Producers: Mine Closures & Big Cuts

Silver Minres Cuts & Closures

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:

U.S. Silver Q2 2013 Highlights

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:

Alexco Resources Q1 2013 Highlights

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.

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22 Comments on "Fed Policies Impact Silver Producers: Mine Closures & Big Cuts"

  1. Superb analysis,extremely greatful,thank you very much for your valuable contribution.

    According with Mexican federal institute(INEGI),”silver” production for the month of
    April decline had decline of 10.5 PERCENT decline and ZACATECAS silver distric
    suffered a 21% reduction for the month of April.

    http://www.inegi.org.mx/inegi/contenidos/notasinformativas/ind_miner/ni-im.pdf

    May very soon a supply collapse…

    • luiscarlos… thanks for the reply and the great link to the INEGI pdf. I gather you can read Spanish. I wish I could. I would like to make a post out of this but I would love to get some of the text translated or if there was an English version.

      That is something else that silver production was down 10.5% in April and 21% in the great Zacatecas district.

      Lastly, is there any way that I could access each new monthly report? Can you provide me a link to those montly reports from the INEGI?

      steve

      • Steve. With your permission,as soon as the data is release by INEGI for
        the month of May,I’ll posted at your site with a very brief sinopsis.

        luiscarlos

        • luiscarlos… sounds great. I looked at the PDF file for April, as well as the other months from the link that Brendan gave. I had a question. There are two different figures for silver production.

          1) On the first page under the heading of “Produccion Minermetalurgica (Tonlades)

          Plata = 350 tonnes 2012, 353 tonnes 2013

          2) On the second page under heading of “PRODUCCIÓN MINERA SEGÚN PINCIPALES ESTADOS PRODUCTORES DURANTE EL MES DE ABRIL”

          Plata = 462 tonnes 2012, 414 tonnes 2013.

          Can you tell me what is the difference in these two different categories? And why one is higher than the other?

          steve

          • Okay

            First, silver and gold are exclusions in the tables and they are accounted as kilograms and not tonnes. Otherwise that’s a lot of silver 😉

            Second, the difference between the two figures can be interpreted this way. The first table shows MINING production alone in Mexico for the first quarter which increased by about one percent.

            The second table shows TOTAL production which includes recycling of silver and that decreased by 10.5%. If incentive to recycle the metal decreased, then maybe that can be considered rather bearish for the metal in Mexico and not bullish?

            I would rather see recycling go up and mining go down to interpret in a positive (investment-wise) way.

            Great website and I am very interested in the first couple figures showing total mineral production declining. I look forward to looking into this more.

          • When looking at US data however, recycling numbers are very variable and who knows how accurate they are as there is a lot of accounting to do I imagine.

            USGS recycling numbers in tonnes by year
            http://s15.postimg.org/w7pirdkyj/recycling.png

            In general however over the long run, recycling in the US has been pretty constant when compared to a 50% decline in mining production and an import dependence increase from 40% to 70% since 1998.
            http://s23.postimg.org/s2trqy1wb/supply.png

            Also I love this chart. Domestic availability includes recycling, gov stockpile, and mining production
            http://s11.postimg.org/q3slu682b/availability_vs_dependence.png

            Best,
            Brendan

          • Sorry for the confucion.

            first page.,”minerometalurgica”,is the smelting capacity,melting down,
            casting the metal(silver)into bars,granalla(shot silver)or coins(etcetera) and 353 tons(553,222)is the correct number for April 2013.

            Second page,”produccion minera”, the translation is MINE PRODUCTION
            for the month of april 2013 the amount was 414 tons(414,843).

            luiscarlos

          • :s I google translated that wrong. So it is the attractive version of the story where production declined and recycling increased.

            Very interesting luis!

  2. it’s really really sad for me. when i was a kid, i listened to VOA every night, admiring America being the good guy, and hating my own country the villain.

    damn the world!

  3. Great analysis Steve. I read everything you write and you are clearly one of the best researcher-analysts in the precious metals arena. Thanks!

    • Bob… thanks for the comment. It is quite amazing how much more energy the primary gold miners are consuming to produce an ounce of gold today compared to just 5 years ago. This is also true for the Chilean Copper Industry (largest copper producer in the world).

      According to the information provided by the Chilean Copper Commission, liquid fuel consumption increased from 26 gallons per tonne of refined copper (extraction only) in 2005 to 39 gallons per tonne in 2010. That is a 50% increase in just 5 years. Again, those figures only account for the extraction of the metal, not milling, processing and refining.

      I am going to do an update to see what their fuel consumption was in 2011.

      Anyhow, peak metals will be coming sooner than later.

      steve

  4. Why are these miners letting Wall Street determine the price of silver? If I were them I’d sell it at a higher price or start holding on to it.

    • Matt, if the miners do not “play ball” they find their financing from the banks cut off. Also, many mine owners are from the bad old days of the 1980s-1990s when mines were pariahs at the banks when they wanted to get loans for new production. As a result, many mines were forced to hedge their product into the futures market, allowing the central banks to keep the price of the metals low.

      If a mine owner tried to hoard their product they would soon find themselves unable to get loans from any bank, and the local warlord/president/king/politician would start looking at their company as a cash cow in their district for takeover/shakedown/nationalization. It’s just too risky.

  5. it is reported that some gold jewelry shops have run out of gold bullions, advanced orders can be placed with delivery delayed by up to 20 days.

    another story: shanghai is cracking down gold price rigging by local gold jewelry industry, which refuses to lower gold price to match international price decline.

    • judejin… appreciate the update on the local situation. If the Run on the Global Gold Bank is as bad as Andrew Maguire… looks like things are going to get a great deal more interesting going forward.

      steve

  6. Hi Steve,

    I was waiting for a piece on miners shutting production due to the low prices as the opportunity to make a comment/observation or two:

    This year both the Comex and SLV silver inventories have been rising as the price falls. Meanwhile Comex and GLD gold inventories have been falling as that metals’ price falls. A landslide in Utah shuts a major silver(and copper) source while the US and Canadian mints are producing coins greater than the combined countries metal output. Silver imports/consumption for India and China (per Sprott) are going through the roof.

    And the silver price still falls plus inventories increase?

    The US government, formerly the largest known entity for silver stocks has been totally out of stock for years now. So where exactly is all this inventory build metal coming from? (I have an opinion on where as a lot of this silver burns at 451 degrees F). It may just be that the warning the Comex gave that they do not certify the published inventories of the bullion banks applies much more to silver than gold.

    FWIW

    • Mark… I have been looking into this very subject. U.S. silver bullion imports are up significantly so far this year compared to last year., while exports are down considerably. So, something seems strange. I plan on putting together a post on this shortly.

      steve

  7. private stock of silver in china is long gone. i posted info on this in tfmetalsreport.com

  8. One tends to wonder if there is a reduction of silver production in Mexico (more than 10% in April) and which mines are driven down. When one looks at First Majestic with 5 mines in tow and over 10M oz in production and rising every quarter – you have to really wonder who is inefficient?

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