LARGEST SILVER PRODUCER: Facing Losses at Current Prices

The largest silver mining company in the world just came out with their first half financial results and the figures were dismal.  Fresnillo’s first half profits declined a staggering 60% compared to the same period last year.  However, at current metal prices the largest silver producer in the world could be experiencing losses the second half of the year.

According to their 1H 2013 Report, Fresnillo’s attributable profit declined an amazing 60% compared the first half of 2012.  Furthermore, you will notice that as revenues declined, cost of sales increased:

Fresnillo H1 2013 Report

Fresnillo received the following realized prices for gold and silver during the first half of 2013:

Silver = $24.67

Gold = $1,471

Currently, the spot prices for silver are $19.60 and $1,290 for gold.  This is a difference of $5.07 an ounce for silver (-21%) and $181 for gold (-12%).  If we assume that the average loss of revenue for the two metals would be an additional 15% at current prices, Fresnillo would lose approximately $147 million in revenue:

$982.3 million X 15% = $147 million

Of course we are taking some liberties here, but as you can see Fresnillo’s estimated revenue would be $147 million lower if all other costs and items remained the same.  Which means, that the $144.8 million attributable profit would be a $2 million loss — plus or minus.

I would like to point out that even though Fresnillo is known as the largest primary silver producing company in the world, they make more revenue now from gold than silver.  If we look at a table from their 1H 2013 Report we can see that they received 51% of their revenue from gold and 45% from silver:

Fresnillo Adjusted Revenue

So, now that the Fed and Central Banks have manipulated the price of gold and silver much lower, companies such as Fresnillo and Hochschild are feeling the pain more than the base metal miners due to the fact that they produce mostly gold and silver with very little by-product credits.

For instance, silver is down 38% since the beginning of the year, gold is down 22% and copper down a comfortable 13.5%.  If you are producing copper, you are doing a great deal better than if you’re mining gold and silver at the present time.

Let me say this… I think Fresnillo is a class act.  They are a fine company.  I am not singling them out in a negative way, but rather to show what is happening to the largest silver producer in the world as the prices of gold and silver have been manipulated lower due to the Fed & Central Banks trying to keep their Fiat Monetary System alive.

Furthermore, analysts who come out with their MONOTONE commentary stating that the miners can survive at their cash costs for a while do so because they have no blood to lose in the game.  It’s easy to watch MISERY from the distance while trading in and out making profits either way.

Moreover, Fresnillo stated that they would be slashing their dividends 68% to only 4.9 cents a share.  So, not only are the poor shareholders dealing with a much lower stock price, they are dealt an additional blow by losing more than half of their dividends — thanks to the wonderful folks at the Federal Reserve.

COSTS:  They Just Keep on Rising

The problem with rising energy prices is that a doubling of the price can cause a tripling or quadrupling of costs down-stream.  People don’t realize that in a complex system, when the energy input cost increases, the out-put result down the line in either materials or equipment rises much higher in percentage.

Then we have the curse of falling ore grades and aging of the mines themselves.  Again, as an open-pit mine ages and deepens, the haul trucks have to travel a longer distance to remove the same amount of ore.  This is shown in the cost description below from Frensillo’s 1H 2013 Report:

Fresnillo Costs

Costs at Fresnillo increased 8.7% compared to the same period last year.  However, if we look at the highlighted areas, we can see that diesel costs increased a staggering 24% and this was mainly due to “longer distances as the pits are deepened.”

This is the problem that the mining industry faces.  Cost will continue to rise because ore grades are falling causing the mining companies to consume more diesel at even higher prices in the future.

That is why I find it amazing that analysts can forecast gold to hit $850 an ounce.  Not only would the large primary gold miners suffer at current gold prices, but Fresnillo would be stating huge losses.

Energy is the Key to Owning Gold & Silver

I know I am a broken record on this issue, but very few precious metal investors realize how important energy is in the valuation of gold and silver.  The reason why gold and silver have been stores of value for over 2,000 years is due to their monetary nature of storing “ECONOMIC ENERGY”, a term coined by Mike Maloney.

Energy drives the economy and GOLD & SILVER are the BATTERIES to store this economic energy.  Fiat money cannot do this and only can survive in a system that has a growing energy base — which we do not have anymore.  So, the lifespan of the current fiat monetary is coming to an end due to the current energy situation.

Even though the investors of the world are following the bandwagon and getting into stocks or other worthless paper assets to “supposedly” protect their wealth or to earn a pathetic interest rate, they are doing so at their own peril.  While its nice to try to make money in these assets, at some point in time there will be a huge move out of these and into physical assets.

Unfortunately, the little money that was made will be over-shadowed by the huge losses that will come when the musical finally stops.

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9 Comments on "LARGEST SILVER PRODUCER: Facing Losses at Current Prices"

  1. Another great article Steve. Both depressing and exciting.

    • Agree…

      One more validation point for EROI theory.

      KMZ mitigated the Cantarell crash.

      There is no replacement (additional oil production
      capacity) for when KMZ’s CRASHes ( later part of this year).

      Mexico will became TOAST…

      • I can imagine what the other primary silver miners financial reports are going to look like when they come out within the next 3-4 weeks. I know the high cost miners are losing a lot of money, and I can imagine the medium cost producers are probably showing losses.

        However, if silver prices remain this low, the third quarter will reveal that nearly two-thirds of the top primary silver miners will be stating net income losses.

        steve

        • Steve, some of the silver in the eligible category at the Comex is actually SLV silver (17 million oz as of today).
          https://ebts.jpmorgan.com/metalicsWebApp/ebts_downloads/BONY_SLV.pdf
          There could be other ETFs that use the Comex warhouses to store their silver. So the stability of Comex silver inventory level is not necessarily a bearish sign.

          • Adolf… very interesting. Thanks for sharing that info. To be honest, I just didn’t think about the SLV storing some of their silver in the COMEX Eligible category. And like you said, we have no idea how much more silver is stored there by other ETFS.

            Judejin stated in a comment in another blog post that the Chinese have cut back refining copper about 10%. This may be part of the reason why there is a draw-down of silver at the Shanghai Exchange.

            Furthermore, he went on to say that the largest zinc-lead-silver producer/refiner was unprofitable at current market prices.

            So, it looks as if the Fed’s policies are working wonders in all corners of the globe.

            steve

  2. 515! silver inventory at SFE is edging towards 500 tons. it’ll probably break below 500 this week.

    while shanghai gold exchange silver shorts delivered 0 to the longs today, paying penalties to the longs again. i believe as physical silver shortage becomes as intense as gold, both gold and silver longs at SGE will become postive carry trades, enjoying both steady penalty income and upside potential, dream trade!

    • judejin…. that is simply amazing. Again, I don’t know why Shanghai Silver stocks are continuing to decline while the Comex inventories remains flat. It will be interesting to see what comes of the huge transfer of silver from one vault to JP Morgan.

      steve

      • According to the the Comex rulebook, “All Commodities held by a Licensed Facility, as identified in and in compliance with Rule 7A.03, must be reported, even if not weighed into Contract Units or if not intended for Exchange delivery.”
        For example, suppose you have a 1000oz 99.9% pure silver bar. You think it’s dangerous to put it at home so you store your silver bar at Brinks NY (a Comex warehouse). Then your bar will appear in the Comex inventory report (eligible category) even if you don’t know what the Comex is. The eligible category contains a lot of silver of this kind. ETF silver is just part of it.
        Therefore, it’s more reasonable to keep track of the movement in the registered category.
        The silver stock numbers published by the Shanghai Futures Exchange are for registered silver. The SHFE doesn’t publish eligible silver numbers.

  3. Monetary Historian… glad to have you commenting here at the site. Yes, it is quite amazing to see that the majority of people are invested in DEBTS that are masqueraded as ASSETS. Today, stock valuations are based on EARNINGS. Back in the 1930’s, they were based on BOOK VALUE.

    Problem with earnings today is that you have to BURN to EARN. By that I mean burn energy to produce earnings. This is something that will get increasingly difficult going forward.. which means valuations are heading much lower.

    steve

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