SILVER COSTS: Much Higher Than Most Realize

There still seems to be huge misunderstanding by many investors as to what it really cost to mine silver.  I still come across individuals and analysts who believe the price of silver is overvalued because it is so cheap to mine the metal.  Part of the reason for this FALLACY, especially from bearish silver analysts, is due to the reporting of CASH COSTS.

It doesn’t matter which mining company report you look at, just about all of them list what their cash cost is to produce their main metal.  Furthermore, the Silver Institute lists the primary silver miner’s cash cost per ounce from the Annual World Silver Survey on its website for all to see.

According to the Silver Institute:

Primary silver mine supply grew by 1 percent to account for 28 percent of global silver mine output. Mexico was the world’s largest silver producing country in 2012, followed by China, Peru, Australia and Russia. Primary silver mine cash costs rose to $8.88 an ounce, reflecting higher prices for labor, electricity, and maintenance charges.

So, it seems as if the primary miners produced silver at $8.88 cash cost an ounce in 2012.  This was up over 2011.  Here are the cash cost figures for the past 3 years (World Silver Survey’s, Silver Institute & Kitco):

2010 = $5.47   (avg. spot price = $20.19)

2011 = $8.11  (avg. spot price = $35.12

2012 = $8.88  (avg. spot price = $31.15)

With low cash costs such as these, the silver miners should be raking in the dough and stating huge profits.  However, a percentage of these primary silver miners are actually stating net income loses even at realized prices of $28-30 an ounce.

When the World Silver Survey calculates the primary silver miner’s cash cost, they only use a sample portion.  Let’s just say, this sample size is less than two-thirds of the silver produced from the primary miners.  Even though the folks (GFMS, Reuters) who publish the World Silver Survey do a good job calculating the cash cost for the primary silver mining industry, we will find out how useless it can be in determining the profitability of a mining company.

Excellon Resources Very Low Cash Cost & Net Income Loss??

I selected Excellon Resources as they are a perfect example to show how a company can state a very low silver cash cost while reporting a net income loss.  Now, I am not singling out Excellon or putting out negative information about the company, rather  Excellon is actually a pretty good company that has the highest grade silver mine in Mexico.

Let’s take a look at Excellon Resource’s Q1 2013 report on their cash cost:

Excellon Cash Cost

According to Excellon, they produced silver at a cash cost of $6.96 an ounce in Q1 2013, up from $5.67 in the same period in 2012.  As you can see they took their cost of sales ($5,963,000) and then added back Depletion, depreciation, amortization, inventory changes and by-product credits.  Thus, they had a cash operating cost of only $2,173,000 which was divided by silver ounces produced (312,167 oz) to get their $6.96 cash cost.

With this sort of low cash cost structure, Excellon should be making excellent profits.  However, if we look at their Financial Statement for Q1 2013 we have the following:

Excellon Income Statement

Even, with such a low cash cost of $6.96 an ounce, Excellon stated a $601,000 net income loss for Q1, 2013 compared to a $5.6 million net gain in previous period.  If we went by Excellon’s change in cash cost year over year, this would be the result:

CASH COST Change:  $6.96 – $5.67 = +$1.29 oz

Something seems fishy.  How could Excellon’s cash cost increase only $1.29, but their net income decline more than $6 million year over year?

First… we will notice, that revenues on the top of the table declined more than $3 million.  That alone wipes off $3 million from their bottom line.

Second…. their Cost of Sales increased from $4.8 million to $5.9 million, year over year.  So, that knocks off another $1+ million of net income.

Third… if we look at their exploration cost (in blue), we will see that it increased nearly $2.8 million compared to the same quarter last year.  That erases at least another $2.5 million from their bottom line.

Without those three factors, Excellon would have shown a positive $6.5 million net income gain instead of a loss.  As you can see, Excellon’s cash cost of $6.96 does not provide the investor a clue to the profitability of the company.

The Cash Cost Disclaimer

Anytime a company reports their cash cost in their financial reports they include the following explanation (I label it as a cash cost disclaimer) of their cash cost.  This one is from Excellon’s Q1 2013 MD & A Report:

Cash operating cost, net of by-product credits, is provided as additional information as is non-IFRS measure that does not have a standardized meaning.  This measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles and is not necessarily indicative of operating expenses as determined under generally accepted accounting principles.

IFRS stands for International Financial Reporting Standards and GAAP is the generally accepting accounting principles.  Basically, cash costs are not indicative of operating expenses and are not in accordance with either the IFRS & GAAP.

What Caused Excellon to Lose Revenues & Profits?

So now that we know Cash Costs are bogus in determining the profitability of a company, let’s look at what happened to Excellon’s balance sheet.

If you look at the table below there are TWO BIG Culprits that destroyed Excellon’s profitability compared to the same quarter a year ago.

Excellon Operating Data2

 The first big problem was the decline in silver grade year over year.    At the top of the table you can see that the average ore grade in Q1 2013 was 591 g/t (grams/tonne) compared to 949 g/t, Q1 2012.  Not only did Excellon suffer a 38% decline in grade, the also processed an addition 1,250 tonnes of ore.  Here we can see that Excellon had higher costs to produce 125,000 less ounces of silver.

The next big hit came from their $6.30 decline in the price of silver they received shown at the bottom of the table.  I highlighted the green areas to show the zinc and lead by-product data.  We can see that zinc and lead were not part of the problem in profitability as the price of lead was the same while zinc fell half of what silver did.

Furthermore, both lead and zinc had higher production and sales.  The practice of  mining companies subtracting their by-product credits from their silver mining costs to show a LOW CASH COST obfuscates the TRUE BOTTOM LINE PICTURE.

What was Excellon’s Estimated Silver Break-Even Price

There are several ways to get to a pretty good estimated break-even price for a silver miner.   You have to use either Net Income or Adjusted income and divide it by the Silver ounce sold during the quarter.  Then you add or subtract that figure to their Realized Price that quarter.

-$601,000 / 302,466 = -$1.99

$27.60 + $1.99 = $29.59 Net Income Break-Even

So, we can see that Excellon needed $29.59 an ounce silver to break even that quarter.   This is a very simple and easy way to get an estimated break-even, however there are other more detailed methods which will be discussed in future posts.

Total costs to mine silver are much higher than the industry is putting out in their financial statements.  With the current low price of silver below $22, the majority of primary silver producers are losing a great deal of money.   According to my calculations of my top 12 silver miners only ONE is making a little money.

Even though the mining stocks have declined substantially over the past few years, once the broader stock markets collapse, money will be forced to move into hold physical assets to protect their wealth.  The mining stocks may turn out to be some of the best assets to own in the next several years.

Enter your email address to receive updates each time we publish new content.

I hope that you find useful. Please, consider contributing to help the site remain public. All donations are processed 100% securely by PayPal. Thank you, Steve

14 Comments on "SILVER COSTS: Much Higher Than Most Realize"

  1. I found this to be interesting…

    From Volcan Q1 report (average silver price $30.14)

    “In this context of lower metal prices, it should be noted that the Company is taking
    extreme measures in order to reduce costs and expense, improve its financial results
    and preserve its cash position. Such measures are currently being applied despite the
    fact that we perceive these price levels to be [b]unsustainable[/b] in the medium term, due to
    the fact that [b]average production costs in the mining sector are very close to the current
    price levels[/b].”

    Volcan had a 76% decline in profits over 2 years from a 15% decline in price. I can’t wait to see Q2 results for these miners. I think US Silver and Gold was at about $34 estimated total costs for quarter 1 2013. They could experience a 10 dollar loss per ounce next quarter!

    Thanks Steve. You are much appreciated!

    • Brendan… yes, it will be interesting to see what takes place Q2 2013. It seems as if the hard working gold and silver miners have to scratch and claw to stay alive, while the Big Banks make profits by being a parasite.

  2. Your analysis fails to acknowledge that EXN is devoted to exploring its primary Mexican property to find the carbonate replacement deposit it believes is the source of its current production there. That has been the foundation of its business model in Mexico. Its high exploration expenses reflect this.

    • David… I think Excellon is a good company. They are actually in better shape than the other high grade silver producer in Canada, Alexco Resources which has a very high break-even due to their Silver Stream agreement with SLW.

      I was just using Excellon to show that Cash Costs are not indicative of the profitability of a company. Many companies label themselves as LOW CASH COST producers, while at the same time they barely make profits. This sort of practice needs to dry up and blow away.

      Silver Standard on the other hand has adopted the method of calculating ALL COSTS including Depreciation, Depletion & Amortization to get a TOTAL COST per oz…. which was $28.49 for Q1 2013.

      Even though they stated a total cost of $28.49, they still posted a net income loss of $4.4 million. The problem with Pirquitas is that it’s a OPEN PIT silver mine with average grades of 200-210 g/t. Open pit mines are more expensive if you don’t move a great deal of volume and have plenty of by-product credits.

      The best type of open pit is one that has gold & silver ore.

      Lastly, if we made an assumption that Excellon had the same amount of Exploration expense as it did the prior year at $2+ million, Excellon would have stated a net income gain of $2.2 million or so. If we divide that $2.2 million by 302,000 oz sold, they would have shown a $7.28 net income gain per oz for the quarter… which is actually pretty darn good.

      Thus, Excellon’s Net Income Breakeven would have been $20.32.. which means they would still be making money even at the current price of silver. The only other miners I know making money at this level is First Majestic and Fresnillo.

  3. Thanks for the thoughtful and analytic reply. It appears Excellon may well be paying its way to identifying a CRD. If it succeeds it will reward its shareholders many times over. In my mind that makes it a speculation worth pursuing.

  4. miners are screaming buys! too bad i closed out my IB accounts after MFglobal debacle. i lost trust in US brokerages.

  5. can post a comparison based per share ore reserve? silver standard seems to score quite high on this metric.

  6. futures market are rigged so that the miners and farmers are just scraping by while the bankers take home millions year after year.
    if we adjust compensation at wall street firms to silicon valley counterparts, assuming both employ the brightest
    we can clearly see wall street firms are making obscene profits, totally unjustified.

  7. for the nine months after QE3.0 was announced, gold was down 8 out of 9 months. this is the longest losing streak i can find on my charts all the way back to the 1990s.

    silver has been down 5 months in a row including the current months, which is also a first since 1990s.

    fundamental analysis hasn’t worked for over 2 years.

    gold and silver bugs are the laughing stock.

  8. OutLookingIn | June 11, 2013 at 12:20 pm |

    Steve, thank you for shining that light into a dark corner of financial calculating, thats not exactly “honest” by the mining sector. In my opinion, telling half-truths, is the same as telling a lie. It comes down to a question of degree!

    Another “fact” that gets over looked by most silver investors, is the amount of actual physical silver, thats above ground, as compared to that of actual physical, above ground gold.

    Gold is vaulted and hoarded, while silver is used up. The amount of silver used by industry around the globe is huge. As recently as fifty years ago, governments kept large strategic reserve stockpiles of silver. These are now gone. Sold into tthe market.

    To manipulate the price movement of gold, the precious metals cartel has used the massive stockpiles of gold bullion, to sell into the market forcing the price down. They are unable to do this with silver, because of the relative shortage of the physical metal compared to that of gold.

    That is why the silver price is so low. The PM’s cartel is terrified that the price of silver will “get away” from them, so they continue to viciously cap the price. This cannot and will not, continue forever.

    • Miners are businesses. Every business is active in the business of lying, otherwise they would not succeed in this world. There is no “good” successful person or company, they all had to sell their soul to get there.

      On the subject of silver supply, yes, it’s ridicolous that 80% of mined silver, 15000 tonnes a year or more is used in a piece of equipment or merchandise, which is sold and will eventually disappear on some random dumpyard, and will never be accessible again.

      This is silver we are talking about, and we’re actually taking it out of the ground and then throwing it away!

      This is why I don’t care about any investment other than silver. It’s projected to be one of the first elements on the periodic table that we run out of, which might be in 20 years, and in the face of that we’re wasting almost all of it! At some point this will turn, and will turn violently, to the realisation that this is scarce and it is worth something. At this point I’ll be rich. I am 30 now. Would like it better if I had entered a the age of 20, but it’s still okay, I can wait that long. Even if the absolute top is 20 years down the road, we’ll already have massive profits to book (if we want to) in 5 and 10 years time.

      Rocco shows this excellently, and I have to thank him for it. Average ore grades declined 50% within the last 8 years or so, and they’ll continue to. Combine that with a rising oil price. Not too far down the road we’ll be looking at an average production cost of 50$ per ounce. Either the industrial users pay that, or they’ll not be producing anything. And that cost is in today’s money, not adjusted for any potential increase in money supply and resulting inflation (which will happen, as we all know).

      Which will also play a huge part in the future when inflation will become obvious to anyone: silver’s traditional use as a precious metal and inflation hedge.

      So, I can only repeat, I don’t really care for any investment other than silver. I think long term it has both the smallest risk and greatest reward of all investments right now.

  9. OutLookingIn | June 13, 2013 at 9:43 am |

    @Markus; I agree. The “poor mans gold” in future, (to those who own it), will be the rich mans wealth.

  10. That_1_Guy | June 13, 2013 at 1:32 pm |


    Great article! I also feel that EROI is the right way to analyze true costs. It is shocking to see what actual cash costs are vs GAAP etc….accounting.

    So I was checking out this company Avino. They seem to be a primary silver producer and have their costs at about 17$ an ounce. Would really like to get your take on it.

    Keep up the great work!!!

    Best regards,


    • Guy… Thanks for the reply. I looked at Avino, and do not have it included in my top 12 silver miners. Just to let you know Avino did the following Q1 2013:

      Avino Silver Production = 159,582 oz
      Silver Sold = 123,166 oz

      Revenue = $3.5 million
      Cost of Sales = $2.4 million
      Net Income = $88,000

      Net Income Per Oz = Net Income / Silver Sold
      Net Income Per Oz = $88,000 / 123,166 = +$0.71

      Net Income Break-even = Avino Realized Price – Net Income Per Oz
      Net Income Break-even = $27.95 – $0.71 = $27.24

      So, Avino’s Net Income Break-even was $27.24 for Q1 2013. Even though the company states a $17 cash cost, their ALL IN COSTS are more like $27.24.

      Right now at $21.50, Avino is losing between $5.5-$6.0 an ounce.


Comments are closed.