What Did It Cost To Mine Silver Q3 2013?

Even though the Top Primary Silver miners were able to lower costs in Q3 2013, they still recorded a loss for the group.  Of the twelve silver companies in my group, only three were able to show positive gains.

The results for Q3 2013 were better than the previous quarter, but still significantly off from the same period last year.  If we take a look at the first table below, we can see how the top 12 silver miners compared from Q2 to Q3 2013:

Top 12 Silver Miners Q2 2013 vs Q3 2013. NEW

(NOTE:  the change in adjusted silver income [ADJ-Silver] should be a positive $2.38)

Overall revenue from the group increased from $739.9 million Q2 to $821.7 million in Q3.  This was due to an additional 970,078 oz more silver sold than the prior quarter as well as significant gains from three of the companies.

You will notice that the groups overall production cost in Q3 declined $16.5 million compared to Q2 as production remained virtually flat (down just a tad at -95,143 oz).

Mine operating earnings increased substantially from $37.8 million (Q2) to $158.6 million (Q3) which had a positive impact on adjusted earnings.  You will notice that adjusted earnings improved from being a negative $88.3 million in Q2 to a minus $4.6 million in Q3.   I like adjusted earnings because it excludes gains or losses not directly related to mining silver that quarter.

The interesting thing to see here is that the Estimated Adjusted Break-even fell from $25.23 in Q2 to $21.39 in Q3, nearly $4 an ounce.  The reason for the lower break-even is due to lower costs across the board as well as an additional 1 million ounces of silver sold compared to the previous quarter.

Some of you might be thinking, “How on earth did overall revenue go up that much in the third quarter compared to the previous quarter if the Realized Price declined more than a dollar with only 1 million more in silver sales?”

I spent a few hours looking at the quarterly reports and could not find the reason why the overall revenue increased so much in Q3 over Q2 (as silver sales increased only a million oz).  However, several of the larger companies such as Pan American, Hecla and First Majestic increased their revenues significantly compared to the previous quarter — nearly $88 million for the three.

One of the costs that these companies have cut back on in a big way is exploration.  Last year in Q3 2012, the group spent $39.8 million on exploration alone, but knocked it down 62% to only $15.3 million in Q3 2013 (First Majestic, Alexco & Aurcana were not included in the exploration figures as they did not show a separate figure on their income statements).

This is indeed a significant amount to cut exploration.  We must remember, a mining company’s share price will increase based upon 3 fundamental factors:

1) increase of the price of metal

2) increase of its reserves

3) increase of its annual production

It is very hard to accomplish number 2 & 3 if exploration and CAPEX expenditures are cut to the bone.

Now, if we take a look year over year, we see a much worse picture for the top silver miners.

Top 12 Silver Miners Q3 2012 vs Q3 2013. NEW

Even though the miners have done a good job cutting costs and lowering their break-even (based on adjusted income) quarter over quarter, here we can see just how bad the situation looks year over year.

First, total revenues from the group declined from $924.2 million in Q3 2012 to $821.7 million in Q3 2013.  This was a $102 million decline y.o.y while sales of silver increased a staggering 2.6 million oz.  Basically, the group sold 2.6 million oz more of silver, had $8.6 million more in by-product credits and still recorded an adjusted income loss of $3.1 million for Q3 2013 compared to the same period last year.

Second, production costs actually increased in Q3 2013 over Q3 2012 per ounce of silver.  Here is the math:

Q3 2012 = $456 million production cost / 21.9 million oz of production   = $20.82 oz

Q3 2013 = $495.6 million production cost / 23.5 million oz of production   = $21.09 oz

Of course I am not including any of the by-product metal revenue in this cost metric, instead it is being used just as a form of reference.

Third, the Estimated Break-Even price per ounce has fallen $5.11 from $26.50 in Q3 2012 to $21.39 in Q3 2013.  This is due to selling more net silver and reducing costs.  While this looks like a good thing for the group, it hurts these mining companies over the longer haul.

For example, Alexco Resources who is one of the higher marginal cost producers had to put its mine on care and maintenance over the winter, hoping for better prices in the spring.  Unfortunately, Alexco has a silver-stream agreement (25% of their silver production at $4 an ounce) with Silver Wheaton, so they are still responsible for the remainder of their contract even though the mine is not currently producing silver.

Critical Points to Consider in Silver Costs

In using the Adjusted Income approach for calculating break-even, we have found that it can be lowered as we have seen in the comparisons above.  However, when these companies lower their break-even due to cost cutting, it may help them out in the short-term, but will impact them negatively over the longer time period.

Part of the problem with the mining industry is the inability to factor in all costs.  Another thing that is taking place (especially in the Shale gas industry) is the higher amount of expenditures on CAPEX over operating cash flow.  You will not find this in the income statement.

For example, Free Cash Flow subtracts Capital Expenditures & Dividends from Operation Cash Flow.  So if the company is making more money in operations than they spend on capital and pay out in dividends that quarter, they would show a positive Free Cash Flow.

Here are some of the Free Cash Flows figures for the Top 12 miners during Q3 2013:

Hecla = -$57.1 million

Silver Standard = -$22.2 million

First Majestic = -$9.5 million

Fortuna = -$7.5 million

Coeur = -$5.9 million

Pan American Silver = -$1 million

Endeavour = +$3.4 million

Now if we just compare the change in Free Cash Flow from Pan American Silver y.o.y, we have the following:

Pan American Q3 2012 Free Cash Flow = $37.3 million

Pan American Q3 2013 Free Cash Flow = -$1 million

Even though Pan American was able to lower its break-even in Q3 2013 compared to the same period last year, its Free Cash Flow has gone negative.  Investors must remember, a company does not go into business to break-even, it needs positive free cash flow to sustain its business in the future.

How Cash Costs Have Confused Investors

As I have mentioned several times, Cash Costs are not real costs, but rather a metric to show how by-product revenue can impact the bottom line.  That’s it.

I came across this article at Seeking Alpha, “The Cost Of Mining Silver: Q3 2013 Summary.” It peaked my interest because I was getting ready to put out my version, so I was curious to see what this analyst would show.

Basically, the analyst uses several metrics such as Cash Costs and AISC – All In Sustaining Costs.  The AISC is a calculation by the World Gold Council.  The problem I have with AISC, is that is deducts the by-product revenue at the end of the calculation.

I have stated several times, that these are MINING COMPANIES first.  I don’t care how low their silver cash cost is if they are losing money for their shareholders.

I went to the site where this article was written at Seeking Alpha and had a an exchange with the author.  Here are a few of the comments:

  • Ininerant… Okay, thanks. Yeah, I read that. At the end of the list of costs they deduct the by-product credits. Funny, Hecla stated a $7.40 cash cost, due to deducting by-product revenue (credits is a silly word) and still recorded a $8.4 million net income loss. And this is after cost cutting measures.

    11 Dec, 11:52 

  • Well, production costs are one thing, and profitability is quite another.
    Hecla’s September quarter included effects of the Aurizon acquisition if I remember correctly, so this one is a good example why low production costs in one quarter will not necessarily transfer into a profit once you get to the bottom line.

    11 Dec, 12:13 

  • Itinerant… well according to Hecla’s Q3 Financial Report, there was only $768,000 attributed to Aurizon’s acquisition cost during the quarter. So, for kicks and giggles, let’s take $1 million out and say that Hecla only lost $7.4 million. That’s still a loss in my book if you are a shareholder.and…let’s not forget they had a negative $57.1 million Free Cash Flow in Q3 2013. Which means they are spending more on Capex than they receive from operating cash flow.

    Hecla’s mine operating income after DD & A was $20 million clams. So, if we just take out $13.5 million in G & A and Exploration (which exploration was down from $11.7 million Q3 2012 to $5.7 million Q3 2013) we have $6.5 million left over.

    Exploration as you know is a viable part of a mining company. When they start dicking around with cutting Exploration (as most are now doing), it destroys the value of the company in the future.

    Then you add a million for closed operations and reclamation, loss on derivatives, interest expense (because we always have to add interest expense) and you start getting into negative territory even before the $768,000 for Aurizon’s cost.

    I believe cash costs are bogus as well as the AISC metric that the WGC puts out. Pure rubbish when they deduct by-product revenue.

    Deducting by-product revenues is like a Hot Dog vender deducting his Soft Drinks sales from his costs. Pure nonsense.

    SRSrocco Report.

    11 Dec, 12:28 

  • As I said: production costs are one thing, and the bottom line quite another, and each number needs to be seen in its context.
    I think it’s wrong to look at AISC and extrapolate straight to the bottom line without looking at all the other things that go on in betwen.
    Personally, I don’t see a better way to take into account by-products than by crediting them the way it’s done in cash costs or AISC.

    11 Dec, 12:35 PMReply! Report AbuseLike0

  • Itinerant… I understand the theory behind by-product accounting. However, it does not determine the profitability of a company.For example, if we have two mining companies and they have the following:

    Company A = 70% silver & 30% by-product revenue
    Company B = 45% silver & 55% by-product revenue

    Both share the same identical costs as well as adjusted income or loss for the period. However, Company B will have a much lower AISC just because it has more by-product revenue in the mix. The mix doesn’t change the profitability, it just changes the mix…LOL.

    Just to let you know, Fresnillo actually fits into Company B as it has more gold revenue than silver presently.

    Again, deducting by-product revenue is pure rubbish when we are looking for the bottom line. So why have it at all?


    11 Dec, 01:04 

  • Steve, your last sentence gives it away. If you are interested in the bottom line, then look at the bottom line. If you are interested in costs then look at the costs.If you don’t like by-product accounting, then look at co-product costs – most companies give that number as well.If you want my opinion, I like by-product costs provided there is a dominant metal in the ore. And when I assess production then I only look at the primary metal and forget about all the other metals. Easy and simple.


What I was trying to get across was that the higher the mining companies by-product revenue percentage, the lower the Cash Cost.  Again if two mining companies had the exact same revenues, incomes, production costs and etc, but had two different percentages of by-product revenue, the company with the higher percentage of by-product revenue would have a lower cash cost.

Many investors believe that a company can produce silver at its cash cost.  If Hecla produced silver at a $7.40 cash cost per ounce in Q3 2013, why in the living hell did they suffer a $8.4 million loss at a realized price of $22.22?

The author above likes Cash Costs because there is a dominant metal in the ore… so he can forget about the other metals.  As he says, “It’s Simple.”  I happen to believe the other metals provide necessary revenue to the bottom line that would make or break the company.  To deduct them from the cost analysis, in my opinion, is unwise.

The top primary silver miners Break Even for Q3 2013 was $21.39 for the group.  However, a great deal of cost cutting was done to get it down to that amount.  I don’t see this as a sustainable figure over the longer haul if these companies want to replace production and remain healthy in the future.

Lastly, I still believe the primary silver miners will be some of the best investments to own in the next several years.  As the world’s fiat monetary system gets revalued in the future based on a physical assets, we are going to see a big move up in the value of gold and silver.  Physical metal will be hard to acquire, so the miners will be the next best thing.

Mark my words….

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11 Comments on "What Did It Cost To Mine Silver Q3 2013?"

  1. There are very few “primary silver only miners” compared to the number of mining companies that mine silver purely as a by-product of their primary mined material. Copper being the most common ore mined with a silver by-product component, and copper being one of best performing metals in the past five years.

    The Baltic Dry Index (BDI) has been on fire since November 25, within a general uptrend in place since this past Summer. You must ask, ‘what has changed’? The big receiver of shipped ore and metals is still China. Since the ending of the third plenary meeting in November, China announced an ending to their purchases of US treasuries and the start of their divestiture of their mountanous amount of US reserves.

    What better way then to invest their reserves in tangible assets, such as metals and ores. This partcially explains the BDI presently sitting at 2,337.00 points, with a breathtaking rise since November 25th, when China came out with their announcement. The BDI is now convincingly above it’s 200 day MA for the first time since the onset of the 08 global crisis!

    So, the miners will be doing well in their primary ores, even if the price of silver keeps langushing at these manipulated low levels for the fore-seeable future.

  2. Canadian dirtlump | December 13, 2013 at 7:45 pm |

    great work as always. being a vp for an oil and gas pipeline / facility construction company I don’t always agree with you but I will add some color based on what I know about “cash costs.”

    My understanding of cash costs is that beyond stripping out by product revenue, it also does not include selling general and admin expenses, depreciation, and interest expense ( among other things ).

    That being the case not including them is absolutely disingenuous.

    Depreciation includes all your equipment and infrastructure and although it doesn’t affect cash flow, it is a cost that was borne and is significant. Not covering the cost of your assets can result in asset impairment, write downs, shut downs and more importantly – people not starting new projects because the capital investment doesn’t pay for itself.

    Selling, general and admin is factually an ongoing cost, which does affect cash flow every day. You can shrink it, but it will always be there,impacting the NET margin.

    So, based on my understanding of cash cost, and my experience with helping run multimillion dollar businesses I will offer this. Cash cost, or perhaps beter stated gross margin, is a distorted view. The material fact is that if you have a positive result using cash cost but negative using all in cost you can operate that way for a short time i.e. a cyclical low. It simply can’t be sustained and in such an environment new mining and exploration theoretically grinds to a halt.

    The fact that cash cost is a gold standard of reporting further buttresses the notion that most mining execs and mining trade groups do their product no favors.

    To the point that most silver is a by product, that is troubling…. but.. as has been pointed out, such base metals have exploded in terms of above ground supply, so they can only forestall the inevitable so long.

  3. “The top primary silver miners Break Even for Q3 2013 was $21.39 for the group. However, a great deal of cost cutting was done to get it down to that amount. I don’t see this as a sustainable figure over the longer haul if these companies want to replace production and remain healthy in the future.”

    What they are doing right now is selling their souls to the devil for collection at a later date, for the benefit of earning some fiat $$$ in the present. It’s not a very wise strategy.

    It’s not beneficial to the mining companies, and it’s not good for the silver market, which in turn is again not good for the mining companies. They are making a deliberate effort to pump supply into the markets at prices at which they lose money, and are willing to sacrifice future production (= revenue) for it.

    The miners are also known to put on hedges at market bottoms, and loosening their hedges at market tops.

    They make the worst decisions almost all of the time. Give them your money by buying their shares, and they WILL find a way to lose it.

    Imagine oil being in a 2, 3 year downtrend. Do you think OPEC would react by going “okay, we get it, you don’t want to pay for our product. No problem. We don’t care about our long term profitability, so we will lower production costs at any means necessary so that right now you can buy all the oil you want as cheap as you want. Go ahead and buy it for 50$ a barrel, and hey, if that’s too expensive for you, we can always make it 30$.”

    I think hell no. They’d tell us “okay, so you don’t want to pay for our product? Then try getting any, because you’re not getting it from us at these prices.”

  4. Robert Happek | December 15, 2013 at 9:20 am |

    Any decision to go out of business is not an easy one. Most businesses will do anything possible in order to stay in business even if it means producing at a loss. Illusion is a powerful force. People tend to think that any setback is only a temporary one. That applies also to goldbugs who hold on to their metal holdings despite falling prices. Silver production will decline one day and prices will rise eventually. However, that could take a much longer time than most are prepared to accept. Right now silver production is still rising despite falling prices. Timing is critical. After all, in the long run we are all dead (including the sun).

    • Good post. I’m 32, have been stacking for a while, and expect to cash in my first bar in 10-20 years time. I think PM investors who have less than a decade timeframe planned for their investment might become very unhappy.

      Of course we could have a major short covering rally 2 months from now, but as you’ve pointed out, production is still rising despite falling prices. Some primary silver miners might go under, but from what I gather copper production is set up for a quite substantial rise in the next year, meaning more by product silver.

      Talk about shortages has been plentiful, but we might not actually see them for a couple of years, or even a decade.

      Right now gold seems the PM with more of a momentum behind it.

  5. This is an interesting read from march 2010 about peak cheap oil, energy and possible systemic collapse:


  6. Iain Donnoley | December 16, 2013 at 5:41 pm |


    Good general call regarding the time-frame of 10-20 years before gold and silver reveal themselves to be a good store of value, but I think you’re being a bit optimistic there.

    Personally I believe it will be between 30 and 50 years before I’ll be in a really profitable position and sell my gold. It’s definitely a great store of value in the long-run, but everyone seems to have far too short a time frame as they look at pm’s – most seem to think they’ll get rich quick, which is just plain wrong.

    Well, I’m sticking with 30 – 50 years. I’ll be passing my stack to my children – I’ve always looked at it as an investment for their future, not mine.

    • I respect the long-term point of view, and I believe it’s a much sounder approach to markets. It’s a good reminder for those looking to get rich quick.

      That said, I’m curious about you guys’ reasoning behind the 10-20, even 30-50 years for a payoff?

      Steve, I imagine you’ve written about the still-rising silver production. Could you post a link, or a brief synopsis of your thoughts on the matter.

      My reasoning for thinking there might well be a shorter-term payoff (2-5 years) hinges on
      *global economic turmoil and money printing;
      *huge demand for physical precious metal for investment in Asia;
      *the suppression of PM prices in the west via derivative paper markets;
      *the ever-greater industrial demand for silver;
      *and the energy situation that, as Steve paints it, will be felt in a big way within 10 years, if it isn’t

      I also strongly doubt the notion that gold might develop positive moment without being accompanied by strength in silver.

      • One other thing.

        As John Hathaway noted in his fantastic article “Let’s Get Physical”(http://tocqueville.com/insights/lets-get-physical):

        “Money printing by world central banks, it would seem, has propelled the prices of all things rare. The list includes fine art, vintage wines and antique sports cars. It is front page news that the flood of paper money has enhanced the quotation of almost any tangible asset perceived to be in scarce supply.”

        All things rare, that is, except the precious metals…Will that disconnect continue for another 10-50 years? Seems unlikely.

      • Prices have been at or around mining costs since the current bull market started at the turn of the century. You have to realize that in 1980 when gold reached 800$, mining costs were at 50-100$. That’s what it’d take for me to comfortably sell part of my holdings – prices around 10x mining costs (10000-15000$ today).

        Of course that would mean a mania, or severe shortages, or both, and I just don’t expect that too soon. But when it does develop, it might be that 10x mining costs could be 20000-30000$.

        Of course 30-50 years seems a bit too far. We’ll have reached significant energy shortages, metal shortages, blowup of the paper metal ponzi scheme, and a hyperinflationary depression, all the catalysts to drive gold to extreme prices, long before then.

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