In order to weather the manipulated low paper price of silver, the primary miners cut costs, reduced exploration and capital expenditures. Utilizing these cost cutting measures, the top primary silver miners as a group managed to pull off a small gain even though the average price of silver was only $20.49 during the first quarter of 2014.
As I stated in my previous article, 2013 FULL YEAR RESULTS: Top Primary Miners Real Cost To Produce Silver, the estimated break-even for the group was $24.05. However, the mining companies were able to lower this figure during the second half of 2013 and into the first quarter of 2014.
If we take a look at the table below, we can see that the estimated break-even price for the top 12 primary silver miners is now $19.78 or $4.27 lower than the average for full year 2013.
The top 12 primary silver miners were able to make $0.53 an ounce adjusted silver income profit during Q1 2014 on an average realized price of $20.31 for the group. This is a significant improvement compared to the estimated break-even during the Q2 ($25.23) and Q3 ($21.38) of 2013.
Let’s compare Q1 2014 to the same period last year:
Even though total revenues for the group increased $27.7 million from $804.9 million in Q1 2013 to $832.6 million Q1 2014, it took the additional sales of 5.8 million ounces of silver to do so. Furthermore, by-product revenue increased $105.3 million during the same time period.
Which means, it was the increase in by-product revenue not silver, that enabled the mining companies to show a small profit for the quarter. Here, I will show you.
Q1 2013 Silver Revenue = $550 million (68%)
Q1 2013 By-Product Revenue = $254 million (32%)
Q1 2014 Silver Revenue = $472 million (57%)
Q1 2014 By-Product Revenue = $360 million (43%)
Thus, the top 12 primary silver miners sold an additional 5.8 million oz of silver this quarter compared to Q1 2013 for a net loss of $78 million in revenue ($550 million – $472 million = $78 million)… whereas by-product revenue increased $105 million.
The difference in these two values is due to a much weaker silver price compared to zinc, lead, copper and gold spot prices. Now, when I use the term by-product revenue, it also includes revenue that comes from primary gold mines run by some of these primary silver mining companies.
So, without the increased by-product revenue from these primary silver miners, they would have stated a group loss instead of a gain. This is the very reason why I believe Cash Costs are completely useless as a metric in determining the profitability of a mining company.
In the past year, the top 12 primary silver miners managed to lower their estimated break-even $6.67 an ounce from $26.45 in Q1 2013 to $19.78 in Q1 2014. While cost cutting and the reduction in exploration enabled the mining companies to become more lean, the addition of Tahoe Resources to the group in Q1 2014, helped lower the overall average even more.
Tahoe Resources Escobal mine in Guatamala is now the lowest cost producer of the bunch. The Escobal mine started commercial production in the last quarter of 2013, but ramped up operations during Q1 2014. Tahoe’s Escobal mine produced 4.1 million oz of silver during the first quarter of 2014 (second highest of the group) at an estimated break-even of $16.08. I imagine once they get their mine to full speed producing 18-20 million oz a year, they will be able to lower that break-even figure to the $15 range.
By adding Tahoe Resources to the group while removing Alexco Resources (high cost mine which is now on care and maintenance), the top 12 primary silver miners were able to lower their average estimated break-even below the $20 level.
Three quarters of the miners in the group stated adjusted income gains while four recorded losses. However, if we look at their FREE CASH FLOW for the period, we have the exact opposite…. 8 of the 12 suffered negative Free Cash Flow. Basically Free cash flow is subtracting capital expenditures and dividends from cash generated from operations.
During Q1 2014, the group suffered a net negative $61 million in Free Cash Flow. Which means the primary silver miners are still spending more money on CAPEX than cash provided from their operations.
By lowering their cost of production, the primary silver miners now have two positive forces going for them.
1) They can survive for a while in the present low price environment
2) They will enjoy significantly higher profits when the price of silver heads higher in the future.
Lastly, no company goes into business to break even. Even though these mining companies were able to lower costs, it is not a sustainable practice over the longer run…. and I highly doubt there is much more room to lower costs in the future.
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