The world’s two largest silver mines have seen their productivity decline substantially due to falling ore grades and rising costs. Gone are the days when silver mines could produce silver at 15-20 ounces per ton. Today, the Primary Silver Mining Industry is likely producing silver at an average yield of 4-5 ounces per ton.
In my newest video, I discuss the changes that have taken place in the world’s two largest silver mines, the Cannington Mine in Australia and the Fresnillo Mine in Mexico. Falling ore grades and rising energy costs have contributed to the doubling and tripling of production costs at many silver mining companies. Investors who believe it still only costs $5 an ounce to produce silver, as it did in 1999, fail to grasp what is taking place in the silver mining industry:
A big problem that has confused investors is the reporting of the “CASH COST” metric by the mining industry. Some silver mining companies can brag that they have a very low cast cost of $5 an ounce, but they arrive at that figure by deducting their “by-product credits.” By-product credits are the revenues they receive from producing copper, zinc, lead, and gold along with their silver.
For example, Hecla Mining stated their silver cash cost of $0.16 per ounce for the first three-quarters of 2017. They were able to report that very low $0.16 cash cost by deducting $175 million of their zinc, lead and gold revenues. Hecla’s three silver mines had total revenues of $278 million, but they deducted $175 million in by-product credits to get the low $0.16 cash cost. They deducted 63% of their revenues to arrive at that low meaningless cash cost.
According to Hecla’s financial statements, they only made $4.2 million in net income on a total of $417 million in total revenues Q1-Q3 2017 (including $140 million from their Casa Berardi Gold Mine). Thus, their net income profit was only 1% of their total revenues. How bad would Hecla’s losses have been if they deducted $175 million of their supposed by-product metals’ revenue from their bottom line? How about a loss of $171 million? So, please disregard the Cash Cost metric as it is totally meaningless. Cash cost accounting does nothing to determine the profitability of a mining company.
As the silver mining industry continues to suffer from falling ore grades, costs will only increase going forward. However, the biggest impact on the silver mining industry will be the decline in global oil production. In my next video, I will do an update on the worsening U.S. Shale Oil Industry, even though production continues to increase.
H/t reader squodgy:
“Ore yields falling, costs increasing.
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