Well, it depends. Silver production costs vary from region to region, from mine to mine, and from company to company (e.g., whether it is a junior or a senior company). For example, Coeur saw all-in sustainable costs above the $15 per ounce, while other companies reported costs of $9 or $12 per ounce, depending on company’s operating efficiency, regulatory environment and other factors.
What does make up the cost of silver production? First, the mining company has to discover mineable silver deposits, conduct exploratory drilling and extensive geochemical analysis. Later, the company has to buy an exploration license and meet environmental and other regulations. Then, it can establish the site, buy all the equipment and physically extract the silver ore. And after the mine is tapped out, the mining company may be required to rehabilitate the site to pre-mining conditions. As one can see, silver production costs go well beyond the mere act of pulling the metal from the ground.
This is why we have different notions of silver production costs. Traditionally, the industry used cash cost, which focused only on the mining and processing costs incurred. But in 2013, the WGC published a guidance note on all-in sustaining costs and all-in costs metrics. The former concept is an extension of the existing “cash cost” metrics and incorporates costs related to sustaining production, while the latter notion includes all additional costs that reflect the varying costs of producing silver over the lifecycle of a mine.
OK, so what are the silver production costs and how can we use them in investing? The all-in sustaining costs were about $10.4 in 2018. It means that the price of silver (above $14 as of September, 2018) was importantly higher than the costs, making silver mining profitable. And the obvious investment implication is to invest in silver mining companies that do well in keeping all-in sustaining costs low.
Silver Production Costs and Silver Prices
Last but not least, what is the link between silver production costs and the price of silver? Some analysts claim that silver production costs constitute the floor for the silver prices. They are wrong. Silver is not like other commodities which are burned or eaten. If their prices plunged below the costs, production collapses. The falling supply and rising demand (due to low prices) help the prices to recover. But that mechanism does not work with silver, as the yellow metal is not burned or eaten. Of course, there is more industrial demand for silver than for gold, but it constitutes only part of the production – and some of that gets recycled. The rest is hoarded. So when the production falls, the supply of silver does not disappear. Remember that there are massive above-ground holdings of silver (smaller than in case of gold, but higher than of other commodities). Their presence implies that the link between the production costs and prices is rather weak.
If at all, it is reversed: silver production costs follow the prices. When the price of the metal increases, mining companies will invest in more sophisticated methods to extract silver and will start to operate deeper mines or lower quality ores, boosting the production costs. And when the silver prices decrease, some of ores and sites will become unprofitable, which will reduce the production.
Just look at the data. The chart below shows the cost of mining silver for a few silver mining companies (Silvercrest Mines, Avino Silver, First Majestic Silver, Silvercorp Metals, Pan American Silver, Fortuna Silver Mines, Endeavour Silver, Great Panther Silver) in 2013-2018. It declined during that period, which was the bear market in silver.
Chart 1: Silver prices (blue line, London Fix, yearly averages, in $) and the all-in sustaining costs (red line, in $, the average for several companies).
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