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Wake Me When Silver Mining Is Profitable Again

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It wasn't supposed to be this way. Precious metals are supposed to increase in value when global financial paradigms careen into turmoil and collapse. Gold and silver prices are supposed to balloon with the U.S. national debt.

Of course, nothing today is behaving as it's supposed to, and silver has tested the will of safe-haven seekers everywhere by daring to dip back into single digits. Although major silver miner Pan American Silver (Nasdaq: PAAS  ) managed to eke out a profit for the third quarter, the accelerated deterioration of metal prices through the first half of this fourth quarter is wafting scents of losses into the air. Meanwhile, the company expended $6.61 for each ounce of silver mined, nearly twice the cost from a year earlier. More importantly, today's silver price of $9.48 sits beneath the company's latest all-in cost of production of $9.53, prompting Pan American to hunker down in a big way.

Until prices rebound into the profitability zone, Pan American will implement the following defensive measures:

  • Total workforce reduction of 500 employees.
  • 10% wage reduction for all senior executives. (BRAVO!)
  • Suspension or substantial curtailing of all exploration activity.
  • Cancellation of all discretionary capital spending.
  • Reworking of mine plans to pursue higher-grade ores in the near term.

If these metal prices persist, I believe announcements like these will become the status quo … eventually bolstering prices by virtue of worldwide project delays and cancellations. In the meantime, Agnico-Eagle Mines (NYSE: AEM  ) CFO David Garofalo sees bankruptcies among many junior miners as "inevitable." Even the once-mighty Teck Cominco (NYSE: TCK  ) is engulfed in uncertainty, as lower metal prices call its ability to repay debt into question. Among silver seekers, both Hecla Mining (NYSE: HL  ) and Coeur d'Alene Mines (NYSE: CDE  ) have retreated more than 88% from their 2008 peaks. Even the low-cost, fixed-cost business model of Silver Wheaton (NYSE: SLW  ) provided no shelter from these market conditions.

Pan American, however, carries zero debt, enjoys $167 million in working capital, and has already funded near-term growth projects. Two new mines will ramp up in 2009, including the low-cost Manantial Espejo mine in Argentina, which is slated to produce 4.1 million ounces of silver and 60,000 ounces of gold annually. For these reasons, I consider Pan American among the best-positioned silver miners to withstand these challenges, and I expect silver prices to rebound with a vengeance before long.

Further Foolishness:

Over at CAPS, 109 All-Stars have picked four-star-rated Pan American Silver to outperform the S&P 500. Create your own portfolio at Motley Fool CAPS and start on your way to becoming an All-Star investor. It's free and fun!

Fool contributor Christopher Barker thinks financial sector executives could learn something from Pan American. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Agnico-Eagle, Coeur d'Alene Mines, Hecla Mining, Pan American Silver, Silver Wheaton, and Teck Cominco. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 15, 2008, at 12:53 AM, alison115 wrote:

    These mining stocks are on the verge of exploding,dont wait for the dollar to crash this is a once in a lifetime oppurtunity.Mark Ess

  • Report this Comment On November 15, 2008, at 2:35 PM, moonm wrote:

    Good article.

    I beleive that the IMF are doing everything in their power to lower precious metal prices.

    The IMF seem to be intent on trying to prop up consumerism, debt and paper currencies.

    Donald Trump said a whil back "it is no use building a new tower on an old foundation" I think he is correct.

    Precious metal and mining pricing have also been soured by the large institutions dumping anything of value to satisfy the panic of their clients.

    Mexico has hedged the majority of their 2009 oil production at and average of $75 a barrel, if gold pricing is still tied to oil then gold in 2009 should rise.

  • Report this Comment On November 17, 2008, at 10:56 AM, nycupperes wrote:

    Interesting article, but a little off the mark. One of the biggest drivers of silver and gold prices will be people taking physical delivery from the futures markets - more people are starting to open futures accounts and take physical delivery from the Comex. The arbitrage will save the industry and has proven very profitable taking advantage of the 25% to 50% discrepancies in "paper" silver versus "physical" silver.

    The entire Comex set up is corrupt since "shorting" precious metals would require taking physical delivery of borrowed shares, which is NOT done because it would actually increase the prices by causing scarcity.

    I also believe that HECLA MINING CO (NYSE: HL), is a much better positions Silver Company then PAAS, since the have the lowest cost of production. In the end the mining companies that can produce silver for under $5 an ounce will be the only ones to survive and thrive. This is HL, although I agree that CDE is the best value play right now of any silver company - or any company out there right now period.

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