Uncovering Inefficient Silver Producers

Gold miners have recently come under pressure as they have been forced to publish their all-in-sustaining-cash-costs per ounce of gold produced or AISC for short. Traditionally, gold miners have only published their cash-cost per ounce of gold mined, which is somewhat of a misleading measure as cash costs do not account for such expenses as administration, exploration and interest on debt, all of which are costs that can seriously dent company margins.

While the implementation of AISC will be good news for investors in the gold mining sector, as they will be able to quickly pick out the most efficient gold miners on the market, silver miners lack a similar metric.

However, help is at hand! In this article, I am going to take a look at five silver miners and explain in detail the ASIC per ounce of silver produced, in an attempt to bring more clarity to the silver mining market, just as the AISC measure for the gold market has done.

The five largest pure silver miners are Silver Wheaton Corp (NYSE: SLW  ) , Pan American Silver Corp (NASDAQ: PAAS  ) , Coeur Mining (NYSE: CDE  ) , First Majestic Silver (NYSE: AG  ) and Hecla Mining (NYSE: HL  )

Silver produced
For the basis of this piece, I am going to use the most recent quarter's results to gain the most up-to-date estimate of each producer's efficiency.

Silver Wheaton, during the first half of 2013, produced 16,943,000 silver equivalent ounces at a cash cost of $4.58 per ounce. Additionally, during the first half of the year the company reported revenues of $372,651,000, or $22 per silver equivalent ounce sold. The cost of sales was $130,610,000 and expenses and other income came to a total of $31,559,000. All in all, costs came to $162,169,000, or roughly $9.57 per ounce, more than double the company's stated cash cost per ounce .

Estimated AISC: $9.57

Note: Strictly speaking Silver Wheaton is not a silver miner. The company has a number of agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver and/or gold production, at a low fixed cost, from high-quality mines located in politically stable regions around the globe. This is likely the reason for its low AISC.

Pan American actually sets its costs out for investors, which is helpful considering the company produces several different metals from its mines. Alongside silver, the company's mines produce gold, zinc, lead and copper, all by-products of silver mining. Still, during the second quarter, the company reported a cash-cost per ounce of silver mined of $12.09, excluding by-product credits (revenue from gold, zinc, lead and copper). Including other costs such as interest exploration and depreciation, the total cost per ounce came in at $17.69 .

Estimated AISC: $17.69

First Majestic Silver produced 3,268,117 silver equivalent ounces during the second quarter, which gave revenues of $48,372,000, excluding by-products the average realized silver price per ounce was $22.19. Cost of sales was $23.89 million. However, if we include other charges such as, depreciation, interest charges and admin costs, these the total cost of sales balloon to $44.5 million, which indicates an AISC of $13.61 per silver equivalent ounce .

Estimated AISC: $13.61

Coeur is another company that provides the total production cost per ounce of silver, and it's not pretty. During company's fiscal first quarter of this year, the most recent available quarter, the total production cost per ounce of silver was $19.43, meanwhile cash costs were $9.56. The company produced 3 million ounces of silver during the quarter and 52 thousand ounces of gold. However, the company's total production cost per ounce of gold indicates that the company is losing money on every ounce of gold produced. The total production cost is $1,586 per ounce .

Estimated silver AISC: $19.43

Finally, Hecla, claims to be one of the lowest-cost silver producers in the U.S. Hecla has two main silver mines in production: Greens Creek and Luck Friday. During the first six months of the year, the company produced 4,137,000 ounces of silver from these mines at a cash cost per ounce of $6.24. However, this cash cost per ounce includes by-product credits such as gold, zinc, copper and lead, which are all produced during the process of silver mining. Exclude these by-product credits and the cash-cost per ounce soars to a staggering $29.42 per ounce of silver produced. During the last quarter this cost fell slightly to $27.61 but is still a high number  .

Estimated silver AISC: $27.61.

Foolish summary
All in all, the AISC metric is very revealing and as this article shows, really shines a different light on silver producers. Personally, I'm surprised how varied these costs are, especially Hecla who I have long thought was one of the best silver producers around. 

Overall, it would appear that high depreciation, administration and interest costs are holding most of these companies back. Indeed, Silver Wheaton, which has no mining operations, achieves the lowest AISC of the group. Meanwhile, Hecla and Coeur have high fixed costs, which puts pressure on both companies profitability. Perhaps a wave of aggressive cost cutting is required within the industry.

It's tough to discuss silver without bringing up its golden brethren... 

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Disclosure: These are only estimated costs based on the data laid out in this piece. The AISC figures are not intended to be accurate but provide some guidance based on the figures supplied. All figures are taken from company reports.

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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 October 10, 2013, at 4:21 PM, PlayingFool wrote:

    Mining is mining. Stating that the other minerals are "by-products" is painting an inaccurate picture. Helca is efficiently mining various metals which the silver portions cost is the lowest quoted, yet the article implies Helca is the highest cost producer??

  • Report this Comment On October 11, 2013, at 10:42 AM, speedybure wrote:

    Where in the hell did you pull those SLW numbers from?? First off, they SOLD 14.12m AgEq oz. in the first half. The rest has been produced but yet to be delivered. In any case, the all in cost is $6.50 per AgEq oz. Maybe you included DD&A but that is a mistake given 2 things. SLW has added more oz. to its resource organically making depletion a non issue, not to mention it serves as a tax shield because it is a non-cash charge. As for Depreciation, this serves just as a tax shield as the assets ( which are being depreciated according to the upfront payment) have already been paid for, so why would they be expensed after it was a capital cost??

    Cost per AgEq oz

    Cash Costs AgEq ($4.58)

    G&A costs $8,876,000 ($0.63)

    Other costs $9,771,000 ($0.69)

    Int Expense $2,525,000 ($0.18)

    Taxes costs $5,944,000 ($0.42)

    All in Costs AgEq oz. ($6.50)

    You also have several other mistakes. You use Silver equivalent oz. produced (instead of sold), then you take Revenue and divide it by AgEq produced (instead of sold). You state the avg realize AgEq price in the 1h 2013 is $22, which is almost comical because the avg price for AgEq oz. sold in Q1 was over $26/oz. and over $23/oz. in Q2.

    Yes you are surprised by the all in costs because you obviously have no idea about the companies you mentioned and im guessing are very new to investing in the mining industry. You also make another mistake with first majestic. If you paid just a little attention, you would know they held back selling some of its silver to wait for higher prices, yet you ASSume revenue is generated is from Ag oz. produced instead of SOLD. This also caused you to come up with another false claim, the avg price realized per oz of Ag sold.

    You then go on and state inaccurate all in costs for others but I think I made my point.

  • Report this Comment On October 11, 2013, at 1:15 PM, myatoms wrote:

    And the other minerals that are mined under your accounting method are then 100% profit? Lead, Zinc... How are you accounting for that revenue? Short sellers post garbage like this to buy good assets cheap after the drop. Buy these miners. Their products will continue to be profitable under GAAP.

  • Report this Comment On October 12, 2013, at 8:34 AM, mainelefty wrote:

    The above need to lighten up. The identified costs vs. "all in" costs has been a problem with miners. I believe that these companies are, overall, profitable despite the current slump in gold/silver prices and the persistent slow growth only international demand for minerals. But their share price will likely fall.

    The strategy of holding production from sale awaiting higher prices has been pursued by SLW and probably others for the last two years or more, and is a failed strategy given the price movement. An industrial renaissance may yet save it for silver, but the next couple of years for gold looks grim.

    Some of these reserves have been held for a $500 an once drop in gold and $10 in silver.

    Higher interest rates, lower oil and stronger growth will fade these names for a year or more. I have been a bull for a long time but am now waiting for the weak hands and high cost producers to wash out, which will probably be a year or more.

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