Low silver prices force miners to take measures to prevent their revenues from falling. One of the ways to do this is to increase production. For example, First Majestic Silver (AG +0.14%) recently reported that it produced a record 3.42 million equivalent ounces of silver in the fourth quarter. Endeavour Silver (EXK 0.88%) managed to produce 6.81 million ounces of silver in 2013, up 52% from the previous year. Will these efforts bring value to shareholders?
Production growth is positive despite depressed silver prices
Raising production makes sense when the company's cash flow from operations stays positive. This is the case for both First Majestic and Endeavour Silver. The situation is more difficult for Silver Standard Resources (NASDAQ: SSRI), which had negative operating cash flow in the third quarter.
Silver Standard Resources has only one operating mine, Pirquitas, which is situated in Argentina. According to Silver Standard's management, wages in Argentina have been going up about 30% a year, making it difficult to battle costs.
However, the company recently reported that Pirquitas produced 2.3 million ounces of silver in the fourth quarter, which is the highest quarterly production for the year. As wages are more or less constant costs in the short term, one can expect Silver Standard to return to positive operating cash flow in the fourth quarter because of the increased production.
Coeur d'Alene's (CDE 2.94%) fourth quarter silver production rose 3% in comparison with the third quarter. However, full-year silver production decreased by 6% in comparison with 2012. Coeur d'Alene posted losses for two last quarters, and this trend will continue, as the company expects to record a non-cash impairment charge of approximately $770 million in the fourth quarter.
Growth prospects
First Majestic Silver expects to produce at least 14.85 million silver equivalent ounces in 2014, a 16% rise from last year's level. The company has reported that it expects that its all-in sustaining costs will be in the range of $15.87-$16.69 per ounce of silver. Currently, silver has settled around the $20 mark, so First Majestic has some safety cushion between the actual price of silver and the cost to produce it.
Silver Standard's Mexican Pitarilla project, which could produce an average of 15 million ounces of silver per year during the first 18 years of production, will greatly boost production when it is finished. However, the combination of low silver prices and a new Mexican tax on miners makes it difficult to assess when the project will be complete.
With as much as $401.4 million of cash on hand at the end of the third quarter, Silver Standard plans to spend $15 million at Pirquitas and just $22 million on exploration and development projects in 2014. This means that the company is reluctant to spend much on growth in the current environment.
Bottom line
I view growing production as a positive sign for silver miners. I don't think that this growing supply will pressure silver prices. In my opinion, the drop in silver prices last year was caused by changes in investor preferences. This played a major role in price developments, as investment demand was estimated to constitute 24% of total silver demand in 2013 according to Thomson Reuters.
Delivering more silver will help miners cut their costs and boost their revenues. All in all, I think that 2014 would be a better year for silver miners than 2013.
