With Silver Tanking, How Badly Will Miners Hurt?
(Kitco News) - Some primary silverproducers are no doubt feeling pain these days after the sell-off in silverprices so far this year, but don’t look for major supply cutbacks any timesoon, analysts said.
That’s because it costs somuch to shut down and restart mines that companies will put up with a loss onoperations for an extended time before doing anything as drastic as mineclosures, they explained. Further, companies have become leaner in recentyears, thus some of the major producers - such as Pan American Silver Corp. (NASDAQ, TSX: PAAS) -- likely are still profitable at current prices, they added.
“I don’t think this movelower here will have an effect on mining supply,” said Ryan McKay, commoditystrategist at TD Securities.
Comex September silverfell as far as $14.315 an ounce on Thursday, the lowest level since early 2016.At this juncture, prices are down 19% from the early-2018 high.
The majority of the word’ssilver is mined as a by-product of other metals, such as copper, lead, gold andzinc, analysts reported. Therefore, those producers are more focused on theprices of metals other than silver. However, around a quarter to a third of thesilver comes from primary silver producers, analysts reported.
On the basis of cash costsalone, the majority of the industry is above water, most analysts said. Butthat can change when factoring in costs such exploration, sustaining capitaland more, said Randy Smallwood, president and chief executive officer ofWheaton Precious Metals. Some companies likely have all-in sustaining costs inthe $14-$15 range, although many have less, he continued.
“With the current prices,a lot of the primary silver producers are treading water or slightly underwater, especially when considering capital costs and development costs. It’svery tough to make money mining silver at these prices,” Smallwood said. “That,to me, argues that we should be close to a base in the price. You’re going tosee some supply-side restrictions.”
The mines most likely tobe hurt are those with lower ore grades, said Smallwood and
David Morgan, independentmining analyst with TheMorganReport.com.
But rather than actuallyshutting down mines, these restrictions are more likely to be stalleddevelopment projects that go into standby mode. For existing mines, Morgan andSmallwood said, producers are likely to intensify efforts to cut costs anddefer certain expenses.
Cost Cuts Already Made; Miners To Keep Producing
Even prior to this summer,silver already slid from over $25 an ounce witnessed roughly half a decade ago.Therefore, miners are used to trying to become more efficient.
“The conditions have beenso difficult the last several years, many major producers have already loweredtheir all-in sustaining costs,” Morgan said. “Some are still able to make aprofit at $15 silver.”
But even if they don’t,producers are not likely to rush into any mine closures, he said. They arebetter off taking a loss of a couple of dollars per silver ounce for a certain numberof months, Morgan continued.
“I don’t think it will hitsupply any time soon unless you see prices weaken further and stay weak for anextended period of time,” said Rohit Savant, director of research with theconsultancy CPM Group.
On a production-weightedbasis, CPM Group calculated an average cash cost, after by-product credits, of$5.90 per ounce in 2017, Savant reported. Further, he pointed out, there aregovernment pressures on producers not to shut down mines and thus lay offworkers.
“Pan American will befine,” Morgan said. “First Majestic will be fine. Most Mexican miners will befine.”
After by-product credits,Pan American Silver Corp. -- theworld’s second-largest primary silver producer -- reported record-low cash costs of 92 cents a pound inthe second quarter. All-in sustaining costs came in at $6.45 per silver ouncesold, and the company lowered its full-year guidance range to between $8.50 and$10.
FirstMajestic Silver Corp. (NYSE: AG; TSX: FR) reportedsecond-quarter cash costs of $7.59 an ounce. All-in sustaining costs were$16.43, but some of this was related to the acquisition of Primero Mining Corp. and the San Dimas mine. First Majestic said it looksfor AISC to decline to a range of $13.28 and $14.84 in the second half of 2018due to “expected operational improvements” at the LaEncantada, Del Toro and San Dimas mines.
These and some otherprimary producers that have the benefit of producing some base metals as aby-product, which helps lower the actual cost of each silver ounce. However,the Morgan Report pointed out, the price of base metals is also taking a“beating,” which if continues will push up silver producers’ AISC by lowering by-productcredits.
Among other producers, Hecla Mining Co. (NYSE:HCL) reported second-quarter AISC of $11.40 after by-product credits, althoughcash costs were a negative 57 cents a pound. Endeavour Silver (TSX: EDR; NYSE:EXK) reported AISC of $17.28 after gold credits, and Great Panther Silver Ltd. (TSX:GPR; NYSE: GPL) reported $15.04 per silver ounce.
CPM Group looks for acombination of political and macroeconomic factors to push silver and goldprices higher in the medium term, Savant said.
Whenever prices do rise, primarysilver producers will fare better than producers of other metals, Smallwood aid.That’s because silver tends to move both higher and lower by a largerpercentage than metals like gold, he explained.
“Silver has always had ahigher beta. If gold goes down 1%, silver goes down 2% or 3%,” Smallwood said.“One of the reasons is so much is a byproduct. The supply side just can’t reactto either positive or negative changes in the silver price very rapidly.”
For Kitco News
Follow @AllenSykora
asykora@kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.