By SRSrocco:

I have been spending a great deal of time going over the balance sheets of mining companies to get a better TRUE COST of SILVER PRODUCTION.   I have put out a request for anyone in the accounting profession to assist me in this matter.  After the initial interest, it seems as if these folks have backed off… for whatever reason.  I don’t plan on stopping before I can figure out a BETTER WAY to cost out gold and silver and not the pathetic industry standard of “CASH COSTS”.

Cash costs exclude depreciation, depletion and amortization, accretion, corporate general and administrative expenses, exploration, interest, and pre-feasibility costs.
  How can a mining company or the industry as a whole use CASH COST figures to show the investing public true costs of mining silver?  They do it to MISLEAD the public.

 I have had some SilverDoctors members reply to my previous post on Alexco Resources.  One member told me about another so-called extremely LOW COST SILVER PRODUCER named Dia Bras Exploration.

So, I took on the challenge and researched Dia Bras.  According to their Q2 2012 report, this is what they stated for their 1H 2012 SILVER CASH COST:

Isn’t that amazing… a NEGATIVE $21.70 per ounce silver cash cost.  For Pete sakes, Dia Bras should be rolling in the DOUGH… correct?  I mean, they aren’t mining silver at a ZERO CASH COST… they are mining it for $21 less than FREE…LOL.

If we look at their Consolidated Balance Sheet Q2 2012, we can see that on the bottom row, they had a NEGATIVE $6.7 million net income loss for the first half of 2012.  How in the living blazes can a company state a negative $21 cash cost and lose money?

It’s simple…. ACCOUNTING 101.

The member on SilverDoctors website thought that Dia Bras was an extremely low cost silver producer…. they are not.  They are still showing a negative net income.

Furthermore, you can see that Dia Bras has acquired $9.137 million in deferred taxes in just the first 6 months alone.  At some point in time they will have to pay these taxes won’t they?  Hell, I stated in yesterday’s post on Barrick that it had something like $4.3 billion in deferred taxes.

CASH COSTS ARE BOGUS

I have also posted this from Coeur de’ Alene’s Q2 2012 report on cash costs:

Cash costs exclude depreciation, depletion and amortization, accretion, corporate general and administrative expenses, exploration, interest, and pre-feasibility costs.

I am repeating myself to make an important point.  How can a mining company or the industry as a whole use CASH COST figures to show the investing public true costs of mining silver?  They do it to MISLEAD the public.

I would imagine there are a great deal of investors who really think Dia Bras Exploration is a VERY LOW COST SILVER PRODUCER.  However, I will show you from Dia Bras recent presentation their breakdown in metal revenue:

If they are getting 40% from their gold and silver revenue, I would imagine that we can safely state that they receive 10% of that 40% from gold.  That means they are taking 70% of their revenues and throwing it against their silver.  This is totally ridiculous.  I am surprised this is allowed in the industry.

  1. Marchas45… glad you are getting something out of the article.

    We also have to remember, a company that states a very LOW SILVER CASH COST, may actually be a negative factor in depressed economy.  The low cash cost comes from the by-product credits such as zinc, lead, copper and gold.  The majority of by-product credits come from ZINC & LEAD… followed by COPPER, then GOLD.

    When the eononmy is weak, by-product credits from lead, zinc and copper may reduce ones so-called CASH COST… but it also lowers in a greater degree ones PROFITABILITY.  Because, the more of these by-product base metals a company mines with its silver, the more of a drag these metals weigh down on its balance sheet.

    However, there is one exception.  Gold is a great by-product credit.  It actually makes the balance sheet look better as its market price is holding up much better than the base metals. 

    That is why I believe silver mining companies that have more GOLD in their mix will be more profitable in the future.      

     

  2. I’m not an accountant but I do know that the accounting trade is primarily about taxes, so whenever they can use a slight of hand technique that skates past the taxing authority, they will.  As an example, I used to work in the chemical industry.  Our main plant was located in a state that has no income tax.  Another of our plants that used one of our products was sold this product at the industry max price.  They were located in a state with an income tax.  This boosted our income in the income tax free state and then showed up as a loss in the state with an income tax.  That resulted in either a credit or a deduction, I’m not sure which, so we were able to play the tax system in both states like a violin to maximize our profits in both states.  This is typical in the chemical industry and, I suspect, in industry in general.

    As to the silver miners, is it possible that they are doing something similar here?  Showing the profits from one product as a net cost to minimize their taxes?

  3. Cash cost is garbage. Two better metrics:

    1. Take all the expenses for the quarter.  Divide the ounces of silver equivalency mined for the quarter. 
    2. Take the earnings for the quarter.  Divide the ounces of silver  equivalency mined for the quarter. 

  4. Steve
    I always wondered about cash costs.  Have there been times when the price of zinc and lead were so low as to be a cost to dispose of rather than an item that could be sold. How about the environmental consequences of lead. 

  5. REPLY @ ET AL….  gents… there are many more costs that should be applied to an ounce of silver than is being shown by the miners.  Cash Costs are only for mining companies to brag how BIG THEIR PACKAGE is, whereas it does not meet GAAP:

    Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements.

    Mining companies use the CASH COST METRIC to basically compare their LOAD so to speak compared to their competition.  It has nothing to with profitabilty.  I can prove that from my COMPETE COST charts below:


       

      

    In 2010, Hecla stated a NEGATIVE $1.46 oz silver cash cost.  However, if we look at their balance sheet we see that they only made $48.9 million in net income that year (11.5% of their revenue).  Even though my approach at getting a better cost is very simple and elementary… at least we see that if the average price of silver in 2010 was below $17.84… Hecla would be probably showing a NET INCOME LOSS instead of a GAIN.

    If we compare Fresnillo to Hecla, Fresnillo had a higher cash cost, but they were much more profitable. In 2011, Fresnillo’s revenues were $1.4 billion and their net income was $309 million. Their net income was 22% of their total revenue… twice that of Hecla even though Hecla stated a NEGATIVE CASH COST.

    Furthermore, if the price of silver was lower, so would the by-product metals. Most companies sell their by-product metals for market value. Only a small percentage of by-product metals are sold at very low contract prices.

    Again… I plan on perfecting this method and applying it to all the silver mining companies where applicable.  

         
     

  6. You are 100% correct here SRSrocco.
    Cash costs are only useful for short-term shut down decisions and to compare ore grades.
    Joint production costs (Lead, Cu, Au Ag etc) can be allocated to these metals in a wide variety of ways, and it is ridiculous to say silver has a negative cost while the company is making losses. Losses mean that the joint production process cost is greater than revenue. You could calculate the cost as a percentage of revenue and allcoate that to every metal that the firm is producing. In 6 months ending 2012 the loss was 6,756 and revenue was 90,243. Therefore, total costs are 97,000. This is 107.5% of revenue. So take the average price of each metal and multiple by 1.075 to get total costs.
     
    I have a question about the ore grade. What are the chances that ore grade would decline so rapidily at all the top gold and silver miners? Doesn’t this indicate perhaps fraud, or at least is a red flag for possible fraud. Perhaps TPTB are siphioning off a conatiner of precious metals every quarter — if TPTB can violate sacred laws and put MF Global in Chapter 11 to steal customers’ silver, why not do it to existing miners? It would be like the mob taking their suitcases of money from the casinos.

  7. Cash costing using by product credits is common in all miners, Silver Gold or Copper. Re: Dia Bras, the depletion and amortization charges related to the Yauricocha mine are one time charges. Watch out when that falls to the bottom line. They will have 3 silver producing mines doing almost 4 million oz’s a year. Just this evening Alexco reported lowering cash costs by 33% this quarter.

  8. Nice article, Rocco! 

    It should help anyone looking at mining stocks,
    and such investments may become more attractive
    now that we have a clearer picture of what our nation’s political path is.  
    Not approving said path, just noting that we have a basic knowledge
    of where we are heading for the next 4 years.  

  9. If there is a negative cash cost, then it means that they are receiving 21.70$ plus the price of silver on the market per ounce. This doesn’t make any sense in my opinion because first of all, no commodities are free to obtain especially when they are less than 21.70$ from free.
     

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