The largest silver mining company in the world just came out with their first half financial results and the figures were dismal. 
Fresnillo’s first half profits declined a staggering 60% compared to the same period last year.  However, at current metal prices the largest silver producer in the world could be experiencing losses the second half of the year.

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From the SRSRocco Report:

According to their 1H 2013 Report, Fresnillo’s attributable profit declined an amazing 60% compared the first half of 2012.  Furthermore, you will notice that as revenues declined, cost of sales increased:

Fresnillo H1 2013 Report

Fresnillo received the following realized prices for gold and silver during the first half of 2013:

Silver = $24.67

Gold = $1,471

Currently, the spot prices for silver are $19.60 and $1,290 for gold.  This is a difference of $5.07 an ounce for silver (-21%) and $181 for gold (-12%).  If we assume that the average loss of revenue for the two metals would be an additional 15% at current prices, Fresnillo would lose approximately $147 million in revenue:

$982.3 million X 15% = $147 million

Of course we are taking some liberties here, but as you can see Fresnillo’s estimated revenue would be $147 million lower if all other costs and items remained the same.  Which means, that the $144.8 million attributable profit would be a $2 million loss — plus or minus.

I would like to point out that even though Fresnillo is known as the largest primary silver producing company in the world, they make more revenue now from gold than silver.  If we look at a table from their 1H 2013 Report we can see that they received 51% of their revenue from gold and 45% from silver:

Fresnillo Adjusted Revenue

So, now that the Fed and Central Banks have manipulated the price of gold and silver much lower, companies such as Fresnillo and Hochschild are feeling the pain more than the base metal miners due to the fact that they produce mostly gold and silver with very little by-product credits.

For instance, silver is down 38% since the beginning of the year, gold is down 22% and copper down a comfortable 13.5%.  If you are producing copper, you are doing a great deal better than if you’re mining gold and silver at the present time.

Let me say this… I think Fresnillo is a class act.  They are a fine company.  I am not singling them out in a negative way, but rather to show what is happening to the largest silver producer in the world as the prices of gold and silver have been manipulated lower due to the Fed & Central Banks trying to keep their Fiat Monetary System alive.

Furthermore, analysts who come out with their MONOTONE commentary stating that the miners can survive at their cash costs for a while do so because they have no blood to lose in the game.  It’s easy to watch MISERY from the distance while trading in and out making profits either way.

Moreover, Fresnillo stated that they would be slashing their dividends 68% to only 4.9 cents a share.  So, not only are the poor shareholders dealing with a much lower stock price, they are dealt an additional blow by losing more than half of their dividends — thanks to the wonderful folks at the Federal Reserve.

COSTS:  They Just Keep on Rising

The problem with rising energy prices is that a doubling of the price can cause a tripling or quadrupling of costs down-stream.  People don’t realize that in a complex system, when the energy input cost increases, the out-put result down the line in either materials or equipment rises much higher in percentage.

Then we have the curse of falling ore grades and aging of the mines themselves.  Again, as an open-pit mine ages and deepens, the haul trucks have to travel a longer distance to remove the same amount of ore.  This is shown in the cost description below from Frensillo’s 1H 2013 Report:

Fresnillo Costs

Costs at Fresnillo increased 8.7% compared to the same period last year.  However, if we look at the highlighted areas, we can see that diesel costs increased a staggering 24% and this was mainly due to “longer distances as the pits are deepened.”

This is the problem that the mining industry faces.  Cost will continue to rise because ore grades are falling causing the mining companies to consume more diesel at even higher prices in the future.

That is why I find it amazing that analysts can forecast gold to hit $850 an ounce.  Not only would the large primary gold miners suffer at current gold prices, but Fresnillo would be stating huge losses.

Energy is the Key to Owning Gold & Silver

I know I am a broken record on this issue, but very few precious metal investors realize how important energy is in the valuation of gold and silver.  The reason why gold and silver have been stores of value for over 2,000 years is due to their monetary nature of storing “ECONOMIC ENERGY”, a term coined by Mike Maloney.

Energy drives the economy and GOLD & SILVER are the BATTERIES to store this economic energy.  Fiat money cannot do this and only can survive in a system that has a growing energy base — which we do not have anymore.  So, the lifespan of the current fiat monetary is coming to an end due to the current energy situation.

Even though the investors of the world are following the bandwagon and getting into stocks or other worthless paper assets to “supposedly” protect their wealth or to earn a pathetic interest rate, they are doing so at their own peril.  While its nice to try to make money in these assets, at some point in time there will be a huge move out of these and into physical assets.

Unfortunately, the little money that was made will be over-shadowed by the huge losses that will come when the musical finally stops.

2013 Silver Maples As Low As $2.09 Over Spot At SDBullion!

Silver Maple

  1. It’s simply beyond my comprehension how miners can passively keep enduring this ‘pounding’ humiliation without making plans to escape the financial torture chamber the bullion banks and their proprietary, rigged ‘exchanges’ have then captured in. All they really have to do is stop selling at paper confabulated ‘prices’ and switch over to distributing their metals through direct AUCTION.

    Steve, can you see what preemptive drawbacks might keep the miners from taking that course, if the smelters and fabricators got on board with the idea?

    • It has been said that organizations like the gold council are willing participants of their own demise which really makes a guy scratch his head.
      I’d like to see what is going on in the forward market to see what prices are. Sadly, for all we know, some miners may be getting a pretty penny for their product versus spot.

    • If some producers are getting a pretty premium over spot, why do we see premiums on bullion continue to decline? Some producers are clearly willing to sell at these prices, if they can’t make money they won’t sell, but if their competition can produce a couple dollars cheaper they may be able to sell and break even. I get this idea of auction, but that theory requires buyers. When I trade physical commodities I always look to who will pay me the most on an FOB basis. I promise you these mines are doing the same (why sell to the cheapest buyer when you can sell to the highest). If my product is in demand it trades for big premiums to spot (in effect an auction), when it is not in demand I settle for lower premiums or even discounts. And if I just plum don’t like the price at all then I don’t sell, provided I have a way to store the commodity for a better day.

  2. I feel the qualification “PRIMARY” Silver mine is necessary here. Still a telling article. I’ve asked before, has anyone got any idea or data regarding the state of the base metal mining industry and the supply of silver from there?
    Either way, nice to see the viagra kick in this morning.

    • Not directly, but seeing some of the lower premiums here and other places, they must be making decent money and be willing sellers.  Marginal producers produce in high price environments, they quit in low.  

  3. Seems like they are reporting their breakeven cost ratio for silver:gold to be nicely in line, albeit not 100% dead on, with the realized sales prices for both.
    No reason to think that silver will shoot up due to reatively high costs to produce.

    Silver ore grades may be dropping faster than gold’s, but for no the gold:silver price ratio seems to be affirmed by cost ratios.

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