SRSrocco: In the Face of Irrational Paper Markets, THE COMPLETE COST FOR MINING SILVER

In light of today’s paper futures smash sending silver towards $27 and several recent predictions by silver experts that silver’s long term price target is $20, we thought it apropos to re-post SRSrocco’s detailed analysis of the current COMPLETE COST FOR MINING SILVER, along with a NEW UPDATE from Steve.

By SD Contributor SRSrocco

Last year, I wrote an article titled THE COMPLETE COST OF MINING SILVER.  In it I used a quick formula to figure what a more true cost would be for an ounce of silver than the CASH COST.

This is an update of the complete cost for mining silver:

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MY BALLPARK FORMULA FOR CALCULATING COMPLETE MINING COSTS FOR SILVER

Miners use the CASH COST to compare just how cheap it is to mine silver.

They arrive at their CASH COST by adding all the by-product revenue against an ounce of silver.  For example, if a miner has some Gold, Lead and Zinc in a ton of ore, they take the revenue received from those by-product credits and get an INSANELY LOW CASH COST.  In 2011, HECLA had a CASH COST of only $1.15 an ounce for silver.  To the layman they would think that they would have all this wonderful profit — but they don’t.

Hecla actually had TOTAL REVENUE of $477.6 million with a NET INCOME of only $151.1 million.  You would think with such a low CASH COST that they would be making nearly $350-$400 million.  That is why I came up with my COMPLETE COST for getting a truer figure.

Before I put out the CHARTS… let me give you my DISCLAIMER.  After I came out with the article last year, I had several emails telling me why my formula was incorrect.  While it is true, that my COMPLETE COST is not the best way to get a accurate estimation, it is the simplest way.  I like KEEP IT SIMPLE STUPID — KISS.

First, this is last year’s formula for getting the Complete cost from HECLA’s 10-K:

And this was last year’s COMPLETE COST CHART for (4) primary silver miners:

I did the calculations for 2011, and this is what I found to be the COMPLETE COST PER OUNCE for mining silver at this time:

The RED LINE is the CASH COSTS put out by the Mining companies.  The BLUE LINE is my COMPLETE COST that I arrive by dividing the NET INCOME by the TOTAL REVENUE… this gives me a percentage of PROFITS.  I then take that percentage and times it by the average price of silver in 2011 which was $35.12 oz.  That figure is the PROFIT PER OUNCE for each mining company.

First hand, we can see that actual CASH COSTS for two of the mining companies in the United States (US SILVER-REVETT MINERALS) is actually very high at $17.50+.  I will take US SILVER for an example:

US SILVER CORP:

Total Revenue = $93.4 million

Net Income = $21.3 million

$21.3 mil / $93.4 mil = 22.8%

$35.12 X 22.8% = $8.00 PROFIT PER OUNCE

$35.12 – $8.00 = $27.12 COMPLETE COST PER OUNCE

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Now if the AVERAGE PRICE of SILVER had fallen below $27.12, US SILVER CORP would have started to get into what I call the BREAK-EVEN area.  I would imagine if we had $20 an ounce silver in 2011, US SILVER CORP would have had a NET INCOME LOSS.

Again, this is a BALL PARK WAY of getting to a TRUER figure.  As for by-product metals… we must remember, all mining companies are selling their by-product metals at market value.  Some have used hedges, or have a certain contracted rate (such as Silver Wheaton)… but they all do this.

If the price of Silver falls, so does the price for Lead, Zinc, Copper and Gold.  My method just makes calculating this figure simply.  I could spend hours comparing what the mining company PRODUCED and what it actually SOLD in metal ounces.  They always sell less than they mine, so to me it all evens out in the wash.

If the AVERAGE PRICE of SILVER keeps falling in 2012, but the COSTS for mining increase (which they have), these miners will make a lot less NET INCOME this year.
*Update*

I have since been working on updating the BREAK EVEN ANALYSIS using spreadsheets and getting some help from an ex-CFO of a gold mining company plus another person who studies financial reports.

Let me tell you… BREAK EVEN is now above $27-8 for the GROUP of Primary Silver miners if we include ALL COSTS.

By the way… do you all remember this chart??

 

Well, I just did an update, and the darn YIELDS have fallen EVEN MORE in 2012…LOL

CASH COSTS are for BOZO’s.

LOTS OF GREAT INFO COMING.

-SRSrocco

 

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