Production Costs Say Silver Prices Below $15.00 Could Be Devastating
Here’s a bold statement, but it’s worth making: silver prices at $15.00 an ounce could be cheaper relative to when the gray precious was around $5.00 an ounce back in 2002.
Investors need to know one basic rule of economics: if something is priced below the cost of production, producers won’t produce much. It just makes perfect business sense. Why would a company produce even one unit when that expense will take it into deeper losses?
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This has been said several times in these pages: the declines in the price of silver between 2013 and 2015 were blessings in disguise for those who were looking for the next big trade.
As silver prices declined, miners rushed to take out whatever silver they easily could; they reached for higher-grade silver. As they were doing this, they also slashed their exploration spending, which would have helped them find even more high-grade mining sites.
These phenomena gave an instant boost to their production, so they could remain afloat.
Companies Reporting Higher Costs, Dismal Production
Now what we see is that the cost of production is rising across the board, and silver production is in the slumps.
For example, pay attention to Endeavour Silver Corp (NYSE:EXK). In the first quarter of 2017, the company said its all-in sustaining costs to produce an ounce of silver was $18.24. Its costs rose 64% year-over-year. Endeavour’s silver production declined 29% in the first quarter of 2017, compared to the first quarter of 2016. (Source: “Endeavour Silver Reports First Quarter, 2017 Financial Results,” Endeavour Silver Corp, May 3, 2017.)
Endeavour Silver isn’t the only one.
Look at Coeur Mining Inc (NYSE:CDE), one of the biggest primary silver producers in the United States. In the first quarter of 2017, the company’s all-in sustaining costs to produce one equivalent silver ounce was $15.02. (Source: “Coeur Reports First Quarter 2017 Results,” Coeur Mining Inc, April 26, 2017.)
For Coeur Mining, silver production rose a little bit.
Great Panther Silver Ltd (NYSEMKT:GPL), another leading silver producer—which has mines in Mexico—has been struggling with costs as well. Its all-in sustaining costs in the first quarter of 2016 were $9.25 per ounce. In the first quarter of 2017, these costs were $19.55 per ounce. (Source: “Great Panther Silver Reports First Quarter 2017 Financial Results,” Great Panther Silver Limited, May 3, 2017.)
Great Panther Silver’s production declined by 32%.
Please note: these are not recommendations to sell, whatsoever. They are just illustrations of what’s happening in the silver market.
See something interesting here? The costs for these companies to produce an ounce of silver are above $15.00, and their production is declining. This makes me wonder if $15.00 is the floor for silver prices, and whether anything below this level is like buying something for pennies on the dollar. I really question whether silver at $15.00 is actually cheaper than at $5.00 back in 2002.
What’s Really Ahead for Silver Prices?
This isn’t all.
One question that investors must ask is: if companies are producing at much higher costs, what’s really ahead?
Dear reader, know that this behavior—in which miners produce at a cost that’s higher than the current price of silver—can’t last long. Eventually, we could be seeing them cut back on production even more, and some companies could even go out of business if the price of silver doesn’t improve.
This is a major supply-side issue.
Keep in mind, we have growing demand for silver across the globe—be it for investments or for industrial use. Looking at all this, I can’t help but be bullish on the future of silver prices. I keep my eyes on $50.00-an-ounce silver; we could be seeing it much sooner than anyone thinks.
