Entering the new year, the world’s top silver companies averaged $10.56 in production costs per ounce of silver. But that could change. According to the Silver Institute, global silver production declined in 2016 and should again in 2017. For years now, investment experts and silver bugs warned the public that silver costs too much to mine and that the lack of mining profitability would mean much higher future prices.
The logic seems clear enough: silver mines operating profitably at $20 per ounce might not survive a drop in price to $15 or an increase in mining costs to $25 per ounce. When all of the easy silver gets mined or when demand for silver fluctuates, many mines may close and the world will face a shortage of silver producers. Rising prices follow.
Take a step back, though, and you can see holes in the argument. First, declining silver production would serve to raise prices and attract more innovative mining companies. Second, silver producers are used to fluctuating prices, and many can adjust their procedures to survive in a new economic climate. (Indeed, this is the normal market process at work.)
How to Measure the Cost of Producing Silver
Regular businesses in the United States might use the Generally Accepted Accounting Principles (GAAP) to measure costs, and international companies use International Financial Reporting Standards (IFRS).
Companies that mine precious metals use their own industry-specific metrics to measure costs of production—not GAAP or IFRS. The idea is to create a single cost figure capable of capturing the complete mining lifecycle. Ideally, this means tracking expenses from exploration through exhaustion and closure.
The World Gold Council oversees a working committee on costs and cost transparency. One popular metric is the “all-in sustaining cost,” or AISC. With AISC, silver and gold mining companies can extend traditional “cash cost” methods throughout a mine’s sustainable life. (For a more detailed review, see Ernst & Young’s publication here.)
Despite the best efforts of the WGC and the SEC, mining companies sometimes display great variance in their cost-reporting methods.
Why Mining Silver Is Different than Other Rare Metals
For thousands of years, mining silver was not much different than mining copper or zinc or gold or iron. Past prospectors and exploration companies sought out silver deposits, set up mines to pull the silver out of the earth, and then shipped it to a refinery.
Gold and copper and zinc and iron still get mined this way. By the 20th century, however, silver mining changed. A relatively small percentage of silver originates from traditional silver mines (approximately 25-33%, depending on the year). Nowadays, most of the world’s new silver comes from mines that focus on other metals. For example a zinc mine in Mexico may pull out 65% zinc, 25% silver, and 10% lead. Since this mine would categorize as a “zinc mine,” the silver production is referred to as “byproduct metal.” Most new silver is byproduct.
Not All Mines Have the Same Cost of Production
Silver deposits are not homogenous; one mine near Lake Tahoe might be relatively easy to access, while another in Central America could face environmental and political challenges. That’s why it’s safer to look at a range of silver production costs, rather than pegging a single number.
Couer Mining is renowned for aggressively pursuing high-cost silver mines. For years, Coeur saw AISC above the $15 per ounce threshold. Other companies might report AISC of $9 per ounce or $12 per ounce—much depends on the company’s operating efficiency, its capital equipment, the regulatory environment, the earth (or water) surrounding the mine, and accurate exploration.
Why Silver Production Costs Tend to Follow Spot Prices
Silver mining can be tough business. The geological challenges are obvious; miners need to break apart the earth, find the rare metal, extract it, and move it. The economic challenges are obvious, too; nobody can long operate a mine with AISC higher than the spot price of silver.
Silver companies, especially publicly traded ones (and most silver miners trade publicly), face pressure from investors to expand their operations every time the silver spot prices rise. Similarly, they demand cost-reduction methods whenever silver falls. It’s for this reason that most silver production costs tend to follow spot prices. When silver costs $24 per ounce, most mines saw AISC around $21-23. When silver prices fell to $20 or $17 per ounce, costs fell accordingly.
Silver Bullion as an Investment Asset
Gold remains the most popular precious metal for commodity investing, both in the United States and internationally. Silver is the second most popular investment metal, and is particularly popular for Self-Directed IRA inclusion.
Silver users protect themselves from inflation of fiat currencies, and they also own a universally recognized symbol of wealth and value. That is part of the reason the U.S. government still doesn’t allow economic transactions to take place with silver as a medium of exchange.
The good news is that you can own real, physical silver bullion and store it in a tax-advantaged retirement vehicle. American Bullion can discuss your options and help you every step of the way. Our #1 goal is to help you take control of your own finances – and we promise to be transparent, safe, and efficient in the process.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.