In an earlier article, we discussed one of the most important metrics to analyze the silver industry, the actual cost of mining an ounce of silver, which can help an investor figure out whether it is time to buy SLV and/or the silver miners. In that analysis, we used the FY2012 financials to calculate the combined results of publicly traded silver companies and come up with a true all-in industry average cost of production to mine each ounce of silver.
In this analysis we will calculate the real costs of production of Coeur d'Alene Mines (CDE). This primary silver miner has operations spanning three continents (North America, South America, and Australia) and is one of the largest silver miners in the world, producing around 30 million ounces of silver equivalent per year.
Calculating the True Mining Cost of Silver - Our Methodology
In the previously mentioned article, we gave a thorough overview of the current way mining companies report their costs of production and why it is inaccurate and significantly underestimates total costs. Then we presented a more accurate methodology for investors to use to calculate the true costs of mining gold or silver. Please refer to that article for the details explaining this methodology, which is an important concept for all precious metals investors to understand.
Explanation of Our Metrics
Cost Per Silver-Equivalent Ounce - is the costs incurred for every payable silver-equivalent ounce. It is Revenues minus Net Income, which will give an investor total costs. We use payable silver and not produced silver, because payable silver is the silver that the miner actually keeps and is more reflective of their production. Miners also use payable silver and not produced silver when calculating their cash costs, so this is pretty standard.
We then add Derivative Gains (or minus Derivative Losses), which will give investors total costs without the effects of derivatives. Finally, we add Foreign Exchange Gains (or minus Foreign Exchange Losses) to remove the effects of foreign exchange on the company's costs.
Cost Per Silver-Equivalent Ounce Excluding Write-downs - is the above-mentioned "Cost per silver-equivalent ounce" minus Property/Investment Write-downs and Asset Sales. This provides investors with a metric that removes exceptional gains or losses due to write-downs and asset sales.
Cost Per Silver-Equivalent Ounce Excluding Write-downs and Adding Smelting and Refining Costs - is the above-mentioned "Cost per silver-equivalent ounce excluding write-downs" adding in smelting, refining and all other necessary pre-revenue costs. This is a new metric that we are now introducing to our true all-in cost series because it will more accurately measure all-in costs and allow comparisons between miners.
Most investors are unaware that many miners will remove smelting, refining, and other costs before reporting their total revenues figures and these pre-revenue costs are not reported in the income statement. The result of this is that it skews all-in costs higher for miners that refine themselves or include the costs in their income statement, while inaccurately showing lower costs for miners that remove it before reporting revenues.
A simple test can be done on any miner to see if there are any pre-revenue costs that are not reported in the income statement. Simply take payable production and multiply it by average realized sales price and this should come relatively close to the total revenues figure. If it gives you a number much higher than reported revenues then there are pre-revenue costs that are not being reported.
This line should alleviate these issues and allow comparisons on a fair basis.
Real Costs of Production for CDE
Let us now use this methodology to take a look at CDE's results and come up with their average cost figures. When applying the methodology for the most recent quarter and FY2012, we standardized the equivalent ounce conversion to use the average LBMA price for Q4FY12. This results in a gold-to-silver ratio of 53:1. We like to be precise, but minor changes in these ratios have little impact on the total average price - investors can use whatever ratios they feel most appropriately represent the by-product conversion.
Observations for CDE Investors
The first thing that investors should notice from the table above is that CDE's true all-in costs of $25.16 have come down quite a bit from their 2011 and 2012 costs totals. Though their costs are still high compared to the current silver price, their first quarter all-in costs puts them in the middle of the silver mining pack in terms of costs - they should no longer be considered a high cost miner. Their costs are on-par with their competitors such as Pan-American Silver (PAAS) (costs just over $25), Silver Standard Resources (SSRI) (costs just under $30), Endeavour Silver (EXK) (costs around $25), and behind cost-leader First Majestic Silver (AG) (costs just under $22). The first quarter's true all-in costs were an improvement on both a year-over-year and sequential basis, so management's done a good job of lowering previously high costs.
Liquidity is also very important for investors to monitor in this current silver environment, especially for producers like CDE that have true all-in costs currently above the current silver price. Since CDE has about $330 million in cash and cash equivalents on its balance sheet it can fight through a low silver price environment for quite a bit of time, so it does not seem like investors should be worried too much about the solvency of the company.
Production numbers were down on a year-over-year basis (which could be part of the results of cost-cutting), with silver production dropping from 4.9 million ounces to 3.8 million ounces, though gold production increased to 57,000 ounces. But compared to the previous quarter, the first quarter production numbers were basically flat. CDE management reiterated that 2013 production should be in the range of 18-19.5 million silver ounces, but based on first quarter totals, production would have to ramp up quite a bit for them to meet their silver production targets for the year - we are not sure they will be able to meet them.
CDE management continued its efforts to bring down production costs and now the company is no longer considered a high cost producer and its costs are comparable to most other silver miners. On a negative note, costs are still 10% higher than the current silver price so we do not expect a positive net income second quarter unless there is a significant turnaround in silver prices. CDE liquidity remains very strong, with over $300 million on their balance sheet in cash they can weather through the current silver environment for quite some time. Finally, production numbers were lower than the year ago quarter and we think CDE will have a tough time matching 2012's 18 million silver ounce totals.
For those who invest in the silver ETFs (SLV, PSLV, CEF) or silver as a commodity, it is important to note that CDE is a very large silver producer which is experiencing costs of production that is currently higher than spot silver prices - which bodes well for the silver price. Additionally, it looks like CDE will have a tough time matching 2012 production levels, which may be a sign that silver miners are cutting back on silver production due to low silver prices, which is another bullish sign for silver as a commodity. Investors should look to this as an opportunity to buy an asset that sells for below or at production costs - especially when the fundamental picture for precious metals remains bullish.