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 - Q2FY13
Let us now use this methodology to take a look at CDE's results and come up with its 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 Q2FY13. This results in a gold-to-silver ratio of 61:1. Since our conversions change with metal prices, this may influence the total equivalent ounces produced for past quarters - which will make current-to-past quarter comparisons much more relevant.
(click to enlarge)
Notes about True All-in Costs Table: Since we've updated our gold-to-silver ratio to 61:1, it has led to a drop in true all-in costs for silver miners with large gold output (such as CDE), since that gold output will convert into a larger amount of silver-equivalent production. The ratio has been applied to ALL previous quarters so that comparisons can be done on an apples-to-apples basis.
Observations for CDE Investors
The first thing that investors should notice from the table above is that CDE's Q2FY13 true all-in costs of $32.55 are exceptionally high and a major disappointment for investors since they rose from the previous quarter's $24.07 per silver-equivalent ounce.
We actually double-checked these numbers and they include the removal of the litigation expenses (approximately $32 million) and the removal of impairment of marketable securities (approximately $17 million). The only reason why net income was not much lower than the reported $35 million loss was because this quarter included $67 million in "fair value adjustments," an extra 600,000 in silver ounces sales, and an extra 2,500 in gold ounce sales (totaling more than $15 million) from previously held inventory. If it was not for these unsustainable additions to net income, CDE would have reported a much worse quarter.
We do stress that a company is not made or broken on one quarter, so investors should observe next quarter to make sure management does not repeat this exceptionally poor performance.
Compared to other silver producers' Q1FY13 numbers (we stress these are first quarter numbers from other companies), CDE's costs are much higher. CDE compares to Pan-American Silver (PAAS) (costs just over $25), Silver Standard Resources (SSRI) (costs just under $30), Great Panther Silver (GPL) (costs around $29), Endeavour Silver (EXK) (costs around $25), Hecla Mining (HL) (costs around $25), Gold Resource Company (GORO) (costs around $28), and cost-leader First Majestic Silver (AG) (costs just under $22). Again, these are Q1FY13 numbers, so the comparisons are not apples-to-apples but are just to establish a general range.
Corporate Liquidity - Liquidity is very important for investors to monitor in this current low-price silver environment especially since CDE's costs are currently much higher than the spot price of silver. Based on the Q2FY13 balance sheet, CDE had $249 million in cash and cash equivalents and around $307 million in debt. Though the company experienced a decline in cash flows, most of that is attributed to the Orko transaction and the company still has plenty of liquidity for the near to intermediate future.
Production Numbers - the positive takeaway from CDE's Q2FY13 report is that production numbers did increase. Silver production was up from Q4FY12 and Q1FY13 on both a silver and silver-equivalent basis, but was down expectedly year-over-year. Based on current production numbers, CDE is on pace to produce more silver and gold in FY2013 than in FY2011 and FY2012 - which is good for CDE investors but we need to see production costs drop significantly or else the company will simply be mining at an all-in loss.
CDE's Q2FY13 was very disappointing because true all-in costs rose significantly from the previous quarter and the declines in costs were completely reversed this quarter. Though we do stress that it was a single quarter that was filled with a number of exceptional events, so management does have some leeway, but investors will need to see this all-in costs trend reverse because the company cannot be very appealing with costs over $30 per silver-equivalent ounce.
But this should show investors that even with the current rise in silver prices, some of the largest primary silver miners such as CDE are having trouble producing silver even at these prices. Additionally, some additional research by SRS Rocco has showed that base metal producers are having a tough time in the current environment producing silver.
This is positive news 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 that is experiencing costs of production that are currently much higher than spot silver prices - which bodes well for the silver price.