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One way to value something is by its replacement cost. Appraisers and insurers often use the cost to replace an investment as a baseline of value. In analyzing the silver market, one way to value silver is by measuring the real cost of producing an ounce of silver. This value does not include any premium from investment demand or industrial demand, but it provides a pricing floor because companies don't stay in business for long by losing money.

With the price of silver near its highs this decade and far from its bottom of $3, it would be easy to assume that miners are highly profitable. Considering first quarter earnings from the top four pure silver miners (PAAS, CDE, HL, SVM - excluding SLW because it doesn't mine, and SSRI because it's arguably an explorer), just how much are they earning from these high silver prices?

Company Earnings Silver Produced Breakeven Silver Price
PAAS $19.1 million 5.5 million ounces $3.47 below spot
CDE -$8 million 1.3 million ounces $6.15 above spot
HL $18.4 million 2.5 million ounces $7.36 below spot
SVM $9.8 million 1.08 million ounces $9.07 below spot
Total $39.3 million 10.38 million ounces $4.33 below spot

The average realized sales price of the silver sold was around $16.90. Averaging the earnings and production from all four companies, the breakeven spot price of silver was $12.57. However, it should also be noted that the majority of these earnings did not actually come from silver production, but the byproduct sales of base metals. Silvercorp (NYSE:SVM) recorded a negative silver cash cost of $4.61 per ounce, and Helca (NYSE:HL) recorded a negative silver cash cost of $3.03 per ounce. Without sales of other metals, many of the worlds silver mines would be still unprofitable at these prices.

Miners often provide financial figures that sound too good to be true. For example, Pan American Silver's cash cost per ounce of silver net of byproduct credits was only $4.35. While this sounds fantastic, it doesn't include many other fixed and variable business costs such as infrastructure, maintenance and exploration that is vital to replace consumed resources over time.

While these mining companies have excellent potential and leverage to the silver price, their financial statements also provide a window into just how profitable they will be at lower silver prices. A 30 percent decline would render the industry unprofitable, and if prices fell further mining production would be delayed or canceled. In addition, if energy and water prices spike, or if wages rise, a similar outcome could occur. Despite rising 500% percent in the last 10 years, the price of silver is scraping its own floor.

Disclosure: Author is long SIL, PAAS, SLW, SVM