Silver Miners Respond To The Drop In Silver Spot Price

by: Itinerant
According to The World Silver Survey 2012 29% of silver is produced in primary silver mines, and an additional 13% is produced in gold mines as a by-product. The rest of new silver production comes from lead-zinc mines (37%), and copper mines (21%). To quote Silver Wheaton's (SLW) summary of this report:

The impact of the price of silver is most acute on primary silver production.

The recent drop in precious metal spot price has therefore raised concerns among investors in primary silver mining companies.

We decided to not just speculate on the state of primary silver producers, but instead proceeded to contact some of them in order to hear it from the horse's mouth. To this end, we prepared a short survey asking the following four questions:

  • Q1. Has your company implemented any special measures (e.g. change of mining plan, cost cutting etc.) as a result of the low silver price?
  • Q2. Are you still able to produce profitably at the present silver spot price of approximately $23.00?
  • Q3. Are you considering holding back silver inventory in anticipation of better prices?
  • Q4. What is your best guess for the silver price at the end of 2013?

In alphabetical order we received answers from the following companies: Avino Silver & Gold (NYSEMKT:ASM), Endeavour Silver (NYSE:EXK), Great Panther Silver (NYSEMKT:GPL), Hochschild Mining (OTCPK:HCHDF), Impact Silver (OTCPK:ISVLF) and Silvercrest Mines (NYSEMKT:SVLC). We would like to thank the representatives of these companies for their participation and insightful response.

Here is a summary of the replies we received.

Q2. Most importantly, all participating companies assured us that they were still producing profitably under present conditions. Avino noted that they are currently ramping up production, and next week's financial report will give further indication on cash cost and profitability.

Q3. None of the participating companies are holding back silver at this stage.

Q4. As far as a 2013 price target was concerned, Scott Drever of Silvercrest went on record stating:

My personal opinion is that prices will return to at least pre-drop levels by the end of the year.

Representatives from Endeavour, Great Panther and Impact were not prepared to give any firm targets, but opined that prices would rise from present levels. Avino and Hochschild pointed out that they would not provide commodity price forecasts.

This leaves us with question Q1 on measures implemented in response to the drop in silver price. Marianna Adams of Hochschild answered with a brief "Yes, we are implementing special measures." And Bill Bowker of Avino indicated that no measures were currently put in place. Other companies went to some detail in response to our question as quoted below:

Brad Cooke (Endeavour):

Yes we had planned to re-invest all of our anticipated cash flow at $30 silver this year in order to continue to grow our business and drive operating costs down. With silver now at $23, we have reduced our cash flow expectations and undertaken a company-wide cost review to identify those costs we can defer or cut in order to balance our reduced spending with our reduced income.

We are deferring discretionary capital investments and non-essential exploration expenditures, and have found ways to reduce operating costs and G&A. Having gone through this same exercise in 2008, we know Endeavour Silver will emerge as a stronger company as a result of these measures.

[…] We are a lower cost silver producer, and even with the rise in our forecast cash costs of production this year to the $9-10 range due to our recent acquisition of the high cost El Cubo mine in Mexico, the cash costs are already trending downward again. […] We launched a complete rebuilding program of the El Cubo mine, plant and surface infrastructure in October last year, and it is now nearing completion with re-commissioning scheduled to start before the end of April so we are more concerned about cash management at this time. Once the new facilities are up and running and our spending has normalized later this year, then we can re-consider our inventory management.

Bob Archer (Great Panther):

I wouldn't say we've "implemented special measures" with this recent drop in silver. Cost control and efficiencies are always a good idea, regardless of the metals prices, and we had already begun taking measures last year along those lines. Our focus is on trying to improve grades through better grade control, however, these efforts are usually reflected on an annualized basis, not necessarily quarter by quarter. [...] however we are reviewing both of our operations, as well as non-operational budgets to ensure that we do stay profitable.

Meghan Brush (Impact):

IMPACT is a low-cost silver producer with an all-in cash cost per ounce of less than $14 (as at December 31, 2012). This low cash cost per ounce of silver includes everything from taxes, processing, crushing, rent, directors fees, CEO, CFO and VP of Operations salaries, Investor Relations costs, you name it. As we strive to remain a low-cost silver producer, we are able to further manage our variable costs even more by revising the cut-off grades for the ore mined. For example, when the price of silver is quite high, we revise the cut-off grade to mine more medium-grade ore, or conversely, when the price of silver is quite low, we adjust the cut-off grade to mine the more high-grade material.

Scott Drever (Silvercrest):

We are always very cognizant of maintaining the best cost parameters possible, so there is limited room to move in this area. We have reviewed all our discretionary expenditures to determine what might be postponed or eliminated should the need arise. My view is that much of this was contrived and that there is a strong likelihood that the prices may recover almost as quickly as they dropped. We will not react precipitously until we see how things develop. In any event we have sufficient cash and cash flow to meet our operating and capital expenditures at much lower prices. […] Even if we add in all costs we are protected down to about $1000 gold and $16 silver.

Disclosure: I am long ASM, EXK, SLW, SVLC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.