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 Great Panther Silver (NYSEMKT:GPL). GPL is a junior silver miner with producing mines and development projects in Mexico, and it is led by CEO Robert Archer.
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 Revenue 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 GPL - 1Q13 and FY2012
Let us now use this methodology to take a look at GPL'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, copper-to-silver ratio of 9:1, and a zinc-to-silver ratio of 37:1. 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 GPL Investors
True Cost Figures - GPL's true all-in cost figures for Q1FY13 were an exceptionally high $27.27 per ounce of silver produced. This was a noticeable jump in costs on a year-over-year basis but was slightly lower than its 2012 average of $28.04. The one positive was that these costs were lower than fourth quarter costs.
GPL's costs for the first quarter compare negatively to most competitors such as Pan-American Silver (NASDAQ:PAAS) (costs just over $25), Silver Standard Resources (NASDAQ:SSRI) (costs just under $30), Endeavour Silver (NYSE:EXK) (costs around $25), Coeur D'Alene Mines (NYSE:CDE) (costs just over $25), Gold Resource Company (NYSEMKT:GORO) (costs around $28), and cost-leader First Majestic Silver (NYSE:AG) (costs just under $22).
These high true all-in costs have been a major negative for GPL over the last two years, and even though costs were down slightly from the fourth quarter, investors will need to see much more from management in terms of cost cutting before building large positions in the company.
Corporate Liquidity - Liquidity is very important for investors to monitor in this current silver environment, especially for producers like GPL that have true all-in costs currently above the current silver price. With a little over $20 million in cash and cash equivalents, GPL has plenty of liquidity to make it through this low price silver environment for quite a while.
Production Numbers - One of the main reasons for the significant rise in GPL's true all-in costs was due to the drop in ore grades that limited production. On a year-over-year basis silver production was up slightly by 10,000 ounces (3%), but it was down significantly from the fourth quarter. There was an 80,000 ounce drop in silver production between the quarters, but production of gold and base metals seems relatively stable. Without a significant improvement in silver production, GPL will find it very difficult to match its 2011 or 2012 silver production figures. Investors should pay particular attention to the Q2FY13 report to see if grades will be improving - if they continue to drop this would be very worrisome for investors in GPL.
GPL's first quarter was a relatively poor quarter with true all-in costs rising and putting GPL amongst the highest cost silver producers. Additionally, lower ore grades impacted silver production and led to a drop on a sequential basis. On a positive note, GPL does have plenty of liquidity and can survive for quite a while at these silver prices. But investors would need to see a significant true all-in cost improvement in future quarters before amassing a large position in this company at current silver prices.
Disclosure: I am long PAAS, AG, SIVR, PSLV, GPL, EXK, GORO. 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.