In our complete Q2FY13 cost analysis, we went over a number of the industry's all-in costs to mine an ounce of silver in Q2FY13 and 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 Q2FY13 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 (NYSE: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.
How to Use Our All-in Costs Analysis with Your Investments
In the previously mentioned article, we gave a thorough overview of the current way that 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 silver 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.
The best way to use this analysis for individual companies is to compare the different production cost metrics with the company's profits to look for any anomalies (e.g. large net profits but high costs). Also, we provide historic data to allow investors to check out any trends in regards to costs or production totals that may be an early warning to future successes or failures for the company. Ultimately, this analysis is best used as a first step to further investigative work, and that is our purpose with releasing this series.
Explanation of Our Metrics
For a detailed explanation of the metrics and each metric's strengths and weaknesses please check out our Q2FY13 full quarterly all-in costs silver report where we discuss them in detail.
All Costs per Silver-Equivalent Ounce - These are the total costs incurred for every payable silver-equivalent ounce, which includes everything. This is the broadest measure of costs, and since it includes write-downs, it is essentially the "accounting cost" of producing silver-equivalent ounces.
Costs Per Silver-Equivalent Ounce Excluding Write-downs and S&R -This is the cost to produce each silver-equivalent ounce when subtracting write-downs and smelting and refining costs, but including everything else.
Costs Per Silver-Equivalent Ounce Excluding Write-downs - This is similar to the above-mentioned "Costs per Silver-Equivalent Ounce Excluding Write-downs and S&R" but includes smelting and refining costs. That makes this measure one of the best ways to estimate the true costs to produce each ounce of silver, since it has everything (including taxes) except for write-downs.
Costs per Silver-Equivalent Ounce Excluding Write-downs & Taxes -This measure includes all costs related to silver-equivalent production excluding all write-downs and taxes. Essentially this is the bottom dollar costs of production with an artificial 0% tax rate (obviously unsustainable) which works well because it removes any estimates of taxation due to write-downs or seasonal fluctuations in tax rates, which can be significant. The negative to this particular measure is that since it does not include taxes, it will underestimate the true costs of production.
True Costs of Production for Coeur d'Alene
Let us use this methodology to take a look at the company's results and come up with the true cost figures for each ounce of production. When applying our methodology, we standardized the equivalent ounce conversion to use the average LBMA price for Q3FY13 which results in a gold-to-silver ratio of 62:1.
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.
Observations for Coeur d'Alene Investors
The first thing that is obvious from Coeur d'Alene's Q3FY13 true all-in costs (costs excluding write-downs) is that they are still extremely high and registered at $28.78 per silver-equivalent ounce - which is well over the current price of silver. We always double-check our numbers when the costs are extremely high or low, and they are correct. If investors analyze the financial statements this aligns well with the reported net income which was around -$50 million for the quarter. Additionally, investors should note that the $50 million loss includes a high amount of gold and silver sales which were over and beyond production by 20% - if not for those sales the company would have reported a larger loss. Since we use production numbers not sales figures, our true all-in costs reflect what it costs for the company to mine the silver it produced (not sold) during the quarter.
We do note that true all-in costs did drop from Q2FY13's $30.33 figure, but at $28.78 per silver-equivalent ounce it is still extremely high in the current silver environment.
In terms of Coeur d'Alene's core costs (removing taxes and write-downs), costs did rise on both a year-over-year basis and a sequential basis with Q3FY13 costs at $29.27 per silver-equivalent ounce, and this figure was higher than CDE's true all-in costs because the company benefited from a $2 million dollar tax break.
Since we haven't released any other silver company data for true all-in costs in the third quarter we will compare Coeur d'Alene's $28.78 all-in silver-equivalent costs with the other companies second quarter results which have reported the following costs: Pan-American Silver (NASDAQ:PAAS) (costs over $25), Endeavour Silver (NYSE:EXK) (costs over $25), Hecla Mining (NYSE:HL) (costs over $22), Great Panther Silver (NYSEMKT:GPL) (costs over $25), Alexco Silver (NYSEMKT:AXU) (costs over $30), Silver Standard Resources (NASDAQ:SSRI) (costs over $25), and cost leader First Majestic (NYSE:AG) (costs under $20).
We caution investors to do those comparisons with a grain of salt since these comparisons are for different quarters and use different metal conversion rates.
As investors can see, Coeur d'Alene's costs are still exceptionally high compared to the current silver price and the company needs to do a lot more to control costs. They do forecast production increases in the fourth quarter (primarily from their Rochester mine) so we expect costs to drop in the fourth quarter, but the question for investors is if those costs will be close to the current silver price.
Investors should note that Coeur d'Alene's stock has been punished more than many of its competitors, and though it has a long way to go to drop its true all-in costs, it may benefit to a higher degree than competitors in the case of a large increase in the silver price. Low margins lead to greater leverage to the silver price which is something that Coeur d'Alene does offer investors - but in terms of profitability a lot more has to be done in the current silver environment.
Disclosure: I am long AG, PAAS, EXK, GPL. 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.