Rising Production Costs to Send Silver Prices Soaring?
There’s an interesting phenomenon taking place in the silver market these days and it could send silver prices soaring. Don’t get too discouraged by volatility in silver prices in the short term. Think long-term with this gray precious metal.
What’s so interesting about the silver market?
We are starting to see costs of production increasing across the board.
Consider Pan American Silver Corp. (NASDAQ:PAAS). In the third quarter of 2017, the company produced an ounce of silver for all-in sustaining costs of $8.69. A year ago, these costs were $6.34 an ounce. In other words, costs increased by 37%.
For the entire year, Pan American Silver expects to produce an ounce of silver for costs in the range of around $10.50 to $11.50. (Source: “Pan American Silver Reports Unaudited Net Earnings for Q3 2017,” Pan American Silver Corp., November 8, 2017.)
Pan American Silver could be considered a low-cost producer. If you look at others silver miners, the costs to produce are much higher.
For instance, First Majestic Silver Corp (NYSE:AG) produced an ounce of silver for all-in sustaining costs of $15.73 in the third quarter of 2017. Costs at the company soared 50% year-over-year. (Source: “First Majestic Reports Third Quarter Financial Results,” First Majestic Silver Corp, November 2, 2017.)
Coeur Mining Inc (NYSE:CDE) is another well-known silver miner where costs are soaring. It produced a silver equivalent ounce for all-in sustaining costs of $17.54 in the third quarter of 2017—up from $16.46 in the same period a year ago. (Source: “Coeur Reports Third Quarter 2017 Results,” Coeur Mining Inc, October 25, 2017.)
Look at Endeavour Silver Corp (NYSE:EXK), as well. In the third quarter of 2017, the company reported a 53% increase in silver production costs. It produced an ounce of silver for all-in sustaining costs of $17.53, compared to $11.42 an ounce a year earlier. (Source: “Endeavour Silver Reports Financial Results for Third Quarter, 2017,” Endeavour Silver Corp, November 2, 2017.)
Where Are Silver Prices Headed Next?
Dear reader, combined, these companies produce a significant amount of ounces per year. Also, let me make it very clear, these are not the only silver mining companies where costs are increasing.
Now, let me ask one question: Could they continue to produce at the current price? Keep in mind, silver prices are currently trading at $17.00. You see, two out of the four companies mentioned here are already producing at a higher cost than the current silver spot price.
Understand that as producers’ prices are increasing and if silver prices don’t move to the upside, miners will be forced to take severe measures. They may be forced to halt production and improve grades in the ground by spending more on exploration.
To me, it will not be shocking—and this is a very bold thing to say—if this sort of thing continues. If costs are rising but prices remain the same, we could see a shortage in the silver market. It’s basic economics at play. It would be a very bad business decision by miners to keep on producing at a loss. Losses are fine in the short term, but over the long term, they are deadly.
With all this in mind, rising costs could be a positive thing for silver prices. I continue to see silver at $50.00 in the next few years.