Miners Making a Bullish Case for Silver Prices
Silver mining companies are making a very strong case for higher silver prices in the coming years. A shortage in the silver market could be looming. It’s nothing but great news for precious metal investors.
Understand this (and don’t let anyone tell you otherwise): silver miners are struggling with producing more and keeping costs low.
The longer this goes on, the bigger the possible upside on silver prices.
For instance, look at First Majestic Silver Corp. (NYSE:AG). It’s one of the best-known and purest silver plays out there.
In the first quarter of 2018, the company produced 2.16 million ounces of silver. In the same quarter a year earlier, its production amounted to 2.71 million ounces. This represents a decline of 20% year-over-year. (Source: “First Majestic Reports First Quarter Financial Results,” First Majestic Silver Corp., May 9, 2018.)
Costs at the company have been skyrocketing.
In the first quarter of 2017, First Majestic produced an ounce of silver at all-in sustaining costs of $11.85. In the first quarter of 2018, these costs surged to $16.01. This was an increase of 35% year-over-year.
Here’s the kicker: First Majestic’s average realized silver price was $16.76 per ounce. In other words, this was the price it received for selling silver.
With a production cost of $16.01, we are looking at a gross margin at this company of just $0.75 per ounce.
Assuming that silver prices drop below $16.00 and First Majestic’s production price remains at the current level, will it have any reward for producing? It would be a very bad business decision.
This Sort of Thing Prevails Across the Sector
Look at Coeur Mining Inc (NYSE:CDE), one of the biggest silver producers. In the first quarter, it produced 3.2 million ounces of silver. A year earlier, it produced 2.7 million ounces. Its production increased by 18.5%. (Source: “Coeur Reports First Quarter 2018 Results,” Coeur Mining Inc, April 25, 2018.)
Don’t be too quick to judge. The company’s all-in sustaining costs per silver equivalent ounce was $17.20. Coeur Mining’s average realized silver price was $16.70.
See a problem?
Sadly, this sort of thing is currently prevailing across the silver mining sector. There are very few companies that are able to reduce costs and increase production.
What’s Ahead for Silver Prices?
Now, why should silver investors pay attention to what’s happening at silver mining companies?
You see, with silver miners’ production declining, and their costs surging, there could be in a shortage in the market in the coming years.
How so? Consider this: if silver prices remain the same or decline a little, companies like First Majestic will have a lot of problems turning in profits. For some, survival could become questionable.
This could impact the silver supply. Keep in mind, the silver market has already been facing a deficit over the past few years. It could get much bigger.
With this, since they are already working with small margins, they may not be able to spend money on exploration and development. This will impact the future production of silver.
Keeping all this in mind, I can’t help but be bullish on silver prices ahead.