Silver Plunges Below Marginal Cost: Commentary from a Retired Geologist
Last week as silver headed toward the $29/oz level, I received an excellent piece of commentary from a retired Canadian geologist that goes by the handle “Rhody.” In it he states that at sub $30/oz silver is below cost, which I take to mean marginal cost. For those not familiar with the commodity markets, marginal cost is the price that must be maintained to support new projects in order to keep supply growing to meet demand. This cost includes capital investment in addition to all other costs as well as an implied return on investment. I am not sure if Rhody included a return on capital in his $29/oz figure so it could be even higher. In any event, he goes on to make some extraordinarily poignant statements on the overall macro backdrop in general. So much so that I asked him if I could post it and he agreed. Without any further ado…
Hi Guys:
Silver has now dropped below its total cost of production, which averages about $29. Back in 2007, producers could produce silver at about $22 (which was above the spot price of the time as well) but at a 10% inflation rate, cost per ounce now, about 4 years later is going to be around $30. Ignore mining companies that say they can produce silver at 5 or $6. That’s just mining costs and ignores exploration, smelting, refining and shipping. Back in 2007, if you looked at the top three miners, looked at their production and profits, you could calculate their total cost at $20-$24 back while the spot price was $18. Essentially, silver has been produced below total costs since the 1930′s, which is why only 22% of silver mines subsist on silver alone and the other 78% survive on their other metal production with silver as a mere by-product. No straight silver mine makes money, unless it is very, very high grade.