This was supposed to be the year that gold and silver miners pretty much imploded.
The story in a nutshell is that during the boom years of 2009 -2011, the markets
threw so much cash at the industry that a lot of CEOs went a little crazy,
racing to accumulate the most ounces in the ground without regard for whether
those ounces could be gotten out profitably at prevailing prices. When the
metals got whacked in 2012 and 2013, the miners that had gone the craziest
found themselves with uneconomic mines, way too many people and equipment,
costs that had doubled in just a few years, and in many cases serious doubts
about their future existence.
But one of the nice things about an easy-money binge is that it leaves an
industry with a plenty of fat that can be trimmed right away. The miners have
spent the past six months in survival mode, firing non-essential people, closing
uneconomic mines and cancelling big development projects. Based on the most
recent numbers it's going better than the expected. The following table compares
Q3 2013 silver mining costs to the year-ago number for three companies that
just reported.
These are serious reductions. Only Silvercrest looks strongly profitable at
today's silver price, but Pan American and Great Panther look a lot less ugly
than they did a year ago. So, a few questions:
• What did they have to cut to get such big cost savings? If they've
pared their exploration and development wisely and are now focused on just
the best projects, that's good. If they fired a bunch of people they'll need
back when silver goes to $30 next year, that's bad but not horrendous. If they've
been "high-grading," mining and processing the best ore and leaving the lower
quality stuff for later, that opens the door to disappointment down the road.
• How much further can costs be cut? Assuming the low-hanging fruit was
picked first, progress will be a lot slower going forward. But it's hard to
believe that everything got done in just a couple of quarters, so maybe Q4
- looking past the big write-downs - will feature some more pleasant surprises.
Suddenly, there's a 2014 scenario that's not depressing: Let precious metals
prices start to rise a bit and miners come in with lower than expected costs,
and these stocks, at record lows versus their underlying metals, might have
a big year.
