By SRSrocco:
PEAK SILVER???
There is this notion that if a mine can produce more silver per ton, it will be able to generate more profits. Unfortunately, for Alexco Resources this is not case.
Alexco Resources’ Bellekeno project is Canada’s only primary silver mine producing silver at over 800 g/t (24 oz/t), which is twice the ore grade of the top two silver mines in the world.
However, Alexco recorded a NET INCOME LOSS of $2.6 million in the second quarter of 2012.
If we take a look at Alexco’s Q2 2012 report we can see that it averaged 800 g/t of silver in the first half of 2012. Furthermore, Alexco was able to recover 93% of the silver from the ore which is one of the highest in the industry:
If we take their JAN-JUL total production of 1,040,257 oz and divide it by their processed ore of 43,460 metric tonnes, we get the 24 oz per tonne yield. Just to give you an sense of comparison, Alexco’s Bellekeno mine produced silver at more than twice the ore grade than the two biggest silver miners in the world in 2011.
Here are the stats from 2011:
Alexco Bellekeno = 834 g/t
Fresnillo = 396 g/t
BHP Billiton Cannington = 352 g/t
Furthermore, Alexco’s cash costs more than doubled in a year:
Here we can see that their cash costs have more than doubled from $6.30 oz in second quarter of 2011, to $15.53 in the same period in 2012. Thus, the increase in costs plus the decline of the silver price in the first half of 2012, Alexco recorded a NET INCOME LOSS of $1.3 million from Jan-Jul.
Alexco even had higher revenues in the first half of 2012 compared to the same period last year. The big difference was the increase in COST OF SALES from $27.8 million 2011, to $35.3 million in 2012.
Part of the reason why Alexco has a net income loss is due to the fact that it has a silver-stream contract with Silver Wheaton. Silver Wheaton provided $50 million of the $61 million it took to build out the Bellekeno mine. For their part, Silver Wheaton is awarded 25% of Bellekeno’s silver production at $3.90 an ounce for the life of the mine.
Some analysts such as Ned Schimdt believe the FAIR PRICE of silver should be $16 an ounce. If silver was trading at $16 an ounce it would be nearly what Alexco shows for its cash cost alone.
Thus, if Alexco want’s to make a profit, it will have to get at least $30 an ounce silver. I would imagine if silver did trade anywhere below $20 an ounce Alexco and many other marginal silver produces would be losing a great deal of money and would be forced to close shop.
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All of this be damned! None of it matters as long as silver is valued below any possibility of its use as an alternative to banknotes. That’s it! End of story. (Stated in utter facetiousness, of course)
I was wondering what the break even point in price was for silver. Apparently, it’s about $30 an ounce. So, that would actually have to be the physical price basement to remain solvent. This means at the current price, silver miners are barely getting by. Most businesses need 80%-100% profit to remain comfortably in business, reinvest in the company, etc. Silver producers are going to be in difficult circumstances below $50, very VERY soon.
It is remarkable that a company with this ore grade can’t make a profit. SLW made a nice pact with this firm, no doubt, in advancing $50 million for a new permanent 800% profit on their investment They must have had some great intel on the yields. It appears that the more Alexco grinds the less they make. Whether it’s a function of high mining costs, a generous royalty payout or poor management, this firm seems to be a victim of its own ore grade success. I wonder how the owners view this state of affairs. Probably of the mind set that they will be rescued with silver prices going to high double digits. These folks are like wildcatters. If they hit the oil or silver motherload they will be rich beyond their imagination. Mother eearth usually has other ways of viewing wealth.
I pity the miners that have to subsist on 12 oz per ton.
The key to this story that many are missing is the inference of “peak” silver. It’s a reality folks; the planet will have no mineable silver left within 20 years, even if the price goes to $100/oz. Mineable grades have drastically declined in just the last decade and the costs of two critical mining cost components, that of water and diesel, are increasing year over year. But let’s not forget labor costs; the South African strikes are the figurative canary for this factor.
As the above becomes more widely recognized, what do you think the price will be in year 5, year 10, year 15; certainly multiples of the current one. Unless, of course you see both industrial and investment demand falling off a cliff. Highly unlikely.
“Unless, of course you see both industrial and investment demand falling off a cliff. Highly unlikely.”
It is possible that industry and investing WILL both fall off a cliff via a US dollar collapse. Is this likely? Hard to say but given the current situation and the continuing downward slope of it, it certainly seems possible. The bottom line seems to be that converting fiat into silver and stacking it is a damned good idea. It may or may not make us rich but it certainly won’t let us go hungry. It makes a pretty decent inflation hedge as well.
If anyone ever wanted an education real quick, I’d recommend starting a business. A production business that is. You’ll see pretty quick that at the end of the year you can make numbers say what ever you wanted them to say. TAX is the bottom line, when we first started our business back in Feb ’94 I took our books to 3 accountants for end of year, it was expensive but got a spread of gross and nett income and expenses from the three that were very different. The fellow we ended up using was the most expensive however he also “read” our financials in such a way as to give us a better bottom line end of year so that the expence of his charges was worth it. His experience allowed us to arrange our financial lives in such a way as to maximise every dollar to OUR advantage.
It’s just numbers and accountants, good accountants, are worth their weight in G . . . well Silver.
Saying this and not really being too interested in going looking at previous years returns or prospectus’ I am dubious at drawing a similar conclusion from the above short numbers.
clambake… I am not quite sure of what you are saying. Are you saying that the accounting from the figures above may not be showing a NET INCOME LOSS? Or are you agreeing? Of course numbers can make anything look BETTER…. or WORSE for that matter. However, when Alexco has to sell 25% of its silver at $3.90 an ounce… this is not good for their bottom line starting off. Of course it will get better.
The problem with the mining business is their metric they use called CASH COST. Nick Holland CEO of GoldFields just did a 35 page presentation basically saying the top gold miners are FOS – FULL OF SHEET. He also believes cash costs are bogus.
Anyhow, costs for mining silver are a great deal more than what the mining industry puts forth. Furthermore, there are full lifetime costs of the mines that are not included in production costs. Reclamation of the mining area is one that is not built into the production costs. That’s because most of the mines in the past have been DEADBEATS, and have left the remedation for the GOVT to do.
That is the reason why ALEXCO is now mining the Bellekeno mine. Alexco is also an environmental service company who cleans up old mining sites. When they went to clean up the old mine site, they realized just how much high grade silver ore was still in the area. That is why they decided to venture in the mining business.
“ That’s because most of the mines in the past have been DEADBEATS, and have left the remedation for the GOVT to do.”
Perhaps the governments should hold 10% of miners’ annual output in escrow so that their remediation costs are guaranteed to be paid and the miners can then have any that’s left over AFTER the mine is put to bed. This is not a lot different than income tax withholding.
These guys should claim maintenance problems or something, keep key personnel around painting and organizing, but lay off the help for three months. They are running their claim out at low budget prices, losing a bunch of money. SLW could just wait.
During the down time the price of silver should rise at least a little. It might even blow up in the next couple months.
Or they can work their butts off now, run out the mine, and come away with sore backs and holes in their pants.
“SLW could just wait.”
If you were running SLW would you “just wait”? Somehow, I don’t think that SLW will be very patient where money owed to them is involved.
Well the price of silver did rise. On August 2012, it was at 27$ per ounce and now, it is at 32.35$ per ounce. If we want to see more actions in the silver market, then wait until the US election is over.
If my calculations are close to correct, Alexco gave up 25% of 970,000 to SLW in the first 6 months of 2012. Rounding off to $4 an ounce price to SLW, Alexco forfeited about 242,000 ounces that could have sold for $30 an ounce, thus missing $26 an ounce. That arrangement cost Alexco over $6,000,000 in profits. Annual cost at current production is $12,000,000. That is is a serious forfeiture of profit for $50,000,000 investment by SLW. 4 years of profits could pay for that royalty stream contract. It would seem to me that Alexco made a pact with SLW that could have provided capital investors a return of 25% YOY. Alternatively Alexco could have held the majority of silver beyond the cost of operations and dividend return to investors as a silver bank, awaiting a price increase that would have given a much larger ROI. SLW is making out like a bandit IMO
“SLW is making out like a bandit IMO”
So… time to load up on SLW shares, even if they are close to their annual high?
Stuff happens, Ed. They can always claim a problem, like the oil refineries do when they need to cut production for a bit. They stand to lose millions. They can let SLW file suit, fight in court for a while, stall them.
Yes, stuff does happen. So does welching on a deal that no longer seems good. SLW would most definitely file suit and if they were to win could make a strong claim for monetary damages well in excess of the money they were owed. If the miners lose in court, it could be a LOT more expensive for them. Quite a coin flip!
Wow, this is crazy! I go to the Belle Keno site very often and from what I heard from the guys there they are doing quite well or apparently not.
This is a very neat mine site BTW, it looks like something out of the old west with the buildings there and wood-enterance mine shafts all over the place.
This is why I only buy and stack physical silver.
If the mine companies are having loses, then they will stop producing more silver that fills the market. By doing that, it will raise silver’s price again and the mines are going to start producing more silver again. That means silver’s price is going rise again soon.