Precious Metals

Lower silver prices weighed on miners’ balance sheets, but not so much on their confidence.

The recent financial results for silver miners all share a common theme: low silver prices are having a negative impact on their bottom line. While some companies saw their production increase, they also saw revenues decline. Added to these factors are industry-wide price pressures that are driving up many producers’ costs. Even so, miners still appear confident.

Pan American Silver (NASDAQ:PAAS,TSX:PAA) is one company that had a strong quarter in terms of the volume of metal it mined. With a 14 percent increase compared to Q2 2011, Pan American reported its second-highest quarterly production in the company’s history. Yet revenue declined from $231.9 million in Q2 2011 to $200.6 million in the past quarter, and adjusted earnings declined from $75.4 million to $17.1 million.

According to Pan American’s quarterly report, “revenue and adjusted earnings were directly impacted by a marked decline in realized prices of silver and base metals.”

In addition to silver prices that fell 23 percent, from $38.21 during Q2 last year to $29.53 this year, the company also experienced notable declines in the prices of zinc, lead and copper.

Pan American also reported a $9.6 million negative price adjustment on sales that were recorded in the previous quarter, but settled or marked to market in the current quarter.

Other miners reported similar issues.

In addition to having its Lucky Friday mine closed since January, Hecla Mining (NYSE:HL) had to deal with lower-than-expected grades at its Greens Creek mine, along with lower silver and base metals prices.

The company raked in an average of $35.80 per ounce in Q2 2011, but only $27.05 this year. Hecla incurred a negative adjustment to provisional settlements of $2.4 million “largely due to a decrease in prices in the time period between the shipment of concentrate and the final settlement.”

Compared to an income of $53.7 million from operations in Q2 2011, the company reported a loss of $2.5 million in Q2 2012. Due in large part to gains from derivative contracts, Hecla was able to report net income attributable to common shareholders of $2.4 million for the past quarter, and earnings after adjustments of $4.4 million.

First Majestic Silver’s (NYSE:AG,TSX:FR) silver production rose 8 percent, but the company’s average silver price in Q2 2011 was $39.08 compared to $28.69 in 2012. Its revenues declined 19 percent, to nearly $55 million, and its net earnings after taxes declined 50 percent to $15.3 million.

Coeur d’Alene Mines’ (NYSE:CDE,TSX:CDM) silver production this quarter was nearly flat compared to Q2 2011. However, it saw a decline in silver prices of about $10 per ounce and averaged only $29.28 per ounce this past quarter. Though metal sales were up over 10 percent, about 63 percent of that sales activity during the quarter was represented by silver.

Cash from operating rose from $111,065 last year to $113,203 in 2012. But Coeur d’Alene also saw its production costs increase by 71 percent. Adjusted earnings fell some 52 percent to $28 million and the company’s net income fell 40 percent to $23 million.

Fresnillo (LSE:FRES) recently released its interim results, which compare the first half (H1) of 2011 and 2012. During H1 2011, the company faced falling grades at its Fresnillo mine and a silver production decline of 6.5 percent, if metal from its Silverstream contract is included.

Though Fresnillo’s average silver price also declined 13 percent, the company still managed to command $30.97 per ounce in Q2 2012. This result did not, however, prevent a decline in cash generated by operations; that statistic declined by 10 percent.

The company said that the favorable effect of the higher price of gold, coupled with the precious metal’s record production, more than compensated for the decline in the price of silver and the adverse impact of the expected lower grade at Fresnillo.

Fresnillo’s adjusted revenues increased by 2.5 percent, but net profit declined in H1 2012 by about 21 percent to $434.7 million.

Silver streaming — a better business model?

Mining companies tend to have highly variable costs, but Silver Wheaton (TSX:SLW,NYSE:SLW) is a major player in the white metal business that has a strategy to avoid these problems: the company does not operate mines. As a silver streaming company, Silver Wheaton pays an initial upfront fee for the rights to a mining company’s production and then pays a predetermined and relatively fixed per ounce rate for silver over the life of the contract.

This business model is often considered superior as it provides leverage to rising prices, but eliminates much of the risk associated with production. However, even Silver Wheaton was not able to completely escape the adverse effects of low silver prices.

In Q2, the company’s silver equivalent production was up 10 percent. Like some of the miners, the company benefited from gold sales. Revenues were up 3 percent to a record $201.4 million. Cash flow from operations also rose 3 percent to $173 million. But Silver Wheaton still saw a decline in net earnings, which for Q2 2012 were $141.4 million, down from 148.1 million in Q2 2011.

“The change in net earnings and operating cash flows is primarily due to 36% increase in the number of silver equivalent ounces sold, which was partially offset by a 24% decrease in the realized price per silver equivalent ounce,” the company said.

Companies remain confident despite results

Overall, in addition to lower silver prices, miners commonly reported higher costs in Q2 and lower mine operating earnings. In addition to the aforementioned factors, several companies also pointed to higher depreciation, depletion and amortization charges.

Though gold prices have fallen since the beginning of this year, the average price for the yellow metal during the second quarter was higher than in Q2 2011. For some silver companies, gold sales mitigated the effects of weak silver prices.

Despite the current market environment, companies continue to display confidence in their outlook. Some, such as First Majestic and Coeur d’Alene, have embarked on share repurchase missions.

Silver miners also continue to show a willingness to make investments. During Q2, First Majestic completed its acquisition of Silvermex, and thus the La Guitarra silver mine. Pan American added production from the newly-acquired Dolores mine in Mexico to its portfolio. Hecla made a cash bid for US Silver, though the deal fell through. And Silver Wheaton announced two new streaming agreements with Hudbay Minerals (TSX:HBM,NYSE:HBM).


Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.


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