A bank analyst report was published recently, estimating what the prime producers of silver would produce in cash flow in this upcoming year. Unfortunately, the results weren’t pretty. This report reveals a hint of where the silver cost is heading, which is valuable information.
This does not necessarily imply that an increase in the price of silver is approaching, but the business has experienced this in the past and displayed that there may be one solution to escape this situation.
Let’s begin by providing some context.
What Does Tiny Look Like?
Many people understand that the market for silver is small.
This year’s predicted supply of silver will be worth around $20 billion, which is at a silver price of $20.
In comparison, we find that the Starbucks market cap is at $112 billion, obviously much higher. Though they are known for amazing coffee, is a business that sells coffee truly worth over 5 times higher than the 2022 worth of a critical metal?
The principal equity silver niche is also quite small, in which we’re referring to the companies that primarily produce silver. Looking at the data, about 75% of the metal is taken from non-primary silver mines, meaning only a small handful of authentic primary silver companies exist.
In comparison to most other resource and metal markets, these genuine silver producers don’t have a large market cap.
On November 7th of this past year, the cap for diverse miners (Rio Tinto, BHP, etc.) was up to $441.3 billion, while gold was at $225.7 billion, and copper was at $118.2 billion.
Then we look at the market of the primary silver companies, which was only $21.9 billion.
If we compare Apple’s CASH amount of $179 billion with the silver market’s $21.9 billion, Apple could purchase the whole primary silver producer industry with $157.1 billion left.
Even the cap for silver in 2009 was at $35.1 billion!
The reason the main silver market is so feeble is due to the investors feeling disheartened by the prices of silver and stocks, which causes the cap to fall lower. This has harmed the silver companies in both growth and production.
This leads us to…
How Long is Too Long When You’re in the Red?
The report mentioned at the beginning of this article was performed in November, which means it’s up-to-date and reliable. It represents how much cash flow primary silver producers will earn in 2022 on a net basis.
This is a serious situation for this focused industry. As an investor, you probably know what it means.
Oftentimes, many silver manufacturers aren’t able to produce high cash flow or even positive cash flow. The main cause for this is due to the decrease in the price of silver.
We can take this as a warning for the future of the silver, because an industry can’t keep losing money forever.
What do we do now?
The Only Solution
There is truly only one way out, and it’s because most miners have reduced costs as much as possible, which was forced by the constant low price of silver.
- On a weighted basis, the normal All-In Sustaining Cost (AISC) is recently $19.33 for one ounce. The price of silver has remained in the lower $20s throughout June this year—but then reached an average of $19.55, just slightly higher than the sector’s average production price.
At this point, it’s almost impossible to get the average much lower, especially considering the current high inflation. Inflation affects the mining industry just like it does everything else. While there are some exceptions, it’s common that costs are continuing to rise, meaning the price of silver will also have to increase to justify this.
- There’s another issue ahead as well. Many miners will mine higher-grade sections of their mines to generate higher profits, but this can’t be done forever. For the companies that rely on it, there’s a rough road ahead: low-grade sections of the deposits might not be enough to generate revenue if the price of silver remains low. Low-grade material only works when high-grade is mixed in.
There is some research that presents an argument that there will be a slight improvement in the industry during 2023, but it’s still estimated that over half of the producers won’t be able to generate a positive cash flow that breaks even, even with higher prices of silver.
- Once again, this confirms that the price of silver has to be higher for the sector to be profitable. (Keep in mind that this isn’t a list of recommendations, but the ones to look at are the ones that may have the largest turnaround in cash flow. This is agreed upon by both our opinion and the report.)
It’s a reality that three of every four ounces are from non-primarily silver mines. Since silver is only a byproduct, which simply offsets the entire production cost, these producers don’t need a high price of silver. This can still naturally cause problems in profitability. It’s also considerable that they likely didn’t predict silver to be an average of $19.55 per ounce with high inflation. Even these producers are desiring a higher price for silver.
Some companies may be forced out of their business if the low prices stay constant. Others may be forced to draw back their low-grade mines, merge with other companies, or make choices that they might not want to make.
This will affect the industry as a whole, but in other ways as well: development and exploration budgets may fall, managers and needed workers such as geologists might leave, and students may be turned away from pursuing mining as a career. This could get ugly and become a cycle that may worsen.
We don’t expect things to get this extreme, as long as the silver price increases and difficulties are removed for most producers.In the end, it’s crucial that the price of silver increases. It’s impossible for the silver industry to be profitable this way and stay in business.
Many miners are now hinting toward an upwards, positive shift in the price of silver. It’s recommended that we recognize this and invest wisely.
Recommended for you: Gold IRA Rollover Guide and Silver Investments.
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