London based precious metals consultancy, Metals Focus has noted an improvement in operating margins at the silver mining operations it analyses as the mining companies have been succeeding in making some substantial unit costs savings. With most silver production coming from countries which have seen significant currency depreciation against the US Dollar, this has played a significant part in the margin improvement. The Metals Focus note on this from its latest Precious Metals Weekly newsletter follows:
In spite of a fall in silver prices, basic operating margins rose q-o-q in Q2.15, aided by some notable cost reductions. Utilising data from our Silver Mine Cost Service, primary by-product silver total cash costs saw a 12% decrease q-o-q, falling to US$6.84/oz, a level not seen since 2011. This continued decline in operating costs is linked to the depreciation of many producers’ currencies relative to the US dollar. Of note, the Mexican Peso and Peruvian Nuevo Sol weakened by a further 2-3% versus Q1.15. In addition to the positive FX impact, increased revenue from by-product credits also helped. Q-o-q, lead, zinc and copper prices rose by 7%, 5% and 4% respectively, although this was partially countered by a 2% reduction in gold. Outside of this, oil rose by 7% q-o-q (based on the Brent price), although at an average of $66/bbl it was still some 35% lower versus Q2.14. Global silver grades also remained unchanged, averaging 160 g/t over the past 12 months.
All-in sustaining costs continued to fall, although this was solely attributable to the decline in underlying total cash costs, with the all-in sustaining component actually rising by $0.55 q-o-q; this additional component includes items such as stay-in business capital, near mine exploration and corporate head office costs. Looking at the financial standing of the industry, based on an average silver price of $16.44 in Q2.15, just 9% of the industry was loss making on an all-in sustaining basis; in comparison, 23% of gold production was loss making on an all-in sustaining basis during the quarter.
Looking to the current quarter, although mine site costs will benefit from further domestic currency weakness and falling oil prices, costs in the current quarter will be impacted by falling by-product metal prices. To date in the third quarter, lead, zinc and gold are on average some 11%, 14% and 6% below their second quarter level, while the fact that silver itself is down 9% will further eat into producer margins.