Signs of Life in the Silver Mining Industry?
Last week we reported that Endeavour Silver was planning to put one of its three silver mines into care and maintenence mode by the end of 2016, due to the unprofitable nature of the mine. Silver prices have declined about 70% since hitting their peak of $50 per ounce in 2011. The impact of the silver price decline on the silver miners has been as dramatic and in many cases worse.
The Global Silver Miners ETF (SIL) that represents a basket of silver mining companies, reached its peak of $83.23 on March 31, 2011, and a low of $18.01 in early January 2016, a drop of nearly 80%.
In recent years, many silver mining companies ramped up production in light of lower silver prices in order to meet their financial obligations and rising silver demand. For some miners, however, no amount of added production could make their silver mines profitable as silver prices fell. These silver miners have realized that producing silver at a loss and hoping to make up the loss on volume is a losing strategy, one that forced Endeavor Silver to announce earlier this month they would cut production at one of their unprofitable mines.
Mining Output Cuts
Endeavour Silver’s decision to cut mining production, if followed by other primary and secondary silver miners, may have the impact of slashing supply at a time when demand is rising. The Silver Institute has reported that it believes that the silver deficit of the past few years may finally manifest itself in the form of higher prices this year.
Silver miners that are able to bear the brunt of current low silver prices and maintain production close to current levels, should benefit if prices rise as a result of decreased silver mining supply and increased demand. In recent months companies have reported securing financing, while others have announced guidance indicating continuations of their current mining output. This may reflect some optimism among silver miners that the price has reached bottom or may reflect economic necessity or just wishful thinking.
It’s too early to tell if last week’s 5% rise in the price of silver to $15.75 per ounce marked the end of the near five year decline in the price of silver. For some silver miners further silver price declines may result in bankruptcy and for others a silver price increase could help change their fortunes in a positive way.
The foregoing is not a recommendation to buy the stock of any particular silver mining company or the shares of silver miners in general.
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