One of the greatest arguments against rising production costs of silver is that the majority of silver mining is the byproduct of copper, zinc/lead, and gold mining and thus is free because the target metal assumes the production costs. This is erroneous and I want to demonstrate why that is.
So what is a primary silver miner? A primary silver miner is a company that generates the majority of its revenue from silver. A company such as Fresnillo which generated 49% of its revenue from gold and only 47% of its revenue from silver was a primary gold miner in 2012, not a primary silver miner. However, in other years, Fresnillo could actually be a primary silver miner because of price fluctuations in the metals as well as ore yields change. Therefore it doesn’t make sense that production costs would be distributed towards the primary metal, but rather distributed based on revenue earnings for the year. So in 2012, 47% of the production costs would realistically be associated with silver.
The largest silver producer in the world is a Polish company called KGHM. KGHM produced 40,959,100 ounces in 2012, which is over 5% of global mining production. In 2012, KGHM made $6,760,209,840 from sales of products. Approximately $1,275,863,677 was made from silver based on an average silver price of $31.14 for the period, making silver about 18.87% of the company. Copper composes another 80% and the remaining sales came from minor metals.
KGHM made a profit of $1,587,049,174 in 2012. Assuming silver is 18.87% of the company, then $299,525,968 of those profits were generated from silver sales.
[$299,525,968 (profits from silver)] ÷ [40,959,100 (ounces sold in 2012)] = $7.31 (profit per ounce)
So at an average silver price of $31.15, KGHM had a break-even price of silver at approximately $23.84($31.15 - $7.31)
It’s also important to recognize that KGHM is a low cost copper producer because of its “high” copper grades which would have an effect on the profitability of the company. KGHM is mining for 2.24% ore while the US is mining for .18% grades at its largest copper mine (Bingham Canyon).
It is this kind of misconception that brings non-ferro metal producers to seek financing by selling their future silver streams. When receiving an upfront payment, this is a short term advantage which they need to balance against the cut in their future revenues. The outcome is that the price realized for their silver output is near production cost and its contribution to the total profit is (close to) nil.