Silver Mining Equities and Streaming Companies

What you will learn

• How by-product credits change a silver miner's all-in sustaining cost (AISC) and its sensitivity to silver.
• How streaming companies earn money from silver and how their risk differs from a miner's.
• How jurisdiction, dilution and other metals can make a "silver share" fall while silver rises.
• How to check a miner's exposure per share instead of per company.

Explanation

The Commodities course (lesson "Commodity producers' shares versus the commodity itself") explains operating leverage, price ÷ (price − unit cost), and introduces AISC. This lesson applies it to silver, where the cost figure itself depends on other metals.

Primary producers and by-product credits

As an earlier lesson in this course showed, most silver comes from mines whose main product is lead, zinc, copper or gold. Even listed "silver miners" often earn a large part of their revenue from other metals. Many report AISC per silver ounce net of by-product credits: the revenue from the other metals is subtracted from total costs before dividing by silver ounces. net AISC per oz = (total sustaining costs − by-product revenue) ÷ silver ounces. Net AISC can be very low or even negative. That does not mean the mine is cheap to run; it means its profit depends on zinc, lead or gold prices too.

Some companies instead report silver-equivalent ounces (AgEq): other metals converted into "silver ounces" using assumed price ratios. If the assumed prices change, the production figure changes without one more ounce being mined. Always read the price assumptions in the footnotes.

Streaming and royalty companies

A streaming company pays a miner a large upfront sum. In return it may buy a fixed share of the mine's future silver for a low fixed price per ounce (or a fixed percentage of the spot price) for the life of the mine. A royalty is a right to a percentage of a mine's revenue or output. Streamers do not run mines, so they avoid most cost inflation. Their margin per ounce is wide, so operating leverage is lower than a miner's. Their risks: the operator's problems (strikes, accidents, closures), the operator's credit risk, and paying too much upfront.

Why miners can fall when silver rises

• By-product prices fall: lower zinc or lead revenue raises net AISC.
• Cost inflation: energy, wages, reagents and equipment often rise with metal prices.
• Jurisdiction and political risk: royalty and tax increases, permit delays, export rules, or nationalisation. Much silver is mined in Latin America; check the countries in which each mine operates.
• Dilution: issuing new shares to fund projects or debt. Company profit can rise while profit per share falls.
• Operations and geology: lower ore grades, floods, accidents, delays.
• Equity market risk: small miners fall in broad stock sell-offs.

Worked example

Hypothetical example: a miner produces 10 million oz of silver a year plus lead and zinc. Total sustaining costs $300 million; by-product revenue $120 million; 200 million shares. Silver $30. Taxes, royalties, interest and currency effects are excluded.

1. Gross cost per oz: $300m ÷ 10m = $30. By-product credit: $120m ÷ 10m = $12 per oz.
2. Net AISC: $30 − $12 = $18. Margin: $30 − $18 = $12. Operating leverage: $30 ÷ $12 = 2.5.
3. Silver +10% to $33: margin $15, +25% (2.5 × 10%).
4. Now assume at the same time lead and zinc revenue falls 25% to $90 million: credit $9, net AISC $21, margin $33 − $21 = $12. No improvement at all.
5. Add dilution: the company issues 20 million new shares (10%). Margin cash flow per share: before 10m × $12 ÷ 200m = $0.60; after 10m × $12 ÷ 220m ≈ $0.545, about −9%. Silver rose 10%, yet the per-share figure fell.

Streamer comparison: it paid $200 million upfront for 2 million oz a year at $5 per oz. At $30 the margin is $25 per oz, or $50 million a year; payback is about 4 years, before tax and discounting. At $33 it earns $56 million (+12%): operating leverage only $30 ÷ $25 = 1.2. If the mine stops, the income stops.

Common mistake

Practice activity

Hypothetical: a miner produces 4 million oz of silver. Total sustaining costs $100 million; by-product revenue $36 million. Silver $28. (a) Calculate gross cost per ounce, net AISC and margin. (b) Calculate operating leverage and the margin change if silver rises 20%. (c) What would the margin be at the higher silver price if the by-product revenue disappeared?

Key takeaways

• Net AISC subtracts by-product revenue, so a silver miner's margin also depends on other metals.
• Silver-equivalent ounces depend on assumed prices; read the footnotes.
• Streamers have wide margins and lower operating leverage, but depend on the operator.
• Cost inflation, by-product prices, jurisdiction and dilution can push a miner's share down while silver rises.

Next step

In the next lesson you will learn to recognise the risks, scams and common traps that are specific to silver.