The Beginning of the End? Silver Mine to Cut Production - Nathan McDonald

We've talked about it at length, we knew it was coming, and now it is upon us. Silver mines are beginning to cut production and close up shop. Well, at least temporary.

As I've said many times before, the best cure for low prices is low prices. This is especially true in the commodities space, where low prices will eventually cripple a company and cause mines to cease operations because there is no point in losing money while getting your product out of the ground.

The correct course of action is for companies to simply cap their production and wait until prices recover. Once this is done by enough companies, the low price corrects itself as demand accelerates while production declines. A sure-fire recipe for higher prices.

This is exactly what has unfolded in the case of Endeavour silver, a well-known and respected company in the precious metals space, which had the following to say in a recent press release:

Endeavour’s mine plans for 2016 are focused on minimizing all-in sustaining costs and improving after-tax free cash flow rather than metal output. Silver production is expected to be in the range of 4.9-5.3 million oz, gold production will be in the 47,000-52,000 oz range, and silver equivalent production is forecast to be 7.9-8.5 million oz using a 75:1 silver:gold ratio, as shown in the table below.

Bradford Cooke, Endeavour CEO, commented, “Our Guanaceví and Bolañitos mines continue to be profitable at current metal prices but the El Cubo mine continues to lose money in spite of our successful efforts to expand the operation and reduce cash operating and all-in sustaining costs three years in a row. Therefore, we plan to mine the accessible reserves this year at El Cubo and have suspended investments on exploration and mine development there until metal prices improve. That means El Cubo will see a steady decline of production through the year until it goes on care and maintenance in the fourth quarter.”

This is a wise course of action, given the incredibly depressed and stagnant silver market. Endeavour silver was losing approximately $4.00 per oz at its El Cubo mine, making it pointless to continue with operations at current price levels.

I highly doubt this will be the last news story that we hear about on this subject. If silver continues to decline, similar to how oil prices waver, then more mining operations will be forced to stop production for the short to medium term.

The fact is, this is money in the ground, and the companies that own these mines know this. They know what we know, that prices will once again recover and operations can then resume at higher prices.

Silver’s day in the sun is coming; it may not be next week, it may not be next month, but as this story foreshadows, the end is drawing near.

It is only a matter of time before demand completely overwhelms supply and prices skyrocket higher. Now is the time to take advantage of these artificially depressed prices. Now is the time to accumulate.