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Silver Wheaton Corp. Message Board

  • mac_happy_70 mac_happy_70 Aug 24, 2005 2:17 PM Flag

    JC and omniportent, cost of production

    of one oz of silver for slw? 3.90 + what? do you know how the up front money paid is accounted? for example cde has cost of production plus other expenses. but cde has a tremendous amount of silver reserves and if silver prices just double, which is the better buy?

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    • "cost of production of one oz of silver for slw? 3.90 + what? do you know how the up front money paid is accounted?"

      Yep ... let's go over it, for you and for otheres that may not quite understand the SLW format ...

      You have often heard the term "cash costs per ounce" used by mining companies to describe their cost of production ... this term is not an accounting term, it is a marketing term and is often misleading, especially when you get into massive "metal credits" like at Alumbrera and Luismin, for example ...

      In all mining operations there are, as you gave CDE as an example, "other expenses" that contribute to the "total cost" of production which is a number far higher than that spinmeister's delight "cash cost" ...

      EXCEPT ....

      Except when it comes to SLW in which case, "cash cost" really is "cash cost" ...

      And the reason for that is because SLW is not a "silver miner", it is basically a royalty and investment company and, hence, does not have all those "other costs" ...

      SLW has a "cash cost" and a "total cost" of $3.90/oz, period ...

      Ahhhhh, but what about that "up front money" that was issued to get this silver flow, that $135+ million, how does SLW handle that ... ???

      Hmmmmmmm ....

      If we look at the SLW Balance Sheet where all the Assets and Liabilities are listed, we find an Asset with a heading called "Silver Contracts" and the amount showing at June 30th is about $133 million ...

      This is the remaining amount of the "up front money" to which you referred ...

      Now, this "up front money" was used to purchase the estimated number of silver ounces that should be received over the next 20 years or so, approximately 200+ million ounces in total at a value of about $0.65 per ounce ...

      As the ounces are sold to SLW at $3.90 per ounce, that means there is less and less ounces available to be sold to SLW, that is the value of the "Silver Contracts" declines each year ...

      To account for that decline in value, SLW deducts the number of ounces sold from this Asset at a price of $0.65/oz and that dollar amount is taken as an expense against earnings ... this is a "non cash" charge to earnings ...

      In Accounting, as an Asset declines in value either through simple wear and tear like a vehicle or through life-of-use like a patent or through an annual evaluation like Goodwill or through a specific formula like these Silver Comtracts, the recording of that decline in value is called "Amortization", although you will sometimes see the word "Depreciation" used and in fact, SLW calls it "Depreciation and Amortization" and hopefully that makes everybody happy, lol ...

      Proper GAAP Accounting says that amount for SLW is to be included as part of "total costs" for financial statement presentation purposes and, of course, SLW presents it that way so if you wish, we could say that the "total cost" for SLW is $3.90 + $0.65 = $4.55/oz ... and that does make a certain amount of sense ...

      Personally, because of the special nature of how SLW works, I feel it should be placed in "overheads", or more properly "Expenses and Other Income" as I see it, in this case, as a finance cost and not a production cost ...

      But I digress ...

      For ease of understanding, hiho, take the "$4.55 total cost per ounce" as the figure to compare with CDE or other silver miners but make sure you are looking at their "tatal cost" aslo and not the dreamspinner's "cash cost" ... lol ...

      Which is better, SLW or CDE ... ???

      I see omni weighed in with his view and he is correct in many ways ... but since you are a trader like me, I suggest you also read my response to Herbert, next ...

      jc

    • mac_happy_70 asked about SLW vs. CDE "which is the better buy?"

      Well, with respect to the cost of production that you mentioned, the answer is obvious. SLW has very low costs which are fixed for the next few years, while CDE has abysmal costs which are likely to rise with rising energy costs. If we look at environmental risk, SLW has none, while CDE has lots. When we look at management, SLW has a strong, aggressive management team with a track record of success. CDE on the other hand has, IMHO, incompetent leadership with a flair for failing miserably.

      As far as CDE's reserves go, I'm not impressed. Sure, if silver goes through the roof then CDE will do well, but so will every silver company. If, however, silver makes a gradual ascent, I'm not convinced that CDE's results will be any better than minimally acceptable. And, if silver goes unexpectedly southward, then CDE will crash and burn.

      If you want to trade in and out of CDE, be my guest, but the company isn't up to my standards for a long term investment. Worst of all, Dennis Wheeler is a loser.

      Who dares, wins!

 
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