Analysis: Silver's price slump unlikely to trip up miners

TORONTO Fri May 6, 2011 3:44pm EDT

TORONTO (Reuters) - Silver producers are likely to take this week's precipitous drop in metal prices in their stride and will keep turning big profits even if the bearish mood persists.

For silver investors, the best news is that few analysts believe the reversal that gripped the market in recent days is the start of a long-term trend. Strong fundamentals also mean exploration projects are unlikely to slow.

Silver producers can still make a king's ransom, analysts say, even if prices languish or fall further. Major silver companies report production costs ranging from $4 to $8 an ounce, a mere fraction of the current spot price of around $35.

"The silver companies are making very good money at $35 an ounce. They'd be making very good money at $30 and most of them would be making very good money at $25," said Charles Oliver, a senior portfolio manager at Sprott Asset Management, one of Canada's top mining industry investors.

"The long-term story for precious metals is still very firmly intact," said Oliver, who took advantage of the slump this week to buy Canadian silver mining shares on the cheap.

He said his long-term outlook for the metal is still above $50 an ounce and it could even surge as high as $100 in the next few years.

Sprott is likely Canada's most famous silver bull, and not everyone shares its vision for where prices of the metal can go, although most agree it still has room to grow.

"We never bought into the $50 plus, $60 idea," said Bart Melek, head of commodity strategy of TD Securities (TD.TO). "But I think that given the monetary conditions where they are, demand on the physical side, mining production where it is, and expectations for very tight markets, this can go higher."

Silver prices buckled this week soon after they pushed through resistance and topped a record high that had stood since the 1980s. Increased margin requirements for silver futures made it more costly to invest, accelerating the downward spiral.

But silver edged back on Friday from a two-month low of $33.16 an ounce the previous day. That's still almost double the $17.61 the metal was trading at 12 months ago.

Canadian silver miners, whose stock prices tumbled a day earlier, bounced back on the Toronto Stock Exchange on Friday as investors bet the slump would not last or destroy profitability.

Pan American Silver (PAA.TO), one of the world's largest pure-play silver producers, rose nearly 2 percent, while mid-tier miners Endeavour Silver (EDR.TO) and First Majestic (FR.TO) jumped 11.43 percent and 12.7 percent respectively before paring gains.

Shares of Coeur D'Alene (CDE.N)CDM.TO, another large-scale producer, rose 2.7 percent.

There were good reasons behind the rebound. Pan American had average cash costs of $6.61 an ounce last year and forecast cash costs of $7.00 to $7.50 an ounce in 2011.

Silver Wheaton (SLW.TO), which buys silver byproduct from miners and then resells it, expects cash costs of just over $4 an ounce in 2011. Its rose 1.3 percent on Friday.

"You used to dream of these prices," said Brad Cooke, chief executive of Endeavour, referring to silver in the $33 to $35 an ounce range.

Cooke sees prices retreating slightly over the next few months, but expects the spot price to go back up in the fall as the buying season begins in India and China. He said prices could reach record highs again in the fourth quarter.

"I don't think lower prices are going to affect any projects that are expanding right now or new projects that are coming on line," said Mike White, president of IBK Capital Corp, a Toronto company that specializes in equity financing for miners with projects under development.

Many industry players see no reason to rethink the longer term outlook for silver because the fundamentals of supply and demand are the same as before the recent price slump.

"We should think about the real stuff. Is this a price that makes real projects and development of these new projects a good idea? Yeah, it does," said TD's Melek. "It's way above the marginal cost of production of the highest-cost producers in the world."

(Editing by Frank McGurty)