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Non-Tech : Kirk's Market Thoughts

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To: da_spot who wrote (18498)	4/8/2024 3:52:15 PM
From: Sun Tzu	5 Recommendations Read Replies (1) of 26417

The price of a commodity producer behaves similar to an option on the difference between the price of the commodity and the producer's AISC. In other words, your greatest gains (and losses) happen as the commodity price approaches the production costs. And this means that counterintuitively, as the commodity price rises, it is the worst producers that provide the best gains. For example, consider 2 different silver miners A and B: The production cost for A $15/oz and for B it is $22. When the price of silver is $20/oz, A is already making money and that is reflected in its price. When the price of silver hits 25 and higher, A acts like a deep in money option and moves in linear proportion to the price of silver. On the other hand, at 20 (or less), B acts like an out of money option that may expire (i.e. the company could go bankrupt if silver prices remain depressed). As silver prices pass its AISC (in this example 22), the price B moves disproportionately higher to reflect the fact that they are transitioning from protentional bankruptcy to having earnings. Just something to keep in mind as you choose your miners.

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