Investors looking to get the most out of precious metals should look no further than high-cost mining stocks. While mining operations are traditionally leveraged to the change in price of the underlying commodity, high-cost mining stocks enjoy even more leverage due to the inner finances of the company. I’ll explain below.

High Cost Mining Stocks
High cost mining stocks are stocks that represent a company that pays nearly the full cost of a commodity to bring it to surface. An example of a high cost mining company would be one that spends $15 for every $17 ounce of silver it brings to the surface and refines. Because of the accounting, high cost mining stocks offer huge potential to the upside and are a favorite among investors looking to rev up their returns.

The Hypothetical
Let’s assume that there is a mining company known as XYZ Mining. XYZ Mining operates several silver mines and trades at a price to earnings ratio of 10. Also, the company is a high cost operation, meaning it spends $15 to produce just one ounce of silver. Let’s also assume that the company produces 1000 ounces of silver per year.

So, when silver is $16, XYZ Mining earns $1000 per year. ($16 per ounce X 1000 ounces – $15 cost per ounce = $1000 profit)

However, should silver rise by just 6% to $17 per ounce, XYZ would earn $2000 per year. ($17 per ounce X 1000 ounces – $15 cost= $2000 profit)

As you can see, a small change in the price of silver (6%) generated a profit increase of 100%. If the company were to continue to trade at the same Price to Earnings ratio, it would double in price with just a 6% change in silver prices. Now do you see the value in high cost miners?