IMPORTANT SILVER KEY FACTORS: 3 Must See Charts

The silver market has experienced serious changes which precious metal investors need to be aware.  Unfortunately, there is a shortage of information and data to provide investors with important key factors going forward.  To understand the silver cost-price dynamics, investors need to see the following three charts below.

I did an interview with Jason Burack from Wall Street for Main Street a few days ago (to be published shortly) on the future value of precious metals.  My analysis looks at how energy will be the driving force in pushing the value of gold and silver to substantially higher levels.

When I wrote the article Gold & Silver Prices To Surge On Fundamentals, Not Technical Analysis, many readers who made comments assumed the lower price of oil would guarantee lower precious metal prices for quite some time.  While this sounds logical at face value, I believe the opposite is the case.

Before I get into why I believe the value of silver will surge in the future, let’s look at some silver price vs cost fundamentals.

The Price Of Silver vs The Price Of A Barrel Of Oil

The price of silver has moved in tandem with the price of a barrel of oil for nearly 100+ years.  Here is a chart showing the change in the price of oil and silver since 2000:

Silver-vs-Oil-Price-2000-2015

As we can see in the chart, as the price of oil moved up higher, so did the price of silver.  Some technical analysts may see this as merely a coincidence…. it’s not.  Energy is the key factor that drives the value of most assets.  This is not up for debate, even though many individuals will continue wasting their time trying to prove otherwise.

Now, the important thing to see in this first chart is the relationship between the silver price and oil price today versus what it was the last time oil traded at that level.  To do that, we have to go all the way back until 2004 when a barrel of Brent Crude was trading the same as it is today.

The current price of Brent Crude is $39.65 and the price of silver is $14.11.  However, when the price of Brent Crude was $38.26 in 2004, the price of silver was less than half at $6.67.  This may give silver investors a lousy feeling as this past relationship portends for a much lower silver price.

Don’t worry, the fundamentals show that the present silver market structure is much different from it was just a decade ago.

Silver Mining Yields & Costs Head In Opposite Directions

Several of my readers have sent me emails worried that the lower price of oil will translate into much lower silver prices.  While this sounds like common sense, there are several factors that reveal a much different picture.

One aspect of the silver market that isn’t discussed in detail by the precious metal community is the huge decline in average yield by the primary silver mining industry.  I believe I am one of the only analysts that have published charts showing the decline in average yield in the top silver producers.

Top-7-Silver-Companies-2015-YTD-Average-Yield

From 2005 to 2013 the average yield from the top six silver companies (including one primary silver mine) fell from 13 ounces per tonne (oz/t) to 7.6 oz/t.  This was a 42% decline in average yield in just eight years.  However, this downward trend reversed in 2014 as Tahoe Resources brought on its new super high-grade Escobal Mine in Guatemala.  In 2014, Tahoe Resources Escobal Mine average yield was a staggering 16 oz/t.

What is interesting, by adding the this super high-grade Escobal Mine to the group, it only pushed up the group’s average yield to 7.8 oz/t.  Moreover, if we look at the data for 2015 year to date (Q1-Q3), the average yield is heading lower once again.  One of the reasons the group’s average silver yield declined to 7.4 oz/t this year was due to the large fall in Tahoe Resources Escobal Mine’s average yield.  It fell from 16 oz/t in 2014 to 13 oz/t for the first three-quarters of 2015.

Some analysts are saying the primary silver miners have been high-grading their mines in order to stay profitable.  While this may be true for several mines in some of the companies, this is not the trend for the entire primary silver mining industry.  If it was, we would have seen an increase in the average yield in 2015, not a decline.

Investors need to realize the primary silver mining industry is processing almost double the amount of ore to produce the same or even less silver than it was just a decade ago.  You don’t have to take my word for it, here is the data:

Top 7 Primary Silver Miners Total Processed Ore

2005 = 9,444,000 metric tons

2014 = 17,776,000 metric tons

While it’s not quite double, it’s close.  This huge increase in processed ore has a profound impact on the cost to produce silver.  To get a better idea of how it impacts the primary silver mining industry’s bottom line, let’s look at one of the largest silver producers in the world.

Pan American Silver:  Evidence Of Rising Costs

If we look at one of the largest primary silver mining companies in the world, we can see just how much higher costs are today compared to a decade ago.  This chart shows the average annual price Pan American Silver received for silver (White line), the estimated break-even (Light blue area) and the estimated silver income per ounce (Green or Red).  The green color denotes a profit while red represents a loss:

Pan-American-Silver-Estimated-Breakeven

The realized silver price Pan American received that year was close to the average market price (Note: some older years, the realized price was not stated in the Annual Report so, I used the average market price).  According to my estimated break-even calculations, Pan American lost an estimated 10 cents an ounce in 2004, this turned positive for years 2007-2012 and then fell negative for the past three years.

The estimated silver profit per ounce for Pan American Silver peaked  in 2011 at $9.02 an ounce.  Now, what is interesting about this chart is the cost and market price ratio since 2004.  I did not include 2005 or 2006, because the chart was originally designed from years 2007-2014.  I plan on adding years all the way back until 2000, but that will be in an upcoming Report.

Regardless, Pan American Silver lost 10 cents an ounce in 2004 when the average market price for silver was $6.67.  Thus, Pan American Silver needed to receive $6.77 to break-even.  This was during the year when the price of a barrel of Brent Crude was $38.  Now, if we look at Pan American Silver’s results for the first nine months of 2015, they received an average of $15.85 for silver, but lost 97 cents for each ounce produced.

Which means, Pan American Silver needed to received $16.82 for the first nine months of 2015 to break-even.  Again, this is according to my “Estimated Break-Even Analysis” based on using Adjusted Income.  For Example, Pan American Silver reported a $19 million net income profit in 2004, but this was due to a sale of a property (asset) in the amount of $23.7 million.  The net income gain that year was not the result of profitable silver mining, but rather due to the sale of a property.

This is the reason I use the Adjusted Income approach in determining a more realistic cost to produce silver.

Even though Pan American Silver has been able to lower their break-even by extensive cost cutting and lower energy prices, we can see they still lost 97 cents an ounce at a realized price of $15.85 in 2015 versus losing 10 cents an ounce in 2004 when the market price of silver was $6.67.

Pan American Estimated Break Even:

2004 = $6.77

2015 Ytd = $16.82

Now, if the price of oil continues to fall, the primary silver mining industry could see additional declines in their overall cost to produce the metal.  That being said, I don’t see a huge drop in overall costs for the primary mining industry going forward.  This is due to generally higher inflation and falling yields.  It just cost a lot more today to produce silver than it did a decade ago… even with the same oil price.

While it’s true that Pan American Silver is only one company, the overall cost structure is about the same for the entire industry.  Thus, a lower oil price will not translate into the same corresponding silver market price we had in 2004.

The silver market and industry are experiencing serious changes, and it’s only a matter of time before investors realize it is one of the most undervalued assets in the world.

Silver Commodity Pricing vs A Store Of Value Asset

The one important factor investors need to understand about silver is the difference between “Commodity Pricing” and “Store Of Value Asset.”  Currently, silver and gold are being valued as a commodity.  This is based upon cost of production including supply and demand forces.  If the industry cost to produce gold was $500, the current market price would be much lower.

However, the cost to mine gold is close to its market price.  This is the same for silver.  We can see this in the Pan American Silver break-even price.  Of course, supply and demand play a part, but these forces are artificially manipulated due to the massive siphoning of investors funds into financial paper products (some call them assets… they are not) over the past several decades.

Because the current price to produce silver for the primary mining industry is close the current market price, investors do not understand why precious metal analysts continue to say that silver is severely undervalued.

IMPORTANT FACTOR:  Silver is not undervalued due to its present primary silver mining production cost, but rather due to its misunderstood store of value principles compared to most financial paper assets under management.

As the world’s Great Financial Ponzi Scheme disintegrates under the weight of collapsing U.S. and global oil production, investors will move into hard assets such as gold and silver to protect wealth.  We are already witnessing the beginning stages of this.

Investors have kept their money in bank accounts to earn interest.  However, as interest rates have fallen to zero and soon negative, there is no motivation for investors to keep funds in these accounts.  Matter-a-fact, the notion that gold and silver don’t earn a yield may no longer be a concern to the wealthy who just want to protect their wealth from the possibility of bank bail-ins or etc.

In addition, we are seeing more and more companies reduce or totally remove their stock dividend payouts.  Investors who may have been worried about stock market valuations, have kept the shares because they continue to receive dividend payouts.  What happens when the majority of stock dividends totally evaporate?

The world is entering into a terminal phase in which it’s unprepared.  There will be very few assets to protect wealth in the future.  Gold and silver happen to be two of the most safest and proven stores of value for over 2,000 years.

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32 Comments on "IMPORTANT SILVER KEY FACTORS: 3 Must See Charts"

  1. Interesting stuff but in the short term, oil will be about 10 dollars lower which would result into another big loss for silver and gold.

    • RD,

      It may, and it may not. However, I am not concerned about the short term price movement of gold and silver, rather the destruction of the U.S. and global oil industry due to low oil prices.

      This is how PEAK OIL occurs.

      steve

      • a guy from Ukraine | December 14, 2015 at 4:22 am |

        Most probably, silver will follow oil in the short term. Anyone with half a brain can figure it out that the dramatic slump in oil prices bears little relation to the fundamentials of the “recovering” economy. Geopolitics explain it all. While trying to subdue the unruly russian bear the powers that be are sacrifying the US oil industry. While if does affect Russian economy very painfully, the payback is going to be a bitch for the whole world. Feels like being on board a freight train with no breaks steaming towards a mountain.

  2. Very well presented, Thx ! Keep up the great work !

  3. Steve, the chief reason companies are reducing or removing stock dividend payouts, is that for the most part, these payments were financed with debt by way of floating junk bonds. When these type of bonds were in great demand for yield starved investors.

    Now the junk bond market is in dire straights, as evidenced by HYG (the high risk junk bond index) and those entities (hedge funds, pensions, insurance companies) that gorged themselves upon this debt in search of yield.

    This same thing is now beginning to happen across asset classes, including mining companies. The recent era of cheap credit has now ended. The long awaited credit reset is here.

    • Outlookingin,

      Agreed. Either way, dividend payouts will become extinct not only due to the silly practice of borrowing currency to buy back shares or pay out dividends, but due to PEAK OIL and the FALLING EROI – Energy Returned On Invested.

      People need to start waking up to the fact that an EARNED INTEREST on a bank account or YIELD from a Stock or Bond can only take place when the world has a CHEAP GROWING ENERGY SUPPLY. When this is not the case, we see lots of INSANE practices of borrowing money to continue BUSINESS AS USUAL.

      GOD HATH A SENSE OF HUMOR….

      steve

  4. manipulation of gold and silver markets by derivatives has caused mining companies to operate at a loss all these years. so, now we see these companies going tits up. Planning/manipulation economy is never good. USSR had this kind of economy and it collapsed.

  5. Steve,
    I check daily to your site for updates and don’t wait for the email to tell me.
    But where else can one go to get honest no hyped straight truth?
    Where do you go? What do you read?
    Thank you for being such a breath of fresh air in a polluted environment!

  6. Steve,

    Thanks for another interesting, informative and insiteful article.

    I totally agree that “Silver is not undervalued due to its present primary silver mining production cost, but rather due to its misunderstood store of value…”. The fact that the price of silver has so closely corresponded to the price of a barrel of oil is proof positive that silver is a store of “energy value”.
    But I also agree with RD that it is “Interesting stuff but in the short term, oil will be about 10 dollars lower which would result into another big loss for silver and gold.”

    These two lines of reasoning are not contradictory. The fact of the matter is that silver is still treated as just another commodity. The cost of silver production and the likely market price will decline with oil prices as the world economy descend it to the quagmire of deflation. If oil drops to $25 per barrel, silver could easily hit $10 per ounce.

    At some point in this downward spiral, the light bulb will go off and the world will remember that silver is REAL MONEY and that fiat currencies are just worthless paper.

    I believe that day of reckoning is fast approaching.

    Buy for cash and stash.

    SteveW

    • THAT WAS THE BEST ADVICE ONE CAN GET AT THIS TIME..” BUY FOR CASH AND STASH…” I hear jokers all day predict this…Get ready for that… But the crash is coming…Paper will be worthless…Let the Gold and Silver prices fall…Better deals for me….100 OZ BULLION Bars of Silver..One PER MONTH….Great for Bullion buyers like the Mints…Great in trade for a higher currency or even in trade for now over priced rounds from the Mints at lower prices for those over priced rounds…MORE BANG for the BUCK TOO…..As an aside…I would be buying AMMO, Stock pile Survival food and any other commodity that would be good barter. Also secure a real good water source. Example: I have a domestic well…runs on electricity for the pump…..Added a hand crank pump under ground for rock solid back up of water supply…..It is very close now…The crash that is coming…God bless you all…GOOD LUCK.

    • Ten dollars per ounce , hmmmm? I’d like to see anybody at that point be able to find a coin shop or for that matter , private party , selling .
      Excuse me , hahahahahahahahahahahah !!!!!!!

  7. Sometime in the future lots of people are going to wonder why they ignored gold and silver back in 2015. Unfortunately most people keep ignoring simple facts and they hardly remember what happened 5, 10, or 20 years ago and they totally ignore history as a whole – that’s why they’re “shocked” everytime some depression hits the markets.

    These days I hear people saying buy stocks and paper pm’s while it’s physical g&s that is almost free of charge at the moment.

  8. Tom Schoenrock | December 11, 2015 at 5:40 pm |

    I have wondered why people hold their breath waiting for silver to spike. I would rather have the precious metals market to stay as low as long as possible so I can buy into it as much as possible. I don’t have a retirement to cash out and buy 10,000 oz to hold my breath to see if what we believe in our core is right. I know that in the end the fundamentals that Steve and all of the outside thinking smart money will be right. We all know that the market rigging can’t go on forever. My wife thinks I’m nuts but until then I will keep stacking!

  9. For those who think the low price of oil is an indicator that oil is plentiful and cheap, just watch all of the smaller producers get gobbled up by the majors who can wait out low prices. They will put those profits into their pockets when the price spikes again. And then remember this: a consolidating industry is a shrinking industry.

  10. A theory on a national radio show stated the petrodollar is being kept in place in exchange for Islam to be allowed to spread here in the west. If you think about it govt.’s are selling out their own peoples security to hold on to their wealth and positions of power.

    • One theory is that the elite , 1 % r’s , rulers of this world know that their money debt system is running out of its final life cycles , and it’s time to shift to another controlling method.
      It might be a form of way out thinking but there is just too much going on that reverts back to the center. All tied in together.

  11. Is your Silver Charts report a physical paper book (like hardcover it looks in the picture) or purely by online delivery?

    If it’s a physical book, what happens if/when you produce new charts you deem worthy of similar quality? Do you email them to customers who paid for the book, or you create a new book revision? (For that matter, have you produced any new charts worthy of such inclusion AFTER the book was printed?)

    If they are all online and no paper book, entire paragraph above becomes a moot point.

    • Theravaida,

      THE SILVER CHART REPORT comes as an electronic PDF format. When someone purchases the report, they receive a link to download the report.

      As you know, the charts are very colorful. There are 48 charts in the report and if I went with a nice glossy colored book, the cost would be more than double.

      All my future reports will continue to be sold in an electronic PDF format.

      steve

  12. What keeps all these companies mining if they lose so much money what am i missing here. tony

  13. We go to a deep crash.But nobody knows how this ends.First silver and gold will go down more.

    Where the direction goes i told some weeks ago.They have revealed that the european national banks have bought bonds in an not allowed amount without knowledge from Mr. Draghi.That will happen everywhere.

    The reporter who asked Mr. Draghi said he was very nervous.Similar things i heared about the USA.

    In an zero debt situation the poltical government will try to protect the FIAT-system as long as possible.
    You have to remember that this people all take benefit from this system.So why should they slaughter the cow who gives so much milk?

  14. In some countries they discuss already the unconditional basic income.In Finnland -.->800 euro.
    Only possible in smaller countries?

    The problem is the new printet money circulates only in the financial system and feeds the banksters.
    In a low debt phase and this bad market situation they have no interest to give credits and make instead of that inflation in stocks and house prices and art.

    I know it sounds like kommunism.But the money direct in the hands to six pack joe leads direct to inflation and consum.At the end this will not solve the problem.

    • I have been following the general annual income idea for years. I think it is a fantastic concept to distribute wealth, create inflation and promote economic growth. If done right you can slowly inflate away the depth without hurting the lower income classes or causing a financial meltdown. Plus, in these days of increasing automation and resulting unemployment a livable income for everyone is the only way to go in order to keep the world at peace. I hope the Finns do this one right and set an example for the rest of the world.

      What that would means in terms of EROI or for the precious metals I do not know. But I am willing to take a hit on my PM investments if it means with can transition to a system like that…

      • Joman,.

        I sure wish I could get a steady supply of whatever it is you and silverfreaky are smoking.

        Form each according to their ability, to each according to their needs. Worked so well for the Soviet Union.

        With our current Us government, the Lame Stream Media and having more takers then makers, we should be there in no time at all.

        Your every wish come true.

        AMEN!

        SteveW

        • Steve,

          This idea is not about communism at all. The free market will remain intact just as it is right now. It will probably function much better.

          I look at it from an engineering standpoint. Our economic system requires steady consumption of goods and services as well as an increasing money supply, i.e inflation. With increasing automation and an aging population the “natural” means of injecting money into the system, i.e. labor, is drying up, and the money already in existence is accumulating in a few spots. This is a problem and a General Annual Income fixes it by injecting money at the right place to feed that process. That is all. It has nothing to do with Socialist or Communist ideology.

          Maybe my view is too simplistic, but I tend to analyze the world around me on a systemic level. Humans pretty much do that with everything else. We methodically and with a cool head analyzes natural process and design very complex systems. Only views of our economic and monetary systems are frequently based on ideology which blinds us to viable solutions.

          • Joman,

            “The free market will remain intact just as it is right now

            Don’t you get it? Our government and the FED are destroying the free market system. It stopped functioning properly when they started the program of quantitative easing.

            If you are “giving” so much a month to even a part of the population you have to TAKE it from someone else. And YES that IS Socialism.

            So. unless you have a perpetual motion machine up your sleeve so that we can all sit back and not work, I think you need to reevaluate your proposition.

            Good Luck.

            SteveW

  15. The miners are high-grading. Its clear on their production reports.The easiest way to see this is to look at the production at each of a given company’s mines year-over-year. They have increased tons of ore processed at the higher-grade mines while decreasing tons processed at lower-grade mines. Or they just shut down the lower-grade mines. This is an industry-wide trend.
    Yet all they can produce is 7.4 oz./ton. After they consume the high-grade veins, that’s it for silver in the teens.

    • Erick,

      Assumptions are nice if they are true. However, as I stated in the article, HIGH-GRADING is not taking place on an industry wide basis. While there are many examples, let me give you just one.

      First Majestic is one of the larger primary silver producers. If any of the primary silver miners are going to high-grade, it would be First Majestic. However, the DATA PROVES OTHERWISE.

        Here is First Majestic’s Year Over Year Change Q1-Q3 2014 vs 2015

      2014 Q1-Q3 Production = 8,674,154 oz
      2014 Q1-Q3 Processed Ore = 1,929,883 mt
      2014 Q1-Q3 Average Yield = 4.5 oz/t

      2015 Q1-Q3 Production = 8,086,666 oz
      2015 Q1-Q3 Processed Ore = 1,969,279 mt
      2015 Q1-Q3 Average Yield = 4.1 oz/t

      So, Erick… here is just one example of a primary silver mining company that is NOT HIGH-GRADING. There are many more. As I stated in the article, several mines in some companies are high-grading… but not the entire industry.

      steve

      • I definitely don’t want to contradict your well-researched data. I’m using the word “high-grading” generically- if they shut down a low grade mine and increase production at another, future supply will depend on the enormous cost of reopening a low grade mine at a time when fuel costs will be much higher. This will require much higher silver prices. They haven’t put the capex required to discover new resources because, as Goldcorp’s CEO said about gold holds even more true for silver: there isn’t much to be discovered.
        Steve, your chart above says it all. The trend in ore grades will continue to plummet even as all the miners are already operating at a loss. I’m quite certain the miners will need $60 silver (in today’s dollars) in ten years just to break even, and over $100 in twenty years. I’d adjust those numbers up if fuel goes higher, which it will. Much higher.

  16. But when we assume 30% from 27000 tonnen yearly production comes from primär miner then we talk about 9000 tonnen.

    Steve should make investigations what happens with the basic miners.We talk most time about the primär miner.Even when the primär miner reduce 10 to 20% this is not so much.

    • silverfreaky,

      Yes, anyone with a fourth-grade education can do the math that primary silver mining production is only 30% of the total. However, I would like to remind that NOGGIN of yours that the silver market has suffered a 12+ year silver deficit. So, primary silver mining production of only 30% is important.

      Lastly, the base metal mining industry is in BIG TROUBLE. I have also stated that PEAK SILVER will take place in the base metal mining industry first. As the World GDP collapses due to Peak Oil and the implosion of debt, demand for base metals will drop like a rock.

      Which means silverfreaky, you are going to get your wish. By-product silver from base metal miners will fall precipitously going forward.

      So, when this happens… what are you going to complain about next?

      LOL… Steve

      • I think people under estimate the base metal thing. China (even with dodgy accounting) has built up mountains of copper, a lot of silver out of copper mines. If copper mining collapses’ be interesting with rising demand in silver what happens. (yes i am aware copper mining has collapsed to a degree but not systemically yet) just saying.

  17. I have got an idea for silverfreaky. How about the 18-20 moz in world historical supply that are still unaccounted for?

    SteveW

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