Silver Price to Rise as Top Miner’s Production Evaporates

One of the most insidious problems taking place in the gold and silver mining industry is the decline in falling yields.  Not many realize, when yields decline, production evaporates and disappears.  To offset the decline in metal yields, the mining companies have to add new mines and or increase the amount of processed ore.

If we take a look at the top 6 silver producers, we can see that the average yield declined 38% since 2005, from 13.0 oz/t (ounce/tonne) to 8.1 oz/t in 2012:

Top 6 Silver Companies Production & Average Yield 2005-2012B

The companies and individual primary silver mine included in the graph above were, Fresnillo, BHP Billiton Cannington, Pan American Silver, Polymetal, Hochshild & Hecla.  Furthermore, I only included primary silver mine production from these companies.

For example, both Fresnillo and Polymetal had higher annual silver production figures than are shown in the graph above.  This by-product silver came from their primary gold mines and was excluded from the calculations as it would have significantly lowered the average yield.

This next chart shows the inverse relationship between falling yields and increased processed ore:

Top 6 Silver Companies Production & Processed Ore 2005-2012B

In 2005, these companies processed 9.4 million tonnes of ore to produce 123 million ounces of silver.  However, by 2012 a total of 15.8 million tonnes of ore was processed, an increase of 67%, to supply 127 million oz of silver.

Pan American’s Dolores silver & gold open-pit mine was not included in the 2012 calculations due to its extremely low average ore grade of 42 g/t (grams/tonne).  Even though the Dolores mine added 2.6 million oz to Pan American’s total, it would have severely impacted the group’s 2012 annual yield by knocking it down from 8.1 oz/t to 6.4 oz/t.

Declining Silver Yields = Evaporated Production

If we take the top 6 silver production in 2005 at 123 million oz and figure a seven-year 38% decline in yield, we would have the following:

123 million oz (X) -38% yield = 47 million oz loss of production

So, if no new production was added by these 6 mining companies overall supply would have declined to 76 million in 2012.  To be able to increase production on top of declining yields, the silver miners have to either add new mines or ramp up their milling and processing of ore.

A perfect example of this took place at Fresnillo.  Here we can see that overall production at Fresnillo remained the same in 2012 as it was in 2005:

Fresnillo 2005_2012 Avg Yield POST

How was  Fresnillo able to keep its production at 33.4 million oz as its average yield declined from 15.2 oz/t in 2005 down to 9.2 oz/t in 2012?   This 40% decline in yield caused a huge reduction of 13.3 million oz in this seven-year time period.

To offset this large decline in yield, the company ramped up its milling capacity 26% at its Fresnillo mine and added production from its new Saucito mine.  In 2012, the Fresnillo mine accounted for 26.4 million oz of production while Saucito made up the difference by adding 7 million oz to the total.

Again, the figures in the chart above only came from Fresnillo’s two primary silver mines… Fresnillo and Saucito.  Fresnillo accounted for all the production until 2011 when Saucito ramped up production.

This is the big problem companies face as silver yields decline.  In the case above, Fresnillo PLC had to ramp up production at Fresnillo and had to bring on a new mine (Saucito) just to keep production the same as it was seven years ago.

Now we can see how costs rise as yields decline.  For instance, think of all the capital it took to bring Saucito from the exploration stage to commercial mine production.  Furthermore, the company had 875 contractors working at its Saucito mine in 2012 including all the additional mining equipment, materials and energy costs.

The Cost to Produce Silver will Rise as Yields Continue to Decline

The impact of falling yields shown in the Fresnillo example above is taking place in the whole mining industry.  Pan American Silver was producing silver at 7.4 oz/t in 2005, but by 2012 this had fallen to 5.1 oz/t (this is excluding the Dolores open-pit mine which would drop the average yield down to 2.9 oz/t). Furthermore, Hochschild’s average silver yield declined from 12.4 oz/t in 2005 to only 6.7 oz/t in 2012.  I could go on and on.

What we are witnessing here is the evaporation of high-grade silver production only to be replaced by a much more expensive low yielding supply.  This will only become more difficult each passing year.  As costs to mine silver continue to rise in the future, so will the price of silver.

Lastly, energy is the overwhelming factor contributing to the increased costs of mining silver as yields decline.  Thus, silver will become one of the best stores of value in the future because it functions as an excellent store of trade-able energy value.

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15 Comments on "Silver Price to Rise as Top Miner’s Production Evaporates"

  1. Good article as usiual Steve. The pressure on precious metals price, or as you put it “trade-able energy value”, is inexorably growing. Despite the CB’s of the world flooding the system with liquidity, which is now showing some quite obvious cracks.

    According to the Treasury Departments monthly TIC data (foreign capital flows) in April, foreign investors, offical and private, sold $54.5 billion of Treasurys. This is the biggest monthly sale of Treasurys by foreigners in the history of the data series. People holding US dollars or US dollar backed assets are becoming increasingly alarmed.

    The Fed/governmental fiscal and monetary policies are just not working. If anything, they are but buying time, which is running out fast. The ultimate end game being a devalued US dollar, which would relieve much of the pressure on the massive debt overhang, by inflating it away.

    This past Thursday, June 13, marked the 80th anniverasry of FDR’s confiscation of gold in 1933, declaring its ownership to be illegal. Gold at that time was $20.67 per ounce and everyone with gold had to turn it into the government for that price. In January of 1934 FDR revalued the price of gold to $35.00 per ounce.

    $35.00 minus $20.67 = An increase of $14.33 per ounce of gold.
    $14.33 divided by $20.67 = 0.6934 for a 70% increase in the dollar price of gold!
    Or a 70% devaluation of the dollar in gold terms.

    Could the powers that be, are saving this very course of action as a last ditch effort to get out from under? Talk of “tapering” or of “tightening” by the Fed will not happen. If they do, then the whole thing (economy) crashes, since QE is the only thing keeping the system afloat.

    I foresee a revaluation of the price of gold, since the paper dollars are coming home to roost and physical gold is leaving. Just as when Nixon closed the gold window, to stop the run on physical gold, the present set of circumstances will force a similar choice. Your thoughts?

    • OutLookingin… you bring up some interesting comments and questions. I believe a majority of U.S. GOVT gold has been leased and sold into the market. Now, some of this gold may have been acquired by the big bullion banks and they are waiting for the GREAT GOLD REVALUATION to make a killing. However, I believe the U.S. public gold is gone.

      I just put out a new post on Russia buying the majority of one of its own domestic gold miners production. Furthermore, U.S. based Newmont sold the majority of its gold abroad in 2012 with very bought by the entities here in the states.

      • Back in 1933 gold was 30% of all financial asset, now 1%.
        Will confiscation solve anything ? I don’t think so given the limited share it has in the financial structure.
        I would add the idea that gold will re-enter the system in the final end game.
        And again my question about who ownes the bulk of physical gold ? They will set the rules.

    • First of all i don’t understand why the primary silver miners in particular don’t defend themselves against the more than obvious Silver price suppression orchestrated by central planers, J.P. Morgan the ESF and other suspicious entities.

      Economics 101 teaches that supply falls with the price and vice versa increases with it, so how come the silver miners produce more silver with falling prices? To me that makes no sense, unless you accept to be a slave working for free.

      O.k. got it, they say that they have to quit business if they don’t increase their output as they have no other metal to mine in order to replace the losses of mining Silver. If this is the case , i really hope the price of Silver declines more and wipe them out as this is totally absurd, same as the suppression itself.

      Whatever they may argue, this is just not the way to go. All of them should have a fundamental interest in fair prices for the metal they mine. I mean 6.4 oz/t. Silver output considering today’s gasoline prices. What’s that? That makes about 134 bucks for mining, moving and processing a ton of ore. No wonder that such business is no longer profitable and their shares are at all time lows. I personally hope that they finally wake up and start to defend their own interests and with it those of the shareholders and even more those of the physical silver investors, otherwise i see black for the future for everyone of them.

      • One miner just announced they are shutting down production because of low silver prices. It’s a start.

  2. Another great read Steve. I love your work. I spoke with a friend of mine who is in the Canadian mining space and he told me financings for the junior miners in the 1st quarter was the lowest in 65 years. I don’t know when reality will hit the price of silver, but we can’t be far away. It is a small market. It is an energy intensive business. It’s also highly sought after for many industrial uses. At some pointer the miners will either stop or the price will have to convince them that their hard work has value far above current prices.

    One thing that does seem certain, miners must be dumping every ounce of silver on the market even at these prices. Why are they doing this? I state it this because the premium on Sprott Silver Trust is negative. If anyone anywhere in the world really needed silver, they could buy it from PSLV and take delivery at $21+ an ounce. No one is doing this, so the evidence suggests the world is, at least for now, awash in physical silver.

    Thoughts or comments?

    • Tas… yeah something else about the junior explorers. Even without capital drying up for the Juniors, peak oil would have hurt a good percentage of these small companies going forward.

      The problem with the silver miners like all miners.. they need cash flow. Now, if the silver miners had say 1-2 years worth of cash on their balance sheets so they could hold back production… now that would be a different story. However, these companies need every dollar they can get even though they may state a loss for the period.

      Things are going to get very interesting going forward.

      steve

  3. sprott asked miners to hold back some silver a year ago when price was in 26-30 range. well, that didn’t help.

    awash in silver? never.
    awash in copper/aluminum/zinc/industrial metals? yes.

    china’s strategic stock bureau started stockpile aluminun etc., but does it even have any silver stock left?

  4. you wrote an article about chile’s silver byproduct in its copper mines. do you have any update on that?

    • Judejin… by the way, just wanted to say thanks for the info you put in your comments. I noticed that the Shanghai Silver Stocks fell again on Friday.

      As it pertains to Chile’s copper by-product silver production, I need to take another look. I do know that Chile has some serious issues on updating its electric generating capacity in the future. Even though Chile has updated its copper and silver reserves, it may not have the energy in the future to extract this metal.

      steve

  5. Another great article!

    I’m struck by the fact that silver production here seems to have been in what appears to be an unsustainable bubble from 2009-2011, and I wonder aloud what effect that extra production may have had on the spot price (without getting into any other market shenanigans). I also noticed that total ore processed leveled off last year and that has me thinking that the miners realize that it isn’t practical or possible to process more. If that’s true the downside of the production curve will be much steeper than the upside.

    It appears that these 6 miners account for roughly 16% of total annual silver production (I just grabbed the 2012 production number from The Silver Institute – 787Moz.) How do the ore yields of these larger players compare with smaller miners? Are new mines that are coming online producing with lower yields than the historical averages of these big miners? I generally assume that to be the reason that new mines haven’t been developed earlier (though there could be many issues affecting production), and wonder if that’s true. Also, is there any production data from countries such as Russia or China?

    Thanks for your insights.

  6. i did a comparison of last summer’s bottoming action with the current one. it is amazingling similar.

    so gold/silver did bottom and this coming week will be up week and put in a important reversal signal.

    get long, extremely long if you can.

    best wishes!

  7. Hi SRSrocco,
    Would you advocate investing in ANY of the silver miners ahead of physical bullion? What about a streaming company such as SLW or Sandstorm? Would appreciate your thoughts.

    • John… sorry for not responding sooner… been out all day. However, you bring up a question that is in the minds of most investors. This is my ORDER OF INVESTING:

      1) If possible have ones home PAID IN FULL

      2) have at least 2-6 months of food and supplies (firearms are good to have as well)

      3) own gold and silver bullion…

      4) if you have extra money… THEN and ONLY THEN should you invest in the miners.

      This is how I see the correct order of investing in oneself and family. Once the first 3 levels are accomplished, then it is wise to consider buying some of the miners.

      Right now, the precious metal mining sentiment is in the toilet. However, this will change. If you haven’t read this post:

      https://srsroccoreport.com/gold-bug-hedge-funds-collectively-report-over-183mm-in-new-call-option-positions-on-miners/gold-bug-hedge-funds-collectively-report-over-183mm-in-new-call-option-positions-on-miners/

      I suggest you do.. as some of the top Gold Hedge Fund Managers have bought a great deal of Gold Junior Options.

      Silver Wheaton is a good bet as it does not have the downside of price because it receives most of its silver below $4-5 a ounce. Of course, SLW forks out capital to get that great price, but they don’t have all the problems associated with running a mining company.

      Lastly, I believe if you are going to purchase a mining company… BUY THOSE WITH THE BEST MARGINS. I will be putting out this data in my membership portion of the site when it finally goes live.

      We must remember, companies with the highest margins make the most profits when the price of gold or silver is high, and suffer the least when the metals are beat down.

      steve

  8. Just a few facts on the FDR GOLD confiscation. According to the executive order, FDR only wanted GOLD BULLION/bars & CERTIFICATES. Not coins………….A matter of fact most coins were deemed collectible on top of the $100 allowance to each person in gold bullion.

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