Silver Production Falls by 70%

This headline should grab anyone’s attention, especially those interested in the silver market. Before going forward, let me explain that fully 70% of silver is produced as a result of mining other metals, mostly base metals. Copper mining, for example, is responsible for 28% of the silver mined in 2007. Lead/Zinc mining yielded 32% of the silver mined in 2007. Finally, gold mining brought about 10% of the silver mined, again in 2007. All data is from GFMS World Silver Survey 2008, page 31.

The point is, with the current low prices for all of the base metals, many companies that produce them are slowing, closing, or stopping projects. The result is obvious: the overall production of silver from base metal and even gold mining is going to be reduced because of current economic conditions. Will this bring down silver production by the 70% mentioned in my “yellow journalism” headline? Of course not, but my headline builds awareness that a slowdown in global mining activity is not necessarily going to flood the market with silver; quite the contrary, slowing mining activity slows the amount of silver produced.

As far as primary silver producers are concerned, some will be unprofitable at these levels, and all will be looking to find as much high-grade ore as possible, to stay as close to profitable as can be expected. Some marginal projects will be shelved and some projects may be forced to close if prices remain in the doldrums.

The overall mining equities have been completely devastated, as all of us in this sector know, and the prices of these stocks have dropped to levels that few can believe. The earnings of these companies will of course be falling as well, due to the fall in their respective products.

As of the week ending October 24, 2008, the year-to-date results are as follows:

Copper   -44%

Zinc       -54%

Lead      -55%

Silver     -37%

Gold      -12%

XAU       -59%

HUI       -59%

Across the board, both the metals and mining shares have been blasted. The base metals fare worse than both silver and gold, and the basket of precious metals stocks (as per the XAU and HUI) are doing worse than any metal cited. Again, we find silver at this point in time being not as precious as gold, but more precious than its base metal cousins.

There is some encouragement, as the past few days in the metals markets have shown some strength as interest rates were cut on the U.S. dollar. The gold/silver ratio has backed off from being over 85 recently to 77. Perhaps the worst is over, perhaps not.

I could not help looking further into the GFMS Survey since pulling it off the shelf for this week’s article, and found the following.

For those who are historically inclined, the GFMS World Silver Survey 2008, page 58, discusses the main uses of silver. Under the classification of coins we find:

Historically, silver was more widely used in coinage than gold, being in greater supply and of less value, thus being practical for everyday payments.  Most nations were on a silver standard until the late 19th century with silver coin forming the main circulating currency.  But after the gold rushes, the silver standard increasingly gave way to gold. Silver was gradually phased out of regular coinage...

Yes, silver coinage stopped in 1965, the U.S. closed the gold window in 1971, and here we are today looking at a financial system that has certainly lost its way.

Comments

[enviro111:]

David,
Rather than produce an article with an unsubstantiated claim (apparently purposely false), why don't you spend the time actually researching the situation and make your best estimate of how much silver production is likely to decline as a result of base metal production drops?

Financially strong miners will close down the marginal mines. However, weak miner might not. The fixed costs may be huge and the variable costs might be small. Under those conditions the miner may 'have' to produce the commodity at or above cost for some time just to get the cash flow to pay fixed expenses. This kind of scenario makes it hard to make an accurate estimate of how much production will be shut in.

2008 Oct 31 10:11 AM

[BxCapricorn:]

I agree with the previous comment. I've read your running commentary over the past year, and you have consistently trumpeted the coming silver price explosion, both in print and on radio shows, based on demand outpacing supply and your own historical "experience" with the metal. This summer you spoke of a dip, with a subsequent spike in the price in the Fall, and here we are again. This past week we saw silver dip below $9. I know, I know, there's a conspiracy in Comex to hold down the price and a great reckoning of physical vs. paper price is soon upon us. Although I'm a hedge investor in precious metals, specifically silver, I'm not believing Jim Embry's theory that December will host a Comex meltdown, as forced delivery finds supply unable to meet demand. I'm also unable to find a fall-off in silver production, as silver from mines currently in phases of expansion and development, continue unabated. The reason you do not supply the information is because it does not serve your cause. A simple look at Couer D'Alene (CDE) Q3 2008 production numbers, put out Friday 10/30/08, and Silverwheaton (SLW) Q3 numbers coming out Monday 11/3/08, will show how ridiculous your headline really is. For those wishing to get some kind of baseline for silver....

www.silverstandard.com...

Silver would be lucky to break $13 over the course of the next six months, due to deflation. Once reflation leads to inflation as we enter the summer, supply issues will not matter, silver and other commodities will rise, marginally.

2008 Nov 02 09:00 AM

[BxCapricorn:]

Since I follow the silver mines anyway, I think I'll develop a spreadsheet on the following mines with their previous and soon-to-be reported production numbers, to put this "70% reduction" issue to rest.

The mines I use will be the largest:

Stratoni, Pensaquito, Luismin, Yauliyacu, Zinkgruvan, Mineral Park, La Negra, Campo Morado, San Cristobal, Rochestor, Kensington, Cerro Bayo, Martha, Endeavor, Broken Hill, Bolshoi Kalimansur, KGHM Plska Miedz, Pascua Lama, Mt. Isa, Navidad, Grasberg, Toromocho, Las Mintas, Dukat, Ocampo, Pittanilla, Toquepala, Que River, Corani, Cannington, Kholodninskoe, Olympic Dam, Cerro Colorado, Metates,
Hackett River, MacArthur River, Cananea, Xiacun, San Dimas, Montanore, Rock Creek, and East Region Operations

Maybe I'll post it when the numbers come in. It'll be right next to my "Investment Banks are Sufficiently Capitalized" 2008, Peak Oil $200/barrel, Chinese Stock Market, Gold $2000/Oz, Emerging Market Bonanza, and Men-on-Mars 2012 files.

2008 Nov 02 09:32 AM

[BxCapricorn:]

I don't want to monopolize the discussion, but I do want to add that Dr. Marc Faber is all over the media, predicting his usual financial collapse. You know the one, where everyone somehow continues to have enough inflated currency to buy precious metals at elevated prices. If I linked you to 2002, and you "deja vu'ed" the last time he did so.....

www.financialsense.com...

you may better understand that these guys "talk their book" over and over until one day they are right.

2008 Nov 02 11:42 AM

[BxCapricorn:]

Still no other comments on the 70% reduction in volumes? All you need to do is read the headlines of the silver companies as they report their quarterlies.

www.goldreview.com/sil.../

The silver companies continue to report that their volumes are at "record" levels this quarter (Couer D'Alene, First Majestic, International Minerals, Fortuna, Silver Standard, and on and on and on....).

As always, the "Silver Surfers" like Morgan continue to construct a world based on conspiracy, and conjecture, fed with fear.

2008 Nov 05 11:45 PM

[BxCapricorn:]

Hey...it's March 15th, and silver is back to under $13/ounce....what's going on???

www.kitcosilver.com/ch...

Damn those conspiring central banks (like they have nothing better to do than manipulate PM prices while the world's economies are deflating back to 1995 levels)!!!

Mar 15 07:13 PM

[BxCapricorn:]

Christ, we're still stuck at $13 and deflation is killing corn futures!

BTW, for those just joining us, the banks are LONG silver and gold right now, and have been since December, so they must have called off the "conspiracy", but it just doesn't seem to matter! It turns out that when people do not have money, they sell their precious metals for....FOOD! Imagine that! India, after hoarding silver and gold in the Winter, are now exporting these metals like mad. Not to be outdone, the PM cartel is now selling their book by claiming....

news.goldseek.com/GATA...

that "concentrated shorts" are suppressing the price of these metals. It just gets funnier all the time.

Mar 29 10:34 PM

[BxCapricorn:]

Banks are on death's door....again, and we're about to hit April with silver back under $13. Morgan, Wiegand, etc. are nothing more than shills for the Canadian mining industry. We are in a DEFLATION. Nothing will grow here. Nothing.

Mar 30 09:01 PM

[BxCapricorn:]

Almost May (April 20th), and silver is still under $13 ($12.20). Why would anyone believe these gold and silver pumpers? In David's case, it's literally the only thing he talks about, and yet he knows nothing about its movement. Silver is hurt in deflationary times, by both its industrial and inflation hedge applications.

Apr 20 09:51 PM