By Luke Burgess
You probably already know that every commodity fortune ever made was created by an imbalance of supply and demand. When the demand for a certain commodity is high and supplies are low, prices skyrocket. And investors holding the commodity in question get rich.
This is exactly what has happened in the case of many natural resources just in the past decade alone:
- Crude oil shot up 620% in 6 years
- Gold is now up over 380% since 2001
- Natural gas soared more than 550% in 4 years
- Uranium spiked 830% in 4 years
- Copper increased nearly 530% in 7 years
- Palladium more than tripled in 3 years
- Platinum prices grew 430% in 6 years
As demand grew and supplies dwindled, the prices for these natural resources ballooned in value. But none of these commodities experienced the supply/demand crisis that silver is currently facing.
Take a moment to chew on this...
According to GFMS Limited — the world's leading authority on precious metals markets — the total amount of above-ground silver supplies dropped by 86% last year.
This left the world with just about 20 million ounces of silver reserves. At the same time, the world demands about 2.5 million ounces of silver per day. That means the entire global supply of above-ground silver could be completely wiped out in just eight days!
Fortunately, silver production companies have been able to keep up with demand — but just barely...
Last year, silver miners were only able to increase production by just over 3%. And for the past 10 years, there has been no surplus in silver supplies.
This extremely tight supply/demand dynamic of the silver market has been terrific for investors that own the physical metal. Silver prices have increased nearly 350% since 2002.
But shareholders of the companies that pull the silver out of the ground have done even better. Here are three recent examples.
Silver stocks beating the markets
Silver Wheaton Corp. (NYSE: SLW)
Silver Wheaton is the largest precious metals streaming company in the world. The company has thirteen long-term silver purchase agreements and two long-term precious metal purchase agreements.
These agreements allow the company to purchase all or a portion of the silver production at a low fixed cost from high-quality mines located in Mexico, the United States, Greece, Sweden, Peru, Chile, Argentina, and Portugal.
For 2010, Silver Wheaton expects to produce 22.2 million ounces of silver and 20,000 ounces of gold, for a total production of 23.5 million ounces of silver-equivalent.
By 2013, annual production is expected to increase significantly to 38 million ounces of silver and 59,000 ounces of gold, for total production of over 40 million silver-equivalent ounces.
Pan American Silver Corp. (NASDAQ: PAAS)
Pan American Silver is the second largest primary silver producer in the world. The company owns and operates eight silver mines and four development projects in Peru, Mexico, Bolivia, and Argentina.
Pan American's growth strategy is based on the continued increase of low cost silver production through the efficient operation and expansion of its existing mines, an aggressive exploration program, and the acquisition and development of new silver-rich deposits.
The company has increased silver production by 105% since 2004. Last year, the company produced 23 million ounces of silver from its Latin American assets. For 2010, the company anticipates increasing production slightly to 23.4 million ounces.
According to the latest estimates, Pan American Silver has 234 million ounces of silver reserves and 940 million ounce of resources in the measured, indicated, and inferred category.
The company also mineral reserves of 679,000 ounces of gold, 717,000 tonnes of zinc, 302,000 tonnes of lead, and 67,000 tonnes of copper.
Fresnillo plc (FNLPF.PK)
Fresnillo plc is the third largest silver producer in the world and Mexico's second largest gold producer. The company operates four producing mines and one development project, all located in Mexico. In total, Fresnillo has mining concessions covering approximately 1.75 million hectares across the country.
One of the main drivers of Frenillo's growth is the investment in exploration and the development of projects and prospects with the potential to become low-cost operating mines. The company's disciplined approach to investment includes the evaluation of economic ore grades, maximum extraction costs, and an established reserve base.
In 2009, Fresnillo increased silver production by 9% to a record 38 million ounces. The company also increased gold production by 5% to 277,000 ounces.
The company plans to bring one new mine into production each year until 2014. As a result, Fresnillo anticipates increasing silver production by another 50% to over 56 million ounces in the next four years.