Each year, the U.S. Geological Survey publishes a report on world mine production and reserves. The USGS has just released its 2019 report in March. As precious metals investors, we are especially interested in the silver segment of this report, which gives us extremely valuable information on the supply side of the silver market.
The price of silver has staged a nice comeback in December 2018, possibly due the correction in the stock market. Equity investors have decreased their exposure to the stock market and have moved into bonds and precious metals. Another reason could be that the demand for base metals took a hit because of a possible recession (e.g., lower GDP, flattening yield curve, declining leading indicators). This decrease in demand for base metals leads to a decrease in production of silver as a by-product of base metal mining. 34% of silver production comes as a by-product of zinc and lead mine supply, while 22% comes as a by-product of copper production. Thus, 56% of global silver production is a result of copper, zinc and lead production. The final reason can be found in decreasing primary silver supply, which is a known issue in the silver mining space that I will discuss here.
The 2019 USGS report shows that silver production and silver reserves are trending upwards (see charts below from USGS). Mexico and Peru are still the two largest silver producers in the world and Peru is the leader in silver reserves, but Poland has been adding more silver reserves to compete with Peru. It looked like 2014 was the year of peak silver production, but in 2018, global silver production managed to increase again. When we extrapolate the charts, we can estimate that silver will be depleted in about 19 years, if not sooner, as the average mine life of a silver mine is currently only 10 years. But again, it surprises me that silver production and silver reserves both managed to go up in 2018.
Let's take a closer look at the 3 largest silver producers: Peru, Mexico and China.
During 2017, we saw that Peru's silver reserves have been declining, primarily due to a decline in reserves at one of their largest producers, Minera Yanacocha S.R.L., but the country managed to increase silver reserves in 2018 once again to an impressive 110000 tonnes. On the production side, Peru has been doing well since 2013, with base metal mine production rising 30% from 2013 to 2017 (see chart below from Statista).
However, the Peruvian Ministry of Energy and Mines’ latest statistical report reveals that, in October 2018, the country’s gold output fell by 6.3% when compared to October 2017. Copper production fell by 3.8% in October when compared to the previous year, silver dropped by 9.1%, zinc by 7.9% and lead by 8.4%. So, we could see a trend change here.
Mexico's silver mining production was also down 2.5% from January-October 2018 compared to the same period last year. The chart below from Trading Economics shows how Mexico's overall mining production improved in 2018, although growth is still negative. Silver reserves were unchanged at 37000 tonnes.
The third-largest producer of silver is China, and we have seen a nice comeback in 2018. Silver production in China comes primarily as a by-product of lead and zinc mining (95%), so we need to take a closer look at base metal mining. Mining production in China increased 2.3% in November 2018 over the same month in the previous year (see chart below from Trading Economics). So, it is likely that silver production will be growing in China. Silver reserves were 41000 tonnes, which increased from a year earlier (39000 tonnes in 2017).
Base metal mining has been doing very well, and a lot of silver is coming from there as a by-product. Nevertheless, it is a fact that silver reserves and grades are coming down, and we will be facing a future where silver production will decrease as well.
To illustrate this, a graph of the silver reserves of several silver miners is shown below, where you can see that the trend is declining. Data is taken from Marcello Ruberti's research report, "Are the World-Leading Primary Silver Mines Exhausting?" The consequence of this is that mines will start consolidating their businesses, for example, through mergers like the recent Barrick-Randgold and Newmont Mining-Goldcorp ones. They won't even bother increasing their exploration budgets. Since the peak of 2011, exploration budgets in precious metals have only come down and major gold/silver discoveries have come down as well.
Even more worrisome is that the ore grades are stuck in a multi-decade downtrend. I say worrisome because ore grades are the one thing that cannot rise.
The conclusion is that primary silver mines face a deteriorating trend in their production profile and the amount of capital being put in exploration is almost non-existent, so more and more silver will need to come in as a by-product from base metal mining. Base metal mining has seen a nice uptrend in 2018, but a recession could put a dent on that (and also on the silver supply). There is only one real cure to lower silver production, and that is higher silver prices. Nevertheless, the current trend is still pointing to rising silver reserves and silver production, but this could reverse any time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.