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In order to satiate the world’s growing hunger for silver, a lot of
pressure has been placed on its supply chain. And with total annual supply
recently exceeding 31k metric tons (1.0b ounces) for the first time ever,
the suppliers of this white metal have so far made a valiant effort to meet
demand.
Silver demand is on the rise for a variety of reasons, in large part due
to big increases in investment demand. And this has naturally created a structural
imbalance that has spawned a major secular bull market. A bull in silver of
course translates to higher prices. And silver’s much higher prices
have provided ample incentive for the major sources of supply (recycling and
mining) to boost output.
On the recycling front, silver’s higher price (+1094%
from its 2001 low to its 2011 high) has prompted more folks to recover silver
scrap from devices that would normally end up in junk yards. And as a result,
we’ve seen a 30% increase in scrap supply over the last 10 years (per
the latest figures from research and consultancy powerhouse GFMS).
The biggest supply increase by volume though is from mine production.
Mine production has always been by far silver’s largest supply source,
in 2011 accounting for about 70%. And as you can see in the chart below, the
miners have really stepped up their efforts in wresting this metal from the
ground.
Represented by the blue bars is global mined silver production (in metric
tons) over the last ten full years per figures compiled by the U.S.
Geological Survey. And this USGS data is superimposed (in red) by the annual
average daily price of silver.
The first thing of note is that in 2002, the first full year of
silver’s bull, mine production came in at an all-time high. And
provocatively this 20kt tally capped off an eight-year run that saw
production rise by an impressive 43.9%. This increase was quite
unusual considering it occurred in the late stages of silver’s
preceding secular bear.
Though muted amidst this anomalous production increase, the adverse
effects of the bear did eventually come to the surface. And after years of
neglect on the capex front, the mining
industry’s deteriorating infrastructure just couldn’t support a
continued rise in production. Even though the price of silver started
mounting a charge, output couldn’t respond.
Silver mine production was actually down a hefty 6.0% in 2003, and it
wouldn’t exceed 2002’s output until four years later. But after
2006’s new all-time high, mine production was off to the races.
Silver’s huge price increase had spawned major development in the mining
industry. And through 2011 the miners have responded by delivering six
consecutive years of production growth.
Incredibly since 2003’s low, silver mine production has increased
by a massive 26.6%. 2011’s estimated output of 23.8kt is of course a
new all-time high. And by raw volume it represents a 5.0kt (161m ounces)
increase over 2003. The miners have so far been quite successful in their
quest to meet growing demand and capitalize on silver’s higher prices.
These favorable conditions have of course led to skyrocketing margins for
silver miners. So naturally for investors looking to leverage this metal, it
serves quite well to own the mining stocks that bring it to market. But is
picking silver stocks as simple as pulling from any of the miners contributing
to this overall production total? Unfortunately, no.
Digging deeper into these production figures, we find that only a small
segment of silver’s mine production actually offers direct leverage to
the metal. And we need look no farther than silver’s geology to explain
this phenomenon.
Interestingly the majority of economic mineral deposits that hold silver
tend to be polymetallic in nature. Meaning not only
does the ore contain silver, but strong mineralization of base metals and/or
gold. And more often than not, when measured by revenue silver is not the
primary metal. If a mine for example yields a large volume of silver, yet its
lead output brings in more revenue, it is considered a primary lead mine. In
this case silver would be a lead-mining byproduct.
Amazingly per GFMS only 29% of silver mine production in 2011
came from primary silver mines. This means that nearly 17kt (540m
ounces) of silver came to market as a byproduct of primary
lead/zinc, gold, or copper mines. And to further demonstrate silver’s
byproduct nature, GFMS reports that six of the world’s top-ten largest
silver producers are actually not primary silver companies.
So for investors looking to own stocks that give them the best exposure
to silver, these 6 biggies (KGHM Polska, BHP
Billiton, Goldcorp, Volcan, Polymetal,
and Buenaventura) and other byproduct silver producers are not going to do
the job. And unfortunately it’s not as easy as excluding the 71% to
find the primary silver companies.
In shifting focus to the 29%, we need to further filter the pool based on
the ownership of the mines. Just because a mine operates as a primary silver mine, it doesn’t mean it is owned
by a company that operates as a primary silver company. Byproduct
doesn’t have to be at a mine level, it can be at a company level.
Take for example BHP Billiton. BHP actually owns the world’s
largest primary silver mine. Its Cannington mine in
Australia is responsible for a whopping 15% of the silver produced from the
world’s primary silver mines. Yet since silver is only a very small
piece of the revenue pie for this global commodities conglomerate, BHP
wouldn’t make for a legitimate silver-stock play. Though Cannington is a primary silver mine, it is considered a
byproduct of BHP’s greater portfolio.
Including Cannington, three of the
world’s four largest primary silver mines are owned by companies in
which silver is not their primary asset (the other two being the Dukat and Uchucchacua mines
owned by gold companies Polymetal and
Buenaventura). By my estimate about one-quarter of the world’s primary
silver mines are actually owned by non-primary silver companies, which means
that only about 22% of the world’s silver production is actually in
play for investors looking to leverage the metal via the miners.
The filtration doesn’t stop there though, as we must consider the investability of this 22%. And to no surprise not all the
companies that own these mines sport stock listings that serve the majority
of stock investors. Some of these companies are private, and some only list
on exchanges that aren’t easily accessible. And this takes away a big
chunk of the 22%.
At Zeal our latest round of silver-stock research shows that only about
3.3kt (106m ounces) of annual production are in play via stocks that list in
the US and Canada, the international hubs for resource-stock investing. And
provocatively this translates to only 14% of total global silver mine
production being available to stock investors looking to leverage the metal
with primary silver stocks.
Another interesting note is the 29% haven’t actually been holding
up their end of the bargain on the growth front. GFMS reports a slight decline
in primary silver mine production in 2011 (mainly due to ore-grade issues).
This means that the entirety of silver’s production growth last year
was through increased volume from primary base-metals and gold mines.
Lastly on the inner workings of this production growth curve is
geographical inputs. And there are some fascinating trends in regards to
where in the world the silver is coming from. At the top of the list is the
bellwether trio of Mexico (#1), Peru (#2), and China (#3). These three silver
powerhouses were at the top of the rankings in the beginning of this bull,
and they still hold the throne today.
And not only do they still hold the throne, Mexico, Peru, and China have
each seen huge increases in production over the last decade. Back in 2002
they were collectively responsible for about 40% of the world’s mined
silver. But thanks to a combined 58% growth in annual production, these
countries now account for a whopping 53% of total mined supply.
Also in the mix with big growth over the course of silver’s bull
are Russia and Bolivia. These two countries are now solid top-ten producers
that collectively account for nearly 12% of the total mined supply.
On the flip side we have major producers Australia, the US, and Canada
bucking the growth trend. Back in 2002 these three countries combined to account
for 24% of the total mined silver supply. Yet thanks to a combined decline in
output of 1.1kt to 2011, Australia, the US, and Canada are
now only responsible for 16% of the mined supply. This major decrease in
output is pitiful during a period when global mine production is soaring
higher.
As for the geographical breakdown of the primary silver stocks, we find a
mixed bag based on geopolitics and geology. At the top there isn’t much
deviation, with Mexico host to by far the most publicly-traded primary silver
miners. We also find a healthy amount of these miners in Peru and in the US.
But as a result of tough barriers to entry and/or the fact that a
country’s output is dominated by a single or small group of mines,
there isn’t as much play for investors elsewhere in the world.
Overall mine production has put its pedal to the metal over the course of
silver’s bull market. Year after year the miners have delivered
all-time record production. And we can expect a continuation of this trend in
2012.
And so long as silver’s bull endures, the miners will have a major
incentive to continue to grow their output, which will continue to make the
primary silver stocks appealing to investors. And though the pool of these
stocks is small, they are the best vehicles to leverage this precious metal.
The bottom line is global silver mine production has surged to record
heights over the course of silver’s secular bull. And the impetus for
this growth is the dangling carrot of high margins for the miners. This has
made investing in silver-mining stocks quite attractive over the last decade.
But as discovered when digging deeper into silver’s production
profile, only a small portion of total output is attributable to primary silver
stocks. And this definitely limits the choices for investors looking to
maximize their leverage to the metal. Thankfully there are still plenty of
quality silver stocks that ought to thrive as silver’s bull continues
to charge forward.
Scott Wright
November 30, 2012
At Zeal our research has zeroed us in on an
elite group of mining stocks that consider silver their primary play. We
recently published a detailed fundamental report profiling our dozen
favorites. And in our acclaimed weekly and monthly newsletters,
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While some of our positions already have
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Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the
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