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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 (+1,094% 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 US 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.
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, we’ve been buying some of these stocks in anticipation of
what should be a major upleg in the coming months.
While some of our positions already have excellent
unrealized gains, there should still be a lot of room to run. Join us at
Zeal, where we have a track record that boasts average annualized realized
gains of +34.8% (634 stock trades) since 2001. To find out which stocks we
are trading, subscribe
today! And to get the full list of our favorites at your fingertips, buy your report
today.
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,
we’ve been buying some of these stocks in anticipation of what should
be a major upleg in the coming months.
While some of our positions already have
excellent unrealized gains, there should still be a lot of room to run. Join
us at Zeal, where we have a track record that boasts average annualized
realized gains of +34.8% (634 stock trades) since 2001. To find out which
stocks we are trading, subscribe
today! And to get the full list of our favorites at your fingertips, buy your report today!
Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the
volume of feedback I may not have time to respond personally, but I will read
all messages. Thanks!
Copyright 2000 - 2012 Zeal Research (www.ZealLLC.com
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