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INTRODUCTION
The
purpose of this essay is to pursue an analysis of the coming silver bull market,
specifically to get a feel for how long it is likely to last as well as how
mining entities will respond to a sustained increase in the price of silver,
say to the $30 to $50 per ounce range.
We
have all heard the projections for the coming silver prices, $50, $100, $200,
or higher. Some claim that silver will even reach parity with gold. I have
owned silver on and off nearly 30 years and have read most everything I can
get my hands on regarding
silver for the last 10 years. The bullish case for silver was well made
with Jim Blanchard and Franklin Sanders' "Silver Bonanza" in the
mid 1990's, and the case for silver has only grown much stronger since then.
This piece is treating the coming silver bull as inevitable, whether this
year, next year, or five years from now.
Now,
that being said, let us take a look at what is
likely to happen once this silver bull is underway. Not as far as price
projections for silver, but more so, for the length of time that the bull
will play out.
BASIC
PREMISES
1.Silver demand is currently at a higher level than
silver supply from mining or scrap sources and has been for the last 12
years. Several official silver organizations have put this needed amount
(deficit) at over 100 million ounces per year.
2.This excess demand or
"silver deficit" is being met by already existing above ground
inventories that are rapidly being expended. "Yesterday's Silver".
3.This above ground silver
supply used to meet the ongoing deficit is largely being uneconomically
dumped onto the market, meaning it is either changing hands or being expended
for less than the average cost of silver production.
4.At some point this
current above-ground silver supply will be inadequate and silver will then be
set free as a function of today's (tomorrow's) supply/demand fundamentals.
CURRENT
KNOWN RESERVES & RESOURCES
A
large part of the future silver equation becomes "How much underground
silver remains?" Are we running out of silver?
There
has been a recent survey put out through the U.S. Geological Survey,
"Mineral Commodity Summaries 2001". Let us look at their numbers
and try to determine exactly what they do mean and even more importantly,
what they do not mean.
You
may find the link at: www.nma.org/commodity%20stats%20.html
You
will need to follow the links to the silver references as other minerals are
also listed.
We
will focus primarily on 3 statistics produced by this survey. First, they
state that there were 17,900 tonnes of silver produced in year 2000. Second,
they state there are 280,000 tonnes of "Recoverable Reserves" as of
year 2000. Third, they portray a "Reserve Base" of 420,000 tonnes
as of year 2000.
The
first number, 17,900 tonnes of silver production is straightforward. There
are approximately 32,000
ounces per tonne so this is approximately 573 million
ounces of silver KNOWN by the U.S. Geological Survey to have been produced by
the U.S.
in year 2000. Is this a totally accurate number? Likely not, because
countries like China
are renown for not providing full and accurate
production numbers. Nevertheless, even though this is likely a somewhat low
figure, it will suffice for the purposes of this article.
Let's
look at the second category, "Recoverable Reserves" and explain
exactly what these 280,000 tonnes of underground silver mean. 280,000 tonnes
of silver is the equivalent of over 9 billion ounces of silver. These
"Recoverable Reserves" are often categorized as "economic
reserves", meaning that they have been satisfactorily drill proven and
they can be profitably mined near current going prices of silver. It takes
extensive drilling with relatively tight spacing to prove up these reserves.
Again these are only the reserves that have been detected by the U.S.
Geological Survey and it is quite unlikely to be a complete and comprehensive
figure.
Now
for the third category, "Reserve Base" listed as 420,000 tonnes or
approximately 13 plus Billion ounces of silver. These 420,000 tonnes of
silver "resource" include the 280,000 tonnes of silver
"reserve" (category one). Some might call this category a
geological reserve, but it includes all KNOWN silver deposits that have had a
minimum standard of proving up via drills. Mining companies are always
working to get sufficient drill holes to upgrade a ëresource' to a ëreserve'.
Category three includes silver deposits that are proven and economical as
well as proven yet not currently economical.
These
above categories and silver potential mining numbers are frequently used to
demonstrate how little silver remains to be mined. For example, let's say the
total world annual consumption is 850 million ounces (a 3 year old number),
that would mean
we have a known, economically mineable silver reserve of approximately
9 billion {as previously listed} ounces or slightly more than 10 years of
supply available to be mined at current prices. That is a reasonable
comparison, but only if you project silver to stay at current prices! You
cannot project $35-$50 silver and still hang on to these same
"Reserve" numbers!
At
$30 silver, the vast majority of all of the silver resources will become
economical to mine, so now you're looking at 13 plus billion ounces of known
economic silver. It also must be remembered that there are other sources of
silver available other than
mining; specifically scrap or recycling, as well as currently held
monetary or investment silver. All of these factors will increasingly come
into play as the price of silver inevitable soars. So far, we have listed
silver reserves, resources, scrap, recycling, and investment silver that will
be available to impact the future silver market and its supply/demand
fundamentals. Mining only has to provide a portion of silver supply as above
ground silver from various sources is not going to zero, ever.
Is
this the whole picture? NO, emphatically, NO! Please bear with me as I am
just now at the heart of this essay. Let us project forward to what these
numbers and this survey do NOT tell us, a category 3 if you will. That will
give a much more accurate picture of what will happen with $30, $50, etc.
POS.
3rd
Category. This one includes many UNKNOWNS and that is exactly why it is NOT
listed by the U.S. Geological Survey, they cannot list what they do not know,
right? However, we must analyze what they do know and extrapolate from there.
Let
us start with resources of silver that have yet to receive sufficient drill
testing to be put into either previous category. These are frequently large
systems, yet no capital for initial or expanded drilling is available. Does
anyone seriously think all worldwide silver is a known entity? Does anyone
think that a higher POS might get a few trenches dug and drills turned? What
will happen with $50 POS? Primary deposits will be explored for and
discovered, as will secondary silver producing deposits. Existing deposits
will be expanded, and previous, high-grade narrow veins will find the
marketplace. All the way down to the literal pick and shovel, possible donkey.
See what I mean, the danger in not defining terms? This is not just
semantics, but goes to the core {sorry} of future silver fundamentals. You
cannot attempt to predict the future based on incomplete data.
We
must continually remember that the listed reserves and resources are
projected at near current silver market prices. If a company is drilling and
not finding economic silver (at current $5 POS for example), do they continue
drilling to prove up a resource anyway? Absolutely not! They shut the operation
down and move on to something that may prove profitable. $5 - $10 POS and
$35-$50 POS are two entirely different beings. No one has been looking for
silver that would be economical at $50 POS. Why would they?
Let
us sum up before moving on to more silver details. Category one (reserve) is
incomplete, category two (resources) is incomplete and category three (future
underground silver supplies) is such an unknown entity that it has sparked
this essay and many questions to boot. We ignore category three at our own
peril and should make no long-term investment decisions based
on incomplete information.
I
will briefly mention category four silver, that being aboveground silver that
is not officially recognized or known, and will state 2 indisputable facts for
this essay:
1.Nobody knows the current aboveground
silver supply!
2.Nobody knows the
current underground silver supply!
We
have already talked about the underground unknowns and will actually get into
that in more detail. As far as above-ground supply it is all estimates,
murky at best, rumors abound, and there is much
international and historical intrigue on this issue: "Black Silver"
if you will, silver outside the official numbers. This is another issue
entirely, but it cannot be totally overlooked.
Are there masses of silver available to come out of the Philippines or Indonesia? It is possible, but it
is also unlikely for numerous reasons. Let us discount this category four for
now and focus on the more identifiable silver factors. (If there is much
"unknown" above-ground silver, it is still of a limited amount and
it is uneconomical, to say the least, to waste it on the current silver
market.)
Before
going on, I must remind the gentle reader, once again, that I am a mega
silver bull in spite of anything you have read so far. Silver will blow up on
the manipulators, sooner or later, likely sooner. Again, however, it does
make me pause when experts write of a perpetual silver shortage.
THE
MINING CYCLE
Mining
and commodities are nothing if not cyclical. Low prices for
a commodity such as silver brings decreased exploration and
production, which brings forth a reduction in silver supply. This,
inevitably, brings higher prices and a subsequent increase in exploration,
mining, and production. The higher prices cause hoarding and overproduction
as humans extrapolate the current trend far into the future.
Does
this happen overnight? Nope, it typically takes five to fifteen years,
depending on size to bring a silver mine from
discovery to production. We will have our run away silver bull, but it will
be contained by the mining sector's natural cycle, within ten to fifteen
years, not fifty years or indefinitely! I suggest you not plan to pass all of
your silver and silver related investments down to your grandchildren, as the
cyclical phenomenon will be upheld in silver.
SILVER
MINING
For
the purposes of this essay I have queried numerous silver miners and resource
experts, asking them: "Is there plenty of remaining underground
silver?" I have yet to talk to a silver mining expert that believes
otherwise. I have absolutely no doubt that mining is fully capable of ramping
up silver supply, given sufficient time, to ration down and meet silver
demand.
Let
us now analyze the two different categories of silver mining; primary silver
mining and secondary silver mining. Primary silver mining means simply that
the major economical mineral in the mining operation is Silver. These mines
are absolutely scarce and hard to find, especially at today's POS. Silver
more commonly occurs in combination with gold, lead, zinc, copper, or other
minerals. Silver has been found mostly near surface and most of the easy
pickings and massive deposits, have already been
discovered. Silver can and will be found deeper, say 3-5,000 feet, as future
silver economics allow.
On
the other hand, $30 - $50 POS is a far cry from $5 POS! Mines that are
currently worked for the 35% silver content will then become primary silver
mines. There will be untold numbers of previously drilled properties where
silver was found but deemed uneconomical, that will become primary mines.
Give an explorer or a current struggling producer a $50 POS and his eyes will
light up. Watch him go, slowly, but go he will. All the properties that have
received a few drills that proved mineral existence, yet not economic mineral
existence will be re-analyzed and frequently re-drilled.
There
is also a stockpile of silver properties being presently accumulated by the
likes of Silver Standard Resources, in which I own shares. They have
approximately 400 million ounces of silver resources that are mostly not
currently economic to produce. This silver is documented and largely
permitted and ready to begin production when silver hits a mere $8 - $10.
Think they have any more or can find any more at $30 - $50 POS. Still
thinking an endless $200 POS?
Silver
Standard is only used as an example of mining capabilities; they will be a
small part of the overall coming mining picture. Let there be no doubt that
primary silver mining will increase greatly with the coming silver bull. Ten
to fifteen years is actually an extremely long period of time for a mining
cycle to have its effect. This just demonstrates, once again, how out of
kilter the current silver market is. Why is it out of kilter? Our friend Ted
Butler has amply documented the reasons. The billions of ounces as the result
of past mining have been unceremoniously dumped onto the market for the last
50 years. They have literally managed these assets until they are nearly
gone, from their coffers at least. Oh, the game we play!
The
other category of silver production is secondary silver production. This
currently accounts for 2/3 of today's mining production. A common metal
sometimes found with silver is gold. The fundamental behind each of these
metals is bullish in the extreme. A run in price in either or both metal will
bring an increase in production of both metals. Lots of silver will come out
of these types of mines when reality returns to these markets. In all
fairness, gold/silver mines are much rarer than other types of mines such as
lead/zinc/silver or copper/gold/silver mines.
Depending
on what percentage the economics of the mine is determined by the silver
content will determine how much production is ramped up to access this
silver. Some of these mines may actually become primary silver producers as
the POS rises. Others will ramp up production to get more of the end product
silver, and others will be largely unaffected if their silver content is
quite low.
An
interesting part of this equation relates to the secondary silver producers
in a mine such as a copper or nickel mine that, incidentally, produces silver
credits. Some have suggested that secondary silver mines will ramp up
production to get increased silver and subsequently kill the price of the
base metals associated with the silver in the process. This would, in the
end, decrease silver production because the base metal production and its economic
benefits would be gone. I will explain why this will not happen. If 70% of
your end profit comes from copper and only 3% from silver, you may slightly
alter production or mineral extraction to get more silver, but you would
never produce so much copper that you would kill your primary market. Miners
might increase silver production to the point that copper would be hit for a
few pennies {because the Cu would also be over produced}, but never for a
twenty-cent blow to the market. Better to shut it down and wait for the
particular metal cycle to turn. A tenfold increase in the POS would not be
sufficient for some of these mines to alter their production formulas. Mining
management, mining efficiency, nothing more, nothing less.
In
summary of secondary mining, it is a mixed bag as far as future silver mining
production increases are concerned. Some mines will not be able to ramp up
production a whole lot to get silver, but many of the secondary producers
will have an absolute picnic at $50 POS. Both primary and secondary silver
miners will show free market (finally) dynamics in action. Not overnight, but
merely the typical time to explore and produce.
{I
would like to present a couple of items of interest now in regards to ongoing
silver mining. Most silver deposits are epithermal in nature and will be
found between 1,000 and 5,000
ft. depth. Between sea level and 3,000 meters in
altitude the vast majority of ground has already been explored, at least to
some degree, for silver. Silver Standard Resources has been seeking for 10
years for economical or near economical silver resources and have only been
able to prove up 400 Million ounces {give them a $50 POS and this number
would receive a multiplying factor}. Reserves are calculated with the CURRENT
POS. A 2 oz/ton silver deposit can currently be mined via open pit. A 5
oz/ton is necessary to have a successful underground mine. At a $50 POS,
which is more than a 10 fold increase from today's price,
these numbers would translate to .2 ounce/ton for open pit and .5 ounce/ton
for an underground mine. In general, at $30 POS, an ounce of silver per ton
would become ore.}
SHORT
SQUEEZE?
Let's
look at another common silver misconception before wrapping up this article:
what is the magnitude of the coming short squeeze in silver? The
indefatigable Ted Butler has estimated and outlined as much as 3 Billion
ounces of silver shorts. I greatly admire his work and have absolutely no
reason to doubt his figures. These shorts are from our own COMEX, European
silver banking agreements, as well as Central Bank leasing "games".
Are we going to someday have a massive 3 Billion ounce short covering rally?
There may, indeed, be 3 Billion ounces in above ground existence, but overall
AVAILABILITY is the key factor here. The silver is widely dispersed across
the globe and frequently in such a form, such as jewelry
or religious artifacts, that it will likely never
see the market again. How much remains in the hands of Govt/Banking officials
that wish to suppress the poor man's gold, that's the key question?
In
posts at the premier gold and silver website named EagleRanch Mr. Butler has acknowledged and confirmed
that he seriously doubts these shorts can be covered with physical silver.
How will they be ëworked out' if that is
indeed the case? It will look in many ways like business as usual for our
economic authorities: paper settlements, defaults, taxpayer bailouts, rule
changes, as well as Central Banks doing what they do best, simply managing
their {our} assets until they are totally gone from the balance sheets. Then
we get to hear those infamous words, "OOPS, SORRY!!".
Where
will this leave us in relationship to the massive mountain of accumulated silver
shorts? They will likely be written off with all the book squaring tools just
mentioned, and the silver market will then trade according to its underlying
supply/demand fundamentals. A massive bull market will still unfold
regardless of these shorts not having to be physically covered. This is
exactly why it is so essential to parse the future mining factors to get a
read on what is heading our way. Short squeeze?
YES!
A short squeeze of 3 Billion ounces or even 1 Billion ounces? Unlikely!
Let's
fast forward some 30 years from now, time for a mega-bull silver market and
time for a subsequent silver low from there. The subsequent silver bull, the
one following the upcoming one will not be put out by existing known mining
supply and techniques!
There
will then not exist sufficient below ground supply to be brought into play.
Maybe some Grandchildren could use a few silver coins after all. Will
technology likely catch up and find/process silver economically at that time?
It will be a challenge, no?
EXTRANEOUS
FACTORS
There
are just a few more issues to look into before closing. Let us look at
categories of future silver supply that will ration down the future POS.
Scrap and recycling are currently a very significant part of silver; in fact
now larger than primary silver mining from what I have been told. Recycling
is presently what can be called a "cottage industry" in comparison
to what it will be at $30 - $50 POS. All that future ramped up silver mining
product to make great profits at $30 will also be largely recycled as
recycling will then be exponentially more profitable. American ingenuity at
its best.
Dis-investment
is another issue. Absolutetly, tons of silver bags
and bars have been purchased sub $5 per ounce in order to make some form of profit.
Is not it likely that a lot of this silver will find itself back on the market when a 6 to 10 fold increase has been
"bagged"? Some will hold out for $100 or a multiple of that
and, bless them, they may find it. Some will also buy and hold so long that
they may never see a profit from their venture.
SUMMARY
This
whole line of reasoning started because claims of a ëperpetual' silver bull market were becoming
commonplace. That could only happen if we are running out of underground
silver, and I hope I have convinced at least a few, that is not the case.
Mining is not my day job, but I have asked enough questions of the silver
experts to realize that there is a vacuum of information as to how much
silver remains yet to be discovered. No one really knows, but no mining
expert yet has told me that we will run out any time soon.
Usually,
when the right questions are asked, the answer will be forthcoming. That is
the purpose of this exercise. Will we have our glorious, once in a lifetime
silver bull market? No doubt, we simply must be patient. Will it last
indefinitely? What do you now think? For the cowboys amongst us: ride the
bull for the full eight second and then dismount gracefully and pick up your
trophies. How much silver can, the pros find at a sustained $30 - $50 POS?
Let us keep an eye on these guys, no? I would love to advance this line of
reasoning and can be reached at rtmauspec@hotmail.com.
Russel McDougal
Investor’s Daily Edge
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articles by Russel McDougal
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