The focus of the markets and the alternative media is firmly placed on the
continued disintegration of the world financial system.Many believe that the
collapse of the fiat monetary system along with the global banking cartel is
the worst possible outcome.However, this may actually turn out to be the good
news in a sea of bad news that is lurking around the corner.
As the world's attention is currently directed at its massive paper-debt
dilemma, a physical problem looms larger each passing day.This is what I
call, the brontosaurus in the living room.The information provided in this
article may help connect the dots to the reader who has been
grossly misinformed by the highly specialized analysts in the various
industries and media.
In the future as tens of trillions of dollars of debt masqueraded as
wealth implodes, there will be a stampede into the best safe havens available
-- the precious metals.Many believe gold will play the major roll in this
upcoming transfer of wealth.While this may be true, silver could actually
turn out to be the better choice when we consider the factors presented in
this article.
The inspiration to write this article came while I visited several
historic mining towns in Utah.One of these mines was the Horn Silver Mine
located in Frisco, Utah.After spending most of the day looking at the remains
of the town, its old kilns and the abandoned mine, I began to wonder how much
silver was produced there and what were the size of its ore grades.
The Horn Silver Mine in Frisco was discovered in 1875 and by 1881 it was
producing over one million ounces of silver annually.However, in a rush to
get the silver out of the ground and not taking the time to brace the tunnels
correctly, the mine collapsed in Feb, 1885. The one fortunate part about the
mine collapse is that it took place between shifts so no one was hurt.
The mine recovered and started to produce again at a decent rate in 1887,
but it never regained the level it had achieved prior to the mine collapse.
In the 30+ years the mine was in operation, it produced over 14 million
ounces of silver. This may not seem like a great deal today, but in its
heyday it was the largest silver mine in Utah.
In its initial years of operation, the Horn Silver Mine produced silver at
a staggering 1,608 g/t (grams per ton) or 51.7 oz/t (ounces per ton).We must
remember that during this time, the United States was calculating these ore
grades in short tons or 2,000 pounds. Today the predominant industry standard
is measured in metric tonnes or 2,205 pounds. Thus, these earlier figures
were approximately 10% lower than the comparable ore grades today. If we
adjust the difference to fit present standards, it would be 1,769 g/t or 56.8
oz/t .
To understand just how much the ore grades have changed in the silver mining
industry in the past 100+ years, I decided to compare the Horn Silver Mine to
a present day silver mining company.I choose First Majestic Silver Corp
because it is a smaller producer and it has relatively decent silver ore
grades (more about this later).
The Horn Silver Mine vs. First Majestic
If we look at the data compiled by the United States Geological Survey in
1913, we can see the annual amount of silver produced at the Horn Silver
Mine:
The copy of the original image is hard to read, but the important figures
to focus on are in the ORE & SILVER columns.We can see that prior to
1885, the mine was producing the most silver in a given year.At its peak in
1884, the Horn Silver Mine extracted 40,000 tons of ore and produced 1.56
million ounces of silver.The full potential of the mine was never reached due
to the collapse of the main tunnels in 1885.
To get a better idea of richness of the silver ore grades that were
extracted from the Horn Silver Mine in the first few years of production,
take a look at the graph below:
Furthermore, during the first several years of production, the Horn Silver
Mine produced 10,352 tons of lead at a staggering 41% ore grade.In its final
year of recorded production in 1909, the mine provided 192,22 oz of silver at
18 oz/t and 1,686 tons of lead at a 15% ore grade.
If we fast forward to the present day and look at First Majestic's Q1 2012
Financial Report, we can get an idea of just how much more ore is required to
be processed to produce silver.In the second quarter of 2011, First Majestic
processed 482,077 tonnes of ore to generate 1.78 million oz of silver.The
reason I selected Q2 2011 will become apparent in the following charts.
I took all the data from this report and compiled the graph below:
In the five quarters shown above, First Majestic produced silver at a
range of 3.2-3.9 oz/t.Furthermore, according to their Q2 2011 results, First
Majestic's average lead ore grade was 1.2% -- a far cry compared to its
historic counterpart.
During the 30+ years the Horn Silver Mine was in commercial production, it
processed a grand total of 474,780 tons of ore and supplied 14.2 million oz
of silver.On the other hand, First Majestic processed 482,007 metric tonnes
of ore (in just one quarter!) to produce 1.78 million oz of silver.This is
the reason why I choose First Majestic's second quarter of 2011 as a
comparable -- it was based on a similar volume of processed ore.
Over the life of the Horn Silver Mine, it produced 8 times more silver
than First Majestic (in Q2 2011) when we compare tons of ore processed.Thus,
First Majestic has to process 8 times more ore to produce the same amount of
silver that came from the Horn Silver Mine.
We must remember, that during the late 1800's and early 1900's the
majority of the work was done by human and animal labor supplemented by coal
and wood energy sources.Today, the majority of work is accomplished by diesel
powered earth moving machines and electricity from the grid or onsite
electric generation.This is an extremely important factor when we consider
the future production of silver...more on this later in the article.
How Do Other Silver Mining Companies Stack Up?
I can just hear it now.The skeptics are probably saying "Why don't
you compare the Horn Silver Mine with mining companies that are producing
silver at higher ore grades?"That is actually a good idea.Below you will
find out how the more notable silver mining companies compare to the historic
Horn Silver Mine:
As the graph states, the silver ore grades were calculated by the mining
companies' Q1 2012 financial reports (unless noted) and by their total
consolidated production.Fresnillo was the exception because its three primary
gold mines (containing low grade silver) would have lowered its average
silver ore grade unfairly.
Fresnillo had the highest average silver ore grade (10.6 oz/t) compared to
the other current producers represented in this graph, while Silver Crest
(1.3 oz/t) and Revett Minerals (1.0 oz/t) came in last.If we look at the
different silver ore grades from the graph we can assume the average silver
ore grade from the current producers would be between 5-6 oz/t.
Regrettably, I did not take the time to compile an overall average ore
grade from all the current silver miners when I was acquiring the information
for the article.However, I may be reproducing this figure as well as many
other interesting statistics in future reports on the silver miners (possibly
for a fee if the demand is there).
We can plainly see that the Horn Silver Mine produced nearly 3 times more
silver during its lifetime than Fresnillo -- the highest silver ore grade of
the group.If we compare the average silver ore grade of the Horn Silver Mine
(30 oz/t) to estimated average of all the current miners (5-6 oz/t), then 5-6
times more ore is required to be processed today to produce the same amount
of silver during the lifespan of the Horn Silver Mine.
For those who may have the notion that the Horn Silver Mine was an
exceptionally high grade mine of its time... it wasn't.The average silver ore
grades in the United States and Australia were extremely rich during the
1880-1900 period.For additional factual data, click on the link to my article
PEAK SILVER
AND MINING BY A FALLING EROI, and scroll down to the chart that
shows the average ore grades of various metals in Australia.During the
1880-1900 period, the average silver ore grades for mines in Australia were
1,000-1,400 g/t.
Now that we have an idea on how present silver ore grades have declined
compared the silver mines in the previous century, let's take a look at the
future.
If we take a stroll to GoldMinerPulse.com where they have
a link to their Silver List and we click on the area that says: BY GRADE,
we will see a better view of the table below:
The companies posted above made the Canadian GoldMinersPulse Silver List
if more than 25% of their in-situ (in the ground) value came from in-situ (in
the ground) silver.Basically, the lower value and lower grade companies
didn't make the cut.If we examine the list we can see that most of the
predominant Canadian Silver Miners are included.Furthermore, this is the list
in which I selected the majority of companies when constructing the Silver
Miners Average Silver Ore Grades graph above.
The figure that stands out like a sore thumb and highlighted in
yellow, is the overall average or grade of 62.3 g/t (or barely 2 oz/t) for
all the companies on this list.This number is based on an average of
all the companies' proven & probable reserves, measured & indicated
and inferred resources.Some of these companies are still explorers and have
not yet made it to the commercial production stage.Moreover, the later stage
resources such as measured & indicated and inferred, normally contain the
companies' lowest ore grades.
At a glance, we can see that Coeur 'd Alene (530 million oz @ 43 g/t) and
Pan American Silver (1.38 billion oz @ 77 g/t) have helped bring the overall
average down due to their larger volume of reserves & resources comprised
of substantially lower ore grades.
The problem that the silver mining industry faces as its ore grades
continue to decline, is the increased energy costs in processing more tonnage
of ore to produce the same or even less silver in the future.Enter the
Brontosaurus.
THE ENERGY SITUATION:The Brontosaurus In The Living Room
Alright, I get it.What do ore grades and energy have to do with the future
supply of silver?A great deal as you will see.It is quite unfortunate that
the U.S. Government and the main stream media have recently put forth the
information claiming, "The Future Oil Independence of the United
States" when quite the opposite is true.
In describing these so-called energy delusions during a recent interview
with Chris Martenson, James Howard Kunstler stated,"It's like a
collective psychological break by everybody in American Society, fostered by
a climate of the retailing of lies."This may seem a bit blunt, but I
believe Kunstler hits it right on the forehead here.
The situation in the future global oil industry is so dire, it is simply
amazing that we find very little in the way of open honest public debate.To
truly understand the ramifications of a declining oil supply on the world's
markets, a book can easily be written.However, it can be addressed here in
four simple charts.
The first chart is taken from an excellent article written by Gail
Tverberg titled, "Evidence that Oil Limits are Leading to Limits of GDP
Growth."Here we can see in plain grade-school logic that as the world
oil supply declines... so does global GDP -- pretty straightforward stuff.
If the oil supply growth turns negative as well as the world GDP, how will
this affect the mining industry?Does anyone actually believe the mining
industry will continue to grow its metal production while the world oil
supply and global GDP decline?Well, according to the future forecasts by
expert mining analysts... they don't see a problem with it.
The world is currently experiencing a plateau in global oil production and
will soon be heading down the slope of continued depletion.Very few realize
the massive amount of oil the world's oil fields supplied in just the past
decade.In a comment to a post on TheOilDrum.com
, written by Jeffrey Brown (westexas) and citing official sources,
the world produced 23% of the total cumulative oil production to date between
2002 and 2011.The second chart below puts it into perspective:
From the research provided by ExxonMobil and Ken Deffeyes, the world's
cumulative oil production up until 2005 was 1,000 Gb (billion barrels) with
an additional 160 Gb (EIA) produced from 2006-2011 for a grand total of 1,160
Gb.According to this ENERGY
REPORT,the total ultimate recoverable reserves of conventional
oil are 2,000 Gb.Thus, the world has approximately 840 Gb of conventional oil
reserves remaining.The peak of conventional crude has come and gone without
the slightest peep from the oil industry.
To offset the peak of conventional crude, unconventional sources such as
Tar Sands, Shale Oiland Natural Gas Liquids have be utilized.Even though these
unconventional energy sources have supplemented the overall supply to help
meet the demand of the market, they suffer from a lower EROI (energy returned
on invested).The lower the EROI of unconventional oil sources, the lower net
energy is available for the market -- basically, it costs more to produce and
you get less to use in the economy.
The third chart, The Falling EROI:The Destroyer of Net Energy,
forecasts how the declining EROI of global oil and natural gas destroys the
amount of net energy available for the market.The ratios in red depict the
amount of energy consumed in the production of oil & natural gas.For
instance, in the 1930's, it only took one barrel of oil to produce 100
barrels in the industry.You can see how the ratios have declined as we move
up the oil production graph.
Few realize that capital formation in the financial markets is derived
from a high degree of net energy.As the net energy continues to decline, so
will the availability of capital formation... thus crushing the growth of the
global economy.
Thethree charts above should provide enough information to win over the
worst peak oil skeptic.However, if this is not the case, the last chart
should clear up things nicely.Most of the diehard contrarians of peak oil
always bring up the fact that total global liquid oil production is still
rising.While this may be true in total liquid energy production, it is not
when we look at net oil exports.
It really doesn't matter how much oil a country can produce, but rather
how much it can export that matters.In the final chart we can see that
Available Net Oil Exports have already peaked in 2004-2005.The Land Export
Model and the chart below were developed by Jeffrey Brown.According to
Brown's calculations and based on past trends, available net oil exports will
decline from 35 mbd (million barrels a day) in 2010 to 16 mbd by 2020 -- a
50%+ decline in ten years.
The chart is based upon a conservative 1% annual decline rate of global
oil production.The dark red area of the chart shows the amount of oil
consumed by the "Top 33" oil exporters.The light red area denotes
the (increasing) amount of oil consumed by China & India and lastly, the
green area forecasts how much net exports will be available for the remaining
oil importing countries.Of course these are only forecasts based on prior
trends, but if these trends do continue the world will have to survive on a
great deal less oil by the end of the decade.
For those who would like to acquire more detail concerning the energy
situation going forward, you can do so at my second peak silver article," PEAK
SILVER REVISTED:Impacts of a Global Depression, Declining Ore Grades & a
Falling EROI".
So... how does the approaching energy predicament impact the future silver
supply as well as the broader mining industry?Well, according to the United
States Geological Survey (USGS), in their most recent update of world silver
reserves, it doesn't seem to matter that much at all.
WORLD SILVER RESERVES:A Good Percentage May Just Stay Where They
Lay
If you spend any time in the precious metal blogosphere you will read
comments stating that the world only has 10-12 years worth of silver reserves
remaining.This may have been true a few years ago, but it is no longer the
case.It looks as if the folks at the USGS finally decided to add some figures
to the countries with a N/A in their reserve column as well as update others
with existing reserves.
In 2009, the world held 270,000 metric tonnes of silver reserves (nearly
the same amount for the past decade).However, in their latest 2012 Silver
Mineral Commodity Summary, the world now has a whopping 530,000 metric tonnes
of silver reserves -- amazing what a few taps on the keyboard can do.
In just three years, the USGS has nearly doubled world silver reserves.If
we take a close look at the tables, we can see that the majority of increases
came from Chile and Peru.In 2009, those Chileans had no idea how much silver
they had in reserve, but by the very next year they managed to scrape
together 70,000 metric tonnes (displayed in the 2010, 2011 & 2012 Silver
Mineral Summaries).This is by no means a paltry figure as it turns out to be
more than 2.25 billion ounces.
Furthermore, I guess those Peruvians didn't realize that they had an
additional 84,000 metric tonnes of silver reserves just laying around in
2009. All kidding aside, Chile and Peru accounted for154,000 of the total
additional 260,000 metric tonnes of silver reserves added since 2009.
As it turns out, the world now has more than 22 years worth of silver
reserves remaining.This may seem like a real bummer to the silver enthusiasts
who were touting the low silver reserves as another bullish reason to own the
metal.On the other hand, reserves on paper may not be reflective of the true
amount of metal the world may be able to produce in the future -- especially
in a world of declining energy reserves.
For instance, a good portion of Chile's newly acquired 70,000 metric
tonnes of silver reserves may just have to stay where they lay.
CHILE:Cracks Beginning To Appear In Its Massive Copper Industry
Chile is by far the King of copper producers.In 2011, Chile produced an
estimated 5.4 million metric tonnes of copper.Peru came in as a distant
second at a mere 1.2 million metric tonnes.One of the by-products of copper
production is silver and in 2011, Chile produced 42.1 million ounces of the
precious metal.Chile is now the 5th largest silver producing country in the
world.
For Chile to be able to produce those so-called 70,000 metric tonnes of
silver reserves, it will have to mine a great deal of copper to do so.In
order for the Chileans to be able to mine their huge copper reserves, they
will need a growing supply of energy (especially liquid energy such as diesel
to run the massive earth moving machines).
When I was researching diesel consumption in the mining industry, I came
across an interesting trend taking place in Chile's copper industry.In the
past six years (2005-2010) when Chile's copper production remained virtually
flat, its consumption of diesel and fuel oil in the extraction of the ore has
increased a staggering 50%.
This huge increase in consumption of liquid fuels was due to falling
copper ore grades and the aging of the mine as well.As open-pit mines age,
the haul trucks transporting the ore will have to burn more fuel as the mine
expands and deepens.If Chile wants to grow their copper and silver
production, they will only do so if they can grow their energy base.This is
where the situation gets interesting.
In a recent news article,
"Chile $100 Billion Copper Push Under Threat by Energy Scarcity",
it was made clear that if Chile did not make massive upgrades to its electric
power generation, a $100 billion worth of copper projects could be in
jeopardy.
from the article:
The biggest-ever pipeline of copper projects is under threat as Chile,
the world's top producer, struggles to contain rising opposition to new power
plants.
... "Chile will have to shelve many of the country's mining
investments due to the high cost and scarcity of electricity," Joaquin
Villarino, president of mining lobby group Consejo Minero, said in Santiago
on April 19. Delays will jeopardize a "significant" part of the
proposed mine investments, he said.
and from another article concerning the same subject:
There are no easy fixes for tumbling ore grades at massive mines in
northern Chile, protests over key energy projects that are threatening mining
expansions and possible disruptions from extreme weather and labor unrest.
.... World No. 3 copper mine Collahuasi's output dipped in the first
quarter of the year due to weather disruptions and grades, Anglo reported on
Thursday, while the world's No. 1 copper mine Escondida saw its output
plummet 25 percent last year due to a shock two-week strike and ore grade
slips.(Link to the article: HERE)
Chile faces several daunting challenges in the future if it plans to
increase its overall copper production.Furthermore, these two articles failed
to mention the future threat of peak oil and the declining net oil exports on
top of their rapidly increasing domestic mining problems. If we consider all
of these factors facing the future of Chile's mining industry, it may be
prudent to believe that a good portion of its copper and silver reserves may
just stay where they lay.
Future Silver Supplies More At Risk Than Gold
We have witnessed that as silver and copper mines age, their ore grades continue
to decline.This is also true in the overall mining industry when we consider
the passage of time.Unfortunately, the best quality low hanging fruit in the
industry were picked over a century ago.Today, a good percentage of the
mining companies are just going over old mines and trying to make something
out of the remaining scraps and crumbs left behind.
It would be nice if this phenomenon of falling ore grades did not affect
the gold industry... but it does.Again, as ore grades decline and as open-pit
mines age, it takes more energy to extract and produce the same amount of
gold.To get an idea of the energy demands in the gold industry, I have
focused on the top five gold miners in the world.
Trying to obtain the energy information and to list it in a standard
format was a task in itself.The amount of fuel consumed was listed
differently in various company reports.Mining operations chose to present
their figures in either petajoules, megajoules, gigajoules, cubic meters or
barrels.Each was then converted to more recognized measurement in gallons.
In 2005, the top five gold miners (Barrick, Newmont, Goldcorp, Newcrest
& Kinross) consumed approximately 303 million gallons of diesel in their
operations.By 2010, this figured increased 55% – to a total of 470 million
gallons.(additional note:Lihir Gold now merged with Newcrest was excluded
from Newcrest's figures in the chart below)
If we look at the diesel consumption in the top five gold miners, 20.4
gallons of diesel were needed to produce one ounce of gold in 2006.To produce
this same ounce of gold in 2010, nearly 24 gallons of diesel were required.
New gold mining projects slated to come online in the future on top of
those already in production will need additional sources of diesel to run
their operations.If available net oil exports continue to decline, where will
these companies acquire the liquid energy to run their gold mines?I would
imagine this question rarely if ever crosses the minds of mining analysts.
Even though the gold mining industry faces the same future energy problems
as the silver industry, it may indeed suffer a great deal less.Why?
The following chart provides the answer:
In order for the future global silver production to grow, it must
predominantly take place in the base metal mining industry.When the world oil
supplies start their inevitable decline in the next several years it will
also force global GDP to fall as well.As the global GDP declines, so will the
supply of base metals such as copper, lead and zinc. Thus, future silver supply
is at more risk than gold because 70% of its production comes from the mining
of base metals.
In contrast, 80% of the world's gold production comes from primary
mines.When the world finally succumbs to the gravity of the hundreds of
trillions of dollars in derivatives reverting back to their original value of
zero, gold will become the center of banking and trade.Because the majority
of gold comes from primary mines, it makes perfect sense for the world to
focus its energy sources on the very metal that will be in the forefront of
global banking industry.
That being said, this is not at all negative for silver.Silver is still
the second best monetary metal to gold.In addition, as future base metal
production declines (along with it silver production), this would force the
price of silver to increase in response to its enhanced rarity.
I would also imagine this will motivate the mining industry to enlarge its
number of primary silver producers as well as increase its overall percentage
of primary silver production.We must remember, the most efficient way to use
less energy to extract silver is the mining of underground reserves with high
ore grades.That is why it makes perfect sense that these underground high ore
grade mines will take a premium in the future -- basically, they utilize a
higher EROI in their production.
Final Remarks
It is simply amazing to see professional engineers and geologists planning
and designing technical mining reports for operations that are based on 25,
50 and 100 year life spans (such as the Alaska Pebble Project) without a
comprehensive consideration of the future energy supply.
Future world energy constraints will impact the production of silver in a
larger degree than gold. As the world finally catches on to the fact that
silver production will decline greater in percentage than gold, its value
will more than likely increase to a greater extent than gold.
Got your physical silver?
Steve St. Angelo
srsrocco@gmail.com