2013: A Silver Market In Review
Nice work on your silver market review. Now let's hope that the silver market cooperates. We might need to see some metal miners go out of business, which can take some time.
How much of silver mining is just a side product of base metal mining? I.e. how much silver comes from "pure silver miners" vs as a byproduct of some big copper mine? If I recall correctly, the Bingham Canyon pit mine is a copper mine – more or less anyway – and as you point out, it also happens to crank out silver too.
Byproduct mining is misrepresented in the metals market in my opinion. If silver is considered a byproduct of gold or copper or some other metal, it only means that it is not the dominant source of revenue. In any given year, Fresnillo corp could be a dominant silver miner, or it could be a dominant gold miner. The difference is if ore quality or the price of the metal for the period provides Fresnillo with enough revenue to make it the dominant part of the business.
For example in 2011, when silver went "through the roof," silver was 52% of revenue for Fresnillo making the company a primary silver miner. In 2013, silver was 48% of the business therefore making Fresnillo a byproduct silver miner because gold was the dominant source of revenue.
Companies are making their ore profitable. That's what is comes down to. Byproduct, Primary, it doesn't matter. It comes down to the ore and what makes the company money.
Really nice work Wildlife. Most folks would not understand the drivers behind the rapidly increasing costs of extraction.. but you lay it all out in terms of ore grade degrade (resource depletion.. where have I heard about that?) and the rising cost of energy. Double whammy (that's a technical term).
It won't take much more incremental investment demand to break this market…. and that is why TPTB are working so hard to paint a negative chart for Silver. Turd Ferguson thinks it's all about suppressing Western investment demand at this point.. and I agree.
BTW, Dave Kranzler, my favorite U of Chicago non-Keynesian, is sensing a ripple in the matrix right now;
The overt and blatant manipulation of the gold and silver markets on the Comex reflects frantic desperation – but why?
Perhaps the most unsettling recent event was the announcement by the CME that it was looking at putting daily price limit curbs on gold and silver futures. Why now? The daily volatility of gold is at a 4-yr low. Why were limits not in place a year ago when the bullion banks took the price of gold down $200 in a 24 hour trading period?
The only reason to put price limit curbs in is to prevent true price discovery. Anyone with a pulse knows that the last year’s manipulated trouncing of the metals using Comex futures triggered an avalanche of physical gold and silver buying globally. And based on the fact that over 1000 tonnes of gold was removed – and disappeared from sight – from all of the physical gold investment trust globally combined, including over 500 tonnes from GLD, the massive and determined price take-down last year was anything but true price discovery.
But there are other, equally as disturbing smoke signals:
1) Silver was hammered early this morning, after the a.m. London “price fix” and leading up to and during the opening of Comex futures floor trading. All of the European/eastern REAL physical markets were closed today – Switzerland, China, Viet Nam, Turkey. London was not closed but I think we’re fooling ourselves if we consider London a true physical market. Today was nothing but a pure paper jam job to try to force potential holders of Comex contracts to sell and not stand for delivery. Note: no other correlated markets, like the U.S. dollar index or currency futures flinched during the raid on the metals…. more at the link
Byproduct mining is misrepresented in the metals market in my opinion
The only reason I bring it up is because of its implications for supply & demand. If a mine primarily produces copper, and copper is still relatively profitable, then it won't shut down silver production if silver prices drop. It will lose a bit of money, but it will still crank out silver.
So – "all else being equal" – is silver mostly a 20% byproduct thing, or is it mostly an 80% product thing?
If all silver production was essentially supported by gold, iron, or copper production (i.e. silver just comes out the side, and the only way the mine will shut down is if iron, gold, or copper prices tank hard) then costs of production for silver won't matter as much.
If silver is mostly a byproduct, then it will take the market longer to adjust.
If silver is mostly a primary product, then the market *should* adjust more rapidly.
I really don't know, I was just asking. Sounds like your example (Fresnillo) silver is pretty close to being primary, i.e. 50/50. But my sense is, that's not how it is for most mines. I was just curious if you had a sense as to the breakdown.
Wouldn't it be a good idea to do away with the idea of byproduct mining and just assign costs for each individual mine to all metals produced at that mine in proportion to sales for that specific metal from that mine. For example, if 1 million ounces of silver valued at $20 million are produced at a mine and total sales from that mine are $40 million, assign 50% of that mine's costs as silver production costs. This would more accurately reflect the business decisions around whether to operate a given mine or not.
If revenue determines,ie. the price of each mined material/unit ore, then whether a material is primary or byproduct is influenced by the price if the material as it exits the refinery( right?). this phenom affects market reaction times(right?) OTOH, if primary or byproduct is determined by the percent of the mined material realized as ore is "refined" … there may need to be multiple curves… adding and subtracting sine waves as both price and yield decline or rise..i've confused myself(right?)
Exactly Quercus! It does not make sense that production costs be distributed towards the primary metal, but rather distributed based on their revenue earnings for the year. That’s what I did in the video above. The break-even price point for each company was not provided by the companies themselves. They were calculated using a slightly modified version of Steve St. Angelo’s formula which is this…
(Net profit/loss for the period * % revenue from silver) / Total mined ounces of silver for the period = profit/loss per ounce of silver
Then take the profit/loss per ounce and subtract it from the realized silver price for the company for the period (if you can find it) or the average price for the market for the period which companies are roughly selling at (because they sell continuously through the year). This is the break-even price point for silver the period.
This formula accounts really for the overall health of the mine rather than isolating silver completely as an individual. The major error is that a highly productive copper ore would not require silver to be at as high of a price as a mine which generates most of its revenue from silver.
For example, KGHM made a profit of $1,587,049,174 in 2012. Assuming silver is 18.87% of the revenue, then $299,525,968 of those profits was generated from silver sales.
[$299,525,968 (profits from silver)] ÷ [40,959,100 (ounces sold in 2012)] = $7.31 (profit per ounce)
So at an average silver price of $31.15, KGHM had a break-even price of silver at approximately $23.84 for the period.
KGHM was required to have a price of $23.84 given that copper price was such and such price and gold was such and such price during that period of time in order to not take a loss for the period. However, if the price changes for one of the other metals revenue generating metals then the break-even point for silver will slightly change.
Therefore the major take-home is the overall trend presented here.
I hope this clears things up
Dave: I think my last comment helped address the great point you made. Companies that receive only a fraction of their revenue from silver are less dependent on the price of silver as long as the other metals are performing well as you said.
The price control idea between finding a balance between incentive for producers and providing silver to the market at a cheap price to sponsor growth is likely true with every industrial commodity. I don't have any other data to back that claim up beyond logic and basic economic concepts 🙁
Hugh/Jim: Thanks for the comments. I appreciate the support!
Robie: I also think I may have suggested a response to up above, but I also think you may also have an interesting idea that I'm not sure I was able to grasp just yet from your comment.