The Silver Manifesto – Thoughts for the South African Investor Part 3

(Chapter 1 and Chapter 2 synopses and thought can be found here)

Chapter 3 is a closer look at the silver supply dynamics and provides readers with some very interesting facts, figures, and much needed context. After all, having a basic understanding of where the silver will come from in the near term future is a very important question.

The first section broaches the topics of the changing composition of silver production by type of mine, and provides an overview of the nature and supply dynamics between primary silver producing mines (mines that mine silver only) and mines in which silver production is merely a by-product of mining other metals (like gold, zinc, copper, and so on). The authors predict that silver production from primary silver mines relative to total silver production is set to increase substantially for the rest of this decade. Whether this has any bearing on price remains to be seen.

The next two sections of the chapter deepens the context and deliberates potential new mines that will affect the supply dynamics, as well as naming the largest silver producing mines in the world. Even if figures is ‘not your thing’, the sheer scale and numbers of ounces mined/produced by these giants is quite something. It certainly provides a global overview of the major mines that make up the total yearly world silver production.

By far, the most pertinent and interesting section is the discussion on the cost of mining an ounce of silver. According to the research and calculations of the authors, the industry as a whole (both primary and non-primary silver producers) has all-in cost well in excess of $25 per oz (where a mine fits in on this continuum is of course contingent of operational efficiency, ore grade, and so on).

The next two sections provides technical information and charts on the concept of ‘peak silver’ production, and key regions for silver production growth, while the final section highlights some essential contextual information when discoursing on the gold-to-silver ratio. More accurately, what should it be, given that the current ratio is almost 73-to-1 (it was 83-to-1 less than four weeks ago)? On this all-important ratio, the authors argue convincingly that this ratio should not be seen as necessarily static, but it usually depends on the level, status, and condition of the world economy. Thus, during an inflationary environment, silver typically outperforms gold, and a ratio of 16/1 is not unrealistic (especially since this was already achieved in the previous bull market). In fact, Morgan and Marchese go on to predict that over a 30 year time horizon, it is possible that even a 5-to-1 ration could occur (even if briefly).

A brief note is warranted. The next chapter discusses silver demand dynamics, so much of the information in this chapter will be contextualised within the broader theme of supply and demand dynamics.

So, in addition to the wealth of important and valuable material provided in this chapter, what key issues are worthy of noting for the South African silver investor?

Biggest issue for the local investor is the question of cost. The industry average all-in cost is $25 per oz (in 2013). Even if costs have been cut substantially across the industry due to the depressed commodity prices over the past three years or so, I believe that still today, an ounce of silver is available to the general South African public for less than it cost to mine it. Those who added to their physical position when silver spot price was around $14 – $15 per oz, will more than likely reflect on those purchases in the near future as the purchase of a lifetime. But more to the point at-hand; purchasing an ounce of silver below the cost of production is a no-brainer, in my opinion. This is especially true when viewed from the perspective of peak oil (increasing energy costs in the not-too-distant future) and long-term prospect of our local currency.

Another key comment made by the authors relates to the Mexican mines, ‘The Mexican royalty tax will make the mining industry less viable, at least in Mexico, which is important for the supply of silver because Mexico is the largest silver producing country.’ While we are not even in the top 30 silver producing nations, over taxation of silver is clearly a blueprint for some governments with socialist tendencies. Given the socialist direction and disposition of the current government, as well as the nationalisation of mines and banks rhetoric, perhaps the current pricing structure of silver in the South African context is the lowest it will be, relative to the spot price.