By SRSrocco:

After receiving a great deal of emails and replies on my declining ore grade work in the top gold and silver miners, I thought I would write this post to clarify a few misunderstandings.

The industry practice of mining and processing lower grade ore from a section of the mine is a short term practice that will not impact the DECLINING OF ORE GRADES BY THE AGING OF THE MINE all that much.

First, I presented this chart on the top 5 gold miners declining gold yields since 2005:

Here we can see that the top 5 gold miners (Barrick, Newmont, AngloGold, Goldfields & GoldCorp) have seen their average yield decline 23% in six years or 3.8% per annum.  Secondly, I stated that the top silver miners have seen a 34% decline in 6 years or a 5.6% per annum.

Once I made this statement, I received replies through the email that mining companies alter their mining and processing of lower ore grades as the price of the metal increases.  Basically, they were stating that a portion of these declines may be due to mining companies processing low grade ores than higher grade ores from their reserves in the ground… or from waste rock and etc.

While this industry practice does take place, it is done on a short term basis.

For example, Fresnillo’s average yield has declined 24% since 2006:

(the chart should read average yield not grade)

This decline in average annual silver yield is not due to Fresnillo mining and processing lower grade ore to take advantage of higher metal prices, but rather they are now getting down to mining their reserve base ore grade which is 300-330 g/t.

Fresnillo has also stated that they will have to increase their processed ore from 8,000 tonnes per day (tpd) to 10,000 tpd to keep silver production flat around 26-28 million oz per year.  In 2011, Fresnillo PLC’s Fresnillo mine produced 30.3 million ounces of silver by itself.  Fresnillo PLC also has the Saucito mine that produces silver as well (start up 2010-2011).

So far this year, the Fresnillo mine has only produced 19+ million ounces of silver in the first 9 months of 2012.  They will probably only average about 26-27 million oz in 2012.  This will be another 10% decline in silver production due to lower ore grades and not because they are mining and processing lower grade ore due to higher metal prices.

This is also true for BHP Billiton’s Canningtion mine which has been one of the largest primary silver producing mines for a decade.  Cannington was producing silver at an average ore grade of 667 g/t in the quarter ending June 2000.  However, from their most report, Cannington is now mining silver at 332 g/t.  This is a 50% decline of ore grade in 11 years, or nearly 5% per annum.

BHP Billiton is not mining Cannington’s lower ore grade because of higher metal prices, but rather due to the aging of the mine itself.  Furthermore, if we go to BHP Billiton’s 2011 Annual Report we will see that Cannington’s reserve grade is now below 300 g/t and only has 6 years remaining in the life of the mine.  Of course they will extend that by drilling and proving up more reserves, but these reserves will not be above 400 g/t ever again.

This phenomenon of declining ore grades is also taking place in the majority of silver miners.

Again, the industry practice of mining and processing lower grade ore from a section of the mine is a short term practice that will not impact the DECLINING OF ORE GRADES BY THE AGING OF THE MINE all that much.

Here is one more example.  Pan American Silver was mining silver at an average yield of 7.1 oz/t:

According to its 2011 annual report, Pan American Silver produced silver at an average yield of 4.7 oz/t.  This is a 34% decline in 6 years.  Furthermore, if we look at their most recent Q3 2012 report, they are not yielding silver at 2.9 oz/t, because they have added their new acquisition of the Dolores mine that has an average silver ore grade of only 39 g/t. This lowered their average quite a bit due to the fact that they processed a great deal of ore.  If we were to take the Dolores mine out of the equation, Pan American Silver is yielding silver at 4.9 oz/t for the first 9 months of 2012.  This is a little better than what they achieved in 2011.

We must remember, declining ore grades are not a ONE WAY STREET.  That being said, the reserve grade of the major mines in Pan American Silver show much lower ore grades in the following years.  So we can safety assume, Pan American Silver will be producing silver on average at a lower ore grade in the coming years regardless of the industry practice of processing lower grade material due to higher metal prices.

I hope this clears up things a bit….

  1. Ted Butler wrote a great article about it in 2005 – the guy was truly ahead of the times:  

    …”in silver we have a unique geological circumstance, known as “epithermal deposition”, which holds that most of the silver in the earth’s crust was deposited near the surface. Consequently, there is less silver available the deeper you go…
    ….There is no way we can keep producing at current rates until the moment of complete depletion in any mineral. That would be absurd. But the data indicates there are limits to what can be taken from the ground…” 

  2. Now we’re talking.
     Just my speed.  The best thing that can be said is the silver’s been scraped, mined and extracted from Mother earth for 5,000 years.  The easy stuff is gone and like oil and the day of 25 cent a gallon gas, the $30 an ounce day of silver will soon be seen as the ‘gold old days’  The frenetic use of petroleum really started ramping in the 1970s as the oil sheiks saw they have us over an oil barrel.  Since then the demand for oil has ramped to the moon as 4 billion more additional people on thie planet found themselves possession two things. More money and more desire to buy something with that money  They started buying better food, cleaner water, better consumer goods and all sorts of plastic goodies.  Hence the reason we see $100 barrel oil.
    Silver seems to possess a different upramp of demand and popularity.  These extra 4 billion folks, once their appetites for some of the things of the better life were slightly slaked, they also saw some extra money in the pocket.  That pocket lettuce was dropping in value so they rotated their focus to precious metals.  The mass communication explosion with its huge demand for silver along with coins and jewelry started that proverbial gold rush to the silver and gold supplies.  Leaving aside for a moment the price suppression and manipulation of these metals, the price rise over the last 20 years has been once of the best and most consistent returns on investment  in the world. The last 10 years has been a bit of a moon shot in itself. 
    Just as oil’s begun  its decline as an easy ‘find’ it is clear as a bell that silver demand and silver supply are going to end very badly for everyone except us.     Thanks for the reminder that we are not crazy for stacking.  It’s just a matter of time.

    • Exactly! The two main things that will drive commodities prices higher in terms of fiat currencies are the high inflation and the growing demands. Maybe the reason why the fiat system came in 1971 is because the populations are growing so people would need a way to keep their savings and precious metals won’t be enough.

  3. I agree with AGX and SB. Most people don’t see a good deal until it is near the top. Then, it’s too late. I really missed the silver stacking in the early stages. Luckily, I have been able to stack for over two years now. Though not the first, I certainly won’t be at the top like so many when it goes parabolic. At that time it will be too late and those that start when the sheep jump in will lose their “arse”. My stack is small but strong.

  4. Good backup post SRS makes it more clearer to dummies like me, right AGX. Lol I’m just barely scraping along paying my debts but that’s because I put every spare Fiat into Money and hopefully I’ll have enough to Survive when the time comes and it will.

  5. That is really bullish for silver because if the ores are declining, then production will also be the same which will cause physical gold and silver shortages. After that, the high demands will drive silver’s price up. Paper gold and silver will become worthless since industries will demand for the physicals.

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