One of the most insidious problems taking place in the gold and silver mining industry is the decline in falling yields.  Not many realize, when yields decline, production evaporates and disappears.  To offset the decline in metal yields, the mining companies have to add new mines and or increase the amount of processed ore.
If we take a look at the top 6 silver producers, we can see that the average yield declined 38% since 2005, from 13.0 oz/t (ounce/tonne) to 8.1 oz/t in 2012:

 

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From The SRSRocco Report:

The companies and individual primary silver mine included in the graph above were, Fresnillo, BHP Billiton Cannington, Pan American Silver, Polymetal, Hochshild & Hecla.  Furthermore, I only included primary silver mine production from these companies.

For example, both Fresnillo and Polymetal had higher annual silver production figures than is shown in the graph above.  This by-product silver came from their primary gold mines and was excluded from the calculations as it would have significantly lowered the average yield.

This next chart shows the inverse relationship between falling yields and increased processed ore:

In 2005, these companies processed 9.4 million tonnes of ore to produce 123 million ounces of silver.  However, by 2012 a total of 15.8 million tonnes of ore was processed, an increase of 113%, to supply 127 million oz of silver.

Pan American’s Dolores silver & gold open-pit mine was not included in the 2012 calculations due to its extremely low average ore grade of 42 g/t (grams/tonne).  Even though the Dolores mine added 2.6 million oz to Pan American’s total, it would have severely impacted the group’s 2012 annual yield by knocking it down from 8.1 oz/t to 6.4 oz/t.

Declining Silver Yields = Evaporated Production

If we take the top 6 silver production in 2005 at 123 million oz and figure a seven-year 38% decline in yield, we would have the following:

123 million oz (X) -38% yield = 47 million oz loss of production

So, if no new production was added by these 6 mining companies overall supply would have declined to 76 million in 2012.  To be able to increase production on top of declining yields, the silver miners have to either add new mines or ramp up their milling and processing of ore.

A perfect example of this took place at Fresnillo.  Here we can see that overall production at Fresnillo remained the same in 2012 as it was in 2005:

How was  Fresnillo able to keep its production at 33.4 million oz as its average yield declined from 15.2 oz/t in 2005 down to 9.2 oz/t in 2012?   This 40% decline in yield caused a huge reduction of 13.3 million oz in this seven-year time period.

To offset this large decline in yield, the company ramped up its milling capacity 26% at its Fresnillo mine and added production from its new Saucito mine.  In 2012, the Fresnillo mine accounted for 26.4 million oz of production while Saucito made up the difference by added 7 million oz to the total.

Again, the figures in the chart above only came from Fresnillo’s two primary silver mines… Fresnillo and Saucito.  Fresnillo accounted for all the production until 2011 when Saucito ramped up production.

This is the big problem companies face as silver yields decline.  In the case above, Fresnillo PLC had to ramp up production at Fresnillo and had to bring on a new mine (Saucito) just to keep production the same as it was seven years ago.

Now we can see how costs rise as yields decline.  For instance, think of all the capital it took to bring Saucito from an exploration stage to commercial mine production.  Furthermore, the company had 875 contractors working at its Saucito mine in 2012 including all the additional mining equipment, materials and energy costs.

The Cost to Produce Silver will Rise as Yields Continue to Decline

The impact of falling yields shown in the Fresnillo example above is taking place in the whole mining industry.  Pan American Silver was producing silver at 7.4 oz/t in 2005, but by 2012 this had fallen to 5.1 oz/t (this is excluding the Dolores open-pit mine which would drop the average yield down to 2.9 oz/t). Furthermore, Hochschild’s average silver yield declined from 12.4 oz/t in 2005 to only 6.7 oz/t in 2012.  I could go on and on.

What we are witnessing here is the evaporation of high-grade silver production only to be replaced by a much more expensive low yielding supply.  This will only become more difficult each passing year.  As costs to mine silver continue to rise in the future, so will the price of silver.

Lastly, energy is the overwhelming factor contributing to the increased costs of mining silver as yields decline.  Thus, silver will become one of the best stores of value in the future because it functions as an excellent store of trade-able energy value.

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  1. Events that unfold over this weekend COULD change things on Monday.  Greece is falling apart with political coalitions falling apart and a multi billion euro deficit that is hitting Greece now.  China’s shibor rate went to 25%, down to 10% and banks are not lending to each other, hoarding cash, causing businesses to suffer cash flow lock ups.  State Street’s Muni ETFS are not cash settling.  There are large gaps in the prices as the muni markets are getting hammered by rate increases and a substantial feal factor washes over this industry.  ETFs are worth about $2 trillion and my concern is that if enough people try to redeem, the values could tank, cause a force Majeure and all hell iwll break loose.  Once an ETF breaks down or an MMA in the muni industry breaks the buck like the 2008 incident involving Lehman securities, the financial world came to a sreeching halt.  Get some cash from your accounts today and hold it just in case. 
    These looming problems are just the sort of crisis our government loves in order to lock down anything and everything they can pay their hands on.

    • King Obama will use it as an excuse to declare martial law and gun confiscation. And that will start a very bloody civil war.

  2. Not that I have the market cornered on the idea, but I said that to me it made sense that they relentlessly beat the metals down in advance of some type of collapse and that seems to be more and more likely.
     
    Like a broken record, I’ll say it again, bring on the collapse, and bring on a supply shock in the metals pantheon. It is baked into the cake.

  3. Nice report, thanks!
     
    I’d love to see analysis of primary silver mine ore grades (or a large basket of near-primary and up) versus pure by-product producers, split in gold/platinum type mines and base metal mines. How are THEIR ore grades developing?
    The anti-anrgument for silver, is “it only costs $5 to produce” and “it’s mined for free as by-product”. We know it’s not as simple as that, but the declining ore grades there would be a great insight in my opinion.
    For instance, of we take primary copper mines, how are their silver grades developping as they keep focussing on copper?

    What I am of course hoping to learn, is that silver ore grades are falling across the line. 
    Yet another angle. What’s the ore grades for either group of producers in their first 2 years of real production, and how does this develope over the years? This might hint clearly how new mines that may be open in the coming decade or say, will be able to produce.

    • excellent point and the optics around the base metal miners is in my view a key piece of the puzzle. Give what 70+ % of silver comes from that, the importance cannot be understated.
       
      Either way, this bullsh!t gong show has gone on way longer than probably anyone ever thought it could, and in the end, it will be the bastards who engineer their own demise by pushing too far.

    • Those cheap numbers like $5 or $10 is when silver is a by-product of a zinc, lead or copper mine.  These mines do not make near enough silver to supply the demand.  You can do a little research on the larger producers of dedicated silver mines and cost to produce per oz.

    • Byproduct numbers do not include all the costs associated with getting and processing the ore. it is a number they just sorta pick from thin air.
       
      Easily mined silver is gone, there will not be any cheaper and easy to find silver anymore so costs are going to keep climbing.

  4. I think they need to bring the price lower and watch the paper silver roll over like it did yesterday. 
    Also, all of these metal pumpers have been incredibly wrong.  Not just slightly wrong but very wrong as they hyped $50 and $100 silver in 2011, 2012 and 2013.  Today we’re sitting at $19.86.  Wow, that’s one seriously wrong call almost resembles penny stocks which can fall 30% or 50% in value over a few days or weeks.
    Until the derivative paper is removed true price discovery cannot happen.  Right now there is many years of paper silver capping the market so it can do nothing but bottom bounce.  Sure it could rally back to $30 or $32 which would make a lot of people happy but that’s probably the capped range. 

    • In a rigged and manipulated market, there is NO WAY to know what it might rise to, when, or whether that is a “capped range”.
       
      “Until the derivative paper is removed true price discovery cannot happen.”
       
      Those of us who are still building our stacks do not want true price discovery UNTIL our stacks are complete!  PMs are on sale now and the longer they remain that way, the more we can stack with the fiat we have available.  :-)

  5. But Powerball, did we buy for a quick profit?  There were several times in the last two years where silver bounced nicely, up 20-35%. Taking profits would have been nice. I did a little trading during those times, selling into price surges.My sales spot price was $8 over too boot and people were happy to get immediate delivery.
      But isn’t silver and gold an insurance hedge against matters fall more important that a short term profit?  My thinking is that the fundamentals remain for these two metals to give us a hedge against some sort of incoming financial crisis or multiples.  The near mathematical certainty of real problems here and overseas that will cripple equities, bonds, banks and businesses will give us a fall back position with our personal precious metals banks. Notice that those folks who used to post about their bitter experience over buying silver at $36-42 are not posting presently.  I bought at $42 and my average buy price is about $33.  That concerns me only if I planned to liquidate some gold or silver to pay expenses.
    I did sell some gold at about $1,400 recently to cover bills and bridge a gap in commissions. As much as it pained me to sell in the present day, depending on whether I used LIFO or FICO accounting, I either made a $300 an ounce profit, or lost $300  I’ll use LIFO for tax purposes to garner a small capital loss.  No worries though, this was a temporary stop gap.  I did stock up on some essentials so the sale proceeds and use of gold was not wasted.
    That’s the way I see it and the interesting thing right now is that silver and gold, like prepper foods and supplies, is lower in price today than any time in the last 4 years.  We need more people to pile on and prep up with the needed supplies and do so in an affordable manner. I think of the silver price now as a gift and wish I had a ton more FIAT to cover to PMS.
    With tough times upon us, incomes down and savings depleted, the fact that the Silver Doctor regulars can start and continue to stack for the coming winter is a good thing.
    When silver miners sell at $4 an ounce to a company like Silver Wheaton, we don’t see that price in our physical stocks. SW will sell into the market and recover the cash they used as an investment into that particular silver miner. They stock funds to invest in new mining ventures so i don’t begrudge their buying at $4 an ounce.
    Selling silver as a byproduct just pays a few bills in the overarching cost of mining base metals. It’s a significant sources of silver, that is true, and 70% of the mined silver stocks come as byproduct of base metal mining, so as the world economy slows down and silver supplies drop we cold see further erosion of that silver supply chain. Demand is not declining as quickly as supplies so there is a supply dearth. There will be shortages upcoming, and soon, as the silver and base metal miners and suppliers see much reduced production due to costs, mining disasters, nationalization and other factors.
    There is a much greater increase in the investing use of silver as we can see from Mint demands. Medical silver use is ramping up and solar will use as much as 60-70 MOZ this year, potentially hitting 150MOZ in 2015. Those usage curves can’t be made up from mining without the price increases that allow for a profitable extraction of silver and gold. I would guess that the silver production won’t see growth until prices hit $40-50 an ounce. It takes 5 years to start a mine. The miners will need a few years of substantial profits at $50 an ounce to make up for losses that are certain due to prices that are $5 under production costs. Otherwise these mines will shut down until the price jumps double or more. No miner is willing to sign a suicide pact with low prices. Businesses can’t work that way for long or bankruptcy ensues.
    But it could take a year or more before we break the grip of the manipulators and the miners see silver turn into a Giffen good, prices reset to a level of profits that must be seen to garner interest in this mission critical industry and enough people become aware of how troublesome our times are becoming. It took 3-4 years before silver and gold caught the attention of the public and prices shot up. I think that this time it is different and prices will retain a level that was once seen over 33 years ago and only on a temporary basis.But what the heck, I’d be happy with even a short term rally. Just sayin’

    • “When silver miners sell at $4 an ounce to a company like Silver Wheaton, we don’t see that price in our physical stocks. SW will sell into the market and recover the cash they used as an investment into that particular silver miner. They stock funds to invest in new mining ventures so i don’t begrudge their buying at $4 an ounce.”
       
      Absolutely, AG.  We would ALL be buying silver like there was no tomorrow if we could get it for a price anywhere near $4 an  oz.!  :-D

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