Will $60 Silver Price Spark Higher Mine Output?
Even with silver hitting record highs above $60, mining output won’t surge overnight—most silver still comes as a by-product, not from primary mines.
With the silver spot price reaching an all-time record high this week, above $60 (ignoring the impact of government inflation of the money supply), one question we are being asked is, won’t this prompt a surge of output from silver-producing mines?
This is not a simple question to answer because of the economics of the mining industry. In the long run, at least ten years down the road, this could lead to a noticeable increase in silver output from mines. In the shorter term, don’t expect a large jump in production.
One consideration is that only 30% of mined silver is produced by primary silver mines. The other 70% comes mining operations where silver is only a by-product or co-product of copper, gold, zinc, lead, and other mines. Thus, the price of silver has a minor impact on 70% of silver production.
Here are two examples. The world’s largest silver-producing mine is a copper mine in Poland. The Red Dog Mine in Alaska is the world’s largest zinc mine, where it also produces about 0.5% of global silver output as a by-product. For these and similar operations, the sale of silver is considered more of a reduction in operating cost rather than as a revenue source. A higher silver price is a minor bonus, not a driver of increased production.
Also, mining operations typically focus on extracting from veins where the yield per ton of ore exceeds the marginal operating cost of extracting that ton of ore. In almost every mine, there are multiple veins of varying purity. That means that the marginal yield per ton varies. Well run mines focus on extracting metal somewhat above the marginal operating costs. So, when the price rises and increases the yield per ton, production shifts to lower purity veins that become profitable. The higher-yield veins are reserved in case prices later decline, so that operations could still continue profitably at lower prices.
Then you also have to consider the costs and time delay of developing a newly operating mine once an economic source has been discovered and proven. Two decades ago, it typically took three years from proof of a strike until a mine went into production. Today, with more extensive environmental and government regulations and discoveries found further from existing infrastructure, such as roads and a source of electricity, it is now taking an average of at least 10 years before a new mine goes into production. This extended time before revenue-generating activity begins, by the way, also increases economic risk and the interest costs of financing the project.
But, what about existing mines that may have ceased operations because they stopped being marginally profitable? Almost 20 years ago, I visited the Bunker Hill Mine site in Montana. This was a primary zinc and lead mine that also produced silver as a by-product. It ceased operations because the yield per ton of ore did not cover marginal operating costs. After it closed, the prices of lead and zinc jumped about 1,000%. At the time of my visit, the mine was being rehabilitated to go back into production. A vein close to the mine’s entrance would only yield $20 per ton of metal at the time the mine closed, versus operating costs of $40 per ton to extract that ton of metal. However, with rising prices, that vein at the time of my visit would yield $60 per ton, with almost all of the increase coming from the hike in zinc and lead prices, making it well worth going back into operation. Even then, the time to rehabilitate the mine to meet then-current environmental and government regulations meant it would maybe take two years before production could resume.
Higher silver prices will lead to greater recycling of existing physical silver, but this is only a minor source of total silver supply. The Silver Institute projects that recycled silver supplies in 2025, even at current higher prices, will only account for about 20% of global annual silver supplies. In the past two decades, a surge in silver prices only increased annual recycled supplies by about 10% at the most.
As you can see, the huge jump in silver’s price this year will have only a slight impact on increasing immediate physical silver supplies—not even enough to cover this year’s expected shortage of physical supply to meet physical demand. On this basis alone, prospects for even higher silver prices in the near term are strong.
Last column’s numismatic trivia question.
Last time I asked— Why did Canada begin issuing silver dollars into circulation in 1935, the same year that the US Mint issued the final Peace Dollars for circulation? The US Mint resumed striking Morgan and then producing Peace Dollars in 1921 as part of a somewhat complicated program to help the United Kingdom prop up the value of that nation’s pound currency after that nation’s heavy expenses for World War I. This need was largely filled by 1928. The Great Depression reduced the need for new coinage for everyday commerce, though the US Mint did strike Peace Dollars in 1934 and 1935. In contrast, Canada had never issued silver dollars for circulation but did so in 1935 to commemorate the 25th anniversary of British King George V’s time on the throne. Canada was and is a major producer of global silver supplies. It then continued striking silver dollars for circulation annually through 1967.
This week’s trivia question
Here is this week’s question. The US government is almost completely ending the practice of sending paper checks. According to Michelle Bowman, who serves on the Federal Reserve Board of Governors, what percentage of US financial transactions this year are paid with paper checks? Come back next week for the answer.
Patrick A. Heller was honored as a 2019 FUN Numismatic Ambassador. He is also the recipient of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, the 2017 Exemplary Service Award, the 2012 Harry Forman National Dealer of the Year Award, and the 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild, Professional Numismatists Guild, National Coin & Bullion Association, and the Michigan State Numismatic Society. He is the communications officer of Liberty Coin Service in Lansing, Michigan, and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. He now volunteers with the National Coin & Bullion Association as its Industry Issues Advisor. Past newsletter issues can be viewed at www.libertycoinservice.com. Some of his radio commentaries, "Things You ‘Know’ That Just Aren’t So,” and “Important News You Need To Know,” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio archives posted at www.1320wils.com).
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