At this second, you are saying to yourself – “Nate, I know you invest in Fortuna, First Majestic, Pan American – are you telling me they are dead?”
No. Not by a longshot. But they aren’t silver primary producers, anymore. First Majestic is still probably in that category by a hair. But probably not for long.
See, these silver companies now are mainly gold producers or base metal producers with a silver upside. And…that’s quite ok for me. I once added all of the production of silver up from the “silver primary” producers and it came up to be like 150 million ounces yearly, and that might be generous. Even Fresnillo – the largest silver primary producer – reported their gold sales were comparable to their silver sales in 2021. I saw 751k gold oz against 53m silver oz. At 1800 and $24 respectively, you get more for gold.
What you can see if you look very closely over the last few years is primary producers increasing gold production in order to keep the lights on, so to speak. First Majestic acquired Jerrit Canyon, and Fortuna Silver Mines was at 27% silver last year and saw it may be as low at 19% this year. Pan American has been at the 26% silver, but had a lot more base metals as their primary metals than gold.
When I was picking mining companies – I liked the idea of both gold AND silver. Gold keeps the lights on – hopefully – but the upside with silver is undeniably attractive if silver were to go after its 1980 highs again.
It begs the question, what silver PRIMARY companies are really left? The last I saw Endeavor was 60-40 silver to gold, but had a higher cost of silver production than some of its peers. This is one reason the stock was ground to dust when the price of silver hit $18. A quick glance of their 2021 production has them still a bit over 60% silver – depending on the number you use to calculate it.
But of course, Hecla is then the last pure play, right? Well – by back of the napkin math based on their 2021 production, you see about 43% silver – depending on what silver price for 2021 they used – I used $24, which might be low.
Point is – where is your “pure” silver plays today? They are less and less….
I saw a chart when I was getting into this several years ago – Steve St. Angelo was doing weekly YouTube reports and I ate up the charts. He put something out there that mesmerized me. You can see how Maloney’s team saw this up to 2016
But Steve took this ball and ran with it…
Steve’s numbers are a little lower than Maloney’s – but they are following the same curve through 2016, then you really see how they have degraded in just the last 7 years.
Now, if the grades go down, this means you have to run more tons of ore to make your nut for the month. This drives up operating costs and lowers operating margin on your financial statements.
Here’s another Steve pic which shows how much ore these guys need to run.
What you are seeing is perhaps max output from 2014 on, but grades have been decreasing. So if you cannot run more per month to make your nut, you have to lower production guidance. That’s clearly what you are seeing here. And – this probably coincides with a lot of these primary silver miners transitioning to gold/base metal companies.
Many of these silver primary producers didn’t hedge their silver production. Meaning, they didn’t forward sell on the COMEX to lock in prices – which creates “shorts” on the COMEX and depresses prices by signaling supply. The REAL supply is intermixed with the PAPER supply and all the physical supply hedging here by primary producers does is lower prices for silver. However, the big and massive base metal companies as well as massive gold companies may hedge their silver production. Why? Because it is a byproduct and therefore it is good to lock in prices now and focus on your primary metal.
This begs the question – could a Pan American now that Ross Beaty is gone be sold to a massive base metal producer who might have better profit margins by hedging their silver? Could a Hecla with 42% silver production also be swallowed up by a massive lead or zinc producer? Could a First Majestic get swallowed whole by a Newmont? The answer to all of them is yes, yes, and yes. Why? Because these primary producers rely heavily on a suppressed price of silver.
Market Efficiency and Price Suppression
I think the design of the COMEX was absolutely brilliant in order to find market efficiencies. Now, bear with me a few minutes here before you rage quit this and throw your cup of coffee at the screen.
The design here has a form of built-in air brake system. Let’s say that a massive silver producer one day says, “we’re hanging it up, we are tapped for silver”. This could rid the market of 50m oz of production every year. This could have massive implications on those existing ounces and who bids them up. For argument’s sake, let’s say it was up to $40 an ounce in a month. This design allows betters to come in and “sell” futures – betting that market participants would eventually catch up to that lost demand and overshoot – flooding the market with silver and they could then buy back this at $30, pocketing $10 on this bet that price would lower.
The problem is high frequency trading got involved, and with this, trades are being made thousands of times a minute to profit a penny here on a thousand contracts, $.03 here on another. Then – the same banks that know where people put the stops are then able to sell into this market to force these stops to sell, then buy back cheaper.
Leave it to Wall Street to squeeze every nickel out of you. And, when you win, they simply change the rules. See nickel.
When silver squeeze happened – we won. We really did. But, they sort of pulled a nickel on us behind the scenes where maybe only a few thousand people on the planet can see what happened. To avoid any form of lawsuits, let’s use ABC as a proxy here for an unknown silver ETF. Many people such as myself saw what was unfolding – and with this, bought a ton of options on ABC. This forced brokerages to buy shares of ABC to ensure they could cover. ABC ETF then told market participants that 110m oz was moved into their vaults in the LBMA to cover this surge. Everyone who is in the industry called bullshit on this (I’m not in the industry, but report and research intensely what those in the know have to say). I thought it was POSSIBLE they did some sort of short term lease from another horde close by and simply slapped another name on this pile, perhaps rehypothecating them. It was then reported a month or so later by Ronan Manly that the LBMA reported a 100m difference in their accounting records – as if someone said they had 100m more oz than they did. They never named ABC bank, but the LBMA had about 1b oz in their vaults, and ABC made up about 60-70% of these stocks, so you do the math on how hard it is to be off in your inventory by 17%. Maybe a few bars here and there, but 17% of your 600m oz pile?
It was clear to anyone watching this closely that something broke. We won. Or did we? Chris Marcus at Arcadia had reported on Ronan’s piece which also detailed the prospectus change during the middle of the squeeze – essentially now stating that ABC might not have all of the metal.
So…did ABC mislead the markets by erroneously stating they moved in 110m oz, which could clearly by market manipulation if not true – and myself and others could have been made whole with millions of dollars in lawsuits?
While the COMEX is a beautiful design to allow producers to sell at the lowest costs possible, it is clear to anyone that looks closely that the supply/demand underlying structures of these markets were broken by machines a long, long time ago.
Where does this leave us with silver?
It is clear to anyone watching this that it is Krakatoa in super slow motion. We saw what happened when the nickel market broke. The LME simply reversed all of the trades. Those who thought they made millions had it taken from them – all to appease a single Chinese investor who bet short and got blown out. This market destroyed its reputation in order to make a single participant happy – who refused to cover his shorts.
To me, this was a blueprint of more or less what happened with silver during silver squeeze. The ABC bank refused to by the silver on the open market which would have pushed price up significantly. The ETF that people buy into in order to play the price of silver was supposed to go out and buy silver in the open market – which would have driven up prices and made those who bought into the ABC rich. Instead, the planners of this ETF took actions against their shareholders – directly going against their fiduciary responsibilities. Later that quarter, their CFO resigned rather than sign their quarterly reports – or so it seems. A resignation on the last day of the quarter? Interesting.
What this ultimately did was keep the suppression game going longer without higher prices. This was kind of – sort of – a nail in the coffin for the future of silver primary producers. Why?
You have clearly seen above there were declining grades. You also have seen a lack of silver projects that make any sense at $18. Taj Singh once said about Discovery Silver “it’s a home run at $20 silver”. He spent a lot of time taking a 1b oz deposit and turning it into a 650m oz deposit which had higher grades to be profitable at $20. Bear Creek has 500m oz, but it also may be a higher cost of production.
You can clearly see mines like San Jose from Fortuna that are coming to end of mine life – and Fortuna has had a ton of focus now on West African gold mines with their risky acquisition of Roxgold – which Dave Kranzler has been writing a ton of great stuff about. This eventually will take them under 20% silver production.
But what about all of the solar panels and EVs? What about the demand? Where are they getting it?
Let me see…
- Decreasing ore grades
- Cannot produce more than they are now, as evidenced by charts above
- New mines can’t make money at $20 and may not get financing or built unless price goes up
- Price was to move up, and was smashed by HFT and COMEX market participants who fought back the surge with paper selling
- Increasing costs are decreasing operating margin rapidly with high costs of diesel
- You also have increasingly far leftist socialism in countries where silver is found – harming foreign investment capital in these countries and putting new projects at risk. This also has risks of companies being nationalized.
What this is doing essentially is making anyone who is a silver primary producer to switch to being a secondary producer. If you look at “primary” producers, they make up roughly 15% of all silver supply to the market. But you can easily see the numbers I laid out that by 2026 between EV and solar panels – we may have another 100-300m oz of silver in demand each year…..with lower ore grades and no mines coming online. Yes, you have MAG soon. Discovery possibly in 2023. Bear Creek maybe 2025-2026.
Where do we go from here?
Well, I can tell you that the big companies that are base metal producers may cut back their production. Why? Recession. If you are a lead, zinc, or copper producer and you have millions of oz of silver as a byproduct, you may be cutting back production as the first recession in 12 years is about to hit. If 80% of world’s yearly supply is from base metal producers, and base metal producers are cutting back their base metal production – it also stands to reason they have less silver they are selling forward on the COMEX. Less physical shorts.
It also stands to reason that it’s possible a lot of these silver primary producers morph into things like “Fortuna Gold and Silver” and “First Majestic Metals” or the like. Why? Because as much as having silver in the name can be an upside marketing trick to get investors – it works both ways and can cut you deep on the way down. If you look at FSM, it trades a lot like a silver company with retail and not so much as a gold company – which it is. You still might say First Majestic is a silver primary at perhaps 55-60% silver, but you have to ask yourself for how long with all of the dilution and focus on Jerritt Canyon and diversification of assets – both in metals and jurisdictions.
But aside from the branding, those who now produce 20% silver as opposed to once producing 60% silver may start to hedge production forward. Who knows on this – but I cannot blame them if they do. Those at 60-70% silver (not many, I assure you) might go under with rising costs and have to sell in the next 12 months – IF price doesn’t rise.
You can make a legitimate argument that silver bottomed for now and will be heading back up to $30 as the legitimate supply coming in is really being threatened. Those same bettors that would bet price going lower may now start to load up on price going higher for all of the above reasons.
You can also see a trend line which broke up in 2011 and was papered back into the channel in 2012-present. Could this be the market matching inflation and adjusting for prices? To me, this seems legitimately like a pre-planned trading channel to get just enough supply at the lowest possible prices to meet demand.
But all of that is broken now, I believe. In the coming BRICS+ world, supply chains are going to be torn up. Just In Time inventory, which I learned as part of my MBA studies in 2002ish – specifically my MIS portion, dealt with how software and barcoding and accounting inventory analysis could automatically place orders for you given the lead/lag times of products.
Inflation today is a different beast than anyone has seen before. You not only have the surge in M2 monetary inflation which bid up all asset prices (stocks, real estate, etc) but you also have seen supply chain issues – which drive up costs of limited supply. On top of that, because inflation was not a few months, but now sustained over a year, you will have wage growth also then putting upward pressure on inflation. My bet is that the central planners were counting on demand destruction to take care of the wage problems. However, sustained inflation is now having job seekers looking for higher paying jobs, thus putting pressures on the labor markets. Either you pay higher wages, or you lose your work force to a competitor. This also shrinks operating margins.
All of this is to say that I do believe there is at some point a vast deflation ahead. That bullwhip effect may hit, and products in demand 4 months ago may now hit the shelves in force, but have no buyers. This is what I saw with the grills at Home Depot over the last few weeks.
But the bullwhip effect may be more or less focused on retail goods. I see continued pressure on both food supplies and energy. While Russia can be blamed in part for both – you can clearly see the Netherlands and Canada wanting to destroy farms due to nitrogen production of such. This is an unforced error which indeed will put pressure on food prices as you cannot really get demand destruction for a lot of this if people are hungry. You also saw with Russia and the gas lines/oil and how that drive prices up – but you have Germany and others shutting down nuke and coil plants just as their natural gas is getting cut. This makes energy costs go sky high.
To me – I bought solar and batteries to hedge my energy costs here. I essentially have an electric bill now (my solar/battery loan) which is a fixed cost for the next 20-25 years where electric will continue to rise higher due to globalist wanting you to eat bugs. It’s just a matter of time before the light bulb goes off and due to higher energy bills – people then see solar as cheaper. This cannot be a coincidence. So to me, I see a ton of solar demand coming the next few years.
Likewise, if you drive a car here gas was $5 a gallon. Instead of encouraging Exxon to find more in exploration, they want to call them greedy and punish them. Why would you invest billions in wells when at any moment the admin will take your permits? If you do not have a friendly policy towards fossil fuel exploration, then you will continue to see higher gasoline prices around the world for the next decade. Sure, there can be some demand destruction on travel – but people are now having to go back to work here full time after COVID. This will continue to put pressure on supplies. Meaning – skating to where the puck is going is telling you that the bug eaters want you to buy EVs. Powered by the solar on your roof. This doesn’t work well in Europe, where sunlight isn’t so great.
Between rising production costs, lower grades, a recession coming, and pressures on EVs/solar – I can see a palladium move coming in silver. What I was completely naive to in 2021 during the silver squeeze was just how brazen these guys are to defy the laws, markets, and make up their own rules when they lose. That was quite eye opening, and I cringe at the thought of my first Palisades interview. Why? Well, it had ALL of the makings of palladium with the melt of up nickel baked in – and the sustained move of Lithium as a promise to come. But the banks changed the rules.
But I believe all of that is coming to a close. Shelves are getting bare. You see 330m oz of silver in the COMEX, but only 55m are actually “for sale” at this price – which is roughly 20 days supply of worldwide demand if you look at it through those lenses. Meaning – one day the wholesalers have no product, and they scramble to buy and what they may happen is taking delivery out of the COMEX for industrial usage. In theory, this SHOULD have prices go higher, and allow more of the eligible to sell. But – with the giffen good effect, as the price hits $30, to me, that’s when the squeeze REALLY starts.
I think the move to $30 isn’t going to take that long. IF gold hits $2500 by the end of the year as Goldman predicts, 83:1 GSR has silver at $30. But I think THAT is when you might see the GSR move a lot – as the move from $30 to $50 could be quite the episode if shorts cannot push it back under $30 quickly.
So we could have a recession for a lot of retail goods, but I see the demand for EVs/Solar panels under an energy category which I feel will only increase with inflationary costs. Lower ore grades, higher fuel costs – unless silver goes up, and drastically, there will be no solar panels to power homes and cars, and no EVs for producers to sell.
It is logical to then consider significantly higher prices in silver await. And when they do happen, those silver primary producers still standing will be rewarded handsomely for their efforts. Until then, I think it’s VERY wide marketing for silver BYPRODUCT companies with significant silver production to re-brand their companies. You cannot sell 26% silver and call yourself a silver company when silver prices are $18-$20 – you are going to get slaughtered in share price. CEOs will realize this towards the end of 2022 and we may see a lot more of these companies with “gold AND silver” or “metals” in their names.
I definitely see a time inside of a year where this whole thing blows up on shorts. With the recent conviction of Nowak and company – along with the jail time coming, it’s reasonable to assume that risk departments may have more control over their metals trading. It is also reasonable to assume in a Biden presidency that HFT gets taxed per transaction – which can turn the entire quant industry on its head and restore some form of free markets. I had heard there was a NY law coming about this and the HFT told them to piss off and it went away. With 87,000 IRS agents getting hired and 400 billionaires in this country, it stands to reason they will have their hand up everyone’s asses. To me, HFT has destroyed the free markets and it is reasonable to assume that someday taxing these per transaction make break the chains.
IF you eliminate HFT from metals, oh my God what awaits.
Until that day, accumulate. Enjoy the shiny. Read up more on your favorite miners.