First Majestic Silver Corp. (AG)

[re-actor]

https://seekingalpha.com/article/4402741-usgs-2021-report-silver-reserves-and-production-declining

Summary
- USGS reports decrease in silver production and reserves.
- Silver reserves and silver production decreased in Peru and Poland.
- Primary silver production is declining rapidly.
- Most of the silver is produced as by-product from copper and zinc/lead.

Each year, the U.S. Geological Survey publishes a report on world mine production and reserves. As precious metals investors, we are especially interested in the silver segment of this report which gives us extremely valuable information on the supply side of the silver market.

The silver price has risen 50% since last year ever since the Federal Reserve kept interest rates at 0% while increasing its balance sheet by 75%. It is expected that another $4.5 trillion of stimulus will be unleashed over the next few years, so that should boost silver investment demand. On top of that, the recent buying frenzy from the Wallstreetbets community has pushed the amount of ounces in the iShares Silver Trust ETF (NYSEARCA:SLV) to a record high. On the other side, the new trend of electrification (electric vehicles, 5G, solar panels, green energy) will add to fabrication demand. When we look at the supply side of the silver market, we observe that most of the silver supply is produced as a by-product from base metal mining. This is a new trend that has started a few years ago as primary silver production declined while base metal by-product silver production increased. 32.1% of silver production comes as a by-product of zinc and lead mine supply, while 22.8% comes as a by-product of copper production. Thus, 54.9% of global silver production is a result of copper, zinc and lead production.

Statista reported that silver coming from primary silver miners decreased significantly in 2019 and this trend is going to continue going forward. Primary silver miners have enormous problems with declining ore grades and this is starting to show up in the numbers. Also very important to note is that declining primary silver supply only has a minimal effect on the silver price, because most of the supply is coming from base metal by-product (54.9%).

We are seeing a recovery in demand for base metals this year due to the reopening of the economy. For example, copper has risen 75% from its low in 2020 when it took a big hit after the announcement of the coronavirus outbreak in China. Due to lockdowns, the Chinese tourism sector has completely collapsed and this has led to a massive trade surplus for China as the services trade deficit has disappeared. All of this extra saved money was used to invest in commodities like copper, nickel, silver, gold, iron ore, and oil.

Although demand for base metals is improving, I don't expect that supply for base metals will be rising that fast because it is very difficult to bring these mines into production as these are very large projects. The grades of these mines is also decreasing going forward. For example, copper supply (and silver by-product supply) is most likely to grow slowly in the coming years (see figure below of Wood Mackenzie). As a result, silver by-product supply coming from copper mines won't be increasing as much.

Silver by-product supply from lead and zinc mines is rising while silver by-product supply from gold is forecasted to decline. According to Barrick Gold's PDAC 2020 presentation, gold supply (and silver by-product supply) will decrease over the coming years.

The 2021 USGS report shows that silver production and silver reserves have peaked (see charts below from USGS). Mexico and Peru are still the two largest silver producers in the world and Peru is the leader in silver reserves. However, Peru's silver reserves declined from 120,000 to 91,000 tonnes. Also notable is that Poland's reserves declined from 100,000 to 70,000 tonnes. Total silver reserves declined 14% to 503,000 tonnes. It looked like 2014 was the year of peak silver production. Total silver production declined from 26,500 tonnes/year (2019) to 25,000 tonnes/year (2020). When we extrapolate the charts we can estimate that silver will be depleted in about 20 years if not sooner as the average mine life of a silver mine is currently only 10 years.

Let's take a closer look at the 3 largest silver producers: Peru, Mexico and China.

During 2020, we saw that Peru's silver reserves have declined 25% year over year to 91,000 tonnes. On the production side, Peru has been doing well since 2013 with base metal mine production rising 30% from 2013 to 2017, but since 2019 we saw mining production decline again (see chart below from Statista). Peru's silver production decreased 12% year over year to 3,400 tonnes per year in 2020. The outlook for copper production is positive. According to the ministry, next year the mining sector will experience an expansion of up to 15.1% thanks to the normalization of activities and production startup at more copper projects.

Now let's take a look at Mexico. Silver production declined 5% year over year to 5,600 tonnes per year in 2020. The chart below from Trading Economics shows how Mexico's overall mining production improved in 2020 but is still down year over year. Silver reserves were unchanged at 37,000 tonnes.

The third largest producer of silver is China and we have seen a nice comeback in 2018-2019. Silver production in China comes primarily from by-product of lead and zinc (95%), so we need to take a closer look at base metal mining. Mining production in China increased 5 percent in December of 2020 over the same month in the previous year (see chart below from Trading Economics). However, silver production for 2020 was down 7% year over year to 3200 tonnes per year. Silver reserves were unchanged at 41,000 tonnes.

Looking at these numbers, base metal mining has been doing very well despite lockdowns and a good amount of silver is coming from there as a by-product. Nevertheless, it is a fact that silver reserves and grades are coming down. The decrease in primary silver production is evidence of that. The current trend is pointing to declining silver reserves and silver production and this should be encouraging for the silver price going forward.