Sea Change in Metal Mining
The distinction between precious and base metal miner is not clear cut as many base metal mining companies also produce a substantial amount of gold and silver as co-products. On the other side also gold and silver miners produce considerably amounts of base metals.
In this context, Rio Tinto, largely known as a base metal miner, produces around 4 mill oz of gold, which ranks this company among the biggest gold miners in the world. Placer Dome, well know as one of the leading gold mining companies, produces on the other hand around 150,000 tons of copper, which can compete with very large copper miners.
The below chart shows the relative positions between gold miners and base metal miners. Although Placer Dome produces 2 mill oz of gold (all numbers are rounded as due to high volatility of the production numbers over time) it actually produces much less gold than Rio Tinto or the huge Grasberg mine operated by Freegold Copper. Nevertheless Placer Dome produces around 14 oz of gold per ton of copper. This makes then Placer a gold producer and Rio Tinto, which produces only 3,6 oz of gold per ton of copper - yet at a very high yearly production rate of 650,000 tons of copper - to a base metal miner.
The Bingham Canyon mine is in the above picture the only true copper mine. Producing only 2 oz of gold per copper mined it produces over 200,000 tons of copper per year.
The same situation prevails for the silver mining industry. Large zinc and lead producers are also at the same time large silver producers and vice versa. It is now interesting how the production structure has changed over time. Grupo Mexico, the largest silver miner during 2000 at a silver production of nearly 55 mill oz per year has been also one of the largest copper/zinc miners. As lower ore grades and mine closures have slowed mine production, silver production came down at a much higher degree than zinc/copper production. The same trend can be observed for Industrias Penoles, the second largest silver miner. Although silver production could be increased to 55 mill oz per year, this came at a substantial increase in zinc production. The average silver output in oz per base metal has declined from around 300 oz per ton to 200 oz silver per ton of base metal.
It is now interesting to see that most gold and silver miners experience a thinning out of their ore bodies. Gold and silver grades became lower and lower so that higher base metal output has to compensate the lower ore grades. In just two years, Grupo Mexico went from a leading silver supplier to a major base metal producer similar to MIM holding in its production structure.
What is now called by some miners as just a temporary production slowdown seems to be a major trend in metal mining. The next picture about the global trend of silver and gold output per ton of base metals confirms this assumption. Around 1900 the average silver output has been around 140 oz per ton of copper and zinc mined. Gold output has been 25-30 oz per ton of copper. In today's definition, nearly all zinc and copper mines were actually gold and silver mines.
Over the last 100 years ore bodies have been severely depleted. As now giant copper and zinc mines came into production (Grasberg and Antamina) at very low gold and silver output, this trend starts to accelerate. The situation is especially severe for silver mining. Only a few giant mines supply the worldwide silver demand. As these mines are merciless depleted, it is a question of time until these mines are becoming base metal mines rather than silver mines.
As it makes no sense under prevailing low prices to increase base metal output, the consequence will be a steep fall of silver and gold supply over the next years. US silver mine production already came down in the first half of this year from a monthly rate of 150 tons to around 110 tons. US production of silver has been over 2000 tons per year. At the current rate it will be only 1400 tons per year - a decline of 30 %. Also Mexico the biggest silver producer reported a nearly 10 % decline in silver supply - just confirming the trend of its largest producers.
Under the current low price scenario for base metals as well as gold and silver prices, investment in new capacity is very low. Most companies try just to survive. This will even accelerate the current depletion and lead to lower supply in the future.
As it is difficult to predict prices, which dependent on prevailing demand and the monetary situation, investors cannot time the market. Yet it is certainly time to invest in quality assets in the mining industry. SSO, CBD, PAA, Goldcorp and Glamis Gold are excellent investments to participate in the coming shortage of silver and gold supply.
I look forward to your comments.
Dr. Heinrich Leopold
hgleopold@yahoo.com
6 November 2002
Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Email this Article to a Friend 
Printer Friendly Version
