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Where Silver Comes From

Most mined silver comes from Latin America.

Mexico is by far the largest supplier, producing 178.1 million ounces in 2020. Peru is next, with 109.7 million ounces of production, followed closely by China, whose output was 108.6 million ounces. The next group contributes less than 50 million ounces annually, with Chile, Australia, Russia, Poland, the U.S., Bolivia and Argentina producing between 23 million and 47 million ounces each.

What’s striking about the silver supply from mining is how rapidly it’s been falling. Since 2016, the top ten silver-producing countries have all seen their output drop, without exception. In fact, it’s been a marked and sustained decrease for five consecutive years.

This is why I suggest that we may have reached ‘peak silver’ mine supply. Will we ever surpass 2016 output? Only time will say for certain.

Mine production topped out just shy of 900 million ounces, at 899.4 million, in 2016, according to the Silver Institute. By 2020, it had dropped by 12.8% to 784.4 million ounces. In 2020 alone, silver mines produced 6% less than in 2019, but to be fair, a good portion of that decrease was related to COVID-19 pandemic restrictions.

I do know that with all the forecast demand from solar, automotive, industrial, and investment, a supply shortfall is expected within just three years. And it’s set to multiply from there.

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Unless miners and recyclers grow their supply aggressively, the impending silver shortage will be sizeable. And that’s likely to set a rising floor under silver prices.

Jurisdiction Matters

With half of the silver mine supply coming from just three countries – Mexico, Peru and China – geopolitical concerns are real. Silver’s increasing importance to high-tech industries, including electric/hybrid vehicles, solar power, medicine, 5G telecommunications and mobile technologies, should give us pause.

China is a leading manufacturer in many of these sectors and would not hesitate to limit silver exports. There is precedent.

Controlling 97% of production, China nearly completely dominates the global supply of rare earth elements, 17 elements with magnetic and conductive properties. These are crucial in the production of everything from high-tech military equipment to more common smartphones.

In 2010 the Chinese government, which already had export duties and quotas, reduced quotas by 40%, saying these were necessary for environmental protection. This caused rare earth prices to explode 4 higher, with opponents heavily criticizing the move as protectionist. Naturally, domestic manufacturers had a major advantage, as these same rare earth materials sold at much lower prices within China.

The U.S. challenged China’s position by bringing a case against it to the World Trade Organization (WTO). Supported by the European Union and Japan, the U.S. argued the quotas were against the WTO’s rules when China signed on in 2001. China lost, appealed, then ultimately lost its appeal. Of course, by then, it was already 2015, and China finally removed its export quotas. But the rest of the world had to accept higher prices in the interim.

In early 2021, Chinese export restrictions on rare earth minerals were back on the table in the wake of deteriorating China-U.S. relations. The Chinese were considering sanctions against U.S. military contractors Lockheed Martin, Boeing and Raytheon since they were selling arms to Taiwan. China continues to claim Taiwan as part of its territory, though Taiwan is a self-ruling island.

As much as they may need each other, China and the West often go through antagonistic periods, arguing over unfair trade practices, intellectual property, and even human rights as common themes. The point is, as silver grows in importance, China may choose to limit its exports to the West.

Research published by World Developments examined whether mining companies are compensated for geopolitical risk. In other words, they wanted to know if miners in higher-risk jurisdictions get more favorable terms.

As it turns out, the answer is no, though the reasons are difficult to pinpoint. It’s thought that governments in developing countries demand higher compensation from miners since their general tax revenues are relatively low. They may be seeking higher tax revenues, especially from foreign firms, to help support the existing political system. As well, higher taxes are demanded to provide social, economic, and environmental support to local communities.

Remember, a valuable deposit can’t be moved. That makes it an easy target for a government willing to change the rules and extract a higher take from the mining company.

The supply of various minerals is often at risk of geopolitical tensions and internal politics. Peru is a prime example. The country is the world’s No. 2 silver and copper supplier. Remember, over 25% of the annual silver mine supply is a by-product of copper production.

Despite the dire need for more of both metals, Peru may face headwinds to major new investments for some time. Pedro Castillo was elected President in July 2021. During his campaign, the former school teacher first threatened to nationalize mines, then softened his approach by suggesting a major tax revision.

Castillo proposed a new tax of up to 70% on mining profits and royalties on mineral sales. And this, despite mining accounting for almost 60% of the country’s exports. Once elected, he softened his tone once again but still proposed to review contracts with mining companies to hike their taxes.

Though less impactful to the silver supply, even Chile’s 47 million ounces of annual production could face challenges. Keep in mind this nation contributes more than a quarter of global copper production: 60% of Chile’s exports, and 15% of gross domestic product.

And rising copper prices have leaders hungry to tax profits even more. Higher taxes up to 75% on profits from copper above $4/lb. are popular, with nearly three-quarters of Chileans being supportive. There’s no doubt that such dramatically higher taxes would stifle future investments by mining companies, leading to falling output.

At a time when national fiscal deficits and debts are ballooning, exacerbated by the COVID-19 pandemic, desperate leaders are quick to aim at mining companies. Rising revenues, thanks to rising metals prices, make for easy targets.

What those leaders, as well as their voters, forget is that higher taxes on mining companies ultimately mean even higher metals prices. And that will manifest itself as a higher cost of living. There is no escape. But investors can flip the situation to their advantage, investing in those metals and their miners for rising profits.

These risks demonstrate how fragile silver mine production is. In fact, given such rising geopolitical challenges, just maintaining current silver production levels may be difficult. And all of this is unfolding with a backdrop of steadily rising demand from industry and investment alike.

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Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market, with special expertise in precious metals, mining and energy stocks. He is editor of two newsletters to help investors profit from metal market opportunities: Silver Stock Investor, www.silverstockinvestor.com and Gold Resource Investor, www.goldresourceinvestor.com. In those letters Peter writes about what he is buying and selling; he takes no pay from companies for coverage. Peter has contributed numerous articles to Kitco.com, BNN Bloomberg, the Financial Post, Seeking Alpha, Streetwise Reports, Investing.com, TalkMarkets and Barchart, and he holds a Master of Business Administration from McGill University.

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