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By Jon Forrest Little
The quote and chart below is from Crescat Capital’s Tavi Costa.
Mexico’s silver production is now declining double digits annually for the first time in almost a decade. Historical trends indicate that substantial contractions in new supply have presented excellent opportunities to invest in the metal. More importantly: Consider that silver is currently at one of its most undervalued levels in history, especially compared to gold, as the gold-to-silver ratio currently stands at 85.
Mexico has been the #1 producer of silver but the nation’s silver production is down almost 25% in the past two years. That is a shocking drop off the cliff in silver production.
Now factor in the risk of contagion. Latin America is favoring labor and environmental activism which can interfere further with mining activity. Newmont’s (NEM) Peñasquito mine, also located in Mexico, just came back into production about two months ago. Recent trends in Peru, Chile, Panama where labor and environmental clashes are closing down mines.
Silver investors who hold bullion today are in great shape, but this may be a short-sided lens. Silver is the critical mineral for Net Zero economies. Especially in hydrogen fuel cell cars, trucks, vans, ships, barges, and ferries. Especially in satellites, robotics, AI, solar, and other renewables like wind power. There are over 10,000 other industrial applications (military, aerospace, health care, electronics, et al). The United Nations Climate Change Conference just met (COP 28), and they are all in on renewable energy that is silver intensive.
Let’s talk solar. For every Gigawatt (‘GW) of solar, 500,000 ounces of silver are used. Just this one manufacturing facility in Houston, Texas will use 1,500,000 ounces per year and just down the street from this plant is another plant using another 1,000,000 ounces per year.
Now let’s look at solar subsidies… Today, Solar Is Getting 300 Times More In Federal Subsidies Than Nuclear!
According to Vince Lanci, “Mexico is in the process of soft nationalization of its remaining Silver as well. The BRICS nations are increasingly restricting G7 access to their remaining resources now.” The situation in Mexico is particularly dire. As the world’s leading silver producer, Mexico has seen an average annual output of 5,600 tons in the past decade. Unfortunately, its resource reserves dwindle to a mere 37,000 tons as of 2020. If mining continues at the current pace, the country’s reserves will be exhausted by the end of 2026.
Silver Price Is too Low Compared to the All-In Sustaining Cost of Mining
Most AISC models don’t capture all the capital drain that went into exploration and advancing. Enormous costs associated before the first shovel breaks ground. In many projects, silver’s cost of production is now over $24 per ounce. This will keep increasing due to rising labor and diesel costs. This doesn’t capture the embattled risk with Mexico most likely to maximize the fact that BRICS devours silver monetarily while NATO devours silver industrially. Mexico sits right in the middle of this geopolitical tug of war and will figure out creative ways to bid up the “out of ground” cost. Moreover, laborers know how to engage environmentalists, vice versa. Expect labor strikes throughout these prolific silver mining districts.
When you add up all the significant energy, exploration, personnel, drilling, equipment, admin, insurance, assaying, testing, permitting and advancing mineral resources stages… Now miners are potentially losing money considering an adjusted minimum of $25.75 per ounce (Adjusted All in Cost factors factor in pre-production costs such as exploration and advancement).
Is this sustainable? I think not.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
