Wallace, Idaho - A friend put an interesting question up the other day: Do silver mining companies compete with each other? And if so, how?
The very short answer is, They do compete, and vigorously so, but not in ways that are obvious to the layman.
Walmart can cut prices to compete with (and obliterate) its new neighbours. A new restaurant in town can compete by offering a better menu, better food, friendlier service, etc.
But silver miners cannot compete on those levels. Silver is a fungible commodity, like oil or gold or soybeans, and its price is set by exchanges in London, New York, Chicago and Singapore.
And they can’t compete in the Ågcustomer serviceÅh department, either. The folks on the receiving dock at the smelter or refinery don’t much care if the trucker or train engineer is polite or not. All the smelter cares about is that a mine’s delivery commitments are made on time.
The competition in the silver mining industry is for labour, cost and capital.
Labour is very problematic. Thanks to Federal Reserve Board Chairman Paul Volcker’s policies in the 1980s, commodities were crushed for decades and we lost an entire generation of skilled miners. Hard-rock mining is not dumb labour: it’s equal parts art, craft and part skill, informed by apprenticeship. The Fed ignored that.
(There was a similar labour crisis in ship’s carpentry. Overwhelmed by the secretions of fiberglas boat-makers, nobody was selling wooden boats and proper ship’s carpenters were made redundant. It took an enormous effort on both coasts, getting the dinosraurs out of their feathers to talk to the youngers, to keep this art alive which, happily, it is again.)
Same for mining companies. The best mining companies compete to get the brightest miners, no matter how old, and if they’re smart, pay them well enough to keep them and let them teach.
Cost is a matter of the labour, equipment, energy and shipping fees you’re paying, and the type of ground and grade you’re in. Mining companies have no control over energy, equipment and shipping costs.
By competing for good workers they keep their labour costs down, even if the wage scales wouldn’t suggest it.
As to the ground and grade, they compete for new, low-cost, high-grade (or both) properties, and that is why silver mining companies also compete for decent exploration geologists, and for the money to buy those properties when they find them.
Which brings us to the competition for money, which is vociferous. There are two routes to money for a silver mining company: debt and newly-issued common stock. It is axiomatic in the mining sector that if you want to borrow money you go to London or Zurich, and if you want to sell stock you go to Toronto or New York. That’s for producing companies who want to expand.
If you’re a junior exploration wannabe company with a moose pasture but some wild hopes, you sell stock in Vancouver, B.C. to lease a couple of drill rigs and maybe pay your geologists.
During my pleasant but erstwhile affiliation with The Silver Summit, I’ve seen more than several moose-pasture outfits prove up their discoveries with the help of money from penny-stock offerings in Vancouver, then go into production and move to the Toronto Exchange, or be acquired by one of the grown-ups trading on the New York or London exchanges.
(Miners, take note: It’s a bitch in the stopes, but try a shakedown of your life by a Swiss banker some time with your and your company’s reputation on the line, and if he doesn’t make his pitch just right you don’t get the new shaft that will preserve your job. I think on those days the jet-lagged CEO who has been away from his family for a month would prefer nipping, or barring-down the back behind a freshly-shot round. These guys earn their pay, same as you.)
The silver price itself, whether rigged or not, is counter-intuitive. You’d think, as the silver price rose, than silver mine production would rise as well. Conversely, if the price tanked, production would drop. This is the normal state of affairs at Walmart or your local restaurant. They stock what’s in demand and discontinue what isn’t.
You would be utterly wrong. Primary silver mines are very rare. A few exist here, and in Mexico, Argentina and Peru. These mines, by which I mean the Lucky Friday, Galena, Sunshine, are chump-change in the grand scheme of things.
The vast majority of silver brought up from the ground every year is a byproduct of lead, zinc, copper and gold operations. Primary silver mines, including those here, and in Mexico, Peru or wherever, don’t amount to squat in terms of worldwide silver production. The big base-metal mines operated by BHP Billiton, Xstrata, Fresnillo and the others generate more than 70 per cent of the world’s newly-mined silver and they’re not sensitive to the price because they’re going to mine lead, zinc and copper anyway.
The big boys don’t shut down or start up because of silver price fluctuations. This makes silver a double-edged sword, because supply and demand are not part of the equation. Unlike Walmart, which can order more underwear to meet demand or cancel orders if nobody buys it, silver flows into the market at a fixed rate.
If the silver price goes up due to demand from investors and industry, there won’t be much more silver to assuage the price, and it will head north. We can crank up our little silver mines but we’re not going to put much of a dent in the supply side of things. Likewise, if industrial demand and investor interest drop, supply pours onto the market and silver’s price will head south.
To borrow a line from the movie Barfly, “It’s just the nature of the way things is.”
