Silver Series Part 3: The World’s Growing Demand For Silver
Silver is the most versatile metal in the world. Not only does it have the highest thermal and electrical conductivity of all metals, but it also has many other impressive properties: silver is antibacterial, durable, reflective, and malleable.
With such a multitude of significant material qualities, it is no surprise that now more than half of silver used today is in industrial processes. Last year, it is estimated that 53% of silver was used in industry – an increase from a total of 46% a decade ago.
Perhaps the most notable industrial sector for silver demand is photovoltaics, where 2.8 million oz of silver is used for every gigawatt of solar energy capacity. The total installed capacity of solar globally is at around 178 GW in 2014, and growth in global installs is also significant, gaining 14% between 2013 and 2014.
The metal’s other main industrial uses include brazing and soldering as well as fabrication. In the former category, using silver for brazing and soldering helps produce leak-tight and corrosion-resistant joints when combining metal parts.
In terms of fabrication, silver-containing vehicles, batteries, and chemical processes are the most important categories for future growth. For use in automotive manufacturing, which has the highest project growth (4.9% CAGR) of categories other than solar, silver is used to coat electrical contacts to ensure the most efficient energy flow. Silver batteries, which have similar energy densities to lithium-ion batteries, are used in military and aerospace applications because they are more reliable and safe. Lastly, silver catalysts are also used to help combine ethylene and oxygen together to create ethylene oxide, which is used in medicine, anti-freeze, and cosmetics.
While industrial uses are the most prominent for the metal, it is investment that has been the real growth engine for silver demand over the last decade.
In 2014, 20% of all silver is used for investment purposes, compared to only 7% a decade ago. The demand for silver coins and bars has more than quadrupled since the early 2000s, and the coin sales of Canadian Maple Leafs and American Eagles have been soaring for years.
It is also interesting to note, especially at a time of such market vulnerability, that the ratio of silver to gold ounces bought in the market increases. This ratio peaked recently during the Global Financial Crisis in 2008, and in the last 12 months it has jumped up to comparable levels.
Jewelry is also a crucial market for silver, and the category is considered by some to serve as an investment and store of wealth as well. Lower prices for silver in recent years have helped jewelry rebound in Asia and the United States in particular.
Globally, silver jewelry fabrication experienced its second year of consecutive growth, increasing 1.5% to achieve a new record high. This was a reflection chiefly of the strong performance of silver jewelry demand from India, which surged 47% from 2013 levels.
A record of 7,063 tonnes of silver were imported to India in 2014, up 15% from 2013. The country imported more silver in November 2014 than they did in all of 2009. This is partially due to India’s rising population and per capital income, and also due to import restrictions on gold in the world’s second most populous country.
Silver demand is multi-faceted, with just over half of demand coming from industry and the rest split between mainly investment and jewelry demand. We will cover the historical returns of investing in silver in-depth with our final part of the Silver Series in the coming weeks.
Don’t miss out on the last part of the Silver Series by connecting with Visual Capitalist.
Visualizing the Life Cycle of a Mineral Discovery
Building a mine takes time that poses risks at every stage. This graphic maps a mineral deposit from discovery to mining, showing where value is created.
Visualizing the Life Cycle of a Mineral Discovery
Mining legend Pierre Lassonde knows a little bit about mineral exploration, discovery, and development. Drawing from decades of his experience, he created the chart above that has become a staple in the mining industry—the Lassonde Curve.
Today’s chart of the Lassonde Curve outlines the life of mining companies from exploration to production, and highlights the work and market value associated with each stage. This helps speculative investors understand the mining process, and time their investments properly.
Making Cents of Miners: The Stages of a Mineral Discovery
In the life cycle of a mineral deposit, there are seven stages that each offer specific risks and rewards. As a company proves there is a mineable deposit in the ground, more value is created for shareholders along the way.
This stage carries the most risk which accounts for its low value. In the beginning, there is little knowledge of what actually lies beneath the Earth’s surface.
At this stage, geologists are putting to the test a theory about where metal deposits are. They will survey the land using geochemical and sampling techniques to improve the confidence of this theory. Once this is complete, they can move onto more extensive exploration.
There is still plenty of risk, but this is where speculation hype begins. As the drill bit meets the ground, mineral exploration geologists develop their knowledge of what lies beneath the Earth’s crust to assess mineral potential.
Mineral exploration involves retrieving a cross-section (drill core) of the crust, and then analyzing it for mineral content. A drill core containing sufficient amounts of metals can encourage further exploration, which may lead to the discovery of a mineable deposit.
Discovery is the reward stage for early speculators. Exploration has revealed that there is a significant amount of material to be mined, and it warrants further study to prove that mining would be feasible. Most speculators exit here, as the next stage creates a new set of risks, such as profitability, construction, and financing.
This is an important milestone for a mineral discovery. Studies conducted during this stage may demonstrate the deposit’s potential to become a profitable mine.
Institutional and strategic investors can then use these studies to evaluate whether they want to advance this project. Speculators often invest during this time, known as the “Orphan Period”, while uncertainty about the project lingers.
Development is a rare moment, and most mineral deposits never make it to this stage. At this point, the company puts together a production plan for the mine.
First, they must secure funding and build an operational team. If a company can secure funding for development, investors can see the potential of revenue from mining. However, risks still persist in the form of construction, budget, and timelines.
Investors who have held their investment until this point can pat themselves on the back—this is a rare moment for a mineral discovery. The company is now processing ore and generating revenue.
Investment analysts will re-rate this deposit, to help it attract more attention from institutional investors and the general public. Meanwhile, existing investors can choose to exit here or wait for potential increases in revenues and dividends.
Nothing lasts forever, especially scarce mineral resources. Unless, there are more deposits nearby, most mines are eventually depleted. With it, so does the value of the company. Investors should be looking for an exit as operations wind down.
Case Study: The Oyu Tolgoi Copper-Gold Discovery, Mongolia
So now that you know the theoretical value cycle of a mineral discovery, how does it pan out in reality? The Oyu Tolgoi copper deposit is one recent discovery that has gone through this value cycle. It exemplifies some of these events and their effects on the share price of a company.
- Concept: 15+ Years
Prospectors conducted early exploration work in the 1980s near where Oyu Tolgoi would be discovered. It was not until 1996 that Australian miner BHP conducted further exploration.
But after 21 drill holes, the company lost interest and optioned the property to mining entrepreneur Robert Friedland and his company Ivanhoe Mines. At this point in 1999, shares in Ivanhoe were a gamble.
- Pre-Discovery/Discovery: ~3 years
Ivanhoe Mines and BHP entered into an earn-in agreement, in which Ivanhoe gained ownership by completing work to explore Oyu Tolgoi. A year later, the first drill results came out of drill hole 150 with a headline result of 508 meters of 1.1 g/t Au and 0.8%. To get a sense of how large this is, imagine the height a 45-story building, of which a third of story is copper. This was just one intersection of an area that could stretch for miles.
Wild speculation began at this stage, as steadily improving drill results proved a massive copper-gold deposit in Mongolia and drove up the share price of Ivanhoe.
- Feasibility/Orphan Period: ~2 years
In 2004, the drilling results contributed to the development of the first scoping study. This study offered a preliminary understanding of the project’s economics.
Using this study, the company needed to secure enough money to build a mine to extract the valuable ore. It was not until two years later, when Ivanhoe Mines entered into an agreement with major mining company Rio Tinto, that a production decision was finalized.
- Development: 7 years
By 2006, the Oyu Tolgoi mineral deposit was in the development phase with the first shaft headframe, hoisting frame, and associated infrastructure completed. It took another two years for the shaft to reach a depth of 1,385 feet.
Further development work delineated a resource of 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. This first stage of development for Oyu Tolgoi made Mongolia the world’s fastest growing economy from 2009 to 2011.
- Startup/Production: Ongoing
On January 31, 2013, the company announced it had produced the first copper-gold concentrate from Oyu Tolgoi. Six months later, the company stated that it was processing up to 70,000 tonnes of ore daily.
- Depletion: Into the Future
The Oyu Tolgoi deposit will last generations, so we have yet to see how this will affect the value of the mine from an investment perspective.
It’s also worth noting there are still other risks ahead. These risks can include labor disruptions, mining method problems, or commodity price movement. Investors will have to consider these additional conditions as they pan out.
The More You Know
Mining is one of the riskiest investments with many risks to consider at every stage.
While most mineral discoveries do not match it perfectly, the Lassonde Curve guides an investor through what to expect at each stage, and empowers them to time their investments right.
The Silver Series: The Start of A New Gold-Silver Cycle (Part 1 of 3)
As the decade-long bull run shows signs of slowing, is it time for precious metals to shine? Here’s why it could be the start of a new gold-silver cycle.
The world has experienced a decade of growth fueled by record-low interest rates, a burgeoning money supply, and historic debt levels – but the good times only last so long.
As the global economy slows and eventually begins to retract, can precious metals offer a useful store of value to investors?
Part 1: The Start of a New Cycle
Today’s infographic comes to us from Endeavour Silver, and it outlines some key indicators that precede a coming gold-silver cycle in which exposure to hard assets may help to protect wealth.
Bankers Blowing Bubbles
Since 2008, central bankers around the world launched a historic market intervention by printing money and bailing out major banks. With cheap and abundant money, this strategy worked so well that it created a bull market in every sector — except for precious metals.
Stock markets, consumer lending, and property values surged. Meanwhile, the U.S. Federal Reserve’s assets ballooned, and so did corporate, government, and household debt. By 2018, total debt reached almost $250 trillion worldwide.
Currency vs. Precious Metals
The world awash in unprecedented amounts of currency, and these dollars chase a limited supply of goods. Historically speaking, it’s only a matter of time before the price of goods increases or inflates – eroding the purchasing power of every dollar.
Gold and silver are some of the only assets unaffected by inflation, retaining their value.
Gold and silver are money… everything else is credit.
– J.P. Morgan
The Perfect Story for a Gold-Silver Cycle?
Investors can use several indicators to gauge the beginning of the gold-silver cycle:
- Gold/Silver Futures
Most traders do not trade physical gold and silver, but paper contracts with the promise to buy at a future price. Every week, U.S. commodity exchanges publish the Commitment of Traders “COT” report. This report summarizes the positions (long/short) of traders for a particular commodity.
Typically, speculators are long and commercial traders are short the price of gold and silver. However, when speculators and commercial traders positions reach near zero, there is usually a big upswing in the price of silver.
- Gold-to-Silver Ratio Compression
As the difference between gold and silver prices decreases (i.e. the compression of the ratio), history suggests silver prices can make big moves upwards in price. The gold-to-silver ratio compression is now at high levels and may eventually revert to its long-term average, which implies a strong movement in prices is imminent for silver.
- Scarcity: Declining Silver Production
Silver production has been declining despite its growing importance as a safe haven hedge, as well as its use in industrial applications and renewable technologies.
- The Silver Exception
Silver is not just for coins, bars, jewelry and the family silverware. It stands out from gold with its practical industrial uses which account for 56.1% of its annual consumption. Silver will continue to be a critical material in solar technology. While photovoltaics currently account for 8% of annual silver consumption, this is set to change with the dramatic increase in the use of solar technologies.
The Price of Gold and Silver
Forecasting the exact price of gold and silver is not a science, but there are clear signs that point to the direction their prices will head. The prices of gold and silver do not accurately reflect a world awash with cheap and easy money, but now may be their time to shine.
Don’t miss another part of the Silver Series by connecting with Visual Capitalist.
Markets9 months ago
The Jeff Bezos Empire in One Giant Chart
Maps11 months ago
Mercator Misconceptions: Clever Map Shows the True Size of Countries
Advertising8 months ago
Meet Generation Z: The Newest Member to the Workforce
Misc11 months ago
24 Cognitive Biases That Are Warping Your Perception of Reality
Advertising7 months ago
How the Tech Giants Make Their Billions
Technology10 months ago
The 20 Internet Giants That Rule the Web
Chart of the Week9 months ago
Chart: The World’s Largest 10 Economies in 2030
Environment8 months ago
The World’s 25 Largest Lakes, Side by Side