Reason # 3 The Silver Noose is Tightening

post dateSeptember 8, 2014  •   post categoriesEconomy, Manipulation, Silver & Gold  •   post comments number6 comments

mining-operations-gold

Where do I Sign?

Imagine being invited to hear an early-morning business presentation, where a sizable company promised to show their plans to you and others, in the hopes of raising investment capital.  As you sit down in a comfy swivel chair, with a hot(free) beverage at arms’ length, a well dressed man, in a blue suit, comes through the door, and hits you with this opening line of the sales pitch:

“Good Morning, investors!  Just so you know, for full disclosure: I’m going to offer you an exciting, rare opportunity to sink your hard-earned cash into a business that won’t be turning a reasonable profit anytime soon!”

“I’m sorry, what did you say?”, asks the stunned older fellow next to you, putting down his iPhone.

“Yes, I said there will be no reasonable profit margins anytime soon!  Not to worry though, because even though we’ve spent the last several years with declining profits, as of this day, I’m proudly able to announce that we’re currently producing our sole product at a loss!”

“Wait a minute,” says a woman at the other end of the table, “You mean to tell me, that your company only offers one product, and that you’re knowingly going to continue to produce it…at a loss?

“Oh, I can see we’ve got some sharp minds in this room!”, the company rep responds. “Yes, that’s correct, we’ll continue working hard to ensure that we bring as much of this precious product onto the market as we possibly can, for a loss.”

“But, how do you intend to turn this trend around? What’s your game plan?”, she continued.

“That’s an excellent question, ma’am, excellent question.  What we intend to do is burn through all our best resources now, in the hopes that the losses we’re incurring won’t be large enough to sink us immediately.”

“Soooo, you’re going to attempt to lessen your margin of loss by cranking up the volume of the product you’re producing?  Why?  Why not cease production, cut your losses, and wait for better times?”

“Ah, yes, well ma’am, one reason is that our biggest creditors, who are banks, have ensured us a guaranteed line of credit to continue our operations.  We fear that they might just reconsider that line of credit, or even call the loan, were we ever to stoop to such extreme, unjustifiable measures.”

“That still doesn’t answer my question: why would you bother fighting and struggling at all, for losses? If you’ve had losses, and will continue to have losses into the foreseeable future, why are you doing this at all, and why would banks continue to fund your operations?”

“I’m disappointed in you ma’am, you’re not seeing the big picture, here.  As we continue to produce more of our product at a loss, then those losses continue to mount to greater heights, and our indebtedness to these banks will reach dizzying levels!  With any luck, we can eventually go into the coveted status of “receivership”, and be picked up by these banks who currently fund us, for pennies on the dollar!”

“Receivership?”, you finally ask, having heard enough. “You mean bankruptcy, right?”

Beaming at your words, and with a tear in his eye, the company’s representative approaches you, and says,

“You get it, son.  You get it.  How would you like to come work for our company?”

Who’d Do Such a Thing?

Sound like the dumbest business plan you’ve ever heard?  Yes, it is dumb.  Even a child knows better than to get excited about an investment prospect from a management team who’d do that to their investors.  Who in their right mind would ever run a company this way, right?

The sad fact remains, that plenty of companies think this is a viable business model, for this is a simplified version of exactly how gold and silver mining companies operate, and how they treat their shareholders.  

The mining industry is in an all-out depression, due to a perfect storm of converging factors.  Don’t be deceived though, this is a depression of their own making.  They all know, better than anyone, why the prices of their sole products continue to cliff-dive without respite.  Yet it seems that down to the last company, they would rather go ignominiously unto bankruptcy, than make even a peep of protest, to help either themselves or their shareholders.

The craziest part is that these companies continue to work double time, bringing silver out of the ground at the lowest inflation-adjusted prices in history, which works only to the benefit of the banks who are rigging their product’s prices lower to begin with. The numbers just don’t lie.

Record Production of Silver

Last year, mining companies brought up a record 819 million ounces of silver from the earth, despite a cave-in of silver’s price of over 30%!  Their strategy is to simply use up all their higher grade deposits, and produce even more of this precious resource, in hopes that the losses will be minimized.

Mexico and Peru, are the world’s two leaders in this non-strategy, having brought nearly 170 million ounces, and 118 million ounces out of the ground, in 2013, respectively.

It’s such a pity.  Mexico’s silver should be making them one of the richest producing countries on earth, yet, they like others, are content to be exploited for their precious treasure for pennies on the dollar. Yet, I laugh at the thought of these banks and their price-rigging schemes.

Why?  Because, despite the self-hate that mining companies display in assisting those who are annihilating them, despite the disregard for their fiduciary duties of looking out for their shareholders, and despite the record number of silver ounces being mined: planet earth continues to demand pallets more, tons more, mountains more silver than these people can possibly throw at us.

How much more silver is humanity demanding, beyond the amount that the banks can mine or recycle?  Again, the figure of the silver shortfall last year was a net amount of 113 million ounces.

Stack it to the Sky

That just sounds like a number though, right?  It’s hard to visualize just how much silver that actually is, so let’s have a little fun, and make that number more real for all of us.

Let’s use, for our example, a splendid looking, 100 ounce Johnson Matthey bar.  Beautiful isn’t it? This is over 7 lbs. of pure silver, and fits nicely into your hand.  It’s roughly about 1.25 inches thick. This is not even a drop in the ocean, in relation to how much silver that humanity burned through last year, however.

silver100oz-jm-4

In this example, imagine that a few heroic silver “stackers”, like these gents below(let’s call them “Joe” and “Jake”), decided to stack up that 113 million ounces, just for kicks.

Stacks of 100

If Joe and Jake resolved to stack 113 million ounces of silver, with 100 oz. Johnson Matthey bars, in a single-file fashion, merely one atop the other, similarly to the manner they’re doing above, it would grow into a monstrous, ridiculous tower that would scale untold heights!

How high would the tower of silver go?

Well, let’s just say I hope that Joe and Jake grabbed their spacesuits for this one, as the silver tower would be well over 22 miles tall!

How tall is that?

The world’s tallest building is currently the Burj Khalifa, in Dubia, standing roughly 1/2 a mile tall.

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Here, let’s just put a picture up(it’s a pretty building anyway), and let’s include other buildings for scale.

dubai-skyline

It would take 43 Burj Kalifahs, stacked one atop the other, to reach the height of a silver tower, equal to silver’s global deficit in 2013.

Don’t you see? No matter how much silver that the powers that be try to manically push around on doubled-stacked pallets, it will simply never be enough for us stackers.  Why?

We stackers want MOAR!

Oh, but it doesn’t stop there.  It gets worse for our banking friends, much worse.

A Perfect Storm for Mining

While it may seem to some, that mines might be able to continue producing the amount of silver they’ve been accustomed to producing well into the future, the truth is that these mines, especially primary silver mines, are starting to hit the silver wall of reality.  With the costs of petroleum and diesel soaring, ore grades plunging, and the price for their product free-falling, there’s a perfect, catastrophic storm brewing in the mining sector.

Are you nuts, Watchman?  Petrol and diesel costs??  Everybody knows that silver is dug outta the ground by old guys with pick-axes and pack mules!  How could a pack mule possibly incur high diesel costs?”

gold-rush-49erandmule

Yeah, there’s a term for that “romanticized” image above: ancient history!

Modern day mining is done by gargantuan, diesel-burning trucks.  Not by one or two of these trucks either, but convoys of them!

barrick-gold-silver-mine-epc-12-l

These things are serious hardware!  Any machine that a driver needs a network of ladders to even get into, is bound to be expensive, and these are no exception!

In fact, those puppies, on average, will run you about $5 million a pop.  I count at least 8 of them in the image above, so that’s roughly $40 million dollars which someone sank into them, a truly stupendous input cost. Just one tire for these things costs twice as much as the average household’s family car!

The fuel costs?  Ugh, they’re even worse.  You can expect to burn over 3 gallons of diesel in one of them on a good day, to simply go one mile.  Let’s just say that the only folks who can afford these are the ones rich enough to, say, own their own mines(and even they are getting very nervous about fuel costs).

Why would someone choose to literally burn through mountains of cash all day long to run these contraptions?  It’s because they can load up to 400 tons of earth per trip, literally moving mountains in their wake.

As you can see, mining and producing silver is an expensive, time-consuming, energy-intensive process.  Yet, as expensive as it is, it’s getting more difficult all the time.

Fuel Costs

As prices of oil have gone from roughly $20 per barrel in 2001, to nearly $100 per barrel today, what do you think has happened to the input costs for fuel at these mining companies?  That’s right, they’ve soared to multiples of their previous levels.  What do you think that has done to the bottom line of these companies?  It has eaten away at their profits more fiercely than an army of termites in a woodworking shop!  Just take a look at this chart of the costs compared to revenues of the silver miner called Pan American Silver.

Pan-American-Silver-Costs

Production costs have grown to be a larger percentage of their silver revenue, for the last 8 quarters of that chart, without fail.  In fact, in the latest quarter of that chart, Pan American’s costs actually exceeded their revenues!

Ore Grades

On top of that, the mining industry has fallen victim to something known as falling “ore grades”. That’s just a fancy term for the amount of silver or gold which is found in an average tonne of ore that’s processed.  That amount of recoverable silver has been falling, not simply for years, but for decades, and is now reaching a critical level.  This chart below says it all:

In less than 10 years, the amount of silver being recovered from a tonne of ore has been nearly cut in half, while the amount of ore they’ve had to process has nearly doubled!  All this just to keep production levels virtually flat!

Silver miners are now dealing with the grave wound of having to work nearly twice as hard as a decade ago, simply to produce the same number of ounces, yet that’s not all!

SD Bullion


Then, to pour salt on that wound, the price for the diesel they’re using to do so, continues to climb!  It get’s even better, though.

Then, just to amputate the appendage that the salted-wound rests upon, the price of what they’re mining itself has, all the while, cratered 60% in the last 3 years alone!

Remarkable!  The mining companies, and their investors, are being abused in a serial fashion, by a cartel of banks, who wish to keep silver(and gold) prices lower.

What is the response of the big mining CEO’s and boards of directors, in response to this systematic, wholesale pillaging of their assets and livelihoods?  Are you ready for this game face?  You’d better be, because here it comes!

Conclusion

Now you see what trouble the banks are having to go through, in order to keep this price-rigging game going. Their precious silver supply, despite all their efforts, is stagnant, and actually decreasing. They’re moving heaven(and twice as much earth) just to sustain this inadequate supply just.a.little.bit.longer.  

The moment the metal stops, or even slows its flow in any reasonable quantity, is the moment the scheme comes crashing down.  That’s a problem too, because the evidence is mounting that we are headed into a “peak silver” scenario.

While I do believe miners will eventually be very profitable again, both the pain and agony in financial losses, coupled with the angst of betrayal, is convincing droves of investors to steer clear of these money pits.  After all, the average investor is smarter than banks and mining companies, in that we know: when you’re in a hole, you simply stop digging, not dig twice as fast.

Bingham_Canyon_April_2005Take heart, because the thing which made this price-rigging scam work for so long, mainly its secrecy, is also ancient history.  In fact, with each passing day, legions more are educated as to how and why the banks hold down silver prices to begin with!

Continued, in Part 4

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