by Dan Oancea

It doesn’t happen too often for silver, the beautiful Cinderella of precious metals, to occupy the first place in the hearts and minds of geologists, metallurgists, geochemists, assayers and mining executives. A one day presentation held in Vancouver last week had exactly this purpose: to showcase silver’s virtues and qualities vs. weaknesses and uncertainties and to provide us a short exploration guide to silver deposits.

The meeting was sponsored by elite and well-known members of the small worldwide silver club: Pan American Silver Corp, Silver Wheaton, MAG Silver Corp, Hecla Mining, Teck Cominco, Fronteer, Silver Standard, and Fortuna Silver Mines.

I’ll lead you through some of the topics discussed, and I’ll do this by separating the silver market and economical data from geological and related data; the latter will be presented in a separate article.

The silver market data was presented by Ross Beaty, director of Pan American Silver, the world leading primary silver producer:

- The price of silver fluctuated over the last six years; it was chiefly influenced by gold and base metal prices; silver prices seem to follow gold’s lead;

- A gold/silver ratio of their average prices over the last 36 years showed a constant average of 54:1;

- The 2006 reduction in world silver demand for jewelry, silverware and photography was offset by increases of industrial, investment and coins uses;

- The Indian silver bullion imports collapsed in 2006 due to higher silver prices and governmental stockpiles sales. It seems that Indians stop buying silver over a certain price, waiting for a price reduction or stabilization;

- Fabrication demand is supposed to drop 3% in 2006, while the 2007 will see a possible decline;

- The world silver supply for 2006 was estimated as only marginally higher (by 4 Moz or 0.6%) year-on-year, with an unchanged 70% coming from mine production; the decrease in hedging market outpour was offset by increases in government sales and scrap supply;

- 2006 world silver production: Mexico, Peru and China produced more ounces in 2006 compared to 2005 as a result of increased capacity and higher grades mined; Australia, USA and Canada suffered production reductions as a result of lower silver grades and closure or suspension of mining in certain areas;

- Outlook for mine production in 2007 is for a greater increase of around 16 Moz with strong growth forecast to continue into 2008;

- Scrap supply is little has changed overall even though it is experiencing a decline in volume from photographic sources. Nowadays, many of the containers don’t go empty back to China but filled with electronics for scraping.

R.B. remarked that “Gold jewelry is sold for weight, while silver is sold for beauty, craftsmanship. It means that silver jewelry is not easily scraped by people”; “Most of the silver used in photography comes from film recycling, so the photographic decline in the use of the silver didn’t really influence its market price”; and “Chinese mines don’t report production figures; there is no good repository of mining data in China”;

- In 2000, four countries held major silver stocks: USA, China, Russia and India.

In the 80s silver importation in India was considered illegal and the government confiscated huge amounts of smuggled silver. In 2005, India announced that they want to sell their governmental silver stock, which was then estimated at approximately 80-90 Moz. India’s sales into their domestic market in 2006 probably will reach 30 million oz. It is expected that India will exhaust their silver stocks in 2007.

In 1999 China started selling its decades long mining supply; since then, they’ve dumped some 300 Moz silver on the market through Hong Kong. In 2006 the Chinese sales were expected to decline but held up, apparently due to attractive prices. It is considered that their stock is small today.

Russia sold small amounts of silver and nowadays it is considered that it only has small stockpiles.

USA exhausted their 2 billion oz stock in 2004-2005 by selling it on the market.

- Since 2001 the disinvestment has ended. The advent of the Exchange Traded Fund (ETF) has helped in keeping the silver price above its fundamental equilibrium level of $6.50-7.50/oz. The ETF silver sales accounted for 110 million ounces this year only. The silver ETF outperformed all other ETFs.

- A 2007 forecast:

Demand: industrial production is the key driver and it will be influenced by the increasing Chinese demand; investment demand and Indian silverware and jewelry demand will grow; photographic demand will continue to decline, offset by lower scrap supply; several major new uses for silver: plasma TVs, water treatment (11 Moz/year by 2007), marine anti-fouling paint (30 Moz/year ), wood preservative (140 Moz/year) and superconductors (50 Moz/year);

Supply: mine production will grow 3-5% in 2007 (the 2008 year will see many more projects ramping up their production, but the added volume will be less than late 1990s/early 2000s when over 100 million oz added); Chinese stockpiles unknown but much reduced, while Indian stockpile will be gone in 2007;

Price: investment demand will continue to support a high price; silver is still vulnerable to decline in industrial fabrication taking place at the same time as photographic and jewelry demand fall; and finally the bullish view says that when silver is physically taken out of the market (i.e. inventories pretty much gone), structural silver deficit can only be eliminated by higher silver prices.