The largest primary silver mine in the world saw its average yield fall to the lowest level ever in 2015. Matter-a-fact, the primary silver mine’s yield fell nearly 16% compared to last year. This is a substantial decline in productivity from the world’s largest mine in Mexico that starting production in 1824.
Actually, the area where this mine is located–Zacatecas, Spaniards start producing silver all the way back in 1540. When initial production at the Great Fresnillo Mine started in 1824, Mexico was producing 55% of the world’s silver production. The ore grades were much higher in those days.
For example, average yields for silver production in the United States and Australia in the late 1800’s was 40-50 oz per ton (oz/tonne). However, as the world continued to consume greater amounts of silver over the next century, average yields in its primary silver mining industry fell precipitously.
Fresnillo LLC has several mines in production. Their flagship operation, is the Fresnillo Mine. In 2005, the Fresnillo Mine was producing silver at an average yield of 15.2 oz/t, but this fell 57% over the following decade. In 2015, Fresnillo’s average silver yield was a paltry 6.5 oz/t…. a loss of 8.7 oz/t:
Not only did the Fresnillo Mine average yield fall considerably over the past five years, silver production fell by more than half. In 2010, the Fresnillo Mine produced 35.9 million oz (Moz) of silver at an average yield of 14.2 oz/t. However, silver production from the mine fell to 15.6 Moz while the average yield dropped to 6.5 oz/t.
Now, the downside to falling silver yields is the increased cost of production. For example in 2010, Fresnillo processed 2.5 million tonnes of ore to produce that 35.9 Moz versus processing 2.4 million tonnes of ore in 2015 to extract 15.6 Moz of silver from the mine. Basically, the amount of processed ore remained about the same (close to it), while silver production fell by 56%.
The company realized the ore grades at its flagship Fresnillo Mine were going to fall, so they have been spending a lot of capital to bring on new primary silver mines. The company’s second primary silver mine that came on production in 2009 was its Saucito Mine. Ramp up of production of its Saucito Mine helped to offset losses from the Fresnillo Mine. However, the average yield of these two primary silver mines also declined in 2015.
This next chart shows the combined production of the Fresnillo and Saucito Mine along with their average yield. As we can see the average yield of these two mines was 14.2 oz/t in 2009, but this declined to 7.9 oz/t in 2015:
Even though overall production from these two mines is higher at 37.6 Moz in 2015 compared to 36.1 Moz in 2009, the average yield has fallen 44%. Thus, the company only had to process 2.5 million tonnes of ore in 2009 to produce 36.1 Moz, but this jumped to 4.7 million tonnes last year to extract 37.6 Moz.
Let’s put that increase in processed ore into perspective:
2009 Fresnillo Cost Per Tonne = $36.5
2009 Fresnillo Processed Ore = 2,471,657
2009 Fresnillo Production Cost = $90.2 million
2015 Fresnillo & Saucito Avg Cost Per Tonne = $45.34
2015 Fresnillo & Saucito Processed Ore = 4,749,129
2015 Fresnillo & Ssucito Production Cost = $215.3 million
So, what do these figures show??? The company spent $90.2 million in 2009 to produce 35.4 Moz (Fresnillo only) of silver versus $215.3 million to produce 37.6 Moz in 2015. By adding the Saucito Mine to offset silver supply losses from the Fresnillo Mine, the overall production cost DOUBLED… LOL.
Another interesting TIDBIT is the increased cost per tonne of production. The average price of Brent Crude in 2009 was $62 versus $52 in 2015. So, even with a $10 lower price of oil in 2015 compared to 2009, the average production cost per tonne from the two mines is up nearly $9 a tonne… a 25% increase during the five year time period.
Lastly, Fresnillo LLC has ramped up its gold production significantly over the past several years. For example, total gold production from the company increased from 596,000 oz in 2014 to 762,000 oz in 2015. This has impacted its revenue mix. In 2014, gold sales accounted for 47% of total revenues, while silver sales followed close behind at 46%… the remainder was in zinc and lead. However, this changed remarkably in 2015 as the company’s gold sales accounted for 52% of the total revenue whereas silver fell to 39%.
Regardless, when the prices of gold and silver move up much higher over the next several years, Fresnillo LLC stock holders will be greatly rewarded as their profits will explode. Even with lower gold and silver prices in 2015, the company still made a $70 million profit.
The primary silver mining companies that produce more gold than base metals will be the best performing stock prices in the future.
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