The Economics of Precious Metal Mining


A number of people interested in owning precious metals are exploring the possibility of doing so by buying shares of mining companies. I am not an analyst of individual mining company stocks, so I offer no recommendations for or against specific companies. But, I can explain aspects of owning these stocks that may or may not correlate with precious metal prices.

Over the past few decades, owning shares of mining companies was often an attractive option for those seeking high dividend yields. These high dividends are explained by the fact that mines generally have a limited life – often only 10 to 20 years. These were generally not stocks to buy if they were interested in long-term appreciation.

There are also resource exploration companies which for the most part do not pay dividends. Their goal is to discover promising sites for the development of new mines, then earn money as their stock appreciates when large mining companies seek to buy them to replenish their backlog of “ounces in the ground”. “.

Overall, when you own shares of a mining company, you hope that it can successfully overcome the promises and pitfalls of simply conducting operations, factors that are unrelated to current and future prices. precious metals.

What are some things that can make the stock prices of precious metal mining companies more valuable? Here are the two most significant.

• Discovery of additional resources that can be recovered profitably. This can be either a new discovery associated with an existing mine or the successful acquisition of new properties with promising test samples.

• An increase in the prices of mined metals, which results in an increase in the amount of recoverable metals that the existing mine can produce economically. For example, a known silver vein might not be worth mining at a silver price of $20 per ounce, but becomes recoverable at a price of $30 per ounce.

On the other hand, what can drive stock prices down?

• Increasing regulatory and environmental regulations may extend the number of years required to develop a new mine. At the start of this century, it was typical for three years to elapse between the time of proven samples at a new site and the actual start of mining operations. Today, it often takes more than a decade to go through all the regulatory and environmental steps and build the mining infrastructure. The extra time has the effect of increasing the risk that the mine will never materialize.

• In order to obtain financing to start a new mine, the financiers want to ward off the risk of a drop in the price of the metal. Consequently, many new mines lock in the future prices at which they sell their production through the use of hedging activities. While this can protect the financials of the mine, it also prevents the mining company from reaping additional profits if the price of metals spikes.

• Mining companies can suffer from mismanagement, mine collapses, labor disputes and the risk of political confiscation, which have nothing to do with physical metal prices. To offset the risks that could affect any individual mine, well-operated mining companies typically seek to develop a number of mines, particularly in multiple countries.

Another factor to consider is that mines generate their profits over time. If you have a sudden spike in gold, silver, platinum or palladium prices, mining companies cannot suddenly sell all of their underground reserves. This time lag in production is one reason why gold mining stock prices during the gold and silver price boom of 1979-1980 did not appreciate near rising physical metal prices.

Another consideration is that the mining of precious metals, especially that of cheap silver, is often a by-product or co-product of a mine extracting primarily other metals. Silver is often produced in mines that have been developed to recover gold, zinc, lead and copper.

For example, one of the largest silver mines in the world is actually a primary copper mine in Poland. For this mine, the price of silver does not matter. What matters is the price of copper. Anything he receives for the money he produces is just a bonus. Similarly, the Red Dog mine above the Arctic Circle in Alaska is the largest zinc-producing mine in the world. As a byproduct, it is the second largest silver maker in the United States.

It is entirely possible that owning stocks of carefully selected precious metal mining companies could outperform physical metal prices in the future. The risk is that these stocks also underperform physical metal prices. Either way, the key point to keep in mind is that owning stocks of precious metal mining companies is not directly correlated to actual metal prices. If you are looking to own precious metals for potential appreciation or to hedge against further decline in the US dollar, acquiring the physical metals is a better fit than mining company stocks.


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