Silver Supply to FALL as Mexico Punishes Miners

In the dead of the night with the opposition party not attending out of protest, the Mexican government enacted sweeping and significant laws to punish miners and disincentivise any further investment. Mexico holds 9 of the 30 largest silver mines in the world and in gross terms, supplies approximately 25% of the entire global silver supply. Crimping mine production is going to further ‘tamp-down’ supply in an already very tight market. 

With silver mining being barely a break-even proposition at best, this is one more blow to the already enemic mining supply of the white metal. The vast majority of silver is mined as a by-product of other more economically feasible metals. Only approximately 27% comes from primary silver production, with 32% coming from lead and zinc, 25% as a byproduct of copper and 16% found in gold mining operations. The high grades of silver found in Mexico make it home to the majority of pure-play silver mines. Continued degradation of operating conditions is more likely to have companies calling it quits than spending up to expand exploration and production.  

The mining bill was one of 18 pieces of legislation that were passed early on Saturday morning (29/4). The most controversial was the mining bill which has a number of new policies with immediate effect. For mining companies that may spend more than a decade from exploration, to permitting, to first pour… dramatic changes in policy make investment in an unstable jurisdiction hard to justify.

Companies are required to pay 5% of profits to local communities. What profits one may ask? First Majestic which has three major silver mines in Mexico has a Price to Earnings ratio of “N/A”, which means there are no earnings. The same can be observed in Fortuna Silver Mines and Coeur Mining.

The maximum length of a mining concession has been reduced from 50 to 30 years. This reduces the certainty that mines are worth the risk in the first place. It may not be an issue however, as Mexican President Obrador hasn’t granted any mining licenses since taking office in 2018. There are many things that can go wrong, companies can’t be completely sure that their surveys are representative, and the majority are not successful due to ongoing exploration even once the initial infrastructure is built. Add to that authorities are now able to cancel licenses if no work has been done on them within two years.

As one may expect, this larger structural deficit in silver supply and demand bodes well for the spot price of silver. But it is difficult to find many reasons why the spot price shouldn’t be much higher than it’s present sub $AU40 levels. 

One of the biggest criticisms of investing in mining companies, is that when the prices of precious metals really take off, the assets of the companies might be nationalised. The best play with silver is a physical one, where your assets cannot be nationalised with new laws brought in early on a Saturday morning. Mining stocks are well known to outperform the metal itself in bull markets. While that hasn’t happened yet for gold miners, it’s certainly better to have a silver bar in the hand than two in the bush.