An analysis of China’s use of silver in metric tons reveals that annual silver consumption grows year over year. This kind of growth is technically unsustainable. Just now, the Silver Institute’s 2004 World Survey reveals that China’s silver demand has finally surpassed production, putting China formally in deficit. Since China’s main fabrication use for silver is electrical components/ electronics (with brazing alloys running second) chances are that so long as the country remains a leading industrial producer, its silver usage will grow along with its silver deficit.
There seems little doubt - at the Silver Institute anyway - that China is behind tightening silver stocks. “… Since 1998, the Chinese have made a substantial contribution to global silver supplies,” reads a supply/demand summary in the 2004 Survey, “via the run down of domestic stocks of the metal.”
What probably is more troubling to Chinese officials is that China’s own silver production has remained fairly flat for four years in a row. World production, too, has been flat for the first half of the 2000s. When production is down, China faces the need to push even more strongly for increased production.
Monetary Use of Silver Adds to Demand, Deficit
INITIAL OBSERVATION: China’s dedicated millions of workers season their high-tech production with silver - not a lot but enough, over a year’s time, to add to up a sizeable quantity. Dear reader , you have traveled this far with me - now sit with me here with me and watch the flickering picture on the big, white screen. I think it is telling us a dramatic tale.
Yes, certainly, one set just a little but in the future ... See, there! I believe it is a financial tale - oh, my ... A tale of investment woe. Look at the prices being posted - That’s the silver market. Look, a long delayed reaction is taking place. Prices are rising, first by pennies, then faster and faster. Look over there - a full-blown buyers panic seems to be setting in. No one is prepared to say how high silver will go, now, let alone gold. What prices! What numbers! Oh, the humanity! How could they have expected otherwise? Didn’t they know in their hearts - why didn’t they see, poor fools. Wait ... I think a top is being reached, thank God. And there, the market is taking a breather, drifting in a more normal fashion. See them poke up their heads, the poor prairie dogs. They are trying to calculate their losses. That one, hitting his head on the wall. His brother told him to buy gold, butt he just laughed and called it a “barbarous metal.” Over there/ He sold massive amounts of silver bullion two years ago because it was so “old fashioned” to hold quantities of physical metal. And that one, watch him - he’s a jumper! Who are these others, the animated ones trying not to break out in smiles, hiding their bright faces like children at a wake - hushing each other and then starting to break out into smiles all over again. Sure, they are the investors who understood the cyclical nature of the marketplace and placed their investments accordingly. Not to many, I’m afraid, but they have had their reward. Let’s see what the final numbers are. Silver has peaked at $100 from its start under $4. Gold has peaked at $2,000 from a start of somewhere around $250. These numbers work out to results that are similar to those turned in at the end of the great commodities bull-run of the 1970s.
Please focus on the stresses affecting the silver market. There’s production demand, certainly. But there is another demand altogether straining Chinese - and world - silver supplies. It has to do with silver’s intrinsic value as a money metal; its ability to retain value during periods of high inflation as well as high growth and high inflation and low growth. It seems the 2000s are struggling with the same low growth/ high inflation scenario (some call it “stagflation”) as the 1970s. Toward the end of that decade, silver peaked at $50 and gold at $800. Contrast that to today’s prices, where silver is around $7.50 and gold still fairly close to $400.
Let’s talk about ratios. Silver and gold are famous for maintaining a price ratio with each other of approximately 15 to 1 for century upon century; it has only been in the 20th century that this ratio ceased to hold. However, in the 21st century I expect the ratio to achieve a ten to one ratio, highly favoring silver as a vital industrial commodity and wealth maker! A 2004 Silver Institute graph of precious metals and copper prices starting in October of ‘03 reveals that the price of silver now tracks the price of copper more precisely than gold. This means that available stocks of silver are being purchased, along with copper, primarily for industrial purposes.
The bullish commodity trend in the 1970s lasted nearly a decade - with some hesitations - and there is no reason to believe the 2000’s version is going to be any shorter-lived than previous ones. As of this writing, the silver/gold ratio is approximately 50-to-one, leaving plenty of room for silver to outstrip gold and close the price differential rapidly. While the distortion of the silver/gold ratio has happened before, it takes an extraordinarily powerful surge in demand to do so. One that China has initiated and will sustain.
Below is the demand-side conclusion to which we are inevitably led.
1) The combination of a rapidly declining U.S. dollar causes millions to turn to silver as a store of wealth; in large part supported by U.S. and European banks’ focus on expanding credit demand around the world.
2) China’s accelerated industrial revolution will continue to demand a greater share of the world’s silver supply - increasing demand for electrical power (superconductivity- silver use), Transportation (MagLev train- silver use), Water purification (silver use) and eventually, into aeronautics and space applications.
3) China’s untapped domestic potential for new exploration and development make the future price of silver go ...
Boom! (Silver - prices blown sky high - still the indispensable metal for China’s future!)
PART THREE: PRESENT-DAY ANALYSIS OF CHINESE SILVER DILEMMA
Sustaining Silver - Buy or Develop?
INITIAL OBSERVATION: Silver-mania ... Pass it on! Silver-mania is breaking out all over China. Even China’s private sector is getting into the act. Soon China’s mining companies will soon have a wonderful new 500-acre silver industrial zone - a precious-metal’s habitat from which to gravely discuss the inevitable changes in the silver market or merrily celebrate the private-market victories that certainly should at the very least be noted with a toast. The industrial zone is being built by private funds and will, according to project officials, “enhance the competitiveness and status of the Chinese silver industry in the international market.” According to a report by the Silver Institute, Shanghai was chosen as a silver center because of its strength as a center of business and finance - “ the development will be supported by an existing infrastructure including telecommunications, roads, communications, gas and electricity.” Sounds like a cool pad!
The Soviet Union. Churchill had an apt term for it - something along the lines of a “riddle wrapped inside of an enigma.” That could certainly apply to China too. China’s leaders seem recently to have come to a decision, or have they? I believe so.... It seems to me that old men have finally been pushed into what is at least a two-part decision regarding raw materials. The first part involves overseas’ purchases that allow China control of critical markets where its domestic stockpile is low. This would explain, for instance, the recent purchase of Noranda, the world’s largest base metals producer.
And the second part seems to involve exploration and development of raw material domestically - if enough of the key element seems available. Even here, however, China has a problem - at least it did so long as it stuck to developing multi-year industrial plans, just as the Soviets did. But when it came to mining, these plans were either useless or counterproductive because they ended up funding mines that failed a few years later. Yet these failing mines still received generous development revenues as if nothing had happened - at the expense of promising, mines that were starved for capital because their potential was not established when the multi-year plan was finalized by the Chinese bureaucracy.
Based on my invitation to China, it is my perception that Chinese mining officials are feeling more acutely than ever the need to reach out to others in the profession outside of China to help with the rationalization and professionalization of their mining industry. Like almost everything else in China, this is not exactly a new trend. It’s been going on - with starts and stops - for over 15 years in various configurations. Perhaps a little history is in order …
The Chinese government first became serious about encouraging foreign investment in China early in the 1990s - and according to Goldletter International, “One of the specific aims of the 1990s initiatives was to try and attract foreign investment into the Chinese gold mining industry. However, the lengthy and complex approval process, the limited and poor quality of designed exploration projects, coupled with a legal system that was unclear about ownership and without guarantees of tenure, was enough to deter most candidates. In addition, the mining taxation code did not encourage investment.”
The Chinese kept trying. Eventually, late in the 1990s, they hit on the idea of transferring federal authority to China’s provinces- making the process of foreign investment in China’s mines more flexible and inviting. Now China’s provinces - as Goldletter International tells us - “[had] obtained the autonomy to approve Sino - Foreign Joint Ventures for mineral exploration and mining.” Almost immediately this new version of the law began attracting foreign corporations including many public Canadian mining companies - most with a focus on gold - eager to partner with provinces via Sino-Foreign Joint Ventures.
With some changes, the Sino-Foreign Joint Ventures approach is still in force today and remains a fairly customized procedure. Some proposed ventures need federal government approval while others don’t - mostly depending on whether the project’s size exceeds $30 million and does or does not involve precious metals. The provincial government in question and simply registered with the central government can approve projects that do not demand Chinese central government approval.
Recently there have been some meaningful elaborations. Again, according to Goldletter International, “In December 2003, the Chinese Government issued a white paper on China’s Policy on Mineral Resources, which stresses that China will depend on exploitation of domestic mineral resources to guarantee the needs of its modernization drive. ... Sinoforeign co-operation in the exploration and exploitation of mineral resources will be increased. ...”
You can see from the above information that my statement at the beginning of this report that China is “open for business” is generated by close observation of actual recent events. China is becoming increasingly pro-market and business-friendly, at least as of this writing. When it comes to the silver industry, additional initiatives, not mentioned above, include the following:
· Creation of exchange-oriented private silver trading;
· The removal of a bank monopoly regarding the selling of silver;
· The lifting of import restrictions
· Contemplation of further significant actions intended to rationalize the silver market in light of increased activity and overseas participation.
Until very recently, China’s provincial government’s joint venturing occurred primarily with gold companies. But now China is actively seeking mining companies with a special focus on silver. Recently, several major, North American silver mining companies - Minco Mining & Metals Corporation (Minco) and Silver Standard Resources Inc.- announced a strategic alliance to jointly pursue silver opportunities in China. Under terms of the strategic alliance, Silver Standard will invest C$2,000,000 in Minco Silver to acquire a 20% interest in the new venture. Silver Standard will have preferential purchase rights to participate in future financing of Minco Silver in order to increase its interest up to 30% in Minco Silver. As part of the strategic alliance, Minco Silver will be the exclusive entity for both Minco and Silver Standard to pursue silver projects in China.
I am pleased to see that Silver Standard is headed toward China. They are successful and well run firm, and they will do well in China. When I first recommended Silver Standard the stock was at $2. Today it trades as high as $15.
The gates are open. Foreign silver investment has finally come to China.
PART FOUR: CHINA’S SECRET SILVER SOLUTION
The Mystery Unfolds …
INITIAL OBSERVATION: Far away and high up in a conference room, China’s planners scrutinize secret geological maps suggesting mineralization of such vastness that it makes no sense to fund outside exploration - only to dig and dig and dig. Will China’s silver output surpass 150 million ounces? Will the Chinese nation celebrate what well may be its manifest destiny - hosting the richest store of white metal the world has ever seen? What did they know - the leadership - and when did they know it? And why didn’t they tell us! Wait a minute, they have - well, I have, anyway.
When it comes to silver, China’s leaders seem to have opted to exploit what China may possess internally rather than acquire outside mines, mining entities and infrastructure. The question I must ask and then hope to answer at least partially during my travels in China (knowing such an answer may not ever be fully forthcoming) is how did those in charge of silver production and extraction in China reach their conclusions? Someone, somewhere, knows - or believes - China’s silver regions are fertile enough - once privatized anyway - to provide for China’s manufacturing and monetary needs well into 21st century. This is an astounding conclusion!
Conceptually, the part of China’s rolling privatization that holds the most promise is the obvious inefficiency with which its government-managed silver mines were operated. Most of us can agree that even good governments are rarely equipped to handle sophisticated industrial projects - especially ones as tricky as mines. China’s government, as previously constituted, anyway, was, from most accounts, nothing like a good government.
China’s current production - fourth in the world - was thus achieved under tremendous handicaps imposed by the political structure. It was achieved within the context of rigid multi-year plans and without profit incentives such as bonuses and options packages. But here is the point that those who are interested observers of Chinese silver-mining privatization should ask themselves: If China, with all its problems, could generate enough silver for a fourth-place ranking under the previous regime, then what might be accomplished when these silver producing properties are properly managed and exposed to appropriate modern technology?
Below are just three of wide spectrums of methods to replenish production:
Retrofitting mines in anticipation of price appreciation: If one accepts the inevitability of higher prices for silver (as I do) then one should create a plan to retrofit a number of China’s defunct mines - to put them back to work as the price justifies the production.
Exploration of claims adjacent to hot spots: Another path to success may lie in staking and exploring claims nearby “hot” spots where significant silver is already being mined - and where new world-class discoveries have recently been made.
Use of Technology to Expand Yield of Historical Mines: The application of modern mining technology when it comes to exploration and production, may add years to the lives of some of China’s more famous silver mines while reinvigorating newer production sites.
I am sure that these and many other ore extraction techniques will add tens of millions, even hundreds of millions of ounces, to China’s silver reserves. The managers who will plan strategy for China’s production of silver and those investors who will support them are helping to provide necessary resources for China’s continued progress.
First In, Best In …
INITIAL OBSERVATION: A new productivity boom is coming your way, brought to you by China’s emerging generations of market-educated, University-trained factory managers. They expect to drive their factories past quota and their mines past closing. They are comfortable with each other and gracious with others. Like China itself, China’s younger generation is open for business!
As you can see from this report, I find China’s silver-mining privatization profoundly stimulating and gratifying. I am excited about going over to visit China’s most promising silver regions and mines. As an analyst, I welcome the opportunity to observe those with an “inside track,” but I am trying to embark on this trip without any preconceived notions.
It took a great act of faith in the early 2000s to spend time and energy preparing for what I have come to believe from my own research is a new silver boom. Silver may turn out to be the biggest commodity boom of all the commodities, yes even bigger than oil and gas. Those few who did prepare for this day certainly deserve to have their foresight rewarded. And I truly believe that China’s search for silver is not just going to generate a world-class silver company or two. No, it’s probably going to create brand new entities - silver mining companies on a huge scale.
I would also venture to say that partnerships and joint ventures are probably the way that most foreign participation will occur in China. Distrust is always a factor - especially among the mid-level communist cadres - and so is fear of changing political and social realities. Yet I cannot think how these people would ever make the case that China should go on in the old way, not maintaining mining properties while setting wildly inaccurate production goals.
Even now, the torch is being passed from China’s old mining operators - those lodged collectively within the bosom of the state - to an emergent class of savvy mining entrepreneurs, private, wealthy individuals and their families who have begun to use clout - their Guan-Xi - to participate in some of China’s most profitable and lucrative silver mining sites.
Conclusion and Review
If you have read to the end of this report, it’s my hope you have learned something of China’s deepest and most fascinating silver-money secrets - those from which substantial profits may be derived. Below, for those who still struggle, are three conclusions I believe you should derive from this report.
1) Vast silver fields are waiting to be explored and developed in China: Top Chinese officials apparently have reason to believe - or have been led to believe - that there exist world-class silver reserves within the country that demand to be explored or placed into production.
2) Fields are placed where prospectors have never even made a thorough investigation: Silver has already been mined in China for some 3,000 years, mostly in the eastern regions. The areas most available that promise additional major discoveries lie in and around the northern and northwestern sections of China and Inner Mongolia.
3) China is correct to maintain in-country production of silver: New exploration techniques combined with advanced production technology might just allow China to make a silver mother lode discovery that might just match or perhaps exceed anything found in other silver-rich regions such as Mexico or Peru. At the same time, new uses for the “white metal” continue to develop and further tax supplies. In my next report, we will discuss the feasibility of finding such “super sized” ore bodies and track the movements of well-known prospectors who might be exploring now. We will also launch a fairly rigorous assessment of what regions and mines are likely candidates right now to help China fill its rapidly increasing silver deficit.
All together now ….
Question: What is China’s Secret Silver Solution?
Answer: Vast bodies of silver-rich ore available for exploration and production right now, right in China’s back yard …
I think you’ve got it!
© 2004 David Morgan. All rights reserved. |
