For hard-hit miners, gold is silver lining

Hit by a 68% plunge in the price of silver, they are now turning to yellow metal

Pure-play silver miners, a niche investment market popular with retail investors, are moving up the endangered list.

Buffeted by a 68 per cent plunge in the price of silver since 2011, miners who traditionally made most of their money from silver are increasingly diversifying into gold, buying mines that have been put up for sale and looking to acquire more.

In addition to spurring deals in the precious metals space, the trend is reducing investment avenues for those wanting to take a bet on a commodity that often outperforms gold when bullion is rising.

“The real silver nuts such as myself like pure silver companies. The more leveraged to silver the better ... but you have to be able to tolerate the risk,” said David Morgan, founder of the Silver-Investor. com website.

According to BMO Capital Markets, large primary silver miners have increased their gold output on average by 19.4 per cent a year since 2009 to 2 million ounces. That makes them faster-growing gold producers than gold miners themselves. In that same period, large gold producers increased their gold output by 2.8 per cent on average annually.

Helping drive this trend is big gold miners’ sales of smaller, non-core operations as they try to cut costs and debt. Although gold has outperformed silver, it is still down nearly 40 per cent since 2011.

Mother nature is also a factor in the silver-to-gold shift.

New discoveries waning

Large, high-grade silver deposits have always been scarce and are becoming more so. Already some 70 per cent of silver is mined as a byproduct from copper, gold, lead and zinc mines.

“I don’t see enough discoveries for all the silver companies that exist right now to be able to maintain silver production and replace it. They are becoming precious metal producers because they kind of have to,” said BMO analyst Andrew Kaip.

“The days of the pure silver producers are behind us.”

Recent gold mine acquisitions by silver producers include US-based Coeur Mining Inc’s purchase of South Dakota’s Wharf mine from Goldcorp Inc and Silver Standard Resources Inc’s purchase of Nevada’s Marigold mine from Goldcorp and Barrick Gold.

Mexico-headquartered Fresnillo Plc, the world’s biggest primary silver producer, last year increased its gold exposure when it bought out Newmont Mining Corp’s stake in their gold joint venture in Mexico.

“If we look for M&A in the future, we will consider both [silver and gold],” said John DeCooman, Silver Standard’s vice-president of business development and strategy.