Special Report: Inside the Troubled Mining Industry. Low Production Margins Herald Gold and Silver Price Increases.

By John Manfreda

Don't be fooled by these drops in precious metals prices in 2013:

Gold – down 28%
Silver – down 36%
Platinum – down 11%
Palladium – Flat

Dig below the surface, so to speak, and you'll find supply and demand fundamentals favorable for all precious metals. We're going to do the digging for you to reveal why we think there is a compelling reason to add gold and silver to your portfolio and why we believe now is the time to act.

This is the first in a series of five articles covering this topic. Be sure to read the next installment on Tuesday, February 2nd.

Recent closings and consolidation of top producing gold and silver mines portend a severe pressure on the supply of precious metals. At the same time, government policies in Russia and India have created a pent-up demand for these metals. Couple this with the ongoing tsunami of demand for gold coming out of China, and we have a perfect storm for rising prices.

Ask one of our Preferred Client Representatives how to position yourself for rising prices by discussing which strategy is best suited for your needs. We can be reached at 877-340-0790.

Looking back at 2013, when stock highs broke records, and gold and silver performance disappointed holders, it's easy to overlook the profit potential of precious metals.

ASI is a firm believer in precious metals as a long term, core asset. So, of course, we advocate buying on dips. But, we see extraordinary opportunities in 2014 for profit seekers as well.

The Inside Situation on Mining...

For some time, we have been expecting a supply shortage to emerge based on mine closings and consolidations due to the high cost of production. But, the situation is more dire than anticipated.

For example, Alexco, a Canadian producer, has put its Bellekeno mine on Care and Maintenance, which means that a company is decreasing production to the bare minimum. This is done so they aren't shutting down the mine completely, but the production is minimal until prices begin to rise again. It went from an operating margin of PLUS 4% in 2012 to MINUS 340% in 2013. (Additional reading at the end of this article.)

Aurcana, a Texas company, has put Shafter mine on Care and Maintenance. This means the mine won't start production until higher prices are established. This was done because margins dropped from PLUS 17% in 2012 to MINUS 149% in 2013. The Shafter silver mine is located in Presidio County, Southwest Texas and was a major employer and taxpayer in the area. This closing was not done lightly.

Even a low-cost producer, such as Gold Resource Corporation, while still operating, is doing so at MINUS 6%.

The world's largest gold producer, Barrick Gold Corp closed its Pascua-Lama mine in South America for the foreseeable future. Even though this mine was built, and projected to start production in 2015, this $5 billion project has suspended mining until 2017. Labor issues and costs forced the decision to abort the project at these current price levels.

According to Reuters...

"In suspending construction at Pascua-Lama, Barrick is following in the footsteps of other big miners that have mothballed projects in recent years.

Rival Newmont Mining has put its Conga project in Peru on hold, and Anglo American last month dropped plans to push ahead with the Pebble copper-gold mine in Alaska. Pebble, like Pascua-Lama, has faced strong environmental opposition."

These suspensions have been overshadowed by actual bankruptcies, such as we saw with Colossus Minerals. Directors Douglas Reeson and Greg Hall resigned after the company lost a $25 million financing deal - about a third of what was needed to continue the Serra Pelada mine, located in Brazil.

In a recent article by ASI's President and COO, Rich Checkan, the four outcomes when prices are at, or lower than, the cost of production are:

1. Mines close or go into actual bankruptcy
2. Junior mines consolidate and the major mining companies take over
3. Mines sell as much as they can at current prices in attempt to tread water until prices rise
4. Mines slow production and harvest only the easiest to extract, lowest cost ore

Any of the above, and all of which are already happening, will decrease supply.

What's Ailing The Mining Industry?

It is easy to conclude that with stocks soaring, hedge funds are selling off ETF holdings in precious metals in order to chase profits in the equities markets. This infusion of supply to the market has put short-term, downward pressure on prices. And, ultimately, has driven prices to a point where profit margins have turned into unsustainable losses.

The easy to get-out-of–the–ground deposits have already been mined. Lower grade mining yields 0.5 grams per ton, when normal grades are 1.2 grams per ton. Simply put, it costs more money to get less out of the ground once the low-hanging fruit has been picked.

This means that yields in ounces per ton are slimmer; and it takes more work and higher costs to access precious metals worldwide.

In union driven and organized labor situations, wages have increased, concessions have been given, and there is no going back.

In fact, Chinese wages have increased by 14%. With oil at $90 a barrel, transportation costs for all mines worldwide are at unprecedented levels.

The internal organization and efficiency of mines has not always been top notch.

The smaller mines coasted through the high flying precious metals markets of the past few years, and their weakness shows in their troubles now. There will be turnarounds, and consolidations brought about by the better managed and larger mining operations, but until then, supply is dwindling.

What's Happening To Demand?

While negative margins are atrophying supply, China is buying over 100 tons of gold per month, through its Hong Kong port alone. And, it's important to note, China's official gold import numbers don't include the gold they import through their Shanghai port. (Additional reading at the end of this article.)

India, traditionally a country with enormous demand for gold, has imposed import duties to balance its heavy trade deficit. This has created pent-up demand and an unprecedented black-market economy.

We expect the doors to gold and precious metals importing in India to open in this Indian Election year.

Among the most affected merchants are jewelers, a significant factor in the Indian economy. Because of the import duties imposed on them, the cost of smuggling gold through the Indian boarder has drastically hurt jeweler's margins, leading to many layoffs.

This has created enormous pressure on politicians in an election year. There is a high probability India will ease restrictions on its import duties to appease the electorate. If they ease import duties on gold, it will no doubt open the buying floodgates, putting additional stress on current low supplies.

The imbalance of supply and demand raises prices. This is true for any commodity, whether a bad crop of oranges or a moratorium on oil drilling, the laws of economics do not fail us.

Russia, Turkey and Cyprus put additional pressure on demand and supply.

Currently, COMEX inventories are at an all-time low, with little aboveground gold available to fill demand. In late December, the COMEX registered gold inventories dropped near all-time lows. (Additional reading at the end of this article.)

Russia and Turkey, also traditional gold buyers, are watching their inflation rates rise, driving buyers to use gold as a hedge. In January, Turkey's annual inflation rate jumped above 5% due to tax increases on tobacco and rising food prices.

Cyprus, currently in the midst of a banking crisis, has set a government policy that gold will not be exchanged in return for debt forgiveness. Potential new sources of aboveground gold stores have also dried up.

No Guarantees – Just Logic and History...

Of course, no one can guarantee that gold and silver prices will go up in the future. The predictions of the pundits may or may not materialize. Only time will tell.

What we do know, as careful and educated observers of the gold and silver markets, is the fundamentals of owning precious metals have not changed.

Long time buyers with the goal to Keep What's Yours, buy low at this stage and then add through dollar cost averaging in case of a further short term price dip. This is a wise strategy.

Both profit seekers and those interested in balancing their long-term portfolio, should see the logic of buying when both gold and silver reserves and production are low, when demand pressures are high, and when sentiment is at all-time low levels.

With the above insights in mind, give us a call at 877-340-0790 to appropriately...

1. add to your core portfolio of long-term holdings
2. rebalance your portfolio
3. improve your asset allocation
4. buy precious metals at current prices

... in anticipation of consequential price increases in accordance with the traditional economic fundamentals of supply and demand.

I have just scratched the surface describing the current issues in the mining industry with this high level overview and why I feel it's a good time to take action – to add, gold and silver to your portfolio.

For those of you who want to read more and want to learn more, don't worry. There is more. Keep an eye out for my second of five articles, covering gold supply, on Tuesday, February 2nd, or send me an email if you want to discuss.

I'll continue to unearth why the mining industry is stopping or slowing its digging and the opportunity it offers you as a result.

Supporting Links

The Inside Situation on Mining...
Alexco Control and Maintenance
Mining Explorers 2013: Alexco Resource Corp.

What's Happening to Demand?
China's gold import numbers

Russia, Turkey and Cyprus put additional pressure on demand and supply.
Gold inventories drop near all-time low