The price of the precious metal fell abruptly to an 11-year low of $11.80 per oz in the week to Thursday March 19, having traded close to multi-year highs mere days previously.
Investors dumped silver, a precious metal that in physical form is mostly used in industrial applications, as part of a wide selloff in liquid asset classes on fears about economies halting if efforts to stop the spread of the 2019-nCoV coronavirus infection spark a global recession.
Geologically, zinc, lead and silver are often mined together, with one of them operating as a by-product and lowering the costs of extracting the dominant product.
But with all three metals facing price falls, miners face a challenge when it comes to selling product for more than the costs of production.
“This is a massively testing time for the lead-zinc [and silver] mining sector. More closures are very likely over the coming months,” Ryan Cochrane, head of research at metal concentrates trading platform Open Mineral, told Fastmarkets.
“On paper, I would say that around 15-20% of the PbZn industry is now burning cash on a total cash-cost basis. On more inclusive metrics like All-in sustaining costs, the figure will be above 25%,” he said.
While silver’s price drop came as a surprise to some in the market, with precious metals tending to perform well in times of economic distress, downtrends in zinc and lead were widely forecast.
At $1,845 per tonne, the London Metal Exchange’s cash zinc contract was at its lowest since May 2016, but the price has been in decline since hitting an 11-year high of $3,619 per tonne in February 2018.
That price peak ushered in a series of major new mines - Dugald River, Gamsberg and the resurrection of another in the form of Australia’s New Century tailings recovery project, at a time when demand for refined zinc material dropped.
Similarly, lead, which at $1,551 was at its lowest since November 2015, has been facing demand challenges with the perceived rise in new-era automotive batteries.
Treatment charges high
For miners of both zinc and lead, treatment charge - the fees paid to smelters for turning concentrate into refined product - remained high.
Fastmarkets assessment of the lead spot concentrate TC, high silver, cif China, was $180-200 per tonne on Feburary 28, the highest since coverage started in 2014.
Zinc TCs were at similar highs. At $280-315 per tonne, the Fastmarkets zinc spot concentrate TC, cif China, reflected a bifurcated market, with some low-grade concentrates trading at terms around $350 per tonne.
“Silver is very important for base metal mining when high treatment charges are also adding to miners’ costs,” according to Duncan Hobbs, head of research at trading house Concord Resources.
“In most cases, silver will be counted as a by-product credit, so effectively supporting the cash cost of zinc and lead miners,” Hobbs said.
Mining companies will be helped somewhat by lower oil prices, which have plunged to $30 per barrel since production limiting agreements between the OPEC+ group of oil-producing countries fell apart earlier this month.
Open Mineral’s Cochrane noted, however, that because the majority of zinc and lead mines are underground rather than open-pit, they will benefit less from this, although the US dollar’s gain against emerging market currencies should provide a boost.
“If we look at zinc revenues for major names on a spot basis, revenue [in dollars per dry metric tonne] is ranging between $480 and $560 per tonne. The last time revenues were in that kind of range was in 2015-16,” Cochrane said.
It remains to be seen what will be the overall outcomes from the current economic malaise over coronavirus, but for zinc and lead miners the breadth of the price drop will be a crucial factor.
“I think [closures] really depend on how long prices stay depressed. In 2008, silver was a victim of the market’s need for liquidity, but rebounded fairly quickly,” David Stein, president and director of private silver-zinc-lead mining company Kuya Silver, said.
“Based on the 2019 [all in sustaining costs] costs that I have seen,” he added, “a large proportion of silver mines could be losing money right now.”
Zinc and lead miners have had their silver lining taken out.