Force Majeure – Could a Shortage in Silver be Imminent?

Sean Brazney: Hello! My name is Sean Brazney, Sales Director for Monex Deposit Company. I get the great pleasure of being here again with Jeffrey Christian, Managing Partner and Founder of CPM Group, one of the many analysts over there at CPM Group. Thank you for being with us today, Jeffrey.

Jeffrey Christian: Sean, the pleasure is mutual and It’s great to be with you guys and with Monex.

Sean Brazney: I heard some information recently and sometimes we get information from just the drinking fountain or from our where ever we get it from, but sometimes it comes from people that we know and trust. I just love vetting some of this information out there, because you’re so great with all the data and long history of compiling this data.

I heard something last week, somebody called me up and told me about a mine down in Mexico, the Peñasquito Mine, I don’t know if I’m saying that correctly or not, but one of the largest producers of Silver in the world. On June 8th, they had a labor dispute. They went into contract negotiations, I guess the labor union wanted contract negotiations on profit-sharing, and they ended up shutting down the mine, production in the mine, and then on June 23rd the mine declared a force majeure on some metal contracts for delivery. It brings up two different topics I wanted to ask you today. One is… does this really, since it’s such a major producer, bring up the potential, a real potential for shortage in silver coming to market? Second question would be, if you would help us kind of understand what a force majeure really is, because we hear it about, investors talking about it happening at Brinks or at banks, but this happened at a mine and maybe you can help us really understand what a force majeure really is.

Jeffrey Christian: Talk about part one, and then part two, and then part one continued. The Peñasquito Mine is partly owned by Newmont, which is one of the larger gold mining companies in the world. Newmont is advise for third or fourth place for one of the largest silver mining companies in the world. Peñasquito is its silver mine, it’s a polymetallic mine it produces silver, gold, lead, and zinc. Produces around 30 million ounces of silver a year. So, let’s say, 2.5 million ounces a month. So, it’s loss in a market where you get 750 million ounces of silver mine production every year is…it’s significant, but it’s not devastating or catastrophic to the market. There’s a lot of silver out there. As I said, I think Peñasquito is about 30 million ounces and it counts for most of Newmont’s silver production, and it has Newmont, which is a very large gold mining company, has by-product silver at some of its gold mines and it has some by-product gold at this mine, a few hundred thousand ounces a year. The strike and force majeure at Peñasquito probably is not anything that is going to disrupt the market. And if you look at the last 40-days, while the mine has been on strike, what you see is COMEX inventories are about the same, London inventories are about the same, there’s 850 million ounces or so in London, there’s about 275 million ounces in New York, most of which is eligible, but not registered with the COMEX. So, there’s a lot of silver lying around to compensate for it. There may be some tightness in the market, because there will be companies that say, “Well, I’ve contracted to buy that silver from Newmont and now I have to go into the market and find 2.5 million ounces a month elsewhere.” So, there will be some tightness and some congestion, but you haven’t really seen a major impact on the price and you probably won’t.

Now, I’ll come back to that after it, but let’s talk about force majeure. Force majeure basically means an act of God and most contracts have force majeure clauses in them. The International Swap Dealers Association agreement, under which most commodities trade, have about five different places where you can say— something has happened and I contractually can’t deliver, but that doesn’t mean that we should say that this contract is in default. So, this is an act of God in the eyes of Newmont Mining. Now, in the eyes of the strikers, it’s an act of Newmont mining management—It’s a dispute. So, they declared force majeure on their deliveries saying because of this strike we simply cannot deliver our materials until the strike is resolved. Force majeure is a standard contract clause. CPM Group even uses it in some of our contracts where we’ll say we’ll do a study for somebody. If we can’t deliver certain parts of it, we can declare force majeure—it’s just not doable to come up with some kinds of information. People will talk about, COMEX is going to have to call a force majeure, although it never has on any contract, or a bank will have to declare force majeure. That has happened in the 80’s and maybe in the 90’s a couple of times in the precious metals market. It doesn’t happen very often. Often times when you do see somebody who has a delivery problem, they can do a deal with somebody else and say I owe these people 2.5 million ounces of silver a month, I’d like to lease it from you, you deliver it to my customer, and then when I’m fixed, I will repay you and close out that lease. You have in fact seen some 3 million ounce transactions going on in the over-the-counter market, which may represent Newmont going off to third parties saying I need to find metal to meet my contractual commitments given the fact that there’s a strike. So, force majeure is not as nearly as scary or as devastating as some people would have you believe. It can be, but it all depends on what it is being declared force majeure. So, that’s where it is.

Now, going back to the silver market, 30 million ounces, significant part of production if you see the strike continue. Given the nature of the strike, the dispute actually reflects Newmont has reached an agreement in May with its workers to give them profit participation on the mine, and they gave them profit participation which was equal to about 13-months of wages per worker, and the union has said that’s interesting, but we don’t quite understand the calculations you’ve made and we’d like you to better explain those calculations, and Newmont has declined to do that. So, the nature of the strike is relatively mechanical and we would expect it to be resolved sometime soon. It’s not a big deal for a strike and Newmont has said look there are ways in our contracts with the union and our workers to negotiate this and resolve this, the courts have said the strike is legal. So, it’s continuing, but it probably will end soon. That strike in and of itself, probably doesn’t cause major problems for the silver market, but Mexico is the largest silver producing country by far. It produces about 260 million ounces of silver. The next largest producer is China, which is probably about 140 million ounces. So, Mexico is a major silver producer and Mexico, the government has been changing the rules and regulations for foreign mining companies, and the taxation and other fees that it wants to impose on mining and profit-sharing, and you have a more militant union posture. So, there are a lot of issues bubbling around in the Mexican mining industry, which is very important to the silver market and collectively those problems could cause some constraint on supply over the next period of time, it might be over the next several months or over the next couple of years, because there is a more militant posture toward foreign mining companies and their operations in Mexico. So, that is something worth paying attention to. It’s not something to worry about that it’s going to happen overnight, but it’s just one of those many things that says, “Hey, the world is a lot more treacherous than it used to be.”

Sean Brazney: Definitely a topic worth paying attention to. I want to remind out viewers that these amazing reports we get through CPM also demand some paying attention to like the 2023 Precious Metals in the Eye of the Storm. When you can call Monex today, talk to an account representative, and get your free report. Thank you for your time, Jeffrey, today.