The Silver Institute's World Silver Survey 2009, compiled by independent research house GFMS Ltd, record an outstanding silver hedge book of 1,698 tonnes at the end of 2008, a decline of 175 tonnes over the year. This change was heavily concentrated in options-related exposure (not for the first time), while the vanilla forwards contracted by just 31 tonnes over the year. The survey points out that its analysis concerns only the longer dated hedging and not near-term forward contracts that many miners and refiners use as a standard means of marketing their end-product. In nominal terms the options book contracted sharply, predominantly as a result of contracts running to natural maturity rather than early redemption. This was mitigated, though, by an increase in the implied delta against the options book. The study contains an interesting matrix of how the book changes with increments in both the outright silver price and with changes in silver volatility and it is important to remember that the changes are not linear. At year-end the book stood at 15.7 million ounces; just one example of how this would change would be that a $4 fall in the silver price would take the book up by 5.3 million ounces or 165 tonnes. The majority of the largest changes in the forward sales position actually came from the gold sector, which was responsible for 11% of total silver mine output during the year. Kinross, for example, bought 112 tonnes of silver forwards against the Kupol project when it acquired that operation from Bema Gold. There was a clause in the hedging agreement that precluded the premature buyback of the Kupol hedges, but forward purchases effectively neutralised the position. Other major gold and diversified producers also reduced positions, while fresh hedging was relatively muted, with the largest increase coming from Hochschild Mining. The lack of fresh hedging, especially within the project finance sector, is attributed in part to the continuing increase in silver stream royalty finance agreements.Meanwhile costs of production at primary silver mines almost tripled last year as a result of rising input costs and falling by-product credits. On an intra-year basis, for example, lead, zinc and copper prices declined by 63%, 53% and 56% over 2008, although gold prices increased.Primary silver mines last year accounted for just 28% of total silver mine production in 2008, with 37% coming from lead-zinc operations and 23% from copper. Silver mine output decreased by 1% while production for copper mines was down by 7%. Lead-zinc mines, by contrast, raised their contribution by 6%, while gold-mine production rose impressively, adding 26%.The study notes that only four primary silver mines actually managed to report reduced cash costs over the year. Although there was a reduction in input costs in the fourth quarter as a result of falling energy, labour and process costs, they remained historically high. Furthermore these reductions were swamped by the fall in by-product prices, so that cash costs in the fourth quarter continued to rise.Mine production in 2008 was at a new record level of 21,187 tonnes, some 510 tonnes higher than in 2008, with the increase driven by developments at just a small number of operations, while the contraction in the Chilean copper mining industry generated a fall in local silver production. Peru remains the world's largest silver producer, with 17% of world output at 3,680 tonnes; Mexico is in second place at 3,241 tonnes or 15% of total. China lay in third place with 2,575 tonnes, or 12% so that these three nations between them commanded 45% of world silver mine production. Over the past ten years China has registered the fastest average rate of growth at almost 6.5% per annum, with Peru not far behind at 5.7%. Production in 2009 is expected to decline, with declines coming from all by-product sectors (apart from gold), resulting from the widespread contraction in base metal production that was implemented in the second-half of last year. For further information regarding World Silver Survey 2009, go to www.silverinstitute.org. Those residing outside of North American can go to www.gfms.co.uk.
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