So that’s an increase of 1 million ounces–remember this figure.

But the PM total shows an increase of only 400,000 ounces. So, if SLM production rose in 2007 by a million one-ounce maples all other precious metal production must have declined by 600,000 ounces.

Let’s assume for the moment that ‘relatively stable’ means ‘about the same’–although it does seem to imply a slight decrease it’s not clear and is probably not significant in terms of the 600,000-ounce deficit.

That’s a revenue increase of only $5.6 million. Now this is interesting. First the prices. Kitco put the average price of silver for 2007 at $13.38 and for 2006 at $11.54 — that’s an increase of $1.84 per silver ounce (or 15.9%). So if the mint only produced the same number of maples in 2007 that they did in 2006 (2.5 million) that would be an increase of $4.6 million–almost the entire increase in revenue for the Mint’s entire bullion business. But wait, they produce an additional one million maples. Assuming a spot price $13.38 plus the Mint’s mandatory $2 minting charge that’s an additional $15.38 million dollars. Adding the two means that silver revenues alone should have risen by $19,780,000 (let’s say $20 million).

So I guess the price of the other precious metals must have fallen last year. But wait. Kitco’s numbers show an average spot gold price of $603.46 in 2006 to $695.39 in 2007 — a difference of $91.93 per ounce (or 15.2%). Using the ‘relatively stable’ 2007 gold ounce production count of $278,616 then that should have translated into a revenue increase of $25,613,168.88 (let’s say $25 million).

Therefore, based on these numbers, silver and gold revenues for 2007 should have increased by around $45 million — not $5.6 million. Perhaps the platinum and palladium (of which the mint produces very little) fell off a cliff during this time? I’m afraid not. Kitco data shows an average spot rise in platinum from $1142.31 to 1303.05 (+14.1%) and palldium from $320.27 to $354.86 (+10.8%). Unless I’m missing something, the Mint seems to have misplaced about 40 million dollars in bullion revenue.

Towards the end of the report, however, under the Management Discussion section I find a clarification on the ‘relatively stable’ gold production count. Gold production actually declined from 296,097 in 2006 to 278,616 (a decrease of 17,481 ounces). If we go with the previously-ascribed Kitco spot gold yearly averages revenue for 2006 would be $178,682,695.62 and for 2007 would be $193,746,780.24. Therefore, in spite of the production decline, increased spot prices indicate the annual revenue for 2007 should still have risen by $15,064,084.62 (let’s say $15 million). We can reduce the missing revenue therefore to $30 million.

The Maple Leaf Coinage data at the back reveals a decline in palladium coinage from 2007 to 2006 of 53,292 ounces (68,707 to 15,415) which when using the greater 2007 price of 320.27 helps to correct the discrepancy by $18,911,199.12 (let’s say $19 million). This leaves an estimated $11 million still unaccounted for, but in light of almost $300 million in total precious metals $11 million (or about 3% of total revenues) is getting closer to being a tolerable discrepancy.

Management Appear Bullish On Precious Metals Future

It would make sense for Mint management to hold such a perspective–after all almost half of their business is now derived frum bullion sales and the product has been rising for seven years straight. Take note of this, however, since revelations further on appear to contradict this view.

Interesting logic: ‘volatile’ prices will ’sustain’ demand. The beginning of this sentence doesn’t really make sense to me–unless I replace the word ‘volatile’ with the words ‘rapidly rising’–after which it makes a a lot of sense to me.

This statement is further validated by an Internet comment I read recently in a Jason Hommel Silver Stock Report communique, in which the author claims to have talked to David Madge, marketing director at the Mint. During the conversation Mr. Madge confirmed 2007 silver maple production was around 4 million ounces and that 2008 is on track to be around 12 million–a yearly increase of 200% if fulfilled!

Even though I am highlighting these bullish comments on silver it’s important to note how little prominence they play within the annual report overall. In fact, the accompanying press release and letters from Mint management make no mention of the word silver at all, but heavily highlight other (in my view) much less significant achievements.

Relevant Bullion Objectives

Later on in the report under 2007 Performance Details we read: “Overcame operating challenges in the silver refinery which allowed it to run at full capacity by October.” And even later on: “Start-up problems with the new silver refinery made it necessary to outsource a component of refining services in the first half of 2007. All difficulties were resolved and the refinery was running at full capacity by October.” Start-up problems with any factory are practically de-rigeur so this is not odd. What is implied, however, is that internal demand for silver coinage production was so great that had the Mint been able to produce more silver maples they would probably increased SLM sales by even more than 1 million ounces.

The last objective may be in reference to increasing difficulty the Mint may be having in acquiring additional silver.

Because no numerical data is supplied it is hard to determine how significant this increase is. Its very mention in the report, however, may imply a growing difficulty for the mint in sourcing new silver supply to meet the growing investor demand.

Under Precious Metal Risk two items caught my eye:

At first it appeared to me that the Mint not is playing any games in the futures market…

… Except in the case of its relatively-small numismatic products (a rather stable $56.3 million, or 8.9% of total revenues) where they appear to be purchasing long contracts with the full intention of taking delivery (This is sadly now a rather foreign concept in today’s futures markets, especially in silver’s, let’s-short-the-market-by-half... futures exchanges in New York, Chicago and Tokyo.

But sadly I then found this third item under Commitments and Guarantees:

That’s a 2007 Kitco average spot price obligation of $154 million for gold (at $695.39) and $35 million for silver (at $13.38). Using the recent spot prices of $880 and $16.50 the Mint has so far lost over $40 million in gold and $8 million in silver (assuming they can cough up this gold and silver right now. So much for the $30 million of 2007 supposed ‘profit’ that the report so proudly trumpets.

In 2006 outstanding gold and silver leases totalled 105,119 and 1,386,406 ounces — 2007 therefore represents an increase 111% and 91% respectively. Furthermore increased 2007 leasing activity appears to be a reversal in policy since in 2006 the Mint had been reducing their leasing obligations and stated in their 2006 Annual Report:

The Mint appears comfortable owing 2.6 million ounces of silver. The statement that:

… does not jive with the many statements throughout the report such as:

Why would the Mint not pay cash (the report goes on at some length about the amazing profits the Mint has made especially from foreign coinage production)? Two reasons come to mind:
1) In spite of all of their exhortations to the contrary, the Mint’s management really believes the price of silver and gold will decline and that leasing would therefore be proven a good call, or
2) They are unable to find sufficient bullion on the market (at least at prices the futures market seems to say must exist) and have decided that rather than limit future silver production (like the current rationing policies of the U.S. Mint) they will lease the metal instead.

I find the second reason far more credible.

This last item in the report for me is the most disappointing. As a Canadian citizen I am concerned that such imprudent borrowing policies could lead to large liabilities in the future for taxpayers.

Questions for the Mint

One final note: I would like very much to learn more about the Mint’s precious metal leasing activities. Specifically: