brent cook explains the economics of silver-lead-zinc mines, and why they will be shutting down due to low base metals prices, and even lower payments for zinc concentrate:

TGR: What about precious metals?

BC: That's a different story. I think precious metals will be entering a new era of respect over the next few years at least. Gold is going to do quite well over the long run and silver, which to some degree mirrors the gold price, will also do well.

Gold is real money. Silver is often lumped into that category as well by investors. I do think the fundamentals for silver are going to improve just because 70% of silver production comes out of base metal deposits. With these base metal deposits being shut down, the silver supply or production is going to drop off and that should be positive for the silver price.

TGR: But if silver goes up high enough, wouldn't that justify keeping those projects going?

BC: It's on a case-by-case basis. Let's look at what people call silver mines, the silver companies. There are very few pure silver companies. Almost every silver company is really a lead, zinc, and silver production company and they need this lead and zinc credit to make these things profitable. I look at a lot of the mines and companies operating in Mexico and Peru. By and large the so-called silver companies are underground mining silver grades in, say, the 150 to 275 grams per tonne range with decent zinc and lead credits. That's not a very good deposit, really. It's marginal at best and these things don't make money, especially if you add in exploration and forward development costs.

These mines generally produce a lead-zinc-silver concentrate that then gets shipped to a smelter and the smelter pays you X amount for the lead, zinc, and silver in that concentrate. When zinc was $1.50 to $2.00, you made good money. Now at 50 cents, you can see what the problem is.

Plus, because there's such a low demand for base metals, the smelters are paying even less for the zinc in concentrate. It used to be they'd pay, let's say, 70% of the spot zinc price back to the mining company. Now I've seen them only getting about 50% of the value of zinc in their concentrate. If zinc's 50 cents, which is low, they're only getting 25 cents once the smelter takes their cut.

TGR: So regarding silver, you're saying because the base metal mines are shutting down, the production of silver is decreasing, at the same time the demand will increase because of the financial situation worldwide?

BC: I think so.

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