Risks attached to investing in silver shares
Silver shares or silver share investing, like all forms of paper silver, present unacceptable risks at least as far as the average silver investor who cannot afford to lose money is of a concern. However, like indicated elsewhere on the Silver Bullion website as well, the only form of paper silver that we condone or tolerate as far as a secondary investment in silver goes, is silver shares or silver share investing. Silver mining companies need funds and capital after all, at least initially, to stay afloat or to stay in operation. Therefore, despite the encouragement given to silver share investors, we find it essential to consider at least some of the risks that are attached to silver shares or silver share investing.
‘Trading’ and not ‘investing’…
It is actually more correct to refer to silver share investing as ‘trading’ and not ‘investing,’ because the share prices of silver mining companies are mainly driven by sentiment instead of fundamentals or fundamental principles.
In many cases, the actual value of a silver share takes a back seat when it comes to movements in the share price. The main reason for this phenomenon is because movements in silver shares are mostly driven by short-term speculators or traders, who love to see huge short-term price fluctuations in order to make quick profits, especially considering those with insider trading information pertaining to the silver market manipulation that has been going on for a while now (at the time this was written). It is after all no secret that silver market manipulation is responsible for huge fluctuations in the silver price, fluctuations that affect silver share prices in turn.
Difficult to determine fair value…
There are various factors that impact on silver mining companies or silver mines for that matter, positively and negatively. This makes it extremely difficult to place a fair value on silver shares at any given stage, especially while silver market manipulation is still at the order of the day (at the time this was written). It should therefore not come as a surprise that silver shares provide a hot bed for speculation.
The following are just a few of many factors that can negatively impact on the profits of silver mining companies or silver mines:
Exchange rate risk: Fluctuations in the value of the U.S. Dollar relative to other fiat currencies can have a huge impact on the profitability of a silver mining company or silver mine, especially when something such as quantitative easing (QE) is at the order of the day. The reason being is because the price a silver mining company or a silver mine receives for extracted or mined silver is quoted in USD. In addition, if part of a silver mine’s costs are born in another currency, besides the U.S. Dollar (at the time this was written) and the local currency in the area of operation, then it can lead to additional exchange rate risk.
Mining accidents: It is no secret that silver mining can be extremely dangerous due to various factors such as underground flooding, earth quakes, the leaking of poisonous gasses, fires, etc. It is therefore no wonder that silver mines have its fair share of mining accidents every year despite all the safety measures deployed. These mining accidents can be highly disruptive, especially when silver mining operations need to be halted for an extended period of time (or even permanently in some instances!).
In fact, many silver mines have to close down permanently due to the damage caused by some mining accidents. The cave-in of a mining shaft for one can easily cause the permanent closure of a silver mine, simply because financially it might not be viable to clear the shaft in order to commence silver mining operations, especially in a monetary system where the “paper gimmick” and silver market manipulation are pretty much still at the order of the day (at the time this was written).
Another very ugly side of mining accidents is the side were mine workers lose their lives. This normally has a huge impact on the families involved and on the remaining mine workers’ morale, which can impact very negatively on productivity and thus on the overall profitability of a given silver mine. This is without even considering the cost of compensation to the mine, when a bread winner dies or are serious injured in such an accident and his/her family needs to be compensated.
An example of a relatively modern mining accident, which claimed the lives of no less than 91 silver miners in 1972, is the one that occurred at the Sunshine Mine located between Wallace and Kellogg in Northern Idaho in the U.S.A. The relevant silver miners died due to carbon monoxide poisoning brought on by excessive smoke inhalation caused by a fire of unknown origin. Production at the relevant silver mine was halted for 7 months, which impacted very negatively on the mine’s profitability and in turn on the mine’s share price. This is but one of many other examples.
Silver price fluctuations: Fluctuations in the spot price of silver, the price which is quoted on stock exchange billboards, in newspapers, over the radio, on TV and elsewhere, can impact heavily on the profit margins of silver mining companies or silver mines. The reason being is because it influences the income silver mining companies or silver mines derive from physical silver delivered or sold. This is especially true in a monetary environment where the “paper gimmick” and silver market manipulation are at the order of the day (at the time this was written), causing huge fluctuations in the silver price.
Energy price hikes: Hikes in the price of energy, which include: electricity, fuel, gas, etc., can impact heavily on the profit margins of silver mining companies or silver mines. The reason being is because silver mines can consume a lot of energy in day-to-day silver mining operations. Needless to say, this can be very costly and even disastrous, especially when ridiculous high energy price hikes are at the order of the day.
Unforeseen engineering problems: Silver mines often run into unforeseen engineering problems when extracting silver ore, which can hugely impact on profitability, especially if it increases the production costs of the relevant silver mines.
Politics: Politics can have a huge influence on the success of silver mining companies or silver mines. It is no secret that populist governments sometimes cannot resist the temptation to steal the mining assets of silver mining companies or silver mines. In fact, rumours of possible nationalization or confiscation alone are enough sometimes to send the share prices of affected silver mining companies in a downward spiral.
For example: In 2006 rumours that the government of Bolivia might seize foreign-owned mines led to selling which affected the share price of at least one silver mining company or silver mine negatively. The Coeur d’Alene Mines Corporation, involved with the San Bartolome silver mine project in Bolivia, saw a drop in its share price of between 8% and 10% as a direct result of the mentioned rumours.
Environmental activism is another political threat to the success of silver mining companies or silver mines. There is an alarming increase in the number of silver mining licenses that are being revoked purely based on preventing harm to the environment. This might be a good thing from an environmental point of view, but it is most definitely not good news for the employees nor the shareholders of the affected silver mining companies or silver mines.
Shrinking silver reserves (silver deposits): Many silver mining companies or silver mines are dependent on the discovery of new silver reserves (silver deposits) in order to survive, especially as their existing silver reserves (silver deposits) shrink. If one considers that new silver deposits (silver reserves) are not only hard to find, but a very costly exercise, then one cannot blame silver mining companies or silver mines for trying to mine more silver from their existing properties. It is however no secret that the deeper they need to go for silver, the higher the costs associated with silver mining and the risks to the mine workers involved.
Wage disputes: Wage disputes, although not a problem at all silver mining companies or silver mines, can have a very negative effect on silver mining productivity, especially when allowed to get out of hand.
Managers vs. shareholders: It is no secret that many companies, including silver mining companies, are nowadays run for the benefit of managers, especially top management, rather than for the actual benefit of shareholders (at the time this was written). The truth be told: The bulk of managers are not keen to pay out dividends, simply because it eats away at the pool of money that is available for corporate takeovers, exploration, staff bonuses and other expenses.
Accounting risks: The financial statements of silver mining companies or silver mines, because of the way these statements are compiled, can make it difficult for even accounting experts to determine the fair value of a silver mining company or silver mine based on its financial statements.
With the above in mind and considering that we’ve only touched the tip of the iceberg when it comes to the risks attached to silver mining, then once again it must be clear that investing in silver mining companies or silver mines is not for the faint-hearted. This is true despite the benefits of investing in silver shares, especially considering that silver shares never present a pure investment in silver or pure silver ownership.