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This is an urgent message to all
management and shareholders of any mining company that produces silver,
either as a principal product or as a by-product from mining gold, copper,
lead or zinc. I believe this message will spell the difference between great
wealth or abject failure for many companies and investors. It is intended to
eliminate any excuse later, that no clear warning was ever issued.
Hundreds of mining companies
throughout the world, particularly in Australia, have collectively shorted
well over a billion ounces of silver. At five dollars the ounce, this is
probably the single worst bet in the history of finance. It is a bet that is
guaranteed to bankrupt many of these companies in the coming great silver
price spike, rendering hard earned investments worthless. The companies that
heed the message, and get and stay short free, will enjoy bounty beyond
belief. For the coming silver spike will exceed the many fold price increase
in palladium (from $120 in 1996 to $800 recently), for one simple reason. While
both metals share a deficit consumption profile, silver alone has the
distinction of being the most heavily shorted item in history, period. This
gargantuan short position ensures, all by itself, a run to $50 or $100 per
silver ounce. I don't care that this labels me extreme. The situation is
extreme. (Where did you think the price was headed for the most manipulated
market in the world, when the manipulation ended - $7/oz?). My common sense
tells me that $10 to $20 silver won't fix the dual problem - a structural
physical deficit and a staggering naked short position. Anyone who tries to
fight this coming historic surge will be cast aside.
As big as the silver short bet
is, it is dumber than dumb. Hedging silver at $5 - what for? We're at
inflation adjusted, all-time price lows for silver. All-time means thousands
of years. Think of it. The biggest short bet the world has ever seen, at a
price the lowest the world has seen. How could there ever be a more idiotic
trade? This has to be the record for the most stupid risk/reward ratio. What
could possibly justify being short a five dollar item with a 50 or 100 dollar
upside potential risk? We have seen the effect on gold miners who were
heavily short in the 20-25% price jump in September - two (Ashanti and Cambior) effectively went bankrupt. On a 25% up move. What do you think will
happen when silver jumps 1000%?
Miners who are short any amount
of silver, will be mauled in the price spike. But miners who are short more
than one year's production, appear to stand little chance of avoiding
insolvency. And all for a trade that makes no economic sense. Mine management
will be quick to respond that they are only hedging, exactly what Ashanti and Cambior said before their financial demise. This isn't hedging, not at all time
price lows. This is a certain death sentence. Let me illustrate the point
with a couple of real life examples. In each case, silver is not considered
to be the main product.
Boliden Limited
(www.bolidenltd.com) is a Canadian miner that produces primarily zinc and
copper, with by-product gold and silver. As of 12/31/99, it has sold 30
million ounces of silver in an options strategy at a maximum price of $5.67
oz. (Undoubtedly of the buy put/sell call alligator variety, entered into
during the dealer-inspired 2nd Quarter 99 selling orgy). Boliden has not
hedged its other metals. It produces a little less than eight and a half
million ounces of silver a year. It has incurred operating losses of around
$60 million annually, in each of the past two years. It has roughly $65
million in net current assets and a big $1.2 billion in long term debt. Being
short 3.5 years of silver production, Boliden is exposed badly to a silver
price spike. At $15 per ounce, its short position would be $300 million under
water. At $50 per ounce, the liability would approach $1.4 billion. Even if
by some miracle, Boliden wasn't bankrupt at either point, its suffering
shareholders would reap zero benefit from what should be a price bonanza. Boliden
is hedging against any profit. It's disgraceful.
Barrick Gold doesn't list silver
production and hedging on its web page, so I got that information verbally
from their Investor Relations Department. Barrick produces roughly four
million ounces of silver a year and is forward sold on a little over 14
million ounces at $5.07 oz. (also 3.5 years production). While I have written
extensively on Barrick's gold hedge, its silver hedge is just as dangerous,
in spite of the tiny amount of money involved in doing the trade. Barrick has
the use of $70 million for agreeing to be short 14 million ounces of silver. At
$15 per ounce, Barrick's negative mark to market would be $150 million. At
$50 oz, almost $650 million. At $100 oz, $1.3 billion. Now think about that. At
$5 oz, how much could one make on a short position? Forget whether there
would be margin calls and positions called in - think of how Barrick
shareholders would be screwed in a silver price spike. There would be zero
silver profits over $5.07 on three and a half years of production, no matter
how high silver went. That, I submit, is lunacy and corporate negligence of
the highest order. Of course, Barrick will claim it can defer the short. Big
deal, who knows what silver will be at then? The record shows that Barrick
missed a wonderful opportunity last summer by not listening to my clear
warnings to cover their short gold position at 20 year lows. Let's see if
they miss again, by staying short silver at the lowest real price in history.
Barrick shareholders, beware - being short silver is not in your best
interest. Management should concentrate on developing and producing, not
timing the market.
It should be noted that many
miners with short gold positions can't cover because they lack the funds to
buy back their gold shorts. But silver shorts can be covered, if companies
act quickly, because silver is so cheap. It doesn't take a lot of money to
buy back silver shorts. But once silver prices spike, the money needed will
be great. While I haven't put it to paper and pencil, once silver spikes, I don't
think the Australian banking system has the capacity to fund the silver short
position of that country's miners. There is no legitimate reason for a miner
not to cover silver shortsimmediately. In fact, if miners (particularly the
by-product producers) accumulated silver at current prices, in anticipation
of the price increase, those companies would be richly rewarded. (OPEC in
crude oil and the Russians in palladium should be the model). The temporary
postponement of silver revenues would be minor, at current prices.
There are hundreds of mining
companies short stupid amounts of silver. This is preposterous. Shareholders
must take matters into their own hands. You own these companies. You can not
permit good, productive companies to be destroyed by a stupid financial
transaction. You must insist of management;
1.
Cover
all silver short positions immediately
2. No new shorts on any price increases
3. Accumulate silver at current prices
Do not assume someone else will
contact these companies - do it yourself. Document your contacts and
follow-up. Don't fall for any corporate song and dance. If you are not sure
if your company is short silver - ask. You may make the difference in a
company's survival. Make sure that no officer or director can ever claim that
they didn't know. Make
sure they know. Just do it.
Theodore Butler
Investmentrarities.com
(No one can safely
predict the future and it’s possible that Israel Friedman’s Butler’s analysis will prove incorrect. Silver can go up, but silver can go down. It
is up to you to read, analyze, and arrive at your own conclusions. Prudence
requires we emphasize that precious metals may or may not prove to be
suitable for your consideration.)
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