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No matter how you look at it, by now most everyone
with any sense of the market is likely established in the belief that
commodities are in a secular bull market and we are now entering the second
phase of it known as “the wall of worry” phase. This is the phase
institutions enter the market. Of course they are already in the market, and
we mean to say that institutions enter the sector that is in a bull market. By
that I don’t mean the likes of Sprott Asset
Management or US Global Investors because they are among the few institutions
heavily involved in the sector, but the “mainstream” mutual
funds, the pension funds, the colleges, the Wall Street investment banks, the
darlings of CNBC and Bloomberg TV.
Up until now Fund Families like Legg Mason and
Vanguard have been content with one or two “Gold” or
“Natural Resource” Funds in the total mix, which were grossly
outnumbered and outsized in quantity, capital and air time by their numerous
other funds - the Large Caps, the Core Funds, the Diversified Funds, the
Growth Funds, the Aggressive Funds and so on. I guess it makes sense. The
commodities sector, aside from oil, simply could not accommodate more
institutions because there weren’t enough quality companies that would
clear the minimum investment requirements of most mutual funds. To that end I
would venture to guess that at least half the companies listed on Amex in the
last two years came from natural resource sector.
And here’s another hunch. Whatever the number
of “International” Funds was, meaning US Funds that invest
abroad, it has to double and triple in the coming years. The bulk of world
economic growth is more than likely to happen abroad and I don’t
believe foreign companies will continue to seek listing on US exchanges with
the same vigor as they have in the past.
Jim Puplava has just
created a Gold Index that makes an emphasis on quality juniors including
silver juniors. With that in mind we decided to look at some of the emerging
silver producers that may qualify to be added to shopping lists of institutions
entering the sector or otherwise materially impact their own standing by
becoming a producer.
Apex Silver (NYSE: SIL)
Market Cap on 7/25/05: $662.82 MM
It has to be the first company we look at because
it’s clearly the largest company with the largest mine coming on
stream. Igor Levental of Investor Relations assured us that all work is
proceeding as planed and if anything is slightly ahead of schedule. “There
are a lot of things taking place on the ground, like the infrastructure
project road construction we just finished” said Igor, noting that this
work has to be done, even though it does not draw much excitement from
investors.
Apex, as you recall, is developing its 100% owned San Cristobal project in Bolivia. It’s a
silver/zinc/lead property with vast resources. The plan is to produce 22.3
million ounces of silver a year (plus a whole lot of zinc and lead) scheduled
to begin in second half of 2007. While it is 2 years away, Apex is expected
to become world’s largest primary silver producer and add substantial
supply to the market. It will also be among the cheapest silver producers
with cash cost projected at around US$1.31. In addition Apex has an extensive
portfolio of silver properties for which it does not get any credit at this
time. More recently the company has started to be more active with its other
projects.
Genco Resources (TSX-V: GGC)
Market Cap on 5/25/05: C$19.63 MM
Genco Resources is perhaps one of the least known
companies on the list, yet it is probably one of the more deserving of your
attention. We personally critiqued Genco for what we believe is
“insufficient marketing and promotion” which stands in contrast to many of its peers. The management asserted that it has
been a company policy to “under-promise and over-deliver”. Still
the company is taking steps to address the situation and among other things
launching a new web site next month (August, 2005).
So what should you know about Genco? For starters,
Genco is a silver producer (with some gold credits) and is profitable at
that! In the first half of 2005 the company earned about 5 cents/share net of
all expenses. That is a rare feat among not only silver but even a vast
number of gold companies.
Yet the good news is just beginning to flow and
there is a lot more coming. To date Genco has been
processing some 140 tpd (tons per day) of ore and is working to increase that
to 220 tpd by the end of this year, a 63% growth. It gets better: in 2006 the
company expects to go through 340 tpd and thus ramp up production to 2,000,000
of silver equivalent from 460,000 ounces in 2004. In the first half
of 2005 the company already produced as much silver as it did in the entire
last year.
The bulk of this growth is attributed to higher
grades of both gold and silver at its new San Rafael vein. The management is rather
optimistic about the prospects of this vein and has reasons to believe there
are more parallel ore-shoots like it nearby. To confirm this prognosis Genco
retained another drill rig that is already on the property and should start
poking holes any day now. That is in addition to ongoing drilling at its main
La Guitarra Mine.
The company’s plan is to maintain at least two years worth of reserves
at the prevailing production rate at the time. That said,
Genco’s master plan is to eventually upgrade the mill to 1000 tons per
day if in fact enough ore is found to support such scale of production.
The beauty of it is that all this growth is being
financed from operating cashflow. The company IS MAKING MONEY TODAY and
putting it back in the ground to fund the expansion. Genco has about C$2
million in the bank and has no plans for additional market financing at this
time. The insiders own about half of outstanding shares and there are no
cheap warrants or options hanging over the stock. In fact the management is
very wary of stock dilution. For instance, a number projects the company
looked at for acquisitions has been turned down because they did not offer as
much value as there already is in the stock and therefore would mean dilution
to existing shareholders. At the present time the company is considering five
more prospects.
Endeavour Silver (TSX-V: EDR)
Market Cap on 7/25/05: C$33.04 MM
Endeavour Silver has been among the most aggressive
silver juniors. EDR owns 51% of Santa Cruz
mine in Mexico
and is the operator. It has an option to acquire the remaining 49% for US$4
million by 2008. The company is projecting silver production to triple to 1.3
million ounces in 2005. EDR is also embarking on aggressive exploration
program to expand silver resources from 10 million oz to 20 million by the
end of 2005.
Endeavour is active in acquiring silver assets in
the area and recently bought 9 properties from Penoles. Interestingly, in
addition to 3% NSR, the deal provides that ore mined from these properties is
to be sent to Penoles for smelting. Some of these properties have historic
silver production and could have significant potential. EDR is planning still
more acquisitions in the near future and has one the best marketing teams
working for the company.
First Majestic (TSX-V: FR)
Market Cap on 7/25/05: C$43.99 MM
First Majestic is another junior silver producer
that has been very active in Mexico.
Even though it’s a relatively young company they control a producing
mine in Mexico
and have excellent prospects to build on their initial success. The company
is likely to fall short of its target production of 1 million ounces of
silver for 2005 mainly due to equipment problems. First Majestic cancelled
proposed C$15 million financing earlier this year due to falling stock price
amid a broad sell-off in silver stocks, despite holding up remarkably well
compared to its peers.
Still, FR has been busy in the field as much of the
work, like restoring access to lower areas of the mine, needed to be done
mining could be possible. The company now expects to produce 0.5 million
ounces of silver this year and up that to 2 million ounces in 2006. At last
reporting First Majestic showed 80,000,000 million ounces of silver in the
inferred resources category. A twenty five thousand meters drilling campaign
is under way to upgrade the quality of those resources. At the same time the
company is expanding the mill capacity at the La Parrilla Mine to
400 thousand tons per day. The company believes that the drill program at its
Chalchihuites group of properties, that is host to 4 former producing mines
and only 40 miles
away from La Parrilla,
will yield sufficient results to eventually expand the mill capacity to 1000
tons per day.
In addition the company is looking at other
prospects with a view to acquiring new properties. Expect the company to do
another financing before the year end. The size of it is likely to be
determined by the stock price at the time and could be anywhere from C$5-15
million.
Macmin Silver (ASX: MMN)
Market Cap on 7/25/05: AUD$36.01 MM
Macmin is the only primary silver company in Australia. It
has 55 million ounces of silver equivalent (some gold credits) in resources
and a significant gold kicker through it’s ownership of 30% stake in
New Guinea Gold which in turn is planning to be producing 40,000 ounces of
gold starting 2006. The company is well on its way to becoming a silver
producer from its Twin Hills Project in Texas,
Queensland.
Mine construction is under way and should be entering final stages. Production
is scheduled to commence late in 2005 at an annual rate of 2.5 million ounces
of silver (equivalent). It can be increased to full mine capacity of 3.5
million oz/year if needed.
Processing of thirty ton silver ore sample is under
way for trial silver powder production for marketing purposes. Macmin will
employ open pit heap leach processing but unlike other silver producers may
be able to market its silver powder directly to end users. This is possible
due to its metal recovery process called “electrowinning”. Tests
are being conducted to assess the suitability of Macmin’s product for
various end user applications ranging from electronics to medical and
construction fields. If successful, this may result in higher realized sale
price per ounce of silver and add to the bottom line. Of course, the company
can always go the traditional route and sell its silver to refiners.
Sterling Mining (Pink Sheets: SRLM)
Market Cap on 7/25/05: $49.50 MM
Sterling Mining is now producing silver from its
Baroness Talings Project. The company originally forecasted 30,000
ounces/month of silver based on conservative grades of 2.4 oz per ton (compared
to historical data of 3.0 opt). In our last update we provided for
these and other factors by further reducing the 360,000 ounce
annual production forecast to 200,000. Now that the first set of VATS has
been successfully completed the company intends to proceed with its plan to
build the second facility. Since production just commenced in Q2 2005, Sterling intends to
update projections once it gains additional operating experience at the
facility.
Sterling conducted
initial tests with material from its San Acacio
project and came back with some interesting results. After processing
“fines” from the San Acacio dumps and
backfill, it has confirmed metallurgical tests that this material is amenable
to the leaching process used at Baroness. The company appears to be excited
about these findings and believes that there is a real potential to
significantly expand production rate in 2006. Sterling already obtained approval from the
authorities for a 667 ton per day third facility at the Baroness intended
specifically to process San Acacio material. According
to Sterling
rehabilitation is under way to allow access to lower underground workings. Prior
drilling of over 600
meters resulted in an inferred resource of 14.2
million ounces of silver. The Spanish mined 32 million ounces from the San
Acacio over hundreds of years, with a cutoff grade of 30 ounces of silver per
ton so the company is very optimistic about processing material from San
Acacio in the near future.
At the Sunshine the company completed its Phase II
Mine Plan, with the final Phase III Mine Plan to be completed in November
2005. Key rehabilitation efforts are ongoing with particular emphasis being
placed on the Silver Summit tunnel and hoist. This hoist is necessary for a
secondary escape way, i.e. so that the project is not dependent on solely the
Jewell shaft (which is currently in operation). In addition to ongoing
maintenance and rehabilitation work, the company has contracted an
ex-Sunshine geologist to do computer modeling and work on planning the
exploration program.
The company retained two high level financial
executives including a former treasurer of Coeur D’Alene Mines, so
progress towards a higher listing should be forthcoming. Of course, until the
company moves up to a higher exchange fund buyers are likely to remain on
sidelines, but make no mistake, they are watching this one closely.
Silvercorp Metals (TSX-V: SVM)
Market Cap on 7/25/05: C$115.27 MM
Silvercorp Metals (Formerly SKN Resources) is an
emerging silver producer in China.
SVM is advancing its Ying Project to formal production. In the mean time, it
has been shipping hand sorted ore from the 3 shafts being sunk as part of
mine construction directly to smelter. That was possible due to phenomenally
high grades of silver (up to and over 100 ounces per ton) as
well as lead (up to 55%) and zinc. Silvercorp reports measured and indicated
resources but that is because the grades are so high that there is no need
for further drilling and researching. Reportedly, silver grades are even
higher at depth which makes the area similar to the Silver
Valley in Idaho. Interestingly, the company is
cashflow positive on an operating basis even before commencement of formal
production, but it needs financing for capital expenses and to develop its
other properties.
We attended the company’s presentation at the
IIC NY Show and were very impressed. The Silvecorp has been on the fast track
with developing its Ying Project and stock price is steadily rising. Silvercorp
recently closed a financing that was well oversubscribed. So much so that the
company increased the financing from initial C$4.0 MM to C$6.4 MM.
The company has been getting a lot of press lately, largely due to efforts of
ever so dedicated Cathy Fong, its VP of Corporate Development. We believe
this company has all the ingredients needed to build on its success and there
is plenty of upside potential left in the stock.
By : Sean
Rakhimov
Editor, www.silverstrategies.com/
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