The Gold Report: The Washington D.C.-based Silver Institute
reports that net silver demand has exceeded net silver supply each year since
2004, with a supply deficit of 113 million ounces (113 Moz)
reported in 2013. Why hasn't that trend translated into dramatically higher
silver prices?
Sean Rakhimov: First, I don't put much faith in these numbers. For instance, CPM
Group has somewhat different numbers. Either way, silver supply and demand
have been roughly in equilibrium, in my opinion, over the past decade or so.
Second, silver manifests itself as a precious metal in times of crisis or
uncertainty. When it's business as usual, silver
acts more like a base metal and trades more on supply and demand numbers.
Silver prices will respond during a crisis as its perception changes from an
industrial to precious metal. That's when you will see more of what we saw in
2011 when in the space of about six months silver went up three times.
Another period like that is coming.
TGR: In early June we started to see
stronger precious metals prices and that has carried through. Is this a
trend?
SR: It is the beginning of a trend.
Precious metals characteristically start going up after a prolonged decline,
yet early in the reversal they rarely inspire any confidence because the last
dozen or so similar moves fizzled after a 10�20% move. This could be one of those. Silver is at $21 per ounce ($21/oz) now, maybe next week it will test $18/oz again. It's anybody's guess but I believe that toward
the end of the year we'll probably see higher numbers�maybe substantially higher.
TGR: Is there a telltale sign that
shows investors that this upturn is real?
SR: There isn't one that I use. It's
more of a gut feeling.
TGR: The existing silver fix mechanism
expires on Aug. 14, 2014, and methods to replace it are currently being
reviewed by the London Bullion Market Authority. Is a new silver fix system
likely to yield stronger silver prices?
SR: It's likely. This new replacement
for the silver fix would, at least for the next year or two, have less
tinkering with it than had historically been going on with the fix. On that
basis, the price should become more volatile. On balance it's probably going
to be positive for the silver price.
TGR: What are your thoughts on the
silver space?
SR: In this semi-stealthy firming up
of silver instruments and investments, there is not much fanfare. Silver is
certainly out of favor at the moment, which leads me to remember that it's
always darkest before the dawn. And I believe that this is going to reverse
itself in short order.
Lately I've been thinking
about some passages from the thinly disguised biography of Jesse Livermore, Reminiscences
of a Stock Operator by Edwin Lef�vre He wrote, "There's a
lot of early bulls in a bull market." I've been an early bull in
a bull market for precious metals going back to the early 2000s. Many people
exit along the way but Livermore's idea was that investors have to stick with
it for the entire cycle. That's what I've been telling myself. Of course,
convictions are tested along the way, such as during the last couple of
years.
Silver is a little like
water in that if you tell people you should invest in water, the first thing
people do is look at you like something is wrong with you! Yet fresh
drinkable water is a scarce resource. Silver is so familiar that it lulls
people into this idea that it's not important. Unsophisticated people align
it with gold, yet the fundamentals for the two metals could not be more
different.
TGR: What makes silver special?
SR: If there is one adjective to
describe silver, it's "indispensable."
There are no adequate replacements. It is an extremely versatile metal,
perhaps the most versatile in the periodic table. Silver can do a lot of
good, too. For instance, it is being used more and more in medical implements
that come in contact with the human body because silver kills bacteria in
single-cell organisms. Silver is also used in the food industry to preserve
and process foods like meat and dairy products.
But long before silver
was improving our health and food safety, it was the world's currency. The
word for silver is synonymous with money in 52 languages.
TGR: In April 2011 silver almost
reached $50/oz before undergoing a dramatic
correction. Investors' knees would surely start to wobble if we saw those
prices again. How would you play those kinds of price gains?
SR: It all depends on the character
of the move. Investors have to look at the volume, speed and market sentiment
in order to determine the direction at that point.
TGR: What does the next leg up in the
silver price look like?
SR: My outlook for silver for the next
two or three years is somewhere between $50 and $100/oz. It could be shorter;
it could be longer, but that's not critical. I'm going to stay with it for
the cycle; it could be another 10 years to the end of the cycle. I do not
expect this next leg to be final but I expect it to be a substantial run
comparable to 2010�2011 when silver went from roughly
$10 to $49.50/oz. The next move could go from about $20 to roughly $100/oz, but that will take time. Am I going to take money off
the table along the way? Maybe in some stocks that got ahead of themselves or
that are not responding to the price move. But I would not touch any of my
physical silver.
TGR: What are the next three key
resistance levels for silver?
SR: I think $26/oz
will confirm that the trend has reversed. If we exceed $26/oz on good volume and strength, then we're off to the
races. From there, the next resistance level would be $30�32/oz. If we reach beyond that level, it
becomes $50/oz. And if we take $50/oz convincingly,
then there's a good chance that this move is going to have some serious legs.
TGR: The Performance Report on SilverStrategies.com
monitors 27 silver equities. Since early June, 26 of them are up, some more
than 40%. June is typically a soft month for precious metals equities. What's
supporting those bids?
SR: One thing is a possible top in the
mainstream market. Another is that precious metals are up roughly 15% in the
last month or so and stocks usually have an exaggerated move versus the metal
price. And most of these stocks are coming off depressed levels. There was
something of a vacuum so stocks tend to jump even on low volumes. Most of the
sellers who wanted to sell did. On the flip side, it doesn't take a lot of
money to acquire a lot of stocks. Again, this behavior is typical for the
beginning of a larger move.
TGR: What are some small-cap silver
names that you like in a rising silver price environment?
SR: I like companies that have
demonstrated growth, like SilverCrest Mines Inc. (SVL:TSX;
SVLC:NYSE.MKT)
and Santacruz Silver Mining Ltd. (SCZ:TSX.V;
SZSMF:OTCQX; 1SZ:FSE).
TGR: What did you make of the Q1/14
results from Santacruz? Is the company poised to
build on those?
SR: Santacruz has stated its production numbers
from the current operation and it looks as if it's getting on track. Its
production guidance indicates that, too. More important, the company has a
lot of room to grow. It's two years old. It's already in production. Is it
going to make it or not? Santacruz is almost over the hump.
TGR: The company lost $0.02 a share in
Q1/14. Will it break even or maybe even make money in Q2/14?
SR: That's not how I think about it at
this stage of development. Most junior mining companies do not make money
until their fifth or even eighth year. And in this environment very few
companies have been making money. Unless it's a larger company with
established operations and better cost control, it's difficult for a startup
to pin numbers to something and say, "Okay, this is the benchmark."
Santacruz is not there yet. Do I expect it to make money this year? Maybe it
will break even. But does it have upside? Yes.
TGR: What about SilverCrest?
SR: SilverCrest is implementing a
transition to underground mining at Santa Elena, which at full ramp up should
nearly double production from the current level. So next year bottom-line
numbers should get a substantial bump despite the higher mining and
processing costs from moving to underground mining and milling operation.
That should result in better valuation due to rerating based on the larger
operation or at the very least on greater earnings. Now if I am correct about
improving metal prices going forward, the upside could be very rewarding.
Plus SilverCrest will almost certainly be active in the merger and
acquisition space on either side of the deal. It could be a juicy target for
a larger company while it looks to add another mine sooner rather than later.
TGR: Others?
SR: Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) is another company I'm watching. Excellon is
a junior producer that has been around for a while and has a handle on its
deposit's cost structure and grade.
TGR: How would you compare La Platosa
in Durango state, Mexico, to other silver assets belonging to companies in
this market-cap range?
SR: It certainly is one of the
higher-grade assets. In recent quarters Excellon has been mining 600�800 grams per ton (600�800 g/t) silver, whereas the average for
Mexico would probably be closer to 200 g/t. However, La Platosa has had other
challenges such as underground water issues, which factors into its costs.
Excellon is still chasing the meat of the deposit; it has the tiger by the
tail but it is still looking for the tiger itself. Excellon believes it is
moving in that direction. In a rising metal price environment, such as the
one I expect next year, higher grade may yield some oversized returns due to
greater leverage to rising silver price. The gains could be significant.
TGR: Others?
SR: Avino Silver & Gold Mines Ltd.
(ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE) is producing around 1+ Moz silver
equivalent a year. I have visited the operation and it looks good. The share
price has reflected that, even in a poor environment for resource stocks.
Avino recently acquired Bralorne Gold Mines Ltd, which owns a high-grade gold
project in Canada. It is a bit of a departure from producing silver in
Mexico. Can the company translate its success in Mexico to Canada? Time
will tell.
The other reason I like Avino is that it's bringing the past-producing Avino silver mine back into production. That mine is in
Mexico and is a stone's throw from its current operation. That should
basically boost production to about 2.5 Moz
annually.
TGR: What are some other silver
equities with discoveries that could ultimately become company makers?
SR: The last discovery of that nature
would be the Navidad deposit in Argentina that was
discovered by IMA Exploration and ended up with Aquiline Resources. Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) later bought Aquiline but mothballed Navidad due to the political situation in Argentina.
In this cycle the best
performers have not been the companies that made good discoveries but rather
companies that have properly managed their resources and finances. Those
companies have done well. Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) is on that list. First Majestic Silver Corp.
(FR:TSX; AG:NYSE; FMV:FSE), Endeavour
Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), Fortuna Silver Mines Inc.
(FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), and Great Panther Silver Ltd.
(GPR:TSX; GPL:NYSE.MKT) are on it, too. Most of those companies acquired their flagship
mines. They were not discovery stories, though as part of good management
most assets were expanded and their respective mine lives were extended
through drilling success.
TGR: Nonetheless there have been
discoveries.
SR: Yes. The Chinchillas deposit in
Argentina was discovered by the same group that found the Navidad deposit, a
Grosso Group company called Golden Arrow Resources Corp.
(GRG:TSX.V; GAC:FSE; GARWF:OTCPK). Another discovery is Global Minerals Ltd.'s (CTG:TSX.V; DPF:FSE) Strieborn� deposit in Slovakia. The project has been around a long time but the
entire resource is based on a vein that was not exploited in the previous
precious metals cycle. Global recently made another high-grade discovery,
too. I mention a company like that because it's in the heart of Europe. If we
continue along this trend of increased geopolitical uncertainty, some silver
deposits will become far more attractive than others.
TGR: Let's go back to your list of the
best performers in this cycle. Names like First Majestic, Endeavour, Fortuna
and Great Panther.
SR: First Majestic is perhaps the
best silver miner at this time. It is a classic mining story. It started with
one mine, built it up and bought another one. And then built that up. Along
the way the company made some discoveries or acquired other projects and
built those up�that model seems to work well in
the mining space. That's been the path for many of the major gold producers.
Ten years ago or so, Goldcorp
Inc. (G:TSX; GG:NYSE) was a one-mine company. But it bought other
good assets and put them into production. Yamana Gold Inc. (YRI:TSX;
AUY:NYSE; YAU:LSE) used the same model to achieve similar success, albeit on
a smaller scale. In the silver space that company is First Majestic. I expect
it to get even bigger and better, much like Yamana. Bigger production means
your bottom-line gets so much bigger so much faster in a rising metal price
environment.
TGR: Is it a similar narrative for
Endeavour, Fortuna and Great Panther?
SR: In a word, yes. All these
companies acquired producing or past-producing mines and
revived/improved/enhanced them over time.
Endeavour Silver is
another company that quietly built-up its production profile toward 11 Moz of
silver equivalent, albeit the latter part of growth came from gold. Still at
that rate of production Endeavour should respond well to rising gold/silver
prices.
Fortuna Silver has also
been making headway with respect to its production growth closing in on the 8
Moz of silver equivalent. Fortuna has benefited from drilling success at its
Mexican operation where high-grade intercepts allowed the company to ramp up
both tonnes processed and ounces produced, which in turn reduces per ounce
cost.
Interestingly, Fortuna is
currently valued at a premium to Endeavour despite producing in round numbers
3 Moz of silver equivalent less annually. This likely has to do with
excitement regarding continued impressive drill results in Mexico, as well as
the fact that Fortuna's other producing mine is in Peru and therefore is not
subject to increased royalty/taxes enacted in Mexico in 2014.
Great Panther is one in
the group that hasn't accomplished a major push to get to the next level in
terms of scale (not for lack of trying) and needs to do so. The company had
its share of challenges at both operating mines and was able to overcome
them.
TGR: Perhaps one more silver name?
SR: Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) is a relatively new silver company with what
could be the best deposit in the space�the high-grade Escobal deposit in
Guatemala. Tahoe is one of the larger silver producers, targeting 20 Moz per
annum, and is very similar to Goldcorp in its earlier days. In fact, the
people running the company and its flagship project came from Goldcorp. Tahoe
has been in production for about two quarters and it is already making money.
As was the case with Santacruz, it is a bit premature to talk about benchmark
numbers in terms of performance, yet all indications point to a very
successful future. As long as geopolitics hold together, this is one of the
better deals in the sector.
TGR: If silver rises in excess of
$50/oz, many boats will float. How do investors sort out the pretenders?
SR: You look back and see which
companies were profitable at sub-$20/oz silver. If they are in the black,
that's an indication of how they run their operations. In the short term it
is not a given that the "best" company will be the best performer.
But overall, that would be a good problem to have.
TGR: Parting thoughts?
SR: If silver were oil, people would
have some definite ideas about why it is important. I don't think silver has
that characteristic due to its recent history. That fools people into
thinking that silver is not a good option, even when it is. Silver's stigma
as gold's poor cousin may well morph into gold's "better" cousin
over time due to its vastly superior industrial utility.
TGR: Thank you for talking with us
today, Sean.
Sean
Rakhimov's
writing has appeared on such Internet portals as Le Metropole Caf�, 24hGold, 321gold, Kitco, Gold Seek, Gold
Seiten and The Gold Report. He previously designed financial systems
for the investment banking business, learning about options trading,
securities lending, payments processing, clearing and settlement, fixed
income securities and margin transactions. He launched his website, SilverStrategies.com,
in 2004 and has been focusing exclusively on the silver sector since 2001.
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DISCLOSURE: 1) Brian
Sylvester conducted this interview for Streetwise Reports LLC, publisher of The
Gold Report, The Energy Report, The Life Sciences Report and The
Mining Report, and provides services to Streetwise Reports as an
independent contractor. He owns, or his family owns, shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of
Streetwise Reports: Excellon Resources Inc., Fortuna Silver Mines Inc., Great
Panther Silver Ltd., SilverCrest Mines Inc., and Tahoe Resources Inc.
Goldcorp Inc. is not affiliated with The Gold Report.
Streetwise Reports does not accept stock in exchange for its services.
3) Sean Rakhimov: I own, or my family owns, shares of the following companies
mentioned in this interview: SilverCrest Mines Inc. and Santacruz Silver
Mining Ltd. I personally am, or my family is, paid by the following companies
mentioned in this interview: None. My company has a financial relationship
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