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Prices
above $30/oz of silver as of today are only the first step for the expected
explosion in silver prices due to the size of the market. This guest post by
Sean, who I met first 2007 in Vancouver, confirms that the fundamental
outlook projects a bottleneck for investible silver.
It has
been a while since we had this nagging feeling that we’re witnessing
something profound taking place before our eyes and the market doesn’t seem
to grasp it yet. We are not talking about the smorgasbord of events effecting
markets all over the globe that is receiving ample coverage elsewhere in the
media. As readers might know, our particular interest is in the silver space,
and that is where we see an elephant in the room that hasn’t made headlines
yet.
No doubt
most readers are aware of the recent developments in countries like
Argentina, Bolivia, Peru and others, with respect to what can be broadly
classified as “resource nationalism”. Our general views on the subject were detailed a few years ago, here. As discussed by this writer and others, such
developments are not new and certainly not limited to silver or even the
mining sector. However, in our opinion, it is in the silver space that these
events should have the most profound effect.
Why?
Because the silver sector is so small and the above mentioned countries
collectively make up a big of chunk of it. According to CPM Group’s 2012
Silver Yearbook, the aforementioned countries are projected to produce some
170 Moz silver this year versus the anticipated total global silver
production of 788 Moz. While at first glance that only makes up 21.6% of
total annual mine supply, which in itself is significant, we submit that it
represents an even greater percentage of “investible” silver
production.
Let’s take
a closer look…
Of the
total 788 Moz of annual (projected 2012) world silver production, the part
that is accessible without much hassle to you and me, the unsophisticated
investor through public markets is largely limited to Mexico, USA, Canada,
Australia and Europe. For the purposes of this missive, the rest of world
offers few-to-no easy ways to invest in silver. Why not much to look at here?
The larger contributors to silver production in the rest of the world are
China, Russia, Kazakhstan, Chile, Turkey, Morocco, Indonesia and India.
- The bulk of Chinese production is dominated by
large base metal producers and/or smelters/refiners. Silvercorp is an
exception and is a Canadian company, so we bundle it into North America;
- Russia has several companies listed in New York
and London as well as RTS – most of them primarily gold and/or base
metal miners;
- Kazakhstan has few larger publicly traded
companies (Kazakhmys in London) – none of which make primary silver
plays;
- Same for India, Indonesia and Turkey. Morocco
may produce a silver play in the near future if efforts of May Gold and
Silver (TSX-V: MYA) are successful;
- Chile has no primary silver mines with the
exception of Kinross’ La Coipa, which once again, makes a poor silver
play – the remainder of silver comes from primary copper and gold mines
buried in large companies such as Codelco.
The only
destination of significance in Europe in terms of contribution to silver
production accessible via public markets, is Poland (KGHM is a large
silver producer but primarily a copper mine). The rest of European production
is scarcely accessible as a bet on silver because the mines that produce
silver are either not primary silver mines, or are private, or otherwise not
easily investable. The other European silver play that we know of, is Global
Minerals (TSX-V: CTG) – a Canadian junior advancing a past-producing silver
project in Slovakia – not yet in production, though moving in that direction.
There are a few other juniors scattered around Europe with some silver
exposure that are not primary silver plays. That about sums it up, given that
the whole of Europe is projected to kick-in 56.5 Moz in 2012 – of which,
Poland stands for 40.4 Moz followed by Sweden at 9.1 Moz (Boliden, a
conglomerate, not a silver company).
Australia has a handful of smaller silver mines (under 3 Moz
annual production) to choose from, since the biggies do not make good silver
plays (BHP and Xstrata).
Sounds
ominous, doesn’t it? You know, there is a reason silver is a p-r-e-c-i-o-u-s
metal. That is why Silver Wheaton has a business – it provides a way to
unlock the value of silver buried within larger polymetallic mines, which by
itself is insignificant to the actual miner, but can be substantial when
separated. Silver Wheaton’s $12B market cap is proof of that.
So what is
wrong with Argentina, Peru and Bolivia, and why is it a big deal? Here we would like to refer the reader once more
to the article we penned on the subject
in 2009 where we
defined nationalization as “not only outright expropriation of private
property but all other forms of "creeping" or indirect
nationalization which ultimately leads toincreased control of natural
resources by governments at the expense of current stakeholders in a non-free
market way. These may include any flavor or combination of
increased taxation, excessive/retroactive taxation, breach of contracts,
delay or revocation of permits and licenses required to exercise legal
owner's rights, support or tolerance of other groups/interests' illegal
activities to the detriment of property owners, and so on”. It looks as
if Argentina, Bolivia and to a lesser extent, Peru, are trying to hit it on
all points, based on the actions of central and (in the case of Argentina,
some) provincial governments.
Bolivia, of course, was the latest in the news with
nationalization of the flagship Malku Khota silver-indium project of South
American Silver (TSX: SAC). So much so, that it led to the ultimate
resignation of Greg Johnson as its President & CEO – who was largely
responsible for putting that company on the map in the first place. The stock
is back where it was when Johnson took over as President, back in March,
2010.
Peru has had its share of “misfortunes” in this regard
with Bear Creek (TSX-V: BCM) still trying to recover from its fall from grace
in public markets – through no fault of its own that we can find. All the
rhetoric to the contrary notwithstanding, things seem to be far from
“business as usual”. The good news is that Peru (and Chile) has a rather elaborate
domestic mining industry with sizeable publicly trading companies
contributing a great deal to its economy, which is not the case in Argentina
or Bolivia. The assumption here is that the government will be hard-pressed
to make a move on foreign investors without at the same time squeezing
influential domestic companies.
"This
is an incredibly unfortunate development for the mining industry in the
province of Chubut and in Argentina. Having made significant
investments over the last two and a half years in work to prepare the
world-class Navidad silver project for development, it is extremely
disappointing that the government of Chubut would introduce this legislation
without meaningful consultation with the mining industry. Since
acquiring Navidad, we established a policy of open and honest communication with
all levels of government as to our progress and plans and were surprised that
we were not consulted on the economic effects that the proposed legislation
would have on Navidad's development. I am convinced that it was the
provincial government's intent with the new draft legislation, to define a
path for the development of Navidad, not to render the project
uneconomic. However, if the draft law is passed as submitted there can
be no other choice currently than to stop investing further in the project".
We
encourage you to read that entire news release to learn what else they
propose to do. Mind you, Navidad was supposed to be this blockbuster mine
that would take Pan American to a whole new level (more on that in part II).
If memory serves, they paid some $660 MM to buy it. Despite the recent
acquisition of Extorre by Yamana Gold, which incidentally went for a much
lower price than one figures it would in a more mining friendly jurisdiction,
Argentina appears to be determined to exhaust all other options before doing
the right thing. After all, it’s barely been 20 years since
they opened up the resource sector to foreign investment.
We would
be remiss not to mention Guatemala, as it is home to the other
blockbuster silver project being advanced by Tahoe Resources (TSX: THO). If
you examine its stock chart and check the news from the company, Tahoe
appears to have lost about $1 Billion in market capitalization on the account
of talk related to nationalization of Guatemalan resources by that
government. They back-tracked on that, saying
they want a bigger stake “only in new projects” – but the market was spooked and seems to be slow
to warm up.
Where to
look going forward
Why not
look where the “pros” are going? While we were mulling these matters over in
the last few months, the event that “drove it home” for us was the
unsuccessful bid by Hecla for US Silver. Incidentally, Hecla is our “favorite
co to criticize” in the sector. Why? Because coming into this cycle (say 10
years ago), Hecla was the ‘IT’ company in the silver space. They had it all –
the 100 year history, the NYSE listing, the name recognition, the size
relative to peers, the following (by resource investors and funds), the
technical expertise and reputation of a top underground mine operator. And
they have successfully squandered that early leader advantage. We are aware
of several “due diligence” undertakings by Hecla that ultimately resulted in
them shying away from pulling the trigger on an acquisition. The best thing
they did in the last 10 years was to acquire the balance of Greens Creek that
they didn’t already own. It is about the only thing of note they did in that
period. That, and the settlement with the EPA – which didn’t come cheap. That
same Hecla, who’s execs all but swore on a stack of bibles to never “cross
onto the wrong side of the highway” (referring to highway I-90 which cuts
through the Silver Valley separating operations of Hecla from the other big
three mines – The Sunshine, Bunker Hill and Galena/Coeur) made a bid for US
Silver – which now owns the assets previously owned by Coeur D’Alene Mines in
the Silver Valley.
Question becomes, where else they had to go? There aren’t
many more places they can go! That brings us full circle to where we started
from. As we write this, the news came out on August
21, 2012 that Hecla made a “strategic investment” in Dolly Varden Silver Corp.
And it only re-affirms the point we are trying to make: if you want to be a
player in the silver space, right now you’re virtually limited to Mexico, USA
and Canada. Hecla’s actions suggest that they “get it”. In part II of this
piece we will examine who else gets it.
In summary, we don’t suggest that countries presently
stepping up resource nationalism are a complete write-off, or the situation
could not change in the future. Companies neck-deep with operations in such
places will try to make the best of it and rightfully so – they owe it to
their shareholders. Even when projects are nationalized, they usually
continue to operate – though history suggests that government-run industries
eventually work themselves into the ground (no pun intended). At that point,
they start to look to private business to right the ship and the cycle starts
over. In the meantime, as Jim Dines puts it, the overall trend is “southward”
– towards more government control – and capital will flow wherever it is
treated best. Jindal
Steel exit from a $2.1 Billion iron or project in Bolivia is a
manifestation of that.
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