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Since
the beginning of 2005 there have been a number of significant developments in
the silver sector. For whatever reason these developments escaped
investors’ attention so we felt some sort of summary of these events
would be helpful. We own shares in most companies discussed below. If that
concerns you, please don’t read any further.
Esperanza
Silver (TSX.V-EPZ)
This
silver exploration company hit some very promising grades on its namesake La Esperanza property in Mexico. Even
though they found some silver mineralization, the better grades were in gold.
On March 7, 2005 the company announced drill results from the above property.
Of particular interest was drill hole #5 that
intercepted 2.27 grams/ton gold over 36.3 meters and about
35 grams/ton silver over 47.2
meters.
To get
a plain English translation of these results use “What’s that
Rock Worth” calculator available from
Casey Research. We
believe these are good grades but the real key is the thickness of this
mineralization, particularly for gold. These grades should make the job of
attracting further capital and/or JV interest from larger mining concerns
much easier.
In late
March the company announced an exploration joint-venture with Silver
Standard. This entity will focus on numerous prospects identified by
Esperanza in Peru.
Bill Pincus, President of Esperanza Silver has been
talking about paying more attention to company’s activities in Peru, and we
are pleased to see that they are making progress there as well. In our view
this partnership validates the industry perception about the company’s
quality of expertise in exploration as well as provides funding to do put
that expertise to work. Think about it: if Silver Standard is giving money to
Esperanza to spend, as a fellow investor, you are in good company. We should
see some results from this endeavor later in the
year. We’ll keep an eye on both of these projects and see how further
developments unfold.
Mag Silver (TSX-V: MAG)
Mag Silver has a new management. Yes, that is a significant development
for the company. We have a very good relationship with Mag’s
former President, George Young (now spearheading Palladon
Ventures). As you recall Mag controls the Juanicipio property immediately adjacent to Fresnillo Mine of Industrias Peñoles.
We met
new members of Mag’s management team at the
PDAC show in Toronto.
Dan MacInnis, the new President & CEO and
Gordon Neal, VP Corporate Development bring a great
deal of experience in their respective areas and are accomplished
professionals (see Mag’s web site for more). But
more importantly, they bring new energy and focus that Mag
needed for some time.
On
April 4, 2005 Mag Silver and Peñoles
announced a joint venture on Mag’s Juanicipio property. The principal features of the
agreement are:
1. Peñoles can earn a 56% interest in Juanicipio upon completion of a US$5,000,000 exploration
program on or before the end of year 4 of the agreement.
2. During the
first year, Peñoles shall incur an
obligatory work commitment expenditure of
US$750,000. Year 1 expenditures must include a minimum of 3,000 metres of
diamond drilling.
3. A flexible and staged exploration program is
included in the contract. Exploration work will be
supervised by a technical committee comprised of 3 representatives from Peñoles and 2 from
MAG Silver. Peñoles and MAG Silver are
obliged to share their information in the district. Part of
the geological and exploration work will be conducted by MAG consultants
and in-house
personnel.
4. Exploration results from Juanicipio
will be published as appropriate on an ongoing basis, with
both companies to agree on the content.
5. Peñoles will subscribe for US$500,000 in MAG
shares, at a market based price on signing and an additional US$500,000 in
MAG shares, at a market based price, if the contract continues into the
second year.(As stated in the Press Release mentioned above.)
I just
thought it would be a good idea to reiterate them as the market seems to have
taken little notice. This deal has been long on the table for Mag. The reason they didn’t pursue it before was
not lack of enthusiasm from Peñoles but
because Mag wanted to advance the property further
before dealing it out. Still looks like it Mag will
keep 44% of the upside at Juanicipio, fund the work
on the property for the next 4 years, reserve a say in how the work will be
done AND get a million in the bank to play with on its other properties. It’s
good to see Mag on the move again. The $5 million
exploration budget at Juanicipio should be enough
to determine where the property’s future. In the mean time Mag can do some good elsewhere. We’ll just have to
wait and see which direction the new management will steer the company.
Sterling Mining (Pink
Sheets: SRLM)
Sterling
Mining has been making steady progress at its Baroness Tailings Project in Mexico as
well as the rehab work at the Sunshine Mine. The company has seen some
controversial publicity in recent months and the stock sold off. We are going
to skip the controversy part and move on to actual reported developments.
According
to company’s Press Release dated March 24, 2005, production is under
way at the Baroness project. As a reminder this is not an exploration/property
project, but a tailings processing project. Tailings are defined as
“material rejected from a mill after the valuable minerals have been
recovered” (Casey Research Mining Dictionary). The trick is that often
times processed material still contains useful minerals, especially older tailings, that were generated through less efficient ore
processing methods. The company reports that “it is estimated that the
project contains 5 million metric tons of finely ground tailings that average
3.0 ounces
per ton (opt) silver and 0.02 opt gold, yielding up to 15 million ounces of silver and 100,000 ounces of
gold”. First silver bars should be poured in May. At
full capacity production the project seems to have about 15 years of mine
life and produce some 360,000
oz of silver and a 6,000+ oz of gold. We’ll be
conservative and allow provisions for grade and recovery rates and use an
average of 200,000 oz/year silver and 1,500 oz/year gold. With cash cost of
$5.00 (company projection was $3.50, but they are past the initial schedule)
basic calculations yield some interesting scenarios.
At silver - $7.00/oz, gold - $400/oz, cash cost -
$5.00
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200,000 x ($7.00 -
$5.00)
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= $400,000 (silver content)
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1500 x $400
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= $600,000 (gold
content)
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Total free annual cash flow:
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$1,000,000
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Not bad
for a little tailings project with a capital cost of about $1,200,000 and
total time from inception to production of about 12 months. The way we read it
- management is good with numbers. Now hold on to your chair and dream a
little.
At silver -
$10.00/oz, gold - $500/oz, cash cost - $6.00
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200,000 x ($10.00 - $6.00)
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= $800,000 (silver content)
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1500 x $500
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= $750,000 (gold
content)
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Total free annual cash
flow:
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$1,550,000
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Notice
how we bumped up the cash cost to $6.00, just to keep our feet on the ground.
If you believe precious metals are in a cyclical bull market, try plugging in
higher metal prices.
When
you have a giant asset like the Sunshine mine, for a small company like
Sterling we think it was a nifty strategic move to get their feet wet with a
nice and simple project that will be profitable even at current metal prices,
but also give them actual production experience. People forget that when Sterling took over the
Sunshine Mine in 2003, it was a 3 people company with a market cap under a
million dollars. There was a reason why the stock shot up to $14.00 in a
matter of months. We believe that reason still exists.
We
heard from the management that the Sunshine mine plan is in its final stages
and being prepared for presentation to the Board of Directors for approval. Again,
Sunshine is a big mine that at one time employed over 200 people. You
don’t restart projects like that at the whim of investors OR
management. It’s nothing like the Baroness project and requires careful
and detailed planning. The company assured us that they have the best people
on the job, including former Sunshine Mine Manager, former Controller, former
Safety Director, former Supervisor of Electrical Services and others. Sterling
Mining advised us that these professionals were hired into the same positions
that they held when the mine was operating. We agree that this is a wise approach.
When you need to restore electricity a few thousand feet underground, it kind
of makes sense to hire someone who spent several years keeping the lights on
in that same mine. We’ll see what the future holds for Sterling Mining.
We will
leave you with the following thought. There are several highly successful
companies that are not producing and have no intention of producing until we
see higher metal prices. That is to say investors reward companies for NOT
producing. We further know that most primary silver producers are mining
silver at a loss. Exactly what is the rush to start producing at the Sunshine
Mine?
Portal Resources
(TSX.V-PDO)
This
junior caught our attention when we saw their Press Release of February 7,
2005 regarding some stellar trench sampling results from its Arroyo Verde
property in Argentina’s
Chubut Province. We went to company’s
web site and found that Portal Resources Ltd. was founded in 2004 and is a Vancouver based company focused on precious and base
metal exploration in South America.
We
phoned the company to learn more, a practice we highly recommend to readers. What
we found is a company with experienced management, tight capital structure
and interesting properties. Portal’s management team consists of former
and present executives of such companies as Intrepid Minerals, Bema Gold, Eldorado Gold, Nevada Pacific Gold and Gabriel Resources
among others. Not a bad mix of companies to have on your resume if you are a
mining professional.
So far
the company appears to be making steady progress in both acquiring
interesting projects and moving them forward. It seems to have the right
ingredients for a success story and will be a good one to watch.
Western Silver (TSX:
WTC, AMEX: WTZ)
Western
Silver continues to expand resources at its flagship Penasquito
property and has quietly grown it into a behemoth deposit. As indicated in
March 7, 2005 Press Release resource numbers now stand at:
Name
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Size (Hectares)
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Country
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Location
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Stage
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Penasquito
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95,000
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Mexico
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Zacatecas
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Exploration
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Resources
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Silver (oz)
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Gold (oz)
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Lead (lb)
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Zinc (lb)
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Copper (lb)
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Measured & Indicated
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341,460,000
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4,950,000
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2,101,300,000
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5,306,280,000
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N/A
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Inferred
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190,010,000
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2,300,000
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1,272,000,000
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2,896,000,000
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N/A
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Total
RESOURCES
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531,470,000
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7,250,000
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3,373,300,000
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8,202,280,000
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N/A
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Compare
to Apex’s San Cristobal
deposit.
Name
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Size (Hectares)
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Country
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Location
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Stage
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San
Cristobal
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N/A
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Bolivia
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Potosi District
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Development
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Reserves
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Silver (oz)
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Gold (oz)
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Lead (lb)
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Zinc (lb)
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Copper (lb)
|
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Proven & Probable
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455,550,000
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N/A
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2,800,000,000
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7,700,000,000
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N/A
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Total RESERVES
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455,550,000
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N/A
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2,800,000,000
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7,700,000,000
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N/A
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Note
that we are comparing these two properties, not the companies. But first we
need to reconcile the category of mineralization: Apex reports reserves, while
Western shows resources. The gold content alone is nothing to sneeze at and
would make a stellar deposit. If, for argument’s sake, we credit nearly
5 million oz of gold (measured & indicated) as cost of converting
Western’s silver, lead and zinc resources to reserves, those numbers
start to look awfully good. To put them in perspective we refer you to the
following charts available on Apex’s web site.
This is a case when “a picture is worth
a thousand words”. Bear in mind that Western Silver was at one time
called “Western Copper”, so the company’s other properties
should offer significant exposure to copper as well.
In Brief
- SKN Resources (TSX-V: SRL) has
changed its name to SILVERCORP METALS Inc. The company has
announced the commencement of work to sink 3 shafts at its Ying Silver
Project in
the Henan Province of China. The company expects to be complete this work by
the end of 2005.
- Macmin Silver (ASX: MMN) plans to be
producing silver powder from its Twin Hills Mine,
Texas Project, Queensland, Australia by late third quarter or fourth quarter
2005 (Press Release
March 17, 2005).
- Capstone Gold (TSX: CSG) and Apogee
Minerals (TSX-V: APE) are another two Canadian junior explorers focusing on
silver. Capstone is active in Mexico,
while Apogee is betting on Bolivia.
- Lastly
we would like to draw your attention to a brand new state-of-the-art precious
metal
refining facility that started commercial operations in October 2004. Al Ghurair Giga Gold is the
first gold refinery to commence operations in DMCC (Dubai Metals and
Commodities Centre),
will attain full capacity production of 100 tonnes of gold and 40 tonnes of
silver, by the third
quarter of 2005. Someone wants gold and silver. Wonder where they will get
the metals to feed it…
By : Sean
Rakhimov
Editor, www.silverstrategies.com/
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