Update on Silver Companies

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.

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.

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:

Compare to Apex’s San Cristobal deposit.

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/