Silver plays ignite despite low prices

The excitement in the gold market appears to spilling over into silver plays, even though the silver price remains well below US$5 per oz.

Several would-be silver producers have announced multi-million-dollar financings in recent months, and their stocks have soared to new 52-week highs in tandem with rising gold stocks and on speculation that silver might finally begin to respond to strong supply-demand fundamentals.

Although silver has crept up from US$4.20-$4.30 per oz. at the beginning of the year to US$4.50-$4.75 per oz. lately, the metal has a long way to go before it returns to the plus-five-dollar levels it sustained during most of the waning years of the past century.

Silver was hit particularly hard last year, when demand for the metal experienced its biggest drop in two decades as recession hit in the U.S. and silver’s use in electronic products dwindled. In 2001, the price averaged US$4.37 per oz., down from US$4.95 in 2000 and US$5.22 in 1999.

But silver bugs are betting that a deficit of 100-150 million oz. a year between supply (from mines and scrap) and demand (for jewelry, industrial applications and photography) will soon trigger a price spike. They’ve been saying this since 1990, when the metal first went into deficit. If anything, their bullish tone has intensified.

“This isn’t rocket science; this is a way for the little guy to make a score,” says on-line silver analyst Theodore Butler of Butler Research. “Buy real silver, put it away and forget about it until Dan Rather or Tom Brokaw won’t stop talking about it. This coming silver event has been 60 years in the making.”

Despite the rhetoric, the deficit argument is compelling — so compelling, in fact, that high-profile financier Warren Buffet spent US$650 million to buy 130 million oz. of silver in 1997 because “bullion inventories [had] fallen materially and a higher price (was) needed to establish equilibrium between supply and demand.” Since then, inventories have continued to drop and, while difficult to measure precisely because of unreported hoards, are now at their lowest levels in decades, according to research houses Gold Fields Mineral Services and CPM Group.

Fellow billionaires Bill Gates and George Soros have been quietly increasing their silver holdings in the form of equities. Gates has a 13% stake in Pan American Silver (PAA-T), whereas Soros and his brother Paul own 26% of Apex Silver Mines (SIL-X) — both relatively pure silver plays.

On the demand side, silver use in industrial applications continues to represent about a third of the market, and forecasts that digital cameras will eradicate the use of silver in photography have yet to materialize. Film is still a growing market in countries such as China and India, where, according to Kodak, only about one in five households owns a camera. CPM predicts overall demand in 2002 will rise 3.7% to 861 million oz.

The research house also predicts that supply (including mine production and secondary sources such as scrap) will decline by about 1% to 739 million oz. this year, after several years of increases.

Market gains

All of this is good news for silver producers and explorers, who are emerging from a difficult year in which some mines were forced to close because of the consistently low price. Although most silver is produced as a byproduct of gold, copper and zinc production, a few companies focus on silver as a primary commodity. These include Pan American, Apex Silver and Silver Standard Resources (SSO-V), all three of which have seen their stocks touch 52-week highs in recent weeks.

Other companies, such as Wheaton River Minerals (WRM-T), are increasing their exposure to silver significantly. In April Wheaton announced it was purchasing Minas Luismin, one of Mexico’s largest producers of gold and silver. In one of the largest financings by a North American junior in recent years, Wheaton has arranged a $94.3-million private placement of special warrants, US$75 million of which is earmarked for the Mexican acquisition.

Last year, Luismin produced 5.75 million oz. silver and 98,000 oz. gold. The company’s proven and probable reserves contain about 860,000 oz. gold-equivalent, while resources contain 3.8 million oz. Nearly 60% of the “gold-equivalent” reserves and resources are silver.

Among the silver plays, Pan American has the highest profile. In 2000, the company produced 3.6 million oz. silver at its Quiruvilca mine in Peru, began construction of the Huaron mine in the same country, and continued to develop a silver mine at La Colorada, Mexico.

Quarterly loss

Once the expansion at La Colorada is complete, Pan American expects to boost its annual production to 12 million oz. Nevertheless, the anemic silver price resulted in a first-quarter loss of US$1.3 million (or 3 per share), compared with a net loss of US$1.5 million (4 per share) in the first three months of 2001.

Adopting a different strategy, Silver Standard is sitting on its inventory of silver projects until prices improve. Since 1993, the company has been acquiring silver resources in several countries, from Argentina to Australia.

Now, Silver Standard’s core projects have measured and indicated resources totalling 164 million oz. silver plus inferred resources of 250 million oz. The company recently raised $16.8 million to continue drilling on several existing projects and to add more silver-dominant projects to its portfolio.

Unlike Silver Standard’s multi-project approach, Apex Silver is betting on one, albeit huge, silver-zinc project in Bolivia. The San Cristobal project’s proven and probable reserves contain 470 million oz. silver, and for the first five years, the mine is expected to churn out 27 million oz. silver and 570 million lbs. zinc annually.

At these levels, San Cristobal would rank as one of the three largest producers of both silver and zinc in the world. The mine is also expected to be one of the lowest-cost producers of these metals with an average cash operating cost of US$1.23 per oz. silver (net of lead byproduct credits). Apex has spent US$91 million developing the mine and is currently exploring other silver projects in Latin America.

Corner Bay Silver (BAY-T), Minefinders (MFL-T) and General Minerals (GNM-T) are also seeking the silver lining.

Corner Bay (which added “silver” to its name last year to reflect the company’s new focus on the precious metal) recently closed a $4.6-million financing to continue exploring the Alamo Dorado property in Mexico, where a feasibility study is ongoing. Barclays Capital and Deutsche Bank Securities are arranging debt financing for the project, subject to positive feasibility results.

The current resource at Alamo Dorado stands at 79.6 million tonnes containing 117.5 million oz. silver and 447,000 oz. gold, whereas the minable reserve amounts to 52.5 million tonnes containing 106.5 million oz. silver and 394,200 oz. gold.

Minefinders

Minefinders, meanwhile, has raised $10.1 million, which it will use to advance the Dolores gold-silver deposit in Mexico to the final-feasibility stage. Resources at the main zone at Dolores contain 130 million oz. silver and 2.45 million oz. gold. The company plans to drill more than 25,000 metres this year in order to increase the confidence level of these resources and confirm the potential of peripheral targets that could increase the property resource.

Farther south, in central Bolivia, General Minerals is exploring the Atocha silver project, where results from channel sampling suggest that high-grade silver mineralization (20-15,448 grams per tonne), found previously through underground drilling, occurs at several locations along a 10-km strike length.

Established silver producers Coeur d’Alene Mines (CDE-N), Hecla Mining (HL-N) and Mexican-based Industrias Peoles (IPOAF-O) also stand to gain from an uptick in the silver price.

Coeur d’Alene recently purchased the Ma
rtha underground silver mine in Argentina from Yamana Resources (YRI-T) and expects, as a result, to boost annual production by 41% to 16 million oz.

The shares of Industrias Peoles, the world’s largest silver producer, have doubled since the beginning of the year.

— The author is a Toronto-based freelance writer on mining and environmental issues.