At the Autumn Precious Metals Seminar, held recently in Toronto and co-sponsored by the Silver Institute and Gold Fields Mineral Services, representatives of five North American silver producers gave presentations, during which each tried to argue that his company was the best vehicle for silver investment.
Funny thing is, depending on your perspective, each was right.
Absolute superlatives are often, and accurately, applied to Mexico City-based
The company began operations in 1887 in the town of Peoles in Durango state, and today boasts 9,000 employees in five major divisions: exploration, engineering and construction; mining; metals; industrial minerals and refractory; and infrastructure.
Sales in 2001 totalled US$999 million and the operating profit was US$50 million. This year, the company expects to rake in US$1.1 billion and pocket US$42 million.
Broken down by commodity, Peoles’ 2002 sales are dominated by silver (32%), gold (31%), zinc (15.5%), lead (6.2%) and sodium sulphate (3.9%). Almost 56% of the company’s sales are in Mexico, with the remainder exported to the U.S., Japan, the U.K., India, Peru and Canada, among other countries.
Peoles is one of Mexico’s largest private-sector exporters and has been listed on the Mexican Stock Exchange since 1968. Today the company forms part of privately owned Grupo BAL, a widely diversified Mexican conglomerate.
Last year, Peoles produced 51.7 million oz. silver, or 8.8% of the 538 million oz. silver produced worldwide, and it is expected to have cranked out 52.2 million oz. in 2002.
Even more remarkable is that Peoles has sustained an average 3.9% annual growth rate in silver output since 1996, when it produced 33 million oz.
In terms of refined silver, Peoles has been producing well over 70 million oz. per year since 2000.
“We are a firm believer in silver, both because of its versatility and its beauty,” said Peoles General Director Jaime Lomelin. “Today, silver is indispensable in improving people’s way of life.”
He said his company’s growth in silver output was achieved through a combination of new mines, productivity gains and expansions of existing operations.
At the same time, Peoles has ramped up its gold output to a level where it is now the country’s largest producer. Between 1996 and 2001, output more than doubled to 348,000 oz. from 144,000 oz., and during that period gold sales as a percentage of company-wide sales soared to 31% from 13%.
Although Peoles operates nine precious metals and six base metals mines, the jewel in its crown is the high-grade Fresnillo underground silver mine in Zacatecas state.
The mine is expected to produce 30.6 million oz. silver this year, or about 58% of Peoles’ total silver output, at a cash cost of US$2.17 per oz. silver. There is also some byproduct zinc.
Fresnillo has been in almost continuous operation since 1550, and annual milling capacity was expanded in recent years to 1.4 million tonnes from 900,000 tonnes. Indeed, since 1996. silver output has almost doubled.
(Fresnillo is the world’s second-biggest silver mine after
Peoles’ top gold performer is its 56%-owned Herradura mine, the remainder of which is held by
On the negative side, the recent expansion of Peoles’ zinc mining and refining capacity has occurred during a devastating collapse in global zinc markets. The company’s lead business has not been great either.
At its 101-year-old Met-Mex facility in Coahulla state, Peoles operates Latin America’s largest non-ferrous metallurgical complex, consisting of a smelter for lead and refineries for silver, gold, lead and zinc.
Peoles has been a successful explorer, bringing four new zinc mines and two new gold mines on-stream over the past decade.
Today, the company is pursuing two gold and two copper projects, drawing on an annual exploration budget of about US$20 million.
Peoles has five regional exploration offices in Mexico, and has teamed with
“Peoles will stick to its goals,” concluded Lomelin, “even as we seek out new technologies and business opportunities.”
Best possible silver play
The longevity and success of Peoles are not lost on Ross Beaty, whose company,
“We’re working to be a bigger and better silver producer than Peoles, [but] from the standpoint of purity as opposed to size,” said Beaty, who is Pan American’s chairman. “If we can build our company so that it has the reputation for integrity and quality that Peoles has, I will consider our mission successful.”
That mission is “to create and deliver to equity investors the best possible silver play,” he added, “and I’m pleased to say we are close to having achieved that today.”
Beaty noted that of the 538 million oz. silver produced globally in 2001, only 150 million oz. were derived from primary silver mines, of which there are 21 worldwide.
“It’s rare to find a primary silver mine and much harder, as a result, to build a real silver company. When we achieve the success that we expect, we anticipate having a premium for that rarity in our share price.”
Pan American operates three wholly owned silver mines. Two are in Peru: Quiruvilca, the first mine it acquired (in 1995, from Asarco) and Huaron, which Pan American built itself and which opened in April 2001. The third is La Colorada in Mexico, where the company is engaged in an expansion project.
Last year, Pan American almost doubled its silver output to 6.9 million oz., and this impressive growth trajectory is far from over: in 2002, the company is boosting output to about 8 million oz.; it expects to produce almost 12 million oz. next year; and it hopes to surpass that amount the following year when a fourth project, Alamo Dorado, comes on-stream.
“I hope we can sustain this growth subsequent to 2005, if not improve on it,” said Beaty. “We’ll soon be the purest silver producer, with 75% of our revenues coming from silver on a production basis of 19-20 million oz. per year, which is where we’re going in the next couple of years.”
Beaty commented on each of Pan American’s assets:
n
“Unfortunately, today, as we go deeper, Quirulvilca is evolving from a predominantly silver mine to more of a zinc mine, and with zinc prices at record lows, we’re struggling to operate profitably.
“We’re trying to figure how to stop the operation from bleeding, or at least to resolve the situation so that we can make it into an asset instead of what it is now — a financial cost. Of course, all this would be solved if zinc and silver prices went up.”
Beaty added that Pan American has a couple of gold assets near Quiruvilca that have been optioned to Barrick, while stressing “it’s not for us to use our cash to look for gold; we’re looking for silver.”
n He described the
In fact, as a result of the exploration success Pan American has had at Huaron over the past year, the company is looking at expanding the mine by 10%.
“This is elephant country for vein silver, and within this district is Huaron, a great mine that I think will be producing for decades to come.”
n
In 2001 the company completed a feasibility study, and in June 2002 arranged a US$20-million financing to increase production. Construction is under way and should be completed in the third quarter of 2003.
Beyond that, the company foresees a mine life of at least 10 years, with production averaging 3.8 million oz. silver annually at a cash cost of US$2.65 per oz. and a total cost of US$3.70 per oz.
“La Colorada will be our lowest-cost and most-profitable mine, with the added significance that it will be a true silver mine,” said Beaty, adding that 96% of revenues from La Colorada will be from silver. (Company-wide, Pan American currently derives 73% of its revenues from silver, with base metals accounting for the remainder.)
n Situated in northwestern Mexico,
Corner Bay and Pan American announced a merger agreement in June. However, the deal’s closing is being delayed until sufficient water is secured for a heap-leach operation (T.N.M., Nov. 25/02).
When completed, the merger will result in about 8 million Pan American shares being issued, adding to the current 45 million fully diluted outstanding shares. (Beaty owns about 3.1 million Pan American shares, while Microsoft founder Bill Gates owns 5.1 million.)
In June 2002, Corner Bay completed a feasibility study at Alamo Dorado that outlined 100 million oz. contained silver and a half million ounces of contained gold.
The cost of building an open-pit, heap-leach operation is pegged at US$45 million, and production is expected to ring in at 6 million oz. silver per year over eight years at a total cash cost of US$3.25 per oz.
Initial mining will exploit higher-grade material, which should allow for elevated cash flow in the first few years.
Dukat
Such rosy projections help offset Pan American’s ill luck at the Dukat silver project, near Magadan in far-eastern Russia. Beaty described Dukat as “a very embarrassing episode . . . where we fell on our face when we had a Russian company ambush us, and basically take the project over.” But he added: “That is now behind us: we wrote the project off in 2000 and kept a twenty per cent stake.”
The Dukat project is now being managed by Serebro Magadana, which in turn is owned 80% by Russian-based Polimetall and 20% by Pan American.
In early December, Pan American received notice that production had started at Dukat from both an open pit and from underground, and that silver concentrate was being produced.
Pan American says it will report production estimates only when mine production reaches sustainable levels and export approvals are received.
Beaty said he’s “not sure if Dukat will ever contribute anything” to Pan American but that he’s not giving up. “It’s at least of positive, rather than negative, value right now.”
A geologist by training, Beaty expressed Pan American’s strong commitment to exploration: “It’s not terribly clever, and it’s not great wealth creation to go and buy companies. It does make you bigger, and bigger does have some benefits to it . . . but, at the same time, discoveries are what really make you money, and that’s why we’re out there.”
Pan American has several projects at the exploration stage:
n In southern Argentina, a prefeasibility study is under way at the Manantial Espejo high-grade, gold-silver deposit, in which
“It’s an excellent deposit with adequate tonnage at a very good grade — enough to support a commercial operation,” said Beaty.
n In November, Pan American announced it was acquiring silver assets in Peru from Volcan, a large Peruvian zinc-mining company. Assets include a large stockpile of silver ore that did not have enough lead-zinc in it to be put through Volcan’s concentrator.
The silver, totalling some 200 million oz., is tied up in pyrite and is not recoverable at current silver prices.
“We think it will be economic at modestly higher silver prices, so we’ve taken a low-cost option to acquire this whole 26 million-tonne mineralized body,” said Beaty.
Next, Pan American will carry out a 3-year metallurgical study of the material in an attempt to get recovery costs well below the US$6.50-per-oz. level.
The option deal calls for Pan American to spend US$2 million in order to acquire both a 60% interest and the right to buy the rest.
A second, related deal allows Pan American to acquire, for a nominal cost, a 10-year right to process a high-grade portion of the stockpile, which would generate about 500,000 oz. silver per year to Pan American’s account.
n The company can acquire a 100% interest in the San Vicente property in Bolivia. Some small-scale production is ongoing, and Pan American is in discussions with a company that is leasing the mine to pool resources and construct a large plant.
n Pan American has a few large, undeveloped silver assets in the western U.S., but they require higher silver prices to be economic.
Overall, Pan American has 635 million oz. silver in reserves and resources, and Alamo Dorado will add another 100 million oz.
One-deposit wonder
Denver-based
The San Cristobal in Bolivia is unusual for a silver deposit in that its reserves (240.3 million tonnes grading 68.57 grams silver per tonne, plus 1.67% zinc and 0.58% lead) are exploitable by open-pit methods.
In terms of contained metal, these reserves translate into an eye-popping 470 million oz. silver, 4 million tonnes zinc and 1.4 million tonnes lead, based on price assumptions of US$5 per oz. silver, US50 per lb. zinc and US28 per lb. lead.
Some 80% of the reserves are in the proven category.
Apex’s drilling programs in the late 1990s were carried out on 50-metre spacings to depths of 250-300 metres, and about half the holes ended in ore.
“We have overdrilled it, so it is a high-quality reserve in terms of its assessment for risk,” said Apex President Keith Hulley, who described the reserves as resembling “two-thirds of a doughnut” centred within a 4-km-wide crater rim.
He said the only reason Apex had not drilled the remaining third of the doughnut was that it is the site of a now-relocated town: “We chose not the disturb residents while they were there, but we will drill this area as we progress into the construction period — just to make sure we didn’t miss a high-grade area.”
Overall, Hulley said Apex’s objective is straightforward: “to be the premier institutional-quality silver investment by developing San Cristobal into one of the largest, most-efficient mining operations, and therefore a low-cost producer.”
In its 2001 annual report, Apex rejects the usual jargon of maximizing shareholder value and, instead, declares that “all we care about is making a lot of money for our shareholders and other stakeholders.”
Having completed a feasibility study and follow-up metallurgical work, Apex envisages building a conventional, 40,000-tonne-per-day, grinding-and-flotation operation at San Cristobal at a capital cost of US$435 million, net of US$60 million in tax credits.
This operation could produce 27 million oz. silver in concentrate and 259,000 tonnes zinc in concentrate per year during the first five years of production, when miners would exploit the deposit’s richest portions.
At this production rate, San Cristobal would be the world’s third-largest silver mine, after Cannington and Fresnillo.
From year six onwards, San Cristobal’s annual output would likely level off to 20 million oz. silver and 220 tonnes zinc, though these numbers may change, since the plant would be expandable to 50,000 tonnes per day.
Life-of-mine recovery rates are estimated at 75% for silver, 92% for zinc, and 89% for lead.
Benefiting from a low stripping ratio of 1.8-to-1 (waste to ore), cash costs are estimated at US$1.23 per oz. silver and US23 per lb. zinc in the first five years, and US$1.83 per oz. and US27 per lb., respectively, thereafter. These costs, if realized, would place San Cristobal at the lowest decile on the 2005 cost curve for primary silver producers.
With a Bolivian rail line now passing within 20 km of the project site, concentrates from San Cristobal could be sent by truck and rail west to the Chilean port city of Tocopilla.
The project is relatively remote, though Hulley said this remoteness has its advantages. “San Cristobal has no baggage. There are now no social issues to be dealt with; we’ve already dealt with them. And we have neighbours that are very supportive.
“Nor do we have any environmental legacy to deal with, which is rather unusual in this day and age, when you’re coming into an area where there was at least some mining before.”
Another plus for the project, he said, is that “there is no end of water for us, unlike the Chilean mines across the border, which need to discover water almost more than they need to discover copper.”
Beyond San Cristobal’s “doughnut,” mineralization remains open toward the east, where surface sampling at the Mulatos discovery returned grades higher those quoted in the reserve figure.
There are additional drill targets to the south, including ones at Inca-Toldos, a small former producer which first lured Apex to the area.
Hulley said he didn’t believe the market “would add much value to us, at this point, by drilling, but certainly we will be drilling [exploration targets] as we go into the construction phase. We’re now at 470 million oz. silver in reserves, and we believe we can easily double that.”
Apex has already taken many steps to advance the project:
n After about 18 months of negotiations, Apex now owns the San Cristobal property outright, with no underlying royalties. Holdings in the district now total 526 sq. km.
n The project has received environmental permits for road construction, and permits for mine development and operation.
n Apex has appointed Kvaerner Metals as engineering, procurement and contracting manager, and Henry Walkin Eltin as mining contractor. Power will be provided by GasAtacama.
n Barclays Capital and Deutsche Bank Securities will be lead arrangers on any bank debt.
However, Hulley said that “although we have all these arrangements in place, we are not proceeding at this point, not with the metal market as it is.” Apex can afford to wait, he said. At the end of this year, the company will have more than US$45 million in cash, and about US$1 million in debt relating to amounts owed to property vendors.
Hulley was also pleased to note that Apex, with its current, US$550-million market cap (which is larger than that of Pan American, Hecla Mining, Coeur d’Alene Mines or Silver Standard Resources), was added to the Philadelphia Gold and Silver Index (XAU) in October 2001. Indeed, it is the only primary silver company currently in the index. (Apex does not appear on the American Stock Exchange’s Gold-Bugs Index, whereas silver-gold producers Coeur d’Alene and Hecla are both Gold-Bugs members.)
Beyond San Cristobal, Apex is exploring for precious metals in Mexico, El Salvador, and Peru, and in Bolivia in an area between San Cristobal and Potosi to the northeast.
Hulley believes Apex is not being rewarded in the market for its exploration portfolio, and so the company is kicking around the idea of spinning off its exploration assets.
Largest primary producer
Idaho-based
The company’s silver output for this year is expected to be 14.5 million oz., representing about 70% of the company’s sales revenue — the second-highest percentage of any of the world’s silver producers, after Pan American.
Coeur does not hedge its silver production, but about half of its gold production (around 107,000 oz. in 2002) is hedged.
Founded in 1928, Coeur d’Alene is one of the granddaddies of the mining business, and President Dennis Wheeler pointed to several positive developments over the past two years that have rendered the company a premier silver investment: “We’ve materially increased our silver production; we’ve dramatically lowered the cost of production; and we’ve materially strengthened our balance sheet.”
In addition, Coeur’s production base is growing at a faster pace than those of its competitors. “We knew we had to create a new generation of low-cost mines,” Wheeler said, “and I think we have achieved that.”
The results of Coeur’s recent third quarter offer a glimpse into the company’s spectacular operational turnaround. Silver production was up 47% to a record 3.8 million oz. silver, while cash costs dropped 28% to US$2.92 per oz. silver.
In particular, Coeur is enjoying success at its twinned mines in South America’s southern cone: the Cerro Bayo silver-gold mine and processing plant in Chile; and the Martha high-grade silver mine in Argentina.
Cerro Bayo has been in commercial production since April.
Martha was acquired from Yamana Resources for US$2.5 million in cash in the second quarter, and its ore is now being trucked 435 km to Cerro Bayo for processing.
The two mines are now producing at a combined cost of US65 per oz. silver, distinguishing the complex as the world’s lowest-cost silver producer.
For 2002, the Cerro Bayo and Martha are expected to produce a combined 3 million oz. silver and 44,000 oz. gold.
In November, Coeur released results from exploration drilling at Martha, including bonanza silver grades over lengths of 10-20 metres. The drilling allowed Coeur to boost reserves there by 25% to 4 million oz. silver-equivalent.
“Martha continues to unfold as a significant mine and exploration success, and we expect our cash costs to go lower as we enter 2003,” said Wheeler, who points out that the mine has a geological setting similar to that of Cerro Bayo in that there appears to be a repeated series of narrow, high-grade silver veins.
Elsewhere in South America, Coeur has one major development program under way: the San Bartolome silver project in Bolivia.
With a final feasibility study due for completion soon, the project is expected to produce 6 million oz. silver per year from a 126-million-oz. silver resource at a cash cost of US$3.50 per oz.
Coeur has also completed a metallurgical study showing that tin can be recovered commercially and profitably from San Bartolome, where tin is present in about 80% of the deposit.
However, San Bartolome needs a US$5 per oz. silver price in order to go forward.
“Silver prices are important to us, and we think that discipline should be exercised in terms of new mines and new production,” said Wheeler. “We will continued to adhere to the US$5-per-oz. silver price as a long-term threshold before we decide to place San Bartolome into production.”
In the meantime, Coeur is taking a first look at its financing options for developing San Bartolome, and the company continues to build up its land position in the area.
Wheeler described how he and Apex President Keith Hulley recently met with new Bolivian President Gonzalo Sanchez de Lozada, a centre-right millionaire mining executive who won a clear victory in a National Congress vote in August.
“All indications are that the new government in Bolivia will be stimulative of foreign mining investment,” said Wheeler.
Closer to home, Coeur operates the Rochester mine in Nevada — the largest primary silver mine in the U.S. and the company’s flagship operation since 1986. This year, the mine is forecast to produce 6.3 million oz. silver and 65,000 oz. gold at a cash cost of US$3.20 per oz. silver.
Recently, Coeur began mining a deposit adjacent to Rochester for mill feed.
In Idaho, Coeur has its wholly owned underground Silver Valley mine, which has been operating since 1955 in one of the few areas of the world where silver deposits extend to great depths. So far, the district has yielded more than 1 billion oz. silver. This year, the Silver Valley mine is expected to produce a record 5.2 million oz. and at a cash cost of US$4.30 per oz.
Since buying out its partner at Silver Valley two years ago, Coeur has been able to boost production 50% while cutting costs 22%.
Coeur’s strong operating success this year has allowed it to improve its balance sheet. Since the end of 2001, the company has reduced its total debt to US$104 million from US$145 million (based on results available at the end of the third quarter). In 1997, by comparison, the figure was a staggering US$290 million.
The debt was reduced considerably in the third quarter, when holders of US$24-million worth of convertible debentures voluntarily converted their holdings and increased the number of outstanding common shares by 25% to more than 100 million.
Chief Financial Officer Geoffrey Burns said it was “nice to report that in September we actually generated positive cash flow of US$2.8 million, and this is a trend we expect to continue through the balance of this year and certainly in the next year.”
He said Coeur is “evaluating its options” with respect to US$65 million worth of 6.37% convertible subordinate debentures due in January 2004, and that the company “expects to address the issue in the near future.”
In late November, Coeur filed paperwork with the U.S. Securities and Exchange Commission to sell up to US$125 million of securities, which may include debt securities, preferred stock, common stock and warrants. A portion of the proceeds may be used to pay down debt.
The high-flying stock
Idaho’s other silver company,
“With Hecla, using any measure you want, you’ll find that there’s been a dramatic improvement over the past 12 months,” said President Phillips Baker, who assumed his position about 18 months ago.
Key to the company’s strategy has been remaking itself into strictly a precious metals company.
“For years, we had a successful industrial minerals group that provided good cash flows, but it also distracted the attention of management and consumed capital,” commented Baker.
After disposing of the industrial minerals group, the company intensified efforts to reduce costs, while increasing cash flow and production. “And the results in 2002 are exceeding even our own expectations,” said Baker.
Hecla expects to produce an attributable 8.2 million oz. silver and 235,000 oz. gold in 2002, up from last year’s 7.4 million oz. and 194,742 oz., respectively. Cash costs are expected to drop to US$2.30 per oz. silver this year, down dramatically from US$3.52 per oz. last year and US$4.02 per oz. in 2000.
“We’ve increased our proven and probable reserves with little exploration, and we’re hoping to replace what we’ve mined this year, again with little exploration,” said Baker, who added that next year, Hecla plans to expand its reserve base.
At the Greens Creek silver mine in Alaska’s Panhandle, Hecla is partnered with
For 2002, the mine is on track to produce 3.2 million oz. silver and 30,000 oz. gold at a cost below US$2 per oz. silver.Greens Creek represents 60% of Hecla’s silver reserves, hosting attributable reserves (at the end of 2001) of 2.3 million tons grading 16.7 oz. silver per ton (37.6 million contained ounces) and 0.133 oz. gold per ton (299,456 oz.), plus 4.6% lead and 11.6% zinc.
Something to watch out for: Reserves at Greens Creek are likely to shrink when recalculated at the end of the year, owing to lower zinc prices.
Baker said that the partners are accelerating exploration efforts at the mine site with an eye toward finding new zones of mineralization, on the other side of a major fault zone.
Lucky Friday in Idaho is Hecla’s oldest mine, having started up in 1957. However, costs are high, and production was cut back substantially in 2001 to about one-third of capacity. For the first nine months of this year, the mine produced only 1.4 million oz. silver at a cash cost of US$4.65 per oz.
“We’re keeping Lucky Friday open because it’s important to us as a call on silver at higher prices,” said Baker. “We can do this for about another year until we have to start making new plans.”
Hecla is considering spending US$10-15 million developing lower levels of the mine — work that would include cutting a new mile-long drift.
In Mexico’s Durango State, Hecla is active at its new, high-grade San Sebastian silver-gold mine, which produced 2.5 million oz. silver and 30,000 oz. gold at a cash cost of US$1.29 per oz. silver during the first nine months of the year.
“This is the sort of property that’s the reason why you get into the precious metals business in the first place,” beamed Baker. “At the start of this year, Hecla had a net investment of about US$1 million there and, by the end of the year, this thing will generate about US$7-8 million in cash flow, and we expect a similar or better performance in the future. The potential we have there is really remarkable.”
Hecla has acquired a large land position at San Sebastian and intends to continue drilling more high-grade vein targets.
At the La Camorra underground gold mine in Venezuela’s El Callao district, Hecla has carried out a textbook turnaround of the operation after acquiring it from Monarch Resources in 1999.
“We came in and turned the property around by applying the skills that we know best: narrow-vein underground mining,” said Baker. “We knew that the guys who mined there previously did not have the requisite experience and knowledge to run the operation successfully.”
La Camorra
La Camorra has swiftly become Hecla’s largest generator of revenue, and for the first nine months of the year, it produced 134,000 oz. gold at a cash cost of US$130 per oz. (that is, at about half of Monarch’s cash cost prior to the sale).
Elsewhere in the camp, Hecla has become involved in exploring the newly acquired 20-sq.-km Block B concession. Here, the company is particularly interested in the dormant, high-grade Chile gold mine, which ceased operations in the 1940s owing to water-control problems.
Baker said the property could be redeveloped rapidly if exploration efforts prove successful.
Commenting on the political situation in Venezuela, Baker said it is “certainly not good; it is in fact getting worse.” However, he emphasized that the problems were not directly affecting Hecla since the mine is in a fairly remote area, far from the strikes and unrest in Caracas. “We’ve been able to get our equipment in, we’ve been able to sell our gold, and we’ve been able to get our cash out of the country.
“In our view, the deterioration of Venezuela will not be a long-term problem, because the country is too important to the U.S. and it has too strong a democracy.”
During the summer, Hecla entered Nevada’s Carlin trend by signing on to the Hollister Block high-grade gold project — a 50-50 joint-venture with
This grassroots exploration project is now in the permitting phase, and the partners expect to have the necessary permits in hand by next September.
Hecla has cleaned up its balance sheet considerably this year, reducing long-term debt to US$7.4 million and boosting cash and equivalents to almost US$18 million at Sept. 31. The current ratio is now 1.5-to-1.
Like Coeur, Hecla moved to reduce, by about two-thirds, its number of outstanding preferred shares. The shares trade on the New York exchange under the ticker HL.B.
As a century-old company, Hecla has to face issues relating to the present-day environmental impact of historic mining.
In the third quarter, Hecla withdrew from an agreement in principle with the U.S. and state of Idaho to settle the governments’ claims for cleanup costs and damages related to historic mining in Idaho.
The August 2001 deal had included the Coeur d’Alene Basin area, the Grouse Creek mine, the Bunker Hill superfund site, and the Stibnite mine site, and it called for Hecla to contribute US$138 million in work and payments for environmental remediation and reclamation at those sites, spread over the next 30 years.
“While we would still like to settle that litigation, we came to the conclusion that the agreement in principle was based on facts that were no longer true,” said Baker. “They were based on an assumption that there would be a multi-billion-dollar cleanup requirement in the Silver Valley. What has come out is a US$360-million plan based on the assumption that Grouse Creek would require a water treatment plant — and what happened there is that nature has done its work and has greatly reduced the amount of cyanide in the tailings pond.”
Hecla is now seeking an alternative settlement.
Dark horse
The newest entrant into the silver sector,
Like an anaconda that’s just swallowed an entire capybara in one go, Wheaton River has been unusually quiet this past half year as it digests its San Luis silver acquisition.
In April, a revamped management team at Wheaton struck a deal to buy Minas Luismin, the mining division of Mexican-based auto parts manufacturer Sanluis, for US$75 million (T.N.M., May 6-12/02).
Last year, Minas Luismin’s three mining complexes in Mexico — San Dimas, San Martin and La Guitarra — produced 5.8 million oz. silver and 98,000 oz. gold (190,600 oz. gold-equivalent) at a production cost of US$200 per oz. gold-equivalent. This year, production is expected to exceed 183,000 oz. gold-equivalent at US$195 per oz.
So far, so good: Wheaton’s recent third-quarter results (the first to include the Luismin acquisition) showed earnings from mining operations of US$5.75 million on sales of US$15.8 million, compared with the US$818,000 million earned on sales of US$6.9 million during the corresponding period in 2001.
The company ended the period debt-free and with US$19 million in cash and equivalents.
Silver hedging
The hedging issue is decidedly less contentious among silver miners than it is among gold miners, with only Peoles hedging any of its silver production.
Said Coeur’s Dennis Wheeler: “It’s clear that our investors do believe in the underlying fundamentals for silver and are prepared to wait for the significant increases in silver prices that they feel are coming. They do not want us to hedge and take away their upside.”
Hecla’s Phillips Baker remarked that his company “does not have a ban on hedging but that we may want [limited] hedging in order to provide us with the opportunity to finance opportunities, particular where we want to offset political risk, for instance for project financing in Venezuela.”
Pan American’s Ross Beaty observed “there’s a new buoyancy we’ve all felt . . . and I think we’ve begun to see a shift from a secular bear to a secular bull market for silver.”
Silver markets
Philip Klapwijk, managing director of London-based Gold Fields Mineral Services, gave a rundown on silver’s supply-and-demand fundamentals.
On the supply side, he said global silver mine production will likely flatten by 2005 at around 570-610 million oz., including production from Dukat.
However, this figure could rise 10% if Barrick Gold’s Pascua-Lama gold-silver project in Chile and Apex’s San Cristobal project come on-stream, as both are deemed capable of pumping out a combined 60 million oz. silver annually.
Scrap silver supplies may not rise much, he added, owing to the poor economics of recycling at current silver prices and to declining photographic demand. However, scrap could play a bigger role with silver rising above US$6 per oz.
Klapwijk expects government sales of silver to drop off sharply by 2005 as a result of exhausted U.S. and Chinese stocks. U.S. stocks are essentially now sold off; the Chinese government had been amassing silver through 1997, but it became a net seller from 1998 onwards.
He said the big supply development in 2002 is that Chinese government sales have significantly fallen, by about 50% compared with last year’s sales of more than 60 million oz. Also, Klapwijk pointed out that, over the past decade, the Chinese government has proved to be canny at trading silver.
On the demand side, he sees no major substitution threat in industrial applications, and even expects some mild growth in industrial demand, with things picking up considerably by mid-decade.
He believes the impact of digital photography (which uses no silver) will be greater, but this will be offset by growth in “traditional” silver-consuming photography in India and China.
Silverware demand continues to fade away quietly, and there was a 10% drop in jewelry demand over the 2001-2002 period. Indian jewelry demand led the way down, owing to higher local prices and drought conditions in the northern tribal belt. Indian demand has since revived in this quarter, but not enough to reverse the trend for the year.
Klapwijk expects little if any growth in investment demand for silver, since the metal continues to be overshadowed by gold.
However, he drew attention to the dramatic fund-driven move in silver during the summer, and noted that, in terms of futures positions on the Comex, the net longs have increased dramatically this year to 29 million oz., from 7 million oz. last year.
Klapwijk also remarked that silver has been outperforming base metals since 2000, when the latter group was pummelled by the global economic downturn: “This does tell you that there is some residual investor interest for silver.”
Overall, he expects the deficit between silver supply and demand to be narrow this year, compared with the substantial deficits in the 1990s, and the 100-million-oz. gap in 2002 will likely be filled by sales from government stock.
“This deficit will lead to a bias toward the upside in price, and I certainly expect we’ll see higher prices by 2005,” said Klapwijk.
Silver Institute
Pan American Silver’s Ross Beaty is also president of the Washington, D.C.-based Silver Institute, which, he says, has adopted a “broader, more global purview,” compared with its previous emphasis on stimulating U.S. jewelry and silverware consumption.
This year, the institute pushed hard for an initiative to limit Chinese government silver sales, and even sent a delegation to China in March.
“We were well-received by the Chinese at all levels, in terms of the key players in the Chinese silver equation,” said Beaty. “And we like to think that we were instrumental in having the Chinese change their policies of sales at any price, which they followed for three years, to sales at a good price.”
Beaty said the institute also lobbied the Chinese government to be more transparent with respect to its silver market.
There will be another major silver conference in China, in October 2003, and Beaty would like to increase participation from North Americans who could continue to lobby the Chinese to promote their own silver demand.
In the U.S., the Silver Institute has lobbied the government to fund silver-catalyst research and encourage the use of “biocide” silver as an alternative to arsenic in wood-preservative products used in, for example, residential decks. (For health reasons, arsenic-based wood preservatives are now banned in the U.S.)
This past summer, the institute also played a role in getting U.S. federal legislation passed which permits and directs the U.S. Treasury to buy silver on the open market to satisfy the needs of the Silver Eagle coin program. Silver Eagle coins represent 9-10 million oz. of silver offtake per year.
— Note: A copy of the 87-page World Silver Survey 2002, which is jointly produced by Gold Fields Mineral Services and the Silver Institute, is available at www.gfms.co.uk and www.silverinstitute.org. The next annual survey will be published in May 2003.
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