October 18, 2006

What's Silver Up To?

Well, the short answer is somewhere between $11.50 and $12.00, but as volatile as this metal is, who knows where it will be when you read this. The poor man's gold seems to be rebounding a little better than gold itself after the sell-off a few months ago and more rebounding may be in store - maybe soon.

Of course the correction was more extreme for silver than for gold. Recall that there was quite a run-up in the price of silver associated with the launch of the silver ETF (SLV) back in April, just prior to the May blow-off highs for nearly all commodities and stock markets around the world. Silver had been setup for a major correction after more than doubling in the twelve months leading up to the May peak.

With the price for an ounce of silver declining by one-third versus a setback of only one-quarter for gold, it's not surprising to see a bigger rebound in the less precious of the two metals. But, there is quite a difference in how far the two have come from these lows, as shown in the chart below - silver is up almost 25 percent while gold has mustered only a single digit increase.

Where prices head from these levels is anyone's guess, but if the direction is up, silver has built a pretty good head start.

Look it up

As would be expected, Wikipedia contains a plethora of information about silver. One of the great things about this online encyclopedia is that they provide a balanced view of the world, rather than what might be considered the mainstream view (in many cases the mainstream is wrong).

A good example of this is the treatment given to silver as an investment - they go on at great length about silver as a form of money throughout history, as a continuing store of value, and the different ways it can be purchased.

Also of note over at Wikipedia is this account of the Comstock Lode, the largest deposit of silver ore ever discovered under what is now Virginia City, NV, near Reno. If you ever get a chance to visit this area, Virgina City is a wonderful little mining town, complete with a Boot Hill and a gambling hall still set up to play Pharaoh.

The Comstock Lode was mined in the 1860s by a company owned by George Hearst, the father of newspaperman William Randolph Hearst - this business contributed greatly to the family fortune.

The Producers

Today's silver mining companies may not lead to a legacy as great as the Hearst's but they are of increasing interest to investors figuring that silver prices will head higher in the months and years to come.

The four major silver producers have been doing nicely since the bottom in silver prices in June. Silver Wheaton (SLW), Pan American Silver (PAAS), Silver Standard (SSRI), and Coeur d'Alene (CDE) have all rebounded smartly.

Following is a brief description of these four companies.

Silver Wheaton

Silver Wheaton is, by far, the most interesting of the bunch. They are the purest of all the silver miners, yet they mine no silver. The company derives its revenue through contracts to purchase by-product silver from other company's mining operations, obtaining the silver at low fixed costs yet able to sell the metal at market prices.

This unique approach provides full exposure to higher metal prices with some degree of downside protection. Silver Wheaton's 2006 production is expected to exceed 15 million ounces, with 2009 output targeted at 20 million ounces.

After Coeur d'Alene's failed takeover bid of Wheaton River Minerals, Silver Wheaton was formed as a 100 percent pure silver mining company. Wheaton River claimed that the Silver Wheaton spin-off had nothing to do with the bid by Coeur d'Alene, but with 7 million ounces of annual silver production moving to the new company, investors balked at tendering their Wheaton River shares.

Silver Wheaton has developed a unique business model that is based on the fact that almost 80 percent of all silver produced is a by-product of mining gold, copper, and zinc. The company does not actually mine silver, instead purchasing silver from three separate mines where this metal is a by-product of other mining operations.

Most of the silver is purchased from the Goldcorp mines in Mexico and the Zinkgruvan mine in Sweden, along with some of the silver production from the Goldcorp mine in Peru. The company has signed long term contracts with these established mining companies, filling a very large niche where the silver is paid for in advance, then taken off of the hands of producers at below market rates of $3.90 per ounce and resold into the physical market at prevailing market prices.

Amazingly, the company has only five employees - it functions much more like a trust than a mining company. Share prices have risen dramatically in the short time that the company has been operating, yet their unique business model and long term contracts make the company's prospects much better than pure silver miners.

Pan American Silver

Having acquired a number of silver projects around the world and turned them into larger, more efficient mining operations, Pan American Silver is now very much a growth story. Over the last decade, the company has increased silver production every year and, in the years ahead, more of the same is expected.

In 2006, output is expected to exceed 13 million ounces, this total projected to almost double by 2009, at which time the bottom line should benefit greatly from higher silver prices expected at that time.

Founded in 1994 and based in Vancouver, the company began acquiring a number of projects with known resources and currently has mining operations in Mexico, Peru, Argentina, and Bolivia as well as non producing silver resources in the United States and Argentina.

Pan American Silver has six producing mines and two more under construction. The company owns and operates the Quiruvilca silver mine, the Huaron silver mine, and the Morococha silver mine in Peru; the La Colorada Mine in Mexico; and San Vincente in Bolivia. Its development projects include the Alamo Dorado silver project in Mexico and Manantial Espejo in Argentina.

While silver is the company’s primary focus, several of its operations also produce zinc, copper, lead, and gold, all of which are by-products of mining silver-dominant ore. With the high metal prices of recent years, these by-product metals have contributed to lower costs at many of Pan American’s operations.

Silver Standard

Silver Standard sits atop vast silver resources - more the 100 million ounces of proven and provable reserves and roughly ten times that amount in the measured and indicated as well as the inferred categories.

It is not yet in production on any of its 16 properties, however, it did complete a feasibility report in April for their Pirquitas mine in Argentina with more studies now in process. With a broad portfolio of mining properties, and over 1 million ounces of total reserves, the company intends to become one of the world's leading silver miners in the years to come.

Vancouver-based Silver Standard Resources was incorporated in 1946 as Silver Standard Mines, then changed its name in 1979 and again in 1984, before finally settling on Silver Standard in 1990.

The company operates in Argentina, Australia, Canada, Chile, Mexico, Peru, and the United States. Its most important project is the Pirquitas mine in Argentina and, after an extensive drilling program, a new resource estimate is due for their Pitarilla project in Durango State, Mexico in the current quarter.

The Bowdens Project in Australia and Diablillos in Argentina should both have updated studies before year-end and a new drilling program is expected to begin this quarter in San Luis, following some encouraging initial results last year.

There are number of additional properties where Silver Standard holds mineral interests in Argentina and Peru as well as British Columbia, Northwest Territories, and northern Nevada. As if that weren't enough, Silver Standard has strategic alliance with Minco Silver to pursue silver opportunities in the People’s Republic of China.

Coeur d'Alene

Based in the Coeur d'Alene silver district in Idaho, the company of the same name is one of the oldest mining concerns around. Founded in 1928, the Coeur d'Alene is in the process of winding down one long-producing mining operation while at the same time attempting to start production elsewhere.

As of the end of 2005, the company’s total estimated proven and probable reserves included approximately 221.4 million ounces of silver and 1.3 million ounces of gold. Future projects may transform the company into more of a gold miner, rather than its traditional role as one of the largest silver producers in the world.

Coeur d'Alene Mines Corporation and its subsidiaries engage in the operation and exploration of silver and gold mining properties mostly in the United States, Australia, and Africa. The company has five producing mines in four countries, and two major development projects that will determine the future of the company. In 2006, Coeur is expected to produce approximately 15 million ounces of silver and 130,000 ounces of gold.

In 2005 these assets (including the Galena Mine in Idaho sold in June 2006) had a combined production of almost 14 million ounces of silver and over 100,000 ounces of gold. One of the company’s primary production properties is the Rochester Mine, a silver and gold surface mining operation located in northwestern Nevada that is expected to exhaust production within the next year. Also included in the portfolio of properties are the Cerro Bayo and Martha mines in Chile, the Endeavor mine in Australia, an open pit silver mine in Bolivia, and the development-stage projects in both Alaska and Australia.

With the sale of the Galena mine to Silver Resources and the winding down of operations at Rochester, the company is looking at decreased production levels in 2007 unless existing mines can be expanded or interests in silver production contracts, similar to the Silver Wheaton business model, can be increased.

The company is expected to restart construction of its San Bartolome mine in Bolivia. Increased political risk has resulted from the December 2005 election of a left-leaning governmant, but with almost three-quarters of the Coeur’s proven and probable reserves, and the potential to produce over 7 million ounces of silver per year, success of the San Bartolome project is very important.