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Sterling Buying Opportunity Dead AheadRalph Kettell The best performing stock in 2003, according to 4FigureAU was Sterling Mining Company. It shows the 52 week gain at 3,614% when Sterling trading a few days ago at $13.00 per share. What an incredible ride it has been! What has caused all the fireworks? Quite simply Ray DeMotte, CEO of Sterling, pulled off an amazing coup d'etat. He was able to lease (with option to buy) the historic Sunshine Mine for an incredible price from the bankruptcy trustees. The Sunshine which has produced 330 million ounces of silver over the past 100 plus years, still has approximately 180 million ounces of resources and reserves (with substantial blue sky potential). As Sterling has only slightly over 10M shares outstanding this equates to about 17 ounces of silver per share. For comparison purposes, Silver Standard (another great silver company), SSRI, has about 12 ounces per share of silver and doesn't plan on going into production in the near future. SSRIs charter was to accumulate as many ounces of resources as possible for as cheaply as possible, which they have accomplished in spades. However, Sterling, which has 50% more ounces of silver on a per share basis than SSRI, is currently trading at about the same price as SSRI. Also Sterling owns a mine. Granted the mine is not currently operating, but it is gradually being brought back on line. For a tiny fraction of the cost of building a new mine, the Sunshine could be producing silver for $4.01 or less per ounce. Since silver is trading north of $6 per ounce, and the production capacity of the Sunshine is in excess of 3M oz. per year, the yearly profit potential is currently around $6M or $0.60 per share. At typical multiples for mining stocks (especially considering that we are in a precious metals bull market), this stock could easily trade at $18 and not be overvalued. Well for those who have missed the ride so far, fret not. A buying opportunity should present itself in the day or so. Take a look a the chart below. I have annotated the chart with blue horizontal support lines. Many of the early support lines were never tested, because of the sheer strength of Sterling's rise. The support line at 6.50 was tested and held in the most recent correction. It did drop for a few minutes down to $5, but that was a momentary phenomenon, and I suspect that only the market makers were able to profit from it. The $9.00 support line should hold this time especially since the 50-day moving average is currently at the same level. While the last correction penetrated the 50dma it did not do so convincingly. When the stock broke through the 50dma at the beginning of the current rise, it left a gap on the chart from $7.50 to about $8.50. Some of the traders will likely go after the gap, but they may or may not be successful depending on numerous other market factors.
My take on the situation is as follows: I believe that there is an opportunity to pick up Sterling around $9.50. It may trade as low as $9.00, but with the bid/ask spread on a somewhat thinly-traded stock like this, I would not play it too close to the vest. If you already have a position in SRLM, then by all means place your orders closer to $9.00 or be even more adventurous and play for the gap at $7.50 to $7.75. Assuming that the chart pattern holds, I would expect Sterling to rise to around $16.00 to $16.50 around the beginning of March. Then by the end of March the stock would probably test support in the $12 range. One has to be careful trying to trade these markets too closely. One can get too cute and end up making a 25% profit, but missing a 50% move. This market is potentially explosive as was clearly demonstrated by the move in silver in the past week. My feeling is that the surprises will be to the upside and will come out of nowhere. Hopefully the current correction will allow many more of you silver bugs an opportunity to board the Sterling silver bullet. January 15 2004
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