The Next Big Thing in Silver
Jan 2, 2015
No commodity loses so much money for so many people on so consistent a basis as does silver. There is a small group of self-elected gurus who tout utter nonsense about the metal and on a regular basis the market whacks the newborn silver aficionados.
Silver is a commodity; it’s not a religion. It’s not in short supply and it’s not going to $400 an ounce in a vacuum unconnected to any other commodity.
Over the last 100 years, silver has averaged a ratio of 53-1 to gold. It’s been as high as 16-1 in 1980 and as low as 100-1 in 1991. For fifty of those years, from 1914 to 1964, silver was used as money in coinage. For the other fifty years, from 1965 to 2015, silver was not used in coinage.
So if you actually believe in the laws of supply and demand, you will understand the 53-1 probably represents some sort of pivot point around which the ratio revolves. In April of 2011 when silver hit a major high just short of $50 an ounce, the ratio hit 32-1. Currently the ratio is near a five year high at about 74-1.
Unlike gold, silver production does respond to changes in price. There is a 50-year supply of gold above ground so every gold mine in the world could shutter for 20 years and it wouldn’t make a major change in the supply. Production of silver on the other hand is a function of not only the price of silver but also the price of lead, zinc and copper. Since most silver is produced as a by-product, when base metal mines close, that also affects the supply of silver.
At today’s price of silver, most primary producers of silver are losing money. At some point, the owners will begin to close mines. Certainly today no one is pouring money into opening new mines.
Recently I visited what used to be one of the most important silver mines in the world until the start of the Mexican Revolution in
about 1910. The mine is named San Acacio and it’s located in Zacatecas. Spanish explorers discovered the silver deposit in 1546 and a number of mines were soon put into production.
Existing records show that between 1548 and 1910 some 100 million ounces of silver were produced from a zone 1 km long to a maximum depth of 210 meters at San Acacio. After 1910 many mines in the area closed due to the chaos of the Revolution. Mines both to the Northwest of San Acacio and to the Southeast along the same structure have been put back into production. It’s important that the reader understands
that mines along the same vein system have been expanded both along the structure and to depths of as much as 1000 meters.
Defiance purchased an option to buy 100% of the San Acacio mine for a payment of $5.5 million due no
later than September of 2018 back in 2011. The total payment may be lower depending on how soon Defiance pays off the option. The mine is subject to a 2.5% NSR that can be bought down. The mine covers 5.6 kilometers of the known 8.5 km Veta Grande silver vein system. The vein system is wide averaging between 5 and 12 metres and as much as 20 meters in some areas. Only 1 km of the structure has been explored and mined on the San Acacio portion of the vein.
Defiance has a known indicated resource of 3.55 million ounces of silver at a grade of 95.8 g/t and an additional 12.45 million ounces in the inferred category at an average grade of 134.1-g/t silver. The company has commissioned a new resource that is to be released early in 2015 that will increase the silver resource.
In December of 2014 Defiance began a 2,000-meter drill program. Results will begin to be released in January of 2015. The purpose is to expand the resource both down dip and along strike. Defiance is using a back of the envelope figure of about 30 million ounces of silver in a resource to make a mining decision.
The Spanish needed high-grade oxide material to process. They were unable to cope with either sulfide material or water at depth. That this mine was only mined to a depth of 210 meters doesn’t suggest they ran out of ore, it means there is a lot more high-grade material deeper and along the 4.6 km of unexplored vein system. Based on what I saw, I suspect the market will be shocked at how soon Defiance can come up with their 30 million ounce figure and how cheap it will be to define more ounces. I think the magic number for the market to take Defiance seriously will be above 100 million ounces.
Based on the existing resource, Defiance is paying about $.31 an ounce for silver in a highly prospective known silver area in a mining friendly jurisdiction with power, roads and an experienced work force. I believe they can expand the resource by 5 to 6 million ounces with the first 2000-meter drill program for about $.06 an ounce. A 3,000 meter 2nd phase drill program can add an additional 6 million ounces for about $.07 an ounce.
Once the company starts drilling deeper, costs will go up. A 25,000-meter phase 4 program will drive the price up to $.14 an ounce but double the resource again. In short, back in 2001-2004 primary silver companies were getting in excess of $1 to $3 an ounce. At today’s price of silver, Defiance is getting about $.24 an ounce and they can add ounces a lot cheaper than that. I encourage interested readers to go look at the company presentation for more information; they have done a wonderful job of showing the potential on page 14 of the slide show.
This is going to sound very weird but the strongest natural competitive advantage of Defiance is invisible management. Like 90% of all resource companies, the visible management is made up of mining professionals. Just how valuable an asset that has been is pretty much shown by the 90% decline in the value of resource companies run by mining professionals over the past three years of a dismal market. Geologists tend to think that mining consists of spending money and the more money you spend, the more you should collect in salary. It hasn’t worked out that well and when you invest in a mining company run strictly by mining professionals, you are shooting craps.
The largest shareholder of Defiance is Windermere Capital run by Brian Ostroff. With the shares and the warrants they own exercised they would control 58% of the shares outstanding. You may safely believe that Defiance doesn’t buy an extra box of paper clips without discussion with Brian Ostroff. And I love the idea of a company being controlled by a giant shareholder. I know his interests and my interests are aligned.
I like this story a lot. I liked it enough nine months ago to participate in a private placement and six months ago to buy shares in the open market. I was very anxious to actually see the project for myself once the drill program started. I got to do that last month. They have the next big thing in silver.
I think the market has turned and soon it will be obvious to all investors. With a $6.5 million market cap, this stock has a long way to run. They will need to raise money for more drilling but 24 million warrants are already in the money and that’s good for over $1.2 million any time the company wants to accelerate the exercise.
Defiance is not an advertiser but they are strong in investor relations and communication. There will be a lot of news out soon and a new and larger 43-101. A lot of people are going to be talking about this stock.
I own shares. I am biased. Do your own due diligence but I think this is going to be the silver surprise of the year. Their timing is simply perfect and they have as much blue sky as I have seen with any silver project.
Defiance Silver Corp
DEF-V $.13 (Dec 31, 2014)
DNCVF-OTCBB 50 million shares
Defiance Silver website