I recently came back from a three day trip to the best kept secret in Mexico. I also took a look at a billion ounce silver mine.
The most popular business model in the gold/silver juniors is that of raising some seed money, picking up a property or two, do some drilling and surface exploration until you run out of money, raise money, drill holes: All in the hope of someone coming along one day and buying the company out at great profit to the investors. Unfortunately, it only makes profit for the insiders and those raising capital for the company. When is the last time you heard of a junior being bought out for any reason? It's pretty much a variation of the greater fool theory so common among home buyers at present. Surely there must be a greater fool than me.
Barbara and I used to run a small computer company selling CPU upgrades for Macintosh computers. We were good at it and made money. Actually we used to outsell MacMall and MacConnection by a bunch so you could safely say we were real good at it.
When we began selling these CPU upgrades on the web, the web was still taking baby steps. Our closest direct competitor was Cyberian Outpost in CT. When we were doing $3 million in sales and clearing a nice fat profit, they were doing $21 million in sales and losing $7 million. This was in the days of the dotcom magic. Cyberian went public and soon had a market cap of $500 million. I did some math and if my numbers were right, our little two man (sorta) company should have been worth about $71 million. Except for the minor fact that they were losing money hand over fist and we were making money. I told Barbara about our new found wealth and she told me I was daft.
As long as we ran the company, we made money. That seemed to make sense to me. As long as Cyberian Outpost existed, they lost money. Eventually they went teats up and destroyed $500 million dollars of shareholder value. But we weren't much better off, Steve Jobs hates the idea of anyone making money off of Apple computers so he killed the CPU business. We kept going until we couldn't make a reasonable profit and then we simply shut down and went on our way. We had a good business model but it didn't call for us to lose money.
When you invest in a junior, you are not only getting into bed with the company, you are getting into bed with their business model. Make sure that (1) you understand how they intend for you to make money and (2) it makes sense. As far as I am concerned I get very nervous when a junior doesn't have a plan for making a profit somehow, someday. That makes me fairly unusual, the standard business model accepted by almost everyone is to drill and spend and pray until you have a zillion shares, then do a rollback and start over. Make sure that at least in theory you have some way of possibly making money some day. If you don't, you won't.
The Best Kept Secret in Mexico
In early November I went to Mexico to visit a new property of Great Panther Resources in a town called Guanajuato. Located in Central Mexico at an elevation of about 6,000 feet, it is hot during the day and chilly at night. Designated a UN World Heritage Zone in 1988 because of its ancient buildings and deep sense of history, it attracts visitors from all over the world. The city is the best kept secret in Mexico, it's so beautiful and still pretty much off the beaten path.
Guanajuato is Mexico's foremost mining state. In the south fertile plains support a variety of livestock and the cultivation of corn, wheat and beans.
The Spanish first visited the area around 1541. By 1546 the Viceroy of New Spain granted Don Rodrigo de Vazquez a license for a cattle ranch in return for his services to the King of Spain. Two short years later. in 1548, a mule driver with the name of Juan Rayas changed the course of history by discovering the richest silver vein in history. Rayas was driving a team of mules on his way to the newly discovered ore deposits at Zacatecas when he stopped over night near the Cerro del Cubilete in Guanajuato. The next day he found streaks of melted silver in the rocks surrounding his camp fire and the rush was on.
The primary silver structure is called the Veta Madre vein and it extends an incredible 25 kilometers. At one point, the richest mine in the district: the La Valenciana, still in production today, produced over one third of the silver in the world. It was said that Count of Valenciana, Antonio Obregon y Alcocer, was the second richest man in the world. Second only to the king of Spain. Over the course of 450 years, the mines of Guanajuato have produced somewhere between 1.2 and 1.5 billion ounces of silver.
The Best Kept Secret in Guanajuato
In 1939, after much labor unrest, a number of the mines were turned over to the Cooperativa Santa Fe de Guanajuato. And it was all downhill from there. I don't think much of governments, history books are filled with tales of the stupidity and blunders committed by those in government. It seems to me governments can't do much right. Cooperatives may as well be the same thing, they are true democracy at work; mob rule.
In 1939 the cooperative took over the richest 4.2 kilometers of silver in Mexico. It only took them 65 years to run it into the ground. The mangers should be complemented, all of the other similar cooperatives in Mexico failed long before the Cooperativa Sante Fe de Guanajuato. But when you run a mine based on a democracy, it can only come to a bad end. Everyone wants to vote benefits to themselves and their friends. By August of this year, it got so bad the government turned off the power and they were forced to mine by hand, the same way as they did 450 years ago.
Bob Archer of Great Panther had his ear to the ground and when he heard about the power being turned off, he hustled his way down to Guanajuato. While it may not seem fair to qualify the sale as outright theft on the part of Great Panther, it's close. While everyone else in the business was snoozing or out at the airport, Bob realized his ship had come to port. The cooperative didn't want to sell, they had to sell. Each day made the apparent value of the mines lower. Archer came in with a rock bottom price of US $7.2 million, most of which is going to pay pension obligations of the cooperative.
The purchase price includes 1107 hectares in the two main properties, a 1,200 ton per day mill, workshops and administration facilities and all the mining equipment. They own 4.2 kilometers, the richest 4.2 kilometers of the Veta Madre vein, most of which has been barely explored.
Great Panther has paid $1.45 million already and has 13 months to pay off the remaining $5.8 million. They do have to stretch but after all, they own a barely explored series of mines with 25 shafts, 4 winzes (internal shafts) with a past production of about a billion ounces of silver.
When I visited in early November Great Panther had barely closed the deal. Even in the midst of the richest silver district in Mexico it was possible to hear the gnashing of teeth from all the other Mexican silver companies who missed the boat.
There is a meaningless 43-101 resource but I won't even go into it. When you are looking at a project of this size, you have to look at the past production and try to guess just how much they took out in a percentage. Believe me, the past production isn't much compared to what is left. Let it be said that Great Panther really doesn't have to explore for silver, you don't explore this kind of deposit. When you are exploring, you are guessing. At Guanajuato they don't have to guess, all they have to do is locate. And just looking at the side view of past production shows a lot of gaping holes where no one has ever put a drill. So Great Panther isn't exploring, they are just locating the silver they already know is there.
Actually buying a 1,200 ton per day mill for $7.25 million wouldn't be all that bad of a deal all by itself but this mill was the saddest mill I have ever seen. The cooperative didn't do a lick of maintenance or upgrading. 90% of the mill would make better scrap iron than a mill. But there isn't an issue with Great Panther, Bob Archer knows half his job is rationalizing the mine and mill, not finding silver. He has a giant resource, it's up to him to make it make some sort of sense. I suggested to him that he could pretty much make it anything he wanted to make it. He could try to optimize a mill to match the production capability.
The lack of maintenance was so bad that when we went down to the 300 foot level in a truck, the clutch was so worn out that we almost had to walk back to surface. Bob Archer tells a story about how he saw a pile of beat up iron balls next to the one working ball mill and he asked what they were doing there. He was told that they were too out of shape and worn to be used so the miners used block of granite to replace them. So as they were crushing the ore, they were also diluting it. By the time the mine was closed in August, the miners were being forced to carry 50 kilo sacks of hand-picked ore to the surface. It was a sad tale.
Bob already has a drill rig hard at work. We viewed some of the core from the current hole, the mineralization is easy to see and he has located an entirely new section of the vein. I would be very interested in learning his cost of locating new ounces. I've always felt the Vancouver brokers get carried away with 43-101 ounces but his cost of locating ounces should be among the lowest in the industry. With companies around like Silver Standard getting $.90 an ounce for ounces in the ground with no mines or mills, Great Panther is going to get a hell of a premium for their ounces, these are real ounces of silver which are going to be produced, not hatched some day.
Endeavour Silver began this model of buying assets cheap and adding ounces of silver to increase shareholder value. I really like the model and Brad Cooke deserves full credit for being the early riser. And in my visits to Fortuna in Peru and now Great Panther in Guanajuato, I've seen the model expanded and increased. In my view, the entire silver industry is due for a major shakeup and shakeout. I cannot understand the absurd valuations of the few silver companies around. I like Pan American, they have good mines and great management. I cannot understand Coeur D'Alene, what makes the CEO worth $880,000 a year when profit is as rare as hen's teeth. And just how long does Silver Standard intend to play the "sit on silver until it hatches" trick? Their model made some sense at $3.50 silver but times change and for all their puffed up egos, prices change, too. It's time for those silver companies who want to think of themselves as leaders to start leading.
While I was
in Mexico I didn't have time to visit Great Panther's Topia property
but details can be found on their
website. They intend mining some high grade ore and it seems
their goal is to produce about 1.5 million ounces of silver a
year at a cost of about $3. Their deal there brought with it
a 200 TPD mill and they are in the process of reconditioning
it at this time as they conduct exploration drilling.