Silver Companies - Year in Review

Sean Rakhimov
Editor: Silver Strategies
January 11, 2006

We own shares in most companies mentioned herein; if that is a problem for you, please read no further.

In our last article we looked at the performance of silver. Today we are going to look at how silver stocks faired in 2005. It has been a busy year for silver stocks and there is a lot to cover. This has been perhaps a break-through year for silver stocks. A number of silver juniors made their mark by acquiring properties of merit, making discoveries, expanding resources, spinning off assets, etc. We will look at some of them as space permits.

But first we'd like to get this notion off our chest. In the last several months we have been itching to write an essay titled "I am changing my tune" and it has nothing to do with music. The fact of the matter is that over the past year or so a whole batch of silver companies secured a rather substantial amount of silver resources in the ground. If we tallied them all up we'd probably get a number north of a billion ounces and those are ounces the companies can talk about. Our research suggests that we can probably see another billion ounces of silver the companies cannot talk about yet.

We would like to credit Peter Megaw, who is a top notch geologist with tons of experience in silver exploration in Mexico and is the technical force on the ground behind such companies as Mag Silver and Excellon Resources. Over the years Peter was generous in sharing his knowledge and emphasized the importance of ore grade for the economics of the project which in itself is not a novel concept, but the significance of it is often overlooked by investors. It was Peter who drove the point home for us in that grade is more important than price of silver.

So don't rush to sell your silver investments chances are a good part of those billions of ounces will never see the light of day. We are not saying that to take away from some of the spectacular stories in the silver sector, but it is something to bear in mind.

The following table comes straight from our Stock Performance Report. It pretty much tells the story of who the winners and losers were. But we would like to look under the hood and highlight what made some of those results possible. We also want to remind investors that yesterday's losers can turn into winners on a single drill hole, so don't judge the companies momentarily at the bottom of the table too harshly. There could be any number of reasons why a particular stock performed poorly during a given stretch of time. This table is nothing more than a snapshot of a very dynamic industry.

In the last bit of housekeeping, we'd like to apologize to our readership that this table does not include some of the brighter stars of 2005, such as Fortuna Silver, Great Panther and others. This is simply because the process of collecting this data is very laborious, perhaps why no one else does it, and we are working to add them to our database. Others, such as Excellon, Oremex, Orko, Revett, Tumi, etc. do not yet see the value in our service and expressed no interest to collaborate with us. We don't hold it against them and only bring it up to address a steady flow of emails inquiring about these companies. We make every effort to build our website into the best source of information on silver on the web. If you don't see your favorite silver company below, contact the company.

Back in May of 2005 we penned an article titled Silver Stocks on Sale and immediately received several disgruntled emails expressing all sorts of dismay about silver stocks - tell-tell sign of a cyclical bottom. The majority of companies previously highlighted on these pages did very well in 2005. In no particular order they include: Esperanza Silver, Avino Silver, Minera Andes (contrary to what the table shows, we consider Minera Andes a big winner in 2005 and continue to like it), Palmarejo Silver, Silvercorp, Silver Wheaton, Endeavour Silver, First Majestic, Macmin Silver, Genco Resources, Western Silver and others. We will return to our discussion of these and other silver companies in the future, but for this edition we'll limit ourselves to "new comers".

Sabina Silver (TSX.V: SBB)

Sabina Silver just recently changed its name and announced a renewed focus on silver. This company has the potential to make some waves the silver sector. Sabina has several properties in its portfolio throughout Canada, including gold properties JV-ed with Wolfden Resources and Placer Dome and 100 ounce silver values at the Del Norte option in the Eskay Creek area. Sabina owns 4 million shares of Wolfden Resources which gives the company additional exposure to gold. As of this writing Sabina's 6.5% stake in Wolfden is worth about C$15 MM.

The Hacket-River project was originally acquired from Teck Cominco by spending CA$ 7 million on the property for 100% ownership. The terms of the deal signed in February, 2004 provided for 4 year period but Sabina completed it in 10 months. As part of the deal Teck Cominco owns 300,000 shares of SBB. Sabina spent an additional C$5 million at Hackett River in 2005 forcing Teck's second and final earn-back decision. Teck Cominco has passed up on that option and is now limited to a 2% NSR in the project.

Drilling to date on the company's flagship Hacket-River Property outlined 154 million ounces of silver in measured & indicated category and 50+ million ounces in inferred and that's just the beginning. It also contains over 1.8 million tons of zinc with some lead, copper and gold which at today's metal prices could give the project a significant boost. A recently completed 32,000 ft drill program allowed Sabina to upgrade quality of its resources and raise the potentially mineable cut-off grade to 15 oz/ton silver equivalent. That is a significant boost to the economics of this project. Current work is focused on the metallurgy and is aimed to upgrade recovery grades from a previous study by completed by Cominco in 1981. Pending its results a scoping study is earmarked for the fall of 2006.

With C$8.5 MM in the bank Sabina Silver is well financed and looking for acquisitions with special emphasis on projects that are close to or already producing silver. The company is yet to register on the radar of your average silver bug, let alone mainstream investors. That may change in the coming months as Sabina steps up its marketing efforts and continues to advance its projects towards production.

Apogee Minerals (TSX.V: APE)

Apogee Minerals is a junior silver exploration company focused on Bolivia. Historically, Bolivia was a prominent silver country (Potosi). Today Pan American, Apex and Coeur have producing or development stage properties in Bolivia. While thoroughly outsized by the seniors, Apogee has the ambition to grow into an 800-pound gorilla and is in position to do so. Here's why:

• APE is the symbol for the company's stock on TSX Venture Exchange, not the chief reason by far, but we thought we'd mention it
• Apogee is focused on production, has no debt and offers attractive capital structure
• Local expertise of operating in Bolivia; Two of the top managers live in the country
• Large scale projects with past/present production, including the Pulacayo mine which in Bolivian history is only second to the world-famous Potosi Silver District
• Joint-Venture with Apex Silver; Apex itself is in the business of developing elephant projects
• Strong support from both the local mining cooperatives and state-owned mining company COMIBOL.

In less than a year Apogee has assembled a portfolio of properties each of which meets these criteria:

• Past/present production or near term production potential
• Economic deposit at current metal prices
• Large size ore-body
• Great blue-sky potential

All properties offer significant exposure to silver with some mix of zinc, lead and gold. Apogee has no shortage of high quality projects; in fact each one of its properties could easily justify the company's present market valuation and then some. This is a results oriented company that means business. Six weeks ago we visited the properties of Apogee Minerals and prepared a full report about the company available from Silver-Investor.com.

Impact Silver (TSX.V: IPT)

Impact Silver has recently closed the deal that had an immediate and dramatic impact on its share price. The company purchased a silver district called the Royal Mines of Zacualpan. In fact it did one better - Impact acquired the private Mexican holding company that owns this 125 sq. km property with all corresponding licenses, permits and rights. That is an important distinction because:

a) The property has 3-4 producing mines (the 4th has been on and off line) and Impact can pretty much take over the operations (scheduled for January 16, 2006) without having to jump through extra bureaucratic hoops in Mexico. TSX has approved the deal.
b) The mine is profitable now but was losing money for several years through 2003 (tax credits).
c) Existing contracts with local businesses and service providers will remain in tact.

The location of the property speaks for itself and tells volumes to anyone remotely interested in the silver sector. All in all Impact paid US$1.7 + 300,000 shares of common stock.

The storyline is painfully similar to other high profile deals in the area. - There is an old mine / property / camp / district with a history of production and existing infrastructure, etc, etc. The universal quality of such projects is UNDERINVESTMENT. Primarily private Mexican owners uniformly refused or were unable to invest in their mines during the years when metal prices hit the dust and slowly run them into the ground (how's that for a play on words?). When selling, they usually prefer cash and sniff at shares of potential buyers. Whatever shares they get as part of the sale, they usually unload as soon as possible in favor of greenbacks.

A long term lease on a 500 tonne per day (tpd) mill was included in the transaction. The mill is owned by a major Mexican mining company. We believe Impact chose to avoid additional share dilution to raise funds in order to buy this mill at then prevalent stock price of C$0.40. The stock since has run up to about C$1.00 and most likely the company will do another financing in the near future.

Now that the property is secured, Impact can go to work and unlock its potential value by applying modern exploration and mining technology. It may take a few months to sort things out and a few more months and millions on equipment, infrastructure, exploration and so on. These are all guesstimates on our part but some time in the spring we would expect the company to have a detailed plan for the future of this project. If things go well, that 500 tpd mill could be running at full capacity in 2007. We'll have to wait and see if these projections are anywhere in the ball park of what will actually take place. So far so good, the market seems to like the story, so do we.

In Brief

• A number of new and not so new silver companies are now public. Among them Minco Silver (TSX: MSV), Au Martinique Silver (TSX.V: AUU), Klondike Silver (no symbol yet). As far as we can tell Capstone Gold will be spinning off its silver assets into a separate entity.
  
• Silver Wheaton (TSX: SLW, AMEX: SLW) raised C$100 MM at the end of December, 2005. It took about 6 months for the market to understand the Business Model of Silver Wheaton. If history is any guide Ian Telfer is going to put it to use any day now and it is reasonable to expect some big news from the company. For those gasping for a silver ETF this is the next best thing.
  
• Aspiring ETF investors may also look at Central Fund of Canada (TSX: CEF, AMEX: CEF).
  
• Kimber Resources (TSX: KBR, AMEX: KBX) got listed on American Stock Exchange and its shares were on a tear since. With a great management team and backing from Jim Puplava, who is a director, this one is going places.
  
• Palmarejo Silver and Gold (TSX.V: PJO) changed its name from Palmarejo Gold to better reflect the mix of its mineral assets. This darling of Canadian fund managers has put in an impressive performance in 2005.
  
• Coeur d'Alene Mines (NYSE: CDE) has ventured into new territory, both in geographic and financial sense. It acquired future silver production at two operating mines in Australia:
  • Endeavor mine, paid in full US$38.5 MM for 17.7 MM oz total, 1.3 MM oz annual
  • Broken Hill, paid US$36 MM, future cost approximately US$2.75/oz, 15 MM oz total, 2.3 MM oz annual.

In total they should add 3.6 MM oz of annual silver production for CDE. The company also expressed its intent to embrace the retail investor, but despite our repeated calls, we're yet to hear from Coeur.

• Bear Creek Mining (TSX.V: BCM) has undoubtedly been among the biggest winners in the silver sector in 2005. The cat is out of the bag on this one but we'll try to cover this and other stories as they develop.

A wave of consolidation is rocking the gold sector the most visible manifestation of which was recent acquisition of Placer Dome by Barrick. It stands to reason that 2006 will bring M & A activity to the silver sector as well. That would be a welcome development as it would help the scattered silver sector gain visibility with institutional investors. With only about 30 or so active primary silver companies in the world, it is a far cry from 3,000 gold companies, 150 uranium companies and countless oil & gas companies, to this end silver investors have nothing to worry about.

January 9, 2006
Sean Rakhimov
editor: Silver Strategies
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