 Update on Silver Companies
Sean Rakhimov
April 19, 2005
Editor: Silver Strategies
Since the beginning of 2005
there have been a number of significant developments in the silver
sector. For whatever reason these developments escaped investors'
attention so we felt some sort of summary of these events would
be helpful. We own shares in most companies discussed below but
have not been compensated for this report. If that is problem
for you, please don't read any further.
Esperanza Silver (TSX.V-EPZ)
This silver exploration company
hit some very promising grades on its namesake La Esperanza property
in Mexico. Even though they found some silver mineralization,
the better grades were in gold. On March 7, 2005 the company
announced drill results from the above property. Of particular
interest was drill hole #5 that intercepted 2.27 grams/ton gold
over 36.3 meters and about 35 grams/ton silver over 47.2 meters.
To get a plain English translation
of these results use "What's that Rock Worth" calculator
available from Casey
Research. We believe these are good grades but the real key
is the thickness of this mineralization, particularly for gold.
These grades should make the job of attracting further capital
and/or JV interest from larger mining concerns much easier.
In late March the company announced
an exploration joint-venture with Silver Standard. This entity
will focus on numerous prospects identified by Esperanza in Peru.
Bill Pincus, President of Esperanza Silver has been talking about
paying more attention to company's activities in Peru, and we
are pleased to see that they are making progress there as well.
In our view this partnership validates the industry perception
about the company's quality of expertise in exploration as well
as provides funding to put that expertise to work. Think about
it: if Silver Standard is giving money to Esperanza to spend,
as a fellow investor, you are in good company. We should see
some results from this endeavor later in the year. We'll keep
an eye on both of these projects and see how further developments
unfold.
Mag Silver (TSX-V:
MAG)
Mag Silver has a new management.
Yes, that is a significant development for the company. We have
a very good relationship with Mag's former President, George
Young (now spearheading Palladon Ventures). As you recall Mag
controls the Juanicipio property immediately adjacent to Fresnillo
Mine of Industrias Peñoles.
We met new members of Mag's
management team at the PDAC show in Toronto. Dan MacInnis, the
new President & CEO and Gordon Neal, VP Corporate Development
bring a great deal of experience in their respective areas and
are accomplished professionals (see Mag's web site for more).
But more importantly, they bring new energy and focus that Mag
needed for some time.
On April 4, 2005 Mag Silver
and Peñoles announced a joint venture on Mag's
Juanicipio property. The principal features of the agreement
are:
1. Peñoles can earn
a 56% interest in Juanicipio upon completion of a US$5,000,000
exploration program on or before the end of year 4 of the agreement.
2. During the first year, Peñoles
shall incur an obligatory work commitment expenditure of US$750,000.
Year 1 expenditures must include a minimum of 3,000 metres of
diamond drilling.
3. A flexible and staged exploration
program is included in the contract. Exploration work will be
supervised by a technical committee comprised of 3 representatives
from Peñoles and 2 from MAG Silver. Peñoles and
MAG Silver are obliged to share their information in the district.
Part of the geological and exploration work will be conducted
by MAG consultants and in-house personnel.
4. Exploration results from
Juanicipio will be published as appropriate on an ongoing basis,
with both companies to agree on the content.
5. Peñoles will subscribe
for US$500,000 in MAG shares, at a market based price on signing
and an additional US$500,000 in MAG shares, at a market based
price, if the contract continues into the second year.
(As stated in the Press Release
mentioned above).
I just thought it would be
a good idea to reiterate them as the market seems to have taken
little notice. This deal has been long on the table for Mag.
The reason they didn't pursue it before was not lack of enthusiasm
from Peñoles but because Mag wanted to advance
the property further before dealing it out. Still looks like
it Mag will keep 44% of the upside at Juanicipio, fund the work
on the property for the next 4 years, reserve a say in how the
work will be done AND get a million in the bank to play with
on its other properties. It's good to see Mag on the move again.
The $5 million exploration budget at Juanicipio should be enough
to determine where the property's future. In the mean time Mag
can do some good elsewhere. We'll just have to wait and see which
direction the new management will steer the company.
Sterling Mining (Pink
Sheets: SRLM)
Sterling Mining has been making
steady progress at its Baroness Tailings Project in Mexico as
well as the rehab work at the Sunshine Mine. The company has
seen some controversial publicity in recent months and the stock
sold off. We are going to skip the controversy part and move
on to actual reported developments.
According to company's Press
Release dated March 24, 2005, production is under way at the
Baroness project. As a reminder this is not an exploration/property
project, but a tailings processing project. Tailings are defined
as "material rejected from a mill after the valuable
minerals have been recovered" (Casey Research Mining
Dictionary). The trick is that often times processed material
still contains useful minerals, especially older tailings, that
were generated through less efficient ore processing methods.
The company reports that "it is estimated that the project
contains 5 million metric tons of finely ground tailings that
average 3.0 ounces per ton (opt) silver and 0.02 opt gold,
yielding up to 15 million ounces of silver and 100,000
ounces of gold." First silver bars should be poured
in May. At full capacity production the project seems to have
about 15 years of mine life and produce some 360,000 oz of silver
and a 6,000+ oz of gold. We'll be conservative and allow provisions
for grade and recovery rates and use an average of 200,000 oz/year
silver and 1,500 oz/year gold. With cash cost of $5.00 (company
projection was $3.50, but they are past the initial schedule)
basic calculations yield some interesting scenarios.
At silver - $7.00/oz, gold
- $400/oz, cash cost - $5.00
200,000 x ($7.00 -
$5.00) = $400,000 (silver content)
1500 x $400 = $600,000 (gold content)
--------------
Total free annual cash flow: $1,000,000
Not bad for a little tailings
project with a capital cost of about $1,200,000 and total time
from inception to production of about 12 months. The way we read
it - management is good with numbers. Now hold on to your chair
and dream a little.
At silver - $10.00/oz, gold
- $500/oz, cash cost - $6.00
200,000 x ($10.00 -
$6.00) = $800,000 (silver content)
1500 x $500 = $750,000 (gold content)
-------------
Total free annual cash flow: $1,550,000
Notice how we bumped up the
cash cost to $6.00, just to keep our feet on the ground. If you
believe precious metals are in a cyclical bull market, try plugging
in higher metal prices.
When you have a giant asset
like the Sunshine mine, for a small company like Sterling we
think it was a nifty strategic move to get their feet wet with
a nice and simple project that will be profitable even at current
metal prices, but also give them actual production experience.
People forget that when Sterling took over the Sunshine Mine
in 2003, it was a 3 people company with a market cap under a
million dollars. There was a reason why the stock shot up to
$14.00 in a matter of months. We believe that reason still exists.
We heard from the management
that the Sunshine mine plan is in its final stages and being
prepared for presentation to the Board of Directors for approval.
Again, Sunshine is a big mine that at one time employed over
200 people. You don't restart projects like that at the whim
of investors OR management. It's nothing like the Baroness project
and requires careful and detailed planning. The company assured
us that they have the best people on the job, including former
Sunshine Mine Manager, former Controller, former Safety Director,
former Supervisor of Electrical Services and others. Sterling
Mining advised us that these professionals were hired into the
same positions that they held when the mine was operating. We
agree that this is a wise approach. When you need to restore
electricity a few thousand feet underground, it kind of makes
sense to hire someone who spent several years keeping the lights
on in that same mine. We'll see what the future holds for Sterling
Mining.
We will leave you with the
following thought. There are several highly successful companies
that are not producing and have no intention of producing until
we see higher metal prices. That is to say investors reward companies
for NOT producing. We further know that most primary silver producers
are mining silver at a loss. Exactly what is the rush to start
producing at the Sunshine Mine?
Portal Resources (TSX.V-PDO)
This junior caught our attention
when we saw their Press Release of February 7, 2005 regarding
some stellar trench sampling results from its Arroyo Verde property
in Argentina's Chubut Province. We went to company's web site
and found that Portal Resources Ltd. was founded in 2004 and
is a Vancouver based company focused on precious and base metal
exploration in South America.
We phoned the company to learn
more, a practice we highly recommend to readers. What we found
is a company with experienced management, tight capital structure
and interesting properties. Portal's management team consists
of former and present executives of such companies as Intrepid
Minerals, Bema Gold, Eldorado Gold, Nevada Pacific Gold and Gabriel
Resources among others. Not a bad mix of companies to have on
your resume if you are a mining professional.
So far the company appears
to be making steady progress in both acquiring interesting projects
and moving them forward. It seems to have the right ingredients
for a success story and will be a good one to watch.
Western Silver (TSX:
WTC, AMEX: WTZ)
Western Silver continues to
expand resources at its flagship Penasquito property and has
quietly grown it into a behemoth deposit. As indicated in March
7, 2005 Press Release resource numbers now stand at:
Compare to Apex's San Cristobal
deposit.
Note that we are comparing
these two properties, not the companies. But first we need to
reconcile the category of mineralization: Apex reports reserves,
while Western shows resources. The gold content alone
is nothing to sneeze at and would make a stellar deposit. If,
for argument's sake, we credit nearly 5 million oz of gold (measured
& indicated) as cost of converting Western's silver, lead
and zinc resources to reserves, those numbers start to look awfully
good. To put them in perspective we refer you to the following
charts available on Apex's web site.
This is a case when "a
picture is worth a thousand words." Bear in mind that Western
Silver was at one time called "Western Copper," so
the company's other properties should offer significant exposure
to copper as well.
In Brief
- SKN Resources (TSX-V: SRL) has changed its name
to SILVERCORP METALS Inc. The company has announced the commencement
of work to sink 3 shafts at its Ying Silver Project in the Henan
Province of China. The company expects to be complete this work
by the end of 2005.
- Macmin Silver (ASX: MMN) plans to be producing silver
powder from its Twin Hills Mine, Texas Project, Queensland, Australia
by late third quarter or fourth quarter 2005 (Press Release March
17, 2005).
- Capstone Gold (TSX: CSG) and Apogee Minerals
(TSX-V: APE) are another two Canadian junior explorers focusing
on silver. Capstone is active in Mexico, while Apogee is betting
on Bolivia.
- Lastly we would like to draw
your attention to a brand new state-of-the-art precious metal
refining facility that started commercial operations in October
2004. Al Ghurair Giga Gold is the first gold refinery
to commence operations in DMCC (Dubai Metals and Commodities
Centre), will attain full capacity production of 100 tonnes of
gold and 40 tonnes of silver, by the third quarter of 2005. Someone
wants gold and silver. Wonder where they will get the metals
to feed it.
April 18, 2005
Sean Rakhimov
editor: Silver
Strategies
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Information
contained herein is obtained from sources believed to be reliable,
but its accuracy cannot be guaranteed. It is not intended to constitute
individual investment advice and is not designed to meet your
personal financial situation. The opinions expressed herein are
those of the author and are subject to change without notice.
The information herein may become outdated and there is no obligation
to update any such information. The author, entities in which
he has an interest, family and associates may from time to time
have positions in the securities or commodities discussed. No
part of this publication can be reproduced without the written
consent of the author. ©Copyright 2004-2010 by Sean Rakhimov.
All Rights Reserved.
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