October 2005
Update on Silver Companies

Sean Rakhimov
Oct 10, 2005
Editor: Silver Strategies

We received a good deal of feedback to the first article of this series and took it upon ourselves to provide a periodic update on silver companies that have had significant developments in the given stretch of time. We found this exercise useful for ourselves as well as those readers who took the time to send us their comments. The purpose of this overview is to reflect on some of the news that did/could/should have a substantial impact on company's operations either immediate or longer term.

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

Avino Silver & Gold Mines (TSX.V-ASM)

Avino has been on our radar screen for a quite some time. It is one of the few companies with a history going back several decades and the same management team has navigated the company through boom and bust cycles for many years. In fact Avino, history reads like "who is who" of the silver world. In their day the great Paul Sarnoff and Jim Blanchard thought enough of Avino to invest in the company and recommend it to others (if interested contact David Wolfin at Avino for details of their forays). In January 24, 1994 issue of Barron's Jim Dines featured Avino's stock chart along with his interview. Bob Bishop of GMSR has followed Avino since 1988.

So what was it all about? The company has other properties, but it was mostly about its namesake Avino Silver & Gold Mine in Durango, Mexico. Over 27 years of operation the mine produced 16 million ounces of silver and was shut down due to low silver prices in 2001. In the last year of operation the mine produced 1 million ounces of silver and close to 1 million ounces of silver equivalent in gold and copper credits. What has changed since? A lot.

For starters, silver, gold and copper prices have gone up with copper just making a new all-time high so the main reason the mine was shut down is no longer there. More importantly, the company just received approval to acquire remaining 51% stake in the Avino project that it didn't already have and consolidate full ownership of the property by issuing up to 4 million shares of Avino. This is very important for the company as it opens up many exciting opportunities.

There are three categories of assets on the property:

1. Tailings from prior production.
2. The underground mine.
3. 11,000 hectares of highly prospective land around the mine, of which no one inch has been explored by modern exploration methods.

At this point the company is looking at the tailings project as the fastest way to generate cash. It bears noting that this is one of the old "Spanish" mines that has been discovered back in the 1500s and mined in some way, shape and form ever since. Recovery grades in those days tended to average out at about 35% and based on prior estimates there are some 6,000,000 ounces of silver and 35,000 ounces of gold in those tailing. To confirm these numbers a feasibility study is under way that should be completed in November, 2005.

If proven correct, the company could start processing tailings by the end of 2006. The total value of tailings material is about US $50 MM and it will only take 3-5 MM $US of upfront capital expenses. Not big numbers by themselves but they will allow the company to become profitable and develop its other assets on this and other properties.

Early in 2003, Avino commissioned MineStart Management to examine the existing ore base, the feasibility of re-opening the mine and also the feasibility of processing the large tailings reserve. In a report dated April, 2003, MineStart concluded that enough exploration potential exists at the property to "develop a reserve inventory to support a profitable resumption of operations. Prior prospecting and preliminary exploration has found encouraging mineralized outcrop and veins to the east and north of the mine, and this justifies detailed exploration."

Long awaited consolidation of ownership of the Avino Mine makes the company an attractive takeover target. Larger companies, including Hecla Mining (NYSE: HL) which has its San Sebastian silver mine in the area, have already been circling Avino.

Minera Andes (TSX.V: MAI)

Minera Andes is an exploration company focused on Argentina where it holds about 500,000 acres of prospective land. The company's core expertise is exploration. Its strategy is to bring in a partner to develop properties where a discovery has been made and we just witnessed it work. Minera Andes announced the completion of bankable feasibility study on parts of its San Juan project of which it owns 49%.

The highlights of the feasibility study are:
- Gold contained: 288,094 ounces proven and probable reserves
- Silver contained: 15,229,380 ounces proven and probable reserves
- Average gold production: 60,633 ounces per year
- Average silver production: 3,119,533 ounces per year
- Average operating cost: $200 per ounce of gold equivalent
- Start up capital costs: $61.2 million

These numbers are based on US $6.50/oz silver, US$425/oz gold. A few comments are in order.

1. At first glance these look like modest results. However, the main objective of this feasibility study was to satisfy the bank's requirements for financing mine construction and that is exactly what it achieved. A letter of intent for such financing has been signed earlier this year.
2. The feasibility is based on the information available through July, 2005. It does NOT include three new discoveries on the same property announced on September 22, 2005.
3. Such low reserve numbers are quite common for underground mines as it is expensive and often unnecessary to do more drilling beyond what's needed for the next 3-5 years of production.
4. Based on the feasibility internal rate of return (IRR) for the company after taxes is estimated at 12.5 percent. At recent metals prices the IRR is about 26.1 percent.

It's worth noting that plant capacity used in the feasibility has been increased half way into it which demonstrates confidence in prospects of the project. While this is an important milestone for Minera Andes with only 15% of the San Juan property explored there is a lot of room left for growth.

Minefinders Corporation (TSX: MFL, AMEX: MFN)

Minefinders is a success story. The company has made a discovery on its Dolores property and is currently working on optimizing the feasibility study completed in June 2005. The results of it based on US$375/oz gold and US$6/oz silver are summed up in the following table.

The study showed that these reserves are complemented by an even greater amount of measured and indicated resources so in effect with some drilling reserves could be doubled.

Sounds great right? It does to us. The company has other properties where ongoing work is yielding some very encouraging results as well. So what's the problem? We looked long and hard for it and could not find one. While the company has been delivering excellent results the stock has sold off and as of this writing the market values it at about C$206 MM or roughly about US $170 MM. Subtract from that US $35 MM the company has in the bank (as of end of September, 2005) and you arrive at US $135 million market cap. We are puzzled by such a valuation as it is seriously undervalued compared to other companies with similar reserve and resource base.

If our hunch is correct and this is just another case of market overshooting on the downside (as it often does both up and down) the situation should correct itself and bring valuation of Minefinders in line with its peers in the sector.

Palmarejo Gold (TSX.V: PJO)

We first learned about Palmarejo from several Australian readers who wrote us asking the same question: why is this company not on our site? Indeed, we looked closer and found that it was a legitimate question. We're happy to say this oversight has since been corrected.

It's not uncommon in mineral exploration business for a company name to reflect the intent but not the results of its work and companies looking for one metal to end up finding more of another. We've seen it in the case Western Silver (formerly Western Copper), Esperanza Silver (great gold grades at two of its properties), Capstone Gold (primarily a silver company) and so on. The same is true about Palmarejo Gold as 2/3 of its assets are in silver.

The company is 82% owned by Australian gold producer Bolnisi Gold. Silver and gold bugs will recall that Bolnisi is the company that walked away from what turned out to be a great property, namely Ocampo, to concentrate its efforts on the Palmarejo property. Bolnisi felt it was a better prospect with superior economics and formed a separate entity to capitalize on its expertise in Mexico. That company is Palmarejo Gold.

The company is very well known among Canadian Securities Firms as some of them, including Haywood, Sprott and Dundee completed research reports on Palmarejo Gold (available here). When institutions take their time to look at your properties, it usually means the company has the goods. What does PJO have? The following table is taken from the company's presentation dated September 27, 2005.

As of this writing the company has delineated about 3.1 million ounces of gold equivalent resources at 65:1 silver-to-gold conversion ratio. The table above shows the break down by resource and mineral categories. Given the fact that the company is less than a year old, these are excellent results. Palmarejo is working to upgrade the quality of its resources from inferred to measured and indicated as well as expand them. A feasibility study is planned for Q1, 2006.

There are several other old mines in the area within 10 miles that offer potential for growth. Last, but not least, the management roster of the company is rather impressive which leads us to expect more positive results in the near future. For more information on Palmarejo Gold we refer you to above mentioned detailed reports.

In Brief

- Silvercorp Metals (TSX: SVM) moved up to TSX. The company completed a 77% earn-in on its high-grade Ying Silver Project in the Henan Province of China.
- Sterling Mining (Pink Sheets: SRLM) - Preliminary reports from Baroness Tailings project indicate silver production of about 20,000 oz/month for Q2, 2005. As work continues to increase recovery rates and processed tonnage the company expects increased output. Look for a formal update from the company on this project.

Oct 26, 2005
Sean Rakhimov
editor: Silver Strategies
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