RESOURCE STOCKS
June 2001
Silver lining
thebullandbear.com
Stephen Leeb: "Precious metals have been among the worst investments in the past generation. After nearly 20 years of doldrums, it would be foolish to try to pinpoint a bottom. Still, it seems the new decade bears little resemblance to the past.
The sure in energy prices promises to be a chronic rather than an acute problem, which will gradually push inflation higher. There's also a greater necessity for growth than ever before, which is another reason inflation may rise. History shows that higher inflation will eventually trigger a move in precious metals. History also shows it's foolish to try to time that move.
Our strategy is to recommend leveraged beneficiaries of higher gold and silver prices, which at the same time have ample downside protection in the event gold and silver continue to languish. Frontier holding Apex Silver (ASE SIL $8.25) continues to fit this bill.
Exceptionally well-managed, Apex is a developmental stage company that controls one of the world's most valuable silver and zinc deposits, San Cristobal, located in Bolivia. With nearly 500 million ounces of silver, whose cost of mining would be less than $1.00 per ounce, this mine would be wildly profitable even with silver at current levels, which are close to generation lows.
The company has no debt and a huge cash horde that would allow it to remain operational for at least 20 years. Thus Apex's management under no pressure to start turning operational profits has elected to develop slowly. In management's view, the inevitability of higher silver prices and the accompanying higher share prices will mean less dilution to current shareholders.
Were silver and zinc to remain close to current historical lows, a developed San Cristobal would be capable of $1.00 a share in earnings. With silver at $7.00 an ounce, just a fraction of its 1980 high of about $50 and below its five-year high, the company's underlying earnings power would exceed $3.00 a share. At $10.00 silver, certainly a lowball target in a silver bull market, Apex could earn in excess of $5.00 a share.
In even the most tepid bull market, well-situated mining companies would likely trade at least 15 times forward earnings. Clearly Apex is a stock with long-term potential. We may have to wait for the potential to be realized. But if higher inflation is inevitable and we believe it is so is a many-fold gain for Apex. Buy below 12."
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