EUREKA!
WE FOUND A REAL SILVER STOCK!
By Sam Parks
I cannot even count the number of times clients have asked if we know a good silver stock they could buy. Our sad answer has always been the same: “There aren’t any.”
Until now, we have had to tell silver bugs to buy silver bullion or coins instead of stocks. For the most part that was good advice. Look at the charts on silver and silver stocks over the past decade. While silver has been pretty humdrum, the well known silver producers - Hecla (NYSE-HL $1.15), Coeur d’Alene (NYSE-CDE, $0.91), and Sunshine - have crashed. Last year Sunshine closed for good after nearly 120 years in production. Only Pan American (NASDAQ-PAAS, $4.07) has kept up with silver. [When you ask for quotes on these stocks, be sure to specify Canadian or US dollars. C$1.00 = US$0.65, at this writing.]
RARE AS SNOWBALLS
IN FLORIDA
Silver investors should keep in mind that only 23% of world silver production comes from primary silver mines. The remaining 77% comes as a by-product from mines that primarily produce other metals: lead, zinc, copper, or gold. Primary silver producers mine only 110 million ounces of silver annually, equivalent in value to a mere 1.8 million ounces of gold. The world’s Number Five gold producer - Placer Dome - produces nearly twice that amount.
The point is that primary silver deposits are uncommon, and most of them are saddled with other metals. Pan American’s two primary silver mines in Peru are actually about 50% zinc. Apex Silver’s enormous Bolivian silver project is over 60% zinc. Before buying Pan American Silver or Apex Silver for leverage to silver, investors should decide how well they like zinc. Unless zinc prices improve, zinc will be a drag on the financial performance of silver stocks. There is a difference between pure silver mines and primary silver mines.
EUREKA!
At last, we have discovered a real silver stock to recommend. Corner Bay Silver (TSE-BAY, US$0.96 or C$1.48) is a story of a group of savvy mining people who discovered a brand new silver deposit in Mexico. In 1997 company geologists identified the ground (later named Alamo Dorado), and began drilling in 1998. Less than three years later the company had completed a pre-feasibility study suggesting that the project could be economic even with silver prices well under $5.00. According to the study, cash costs in the early years of the project are expected to be under $1.60 per ounce. The final feasibility study is now in the works, and should be completed by the end of March 2002.
THE ECONOMICS WORK,
SILVER OR NO SILVER
On January 22, 2001 when silver was just under US$5.00, Deutsche Banc Alex Brown published an institutional research report about Corner Bay. In their words, “Alamo Dorado could be the highest-grade and largest heap leach primary silver mine in the world (gold is a by-product).” Their twelve-month price target for Corner Bay was C$5.25 (US$3.41). Although we think C$5.25 by next January is too aggressive (in light of prevailing silver prices), we do believe the stock could perform well as the story unfolds.
The primary reason we are recommending Corner Bay, however, is not because of its silver, but because of its economics.
The table below compares three aspects of Corner Bay’s Alamo Dorado deposit with the six operating “silver’ mines of Pan American Silver, Hecla, and Coeur d’Alene.
Silver Mine Moz./year Silver % Cost per oz.
Quiruvilca (PAAS) 2.5 44% $3.20
Huaron (PAAS) 4.3 59% $3.46
La Colorada (PAAS) 1.0 54% NA
Greens Creek (HL)* 2.8 31% $2.20
Rochester (CDE) 6.7 66% $3.72
Galena (CDE) 4.0 ** $4.61
Alamo Dorado (BAY)
First 2 years 17.5 83% $1.51
Next 6 years 8.0 83% $2.51
*Operated by Rio Tinto. Hecla's 29.73% interest is 2.8 Moz.
**The Galena ore is silver-copper, but Company reports are
are unclear as to the ratio.
"Moz" = million troy ounces.
The enormous San Cristobal property of Apex Silver (ASE-SIL, US$9.07) is 64% zinc and 36% silver. Should they change the name to “Apex Zinc”?
While we do not hold to the view that silver will outperform gold, we do believe that is certainly possibility. Moreover, we do not believe that silver will under-perform gold.
Viewed from the stock market’s perspective, a true silver mine has an advantage over a gold mine of equal size and economics. While there are many gold mines, there are very, very few pure silver mines. Assuming Corner Bay goes into production, it will not get lost in the crowd. There is no crowd.
Corner Bay has only 15.5 million shares outstanding at US$0.96. That is only US$17 million - just over a dime an ounce.
We believe Corner Bay is the best silver story in North America, and we recommend it for purchase by investors interested in precious metals. Ù
[Editor’s postscript]
Whenever I have a question about natural resource stocks, I call Sam Parks. Sam’s research is impeccable, he has the experience necessary to make good judgements, and he is a man of integrity. Sam entered the brokerage business in 1959, working for a firm in Spokane that handled mining stocks. Two brokers took him under their wing and taught him why gold (then fixed at $35 an ounce) was valuable. In addition to mining stocks Sam also has a wealth of experience in oil and gas stocks. He is a registered representative with National Securities, 1001 Fourth Avenue # 2200, Seattle, Washington 98154. You can call his office at (800) 426-9993 or (206) 622-7200. - F. Sanders |
