First Silver Reserve Inc FSR
Shares issued 6,086,061 Feb 6 close $1.65
Mon 9 Feb 98 Research
See Pan American Silver Corp (PAA) Research
Jim Taylor says why
Yesterday's surge in the silver price can be attributed to Warren Buffer's
announcement that his Berkshire Hathaway company had purchased 129.7
million oz of silver over the last six months. Although, Bershire Hathaway
owns almost one quarter of the world's annual supply, Mr Buffet is
perceived to be a long term holder of the metal. The silver market
responded to this positive announcement, rising US$0.53/oz to close at
US$7.31/oz.
The key questions are: 1) do silver stocks outperform silver? and 2) which
silver stocks offer the best leverage?
Over the last six months leveraged silver plays such as Pan American Silver
Corporation, First Silver Reserve, Sunshine Mining and Refining Company and
United Keno Hill Mines Ltd. can all boast share price gains of between 72%
and 127%. Each of these companies has outperformed silver, which increased
by 71% and therefore would have provided a better return than investing in
the metal itself, or silver futures and options.
Now the question is can silver go higher? We firmly believe that the
fundamentals of the silver market remain strong despite the Asian crisis
and estimate that demand will outstrip supply by approximately 220 million
oz this year. If we assume that CPM's higher estimate of unreported silver
stocks is valid at 327 million oz, then total reported and unreported
inventories at the end of 1996 were 572.8 million oz. These figures exclude
government stocks, which have remained relatively stable at 169.3 million
oz and an estimated 370 million oz of silver stockpiled as bullion coins.
However, even if we include silver coins as a potential source of supply at
silver prices of over US$6.00/oz, we estimate that silver inventories
would, at the current rate of depletion, be reduced to zero by the end of
the year 2000.
We expect the current period of speculation and investment in silver to
continue over the short term, and offset any decrease in demand and
increase in secondary supply from South East Asia, due to the Asian crisis.
Recent reports that Indian demand has dried up, due to rising prices, has
failed to impact silver's rise to over US$7.00/oz. Therefore, we envisage
higher prices and improving market fundamentals going forward. As a result
we expect the leveraged silver equities to continue to outperform silver in
a rising silver market. Therefore, we maintain our speculative buy
recommendations on each of the leveraged silver equities, with the
exception of United Keno Hill Mines Ltd., due to the poor state of its
balance sheet.
Our top pick is Pan American Silver Corp for exposure to a pure silver
equity with significant potential production growth. The share price of the
company will increase with the price of silver. We believe it will continue
to outperform the price of silver. |
