Gates Buys Stake in Tiny Silver Concern (New York Times)
A Vote of Confidence in the Metals Market
By GRETCHEN MORGENSON
William H. Gates 3d, the world's richest man and the chairman of the Microsoft
Corporation, has bought 10.3 percent of the Pan American Silver Corporation, a
tiny silver mining company based in Vancouver.
The roughly $15 million investment, made by Cascade
Investment L.L.C., one of Gates's personal investing
companies, was made public in a filing with the Securities
and Exchange Commission Tuesday.
Although Gates's investment in Pan American Silver is a
fraction of his net worth, it is nevertheless a significant vote of confidence in the metals
markets. News of Gates's purchase comes at a time when precious metals prices are
jumping.
Tuesday, the price of gold rose 9 percent, the biggest gain in almost two decades. The
December gold contract touched $329 before settling back to $310 Tuesday, capping a
two-day rally ignited by the news that 15 European central banks would limit their sales of
gold reserves over the next five years. Silver rose to $5.77 an ounce Tuesday, up 7.6
percent. Rising prices for gold, silver and oil, among other commodities, are giving rise to
renewed concerns about inflationary pressures in some parts of the financial market.
Gates's investment in silver places him in the company of Warren E. Buffett, often referred
to as the sage from Omaha for his investing success over the years. Buffett bought 130
million ounces of silver in early 1998. The hedge fund manager George Soros is another
believer in silver.
Gates hired Michael Larson, a former bond fund manager, in 1994 to manage his personal
investments. In addition to the Pan American stake, Gates owns 10.8 percent of Schnitzer
Steel Industries, a scrap recycling company, and 9.7 percent of Warner Chilcott P.L.C., a
maker of prescription pharmaceuticals. He has also invested in several biotechnology
companies, including a 14.6 percent stake in the Corixa Corporation and a 13.2 percent
holding in the Icos Corporation.
Larson, the son of an industrial engineer,
started buying shares in Pan American Silver in
February and added to that position in August.
In the filing, Cascade is said to own 3.15
million shares. Larson was not available for
comment Tuesday.
Rosalie C. Moore, vice president for corporate
relations at Pan American, reckoned that
Cascade paid approximately $5.25 a share for its stake. The stock closed Tuesday at $6.5625
in Nasdaq trading.
"Michael Larson was very personable, very laid-back and unpretentious," she said. "He
asked very smart questions and knew a lot about the silver market before we walked in to
talk to him."
Pan American was created in 1994 when Ross J. Beaty and John H. Wright realized that few
companies could be considered a pure bet on silver. That is because 80 percent of the
world's silver production is a byproduct of other mining activities -- such as the production
of lead, zinc, copper or gold. According to Ms. Moore, there are no more than 25 primary
silver mines in the world that derive at least half of their revenues from sales of silver.
In the last five years, Pan American has bought all or portions of mines in Peru, Mexico and
Russia. Beaty and Wright were able to acquire the properties for pennies on the dollar
because the mines were not profitable at prevailing silver prices. They then made the mines
feasible by cutting costs. In the mine in Peru, for example, Pan American management
increased production by 50 percent while reducing the work force by a third. When the mine
was acquired in 1995, its cash cost to mine silver was about $6 an ounce. Now it is $3.78 an
ounce.
Silver may be a compelling investment for Gates because consumption has been far
outpacing supply. In the last year, demand for silver has grown 5.5 percent. And in the last
decade, Ms. Moore said that 1.6 billion ounces of silver were used that were not replaced.
Because silver accounts for only a tiny portion of the cost of most medical and technological
products, bulls on silver believe that even if the price goes up, users will not look for
replacement metals. That means demand should remain high.
Pan American Silver is not yet a profitable company. In the first half of the year, the
company had a loss of 12 cents a share, more than the 7 cents a share lost a year earlier.
But with the price of silver rising and Pan American's costs to mine the metal declining, the
company's future appears promising. If its mines in Mexico and Russia begin operating next
year, the company's production will rise to 22 million ounces in 2001 from 3 million ounces,
according to Ms. Moore. The cash cost of producing the silver will drop to $2.50 by 2001
from $3.78, she said.
At that point, Ms. Moore explained, as the price of silver rises, more of the increase will
translate into sales for Pan American. "If silver rises by 10 percent," she said, "our revenues
will go up 8 percent." |
