The Gold Report: Precious metal bullion and equities are taking a hit right now in the market. Why do you feel silver is an interesting investment today?
Rick Mills: There is a disconnect this year between silver and gold. They usually trade in lockstep, and their market prices are doing that.
As of April 2, more than 140 tons of gold has flowed out of various exchange traded funds (ETFs) this year, while silver ETFs have added more than 20 million ounces (20 Moz). Maybe that is because silver is more affordable than gold or because silver also has industrial uses.
TGR: But the ETFs do not reflect a price disparity between gold and silver.
RM: It is hard to figure out. In Q1/13, U.S. mint silver coin sales reached an all-time high of 13.2 Moz. Annualized, that is 52.8 Moz silver sold in 2013, another record. The $10 billion spent to buy those ounces would be a record as well. Investors are buying 56 times more silver ounces than gold ounces.
TGR: Why is that?
RM: Silver is called poor man's gold. Both are monetary metals, silver for even longer than gold. And silver just might outperform gold in the future. The S&P/TSX Venture Composite Index is trading similarly to the early 2000s when silver was below $10/ounce.
TGR: The appetite for silver bullion is voracious.
RM: The monetary climate is dominated by quantitative easing. There has probably never been a bigger need for non-fiat money, yet the most popular safe havens are the U.S. dollar and Treasury bonds. German bunds are popular. It is hard to understand government controlled paper assets being more popular than real hard money.
TGR: Some of the loudest voices in this space have been talking about silver and platinum more than gold, which is interesting.
RM: Given the demand from more cars being on the road around the world and the fact that almost as much jewelry is made from platinum as is used as autocatalysts, as well as the precarious supply source in South Africa, I can see platinum being an extremely timely investment, but nothing will be as good as gold and silver.
TGR: In addition to buying bullion, investors can participate in the equities through the mining companies.
RM: An investor has to be pretty careful with the equities. A lot of people are claiming we are at the bottom. Yes, there are companies with good management teams on sale, but if this is the bottom, what would start the general junior market upward climb?
"Investors should look for companies that can increase cash flow or companies close to cash flow that can raise the money to jump the final hurdles."
In my opinion, we will need a huge discovery, but with no initial public offerings (IPO) this year and with the financing well bone dry, where will the upside come from? We are approaching the summer doldrums. Traditionally, the juniors shine in late August through March. How can that happen this year? No money means no drill programs. No discoveries means no returning interest in the sector. For most of these companies, 2013 is a write-off.
If you see a company doing a financing, it usually is for less than $500,000, what I call survival financings. Investors need to be very smart and very cautious. A company doing survival financing will use the money to keep the lights on, keep its listing current and pay salaries, but not do much on its properties.
We just had the Prospectors and Developers Association of Canada conference, where everybody tried to get everything arranged: money, financing, deals, But Q1/13 is over; companies must file their quarterly reports. They have to have a year's worth of General and Administrative (G&A) expenses in the treasury to stay on the TSX or risk becoming insolvent. Hundreds of these mining companies do not. Depending on what the auditors say, that might deliver even more bad news this summer and fall when the TSX may very well be delisting or suspending 20 or 30 companies a week.
If you believe precious metals, particularly silver, are a good investment, you have to become a stock picker. You have to cut through the noise and understand what is important. Right now, that is money in the bank or cash flow from operations.
TGR: With so many companies in dire straits, why would an investor buy any stock in the sector right now?
RM: We can start with the context of silver production in the U.S.The U.S. has several historic primary silver districts. Most of them were shut down in the bear markets of the 1980s and 1990s. Today, most silver production in the U.S. is a byproduct of copper and gold mining, both of which, in the U.S., are in decline.
"The essence of investing in a junior is you are investing in people."
Primary silver deposits are extremely rare; less than a third of the silver mined globally comes from primary silver mines. The average yield of the top primary silver miners dropped 34% between 2005 and 2011. It was even worse in 2012. Silver grades are actually declining. For proof, just compare the average ore grade for the year of production to the prior year's reserve average ore grade. Most silver mines today are producing their best stuff, yet over the last seven years, ore grades have dropped more than 40%.
There are real supply issues and people are snapping up silver as if it will run out tomorrow. Take the U.S. Silver Eagle. In Q1/13, its sales equaled 42% of total 2012 sales. And in 2012, U.S. mint silver coin sales surpassed the amount of physical silver mined in the U.S.
TGR: We have not seen a lot of new silver production in the U.S.
RM: Not much production and very few silver discoveries.
As a group, silver stocks have not experienced a sustained breakout to new highs since 2007, yet people are buying physical silver.
If you look at a 40-year correlation chart between silver and global national debt, the arrows point from the bottom left straight to the top right on the chart. I have no doubt debt will continue to climb.
TGR: If an investor owns silver bullion and wants to buy selected equities, what are some companies to look at?
RM: Let's talk about three companies: a producer and a brownfields developer, both in Mexico, and a junior with a greenfield project that has considerable upside potential.
Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) owns two silver mines in Guanajuato, Mexico, and has been increasing production. The company is unhedged—with no underlying royalties. In 2010, Great Panther produced 2.26 Moz silver equivalent (Ag eq). In 2012, production was 2.38 Moz. The 2013 forecast is a bit lower because the company spent a considerable amount of time and money on its mines and on two satellite operations for its main mine at Guanajuato. It put in underground haulage to get Guanajuato ore to the Cata processing plant. When all that is consolidated, I expect this company to start rewarding investors with vastly increased production.
TGR: Its stock had a big drop in March. What happened?
RM: The company was having cost and operational issues and there was a drought at its Topia mine.
TGR: Is the growth at Guanajuato or in the other exploration projects?
RM: San Ignacio has a 650 meter (650m) strike length out of a 4 kilometer (4km) potential on a vein system just 5km west of the Veta Madre structure that hosts the Guanajuato mine complex. Stepout drilling shows excellent silver and gold mineralization, 50–100m below surface. A shaft will not be needed; a ramp will do it. San Ignacio will be in production next year and can be monetized immediately to pay for its development. The ore can easily be trucked to the Guanajuato plant, and the two have similar metallurgy.
In addition, the company discovered higher-grade gold mineralization at Guanajuato last year. That will increase silver equivalent ounces with the serious gold kicker.
El Horcon is another Great Panther project. It is a silver-gold project in a past-producing underground mine with multiple veins. One vein, Diamantillo, is traceable on surface for more than 4km. The mineralization is compatible with the existing mill feed for Guanajuato.
Both San Ignacio and El Horcon show awesome potential for satellite feed deposits. We should see lower production costs and more throughput.
TGR: What is your brownfields name?
RM: It is Kootenay Silver Inc. (KTN:TSX.V). Its Promontorio project in Mexico has an NI-43-101-complaint resource with 69 Moz Ag eq; most of the resource is open pittable.
What most excites me here is the substantial gold component that has never been counted in the resource estimate. The company's metallurgical tests are showing that the gold might be economically recoverable.
I did some back-of-the-envelope calculations on reported gold assays. If there is 400,000 oz gold, even if it is only 50% recoverable, that is another 10 Moz Ag eq. The company will be sitting on 80 Moz Ag eq.
Kootenay will publish an updated NI 43-101 resource estimate to include the gold component.
TGR: On April 2, the stock was up 6% on three times volume without any kind of announcement.
RM: Kootenay had taken a hit just like a lot of quality companies; somebody is buying at very nice prices.
Kootenay is doing a 30,000m drill program; the company has three drills turning 24/7, and the money in the bank to pay for it. This is a company that will have news all summer long and another resource estimate after the drill program; watch for plus 100 Moz Ag Eq.
If you like the price of the company, you have to start chipping away at it and pick it up a bit at a time. A smart investor averages in over time.
TGR: And Mexico is a great address for silver.
RM: There is no geopolitical risk among my sponsors. There is enough risk in this sector without deliberately adding to it. You need geopolitically safe areas. You need quality management teams with experience. You need cash in the bank, and you need news flow.
TGR: What is the greenfields name?
RM: Terraco Gold Corp. (TEN:TSX.V) has one of my favorite management teams. Its Almaden project in Idaho is a 1 Moz gold heap-leach project. A lot of it is up on a mountain, and there is quite a bit of starter material laying around down below. When you need more you get a caterpillar and just push it down. Terraco is working behind the scenes on water testing and advancing to a production decision.
The company has $1.4M in its treasury.
Terraco's Moonlight project in Nevada lies at the north end of the Spring Valley joint venture between Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT), which is currently 3.5 Moz gold. The big question is whether that mineralization carries on to Terraco's Moonlight. It is the same trend, the same cover. That could put Moonlight into play for Terraco.
But I called Terraco a silver play. Andy Wallace and the late John Livermore's Cordilleran Resources Company (Cordex Exploration) optioned Moonlight to Terraco. John Livermore discovered the Carlin deposit; he discovered and developed the Pinson and Dee mines. Andy Wallace is credited with the major discovery of the Marigold and the Stonehouse/Lone Tree gold deposits and the Secret Pass mine. They are on the record as stating that they should never have sold Moonlight, not because of the gold, but the silver.
Moonlight has never been drilled. It got its name from the old-timers sneaking into the mine and stealing chunks of silver out of it at night. This is a greenfields property and two of the most respected names in Nevada exploration believe there is a silver mine here.
Terraco has a 2.5% royalty on the Barrick-Midway JV, Spring Valley, valued at perhaps $60–80M. Todd Hilditch, Terraco's CEO, could monetize that royalty. He could put Almaden in production and get that cash flow going. Then he could chase Livermore and Wallace's silver mine on Moonlight while it is in play from Barrick drilling. It brings a smile to my face to think that Hilditch could be in a position AGAIN to return this kind of value to shareholders.
TGR: The royalty derisks the stock in a sense.
RM: Yes. Who else has a royalty on a Barrick deposit? But Todd does not want Terraco to be a royalty company. He seems to want to monetize the royalty, put Almaden into production and look for a silver mine on the Moonlight property.
TGR: Rick, thank you for helping our readers understand the silver space a little better and giving them some ways to invest selectively in equities. Do you have any parting thoughts?
RM: Investors should look for companies that can increase cash flow or companies close to cash flow that can raise the money to jump the final hurdles.
We are not buying these companies for instant riches. We are listening to experienced management teams laying out their plans, their vision for the future. If you believe what they are saying, if you believe they can carry it off, if you believe the market will reward them for that—buy in.
Then, trust in them. Go live your life. Check in once in a while to monitor progress. As long as things are going according to plan, life is good. That is the essence of investing in a junior—you are investing in people.
TGR: That is also the basic difference between investing and speculating. You are investing in a hard asset that exists and in a group you think can monetize it. That seems a lot easier than just playing the market ups and downs on any given day.
RM: I agree. It is a lot less stressful and more profitable. Invest in the people and their ideas, then let them go to work and get on with your life.
People do not understand that you only need to get paid once off an investment. If it takes two or three years, fine. You can have several of these things going at once, and get paid every year from one or the other.
The markets will hand you setbacks. There is no sense in crying and whining about it. Not everything goes up in a straight line. Not everything works out the way we plan, but with a little bit of patience, things will work out. Just have a little bit of patience and enjoy yourself.
TGR: I like that. Rick, thank you for your time and your insights.
Richard Mills is the owner and host of www.Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 400 websites.
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1) Sally Lowder conducted this interview for The Gold Report and provides services to The Gold Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Great Panther Silver Ltd. and Terraco Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Rick Mills: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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