The Gold Report: Sean, this market for precious metals is testing the mettle of even diehard investors. How is the market testing your resolve?
Sean Rakhimov: It's as hard on me as it is on everyone else, with the caveat that this is the only market that I participate in. I'm guessing most other people are buying other things along with their precious metals portfolios. It's been very trying in the last couple of years, but particularly this year.
TGR: Let's say for a moment that you're a precious metals coach. Please provide investors with some inspiration.
SR: It's not one-size-fits-all because times like these will identify your weaknesses in your outlook and convictions and exploit them. I am betting that a lot of investors are being shaken out of stocks.
On the other hand, the demand for physical metal has been absolutely astounding. The lower the silver price goes, the higher the demand. Shortages have been reported pretty much all over the world in recent weeks.
This provides an excellent opportunity. If investors haven't had exposure to precious metals at all, then they should start with the physical metal if they can find it. Otherwise, they need to prepare themselves for times like these, which will undoubtedly happen in the future. Learn from it and be prepared to not act like a victim and walk away from their positions when these situations happen again.
TGR: Has the performance of the market over the last two years or so ever made you consider doing something else for a living?
SR: No. However, it did lead me to think that I need to diversify my assets somehow, particularly because some of these downturns have been very prolonged. It's a very unpleasant experience when you're not doing anything else and the market is virtually paralyzed with a downside bias. I don't plan to change careers though.
TGR: There are reports that the Chinese are buying gold at above the spot price. How long do you think that could continue?
SR: It could continue for some time. Gold and silver are fear driven. When you buy gold and silver, you do it because you're not comfortable with your assets elsewhere. Despite the markets going up, particularly in North America, there is plenty of fear and discomfort.
Part of my thesis is that some of this performance in the mainstream markets is inflation-driven because inflation doesn't always show up everywhere equally. It shows up exaggerated in certain sectors.
TGR: How has investing in the silver market changed during this downturn?
SR: If you want to be a little more sophisticated and dig a little deeper, you need to know a few things. I wrote an article a while ago discussing the overall size of the silver sector, "Silver Sector Shrinking." I was referring to two trends: Geopolitical considerations in some parts of the world, specifically Latin America (accounting for the greater portion of silver production), which result in resource nationalism; and mergers and acquisitions activity.
The number of quality silver companies has been going down. Investors should be thinking about what deposit characteristics large silver companies are looking to buy. Not a lot of deposits have those characteristics; probably fewer than 10 would fit the criteria of most large silver companies. This premise is supported by the fact that in the last couple of years senior silver companies have been buying gold projects, which I submit is in large part due to lack of suitable silver targets. Even Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) did a gold streaming deal with Vale S.A. (VALE:NYSE).
TGR: Do you follow silver investors?
SR: I like a number of investors and respect their opinions, but there are not many who specialize in the silver space.
Two of the better silver investors I know are long-time silver investor Ned Naylor-Leyland of Cheviot Asset Management and Ben Davies of Hinde Capital in London. A good friend, Dominic Frisby, also based in London, is another one. He's been covering this space for some time. He's very well informed and talks to a lot of industry experts for his radio show.
TGR: In a piece on SilverStrategies, Dominic Frisby wrote, "For all its volatility, for all the dark rumors of shortages and manipulation, silver trades in a remarkably symmetrical pattern." What does that mean?
SR: I think he meant that most of the activity in the silver space can be explained without resorting to manipulation theories, allegations, etc. I am not a fan of manipulation and conspiracy theory. However, silver is such a small market, it wouldn't be difficult to manipulate if somebody wanted to. It wouldn't surprise me if these kinds of things happened from time to time.
TGR: Doesn't the specter of manipulation hurt the investment thesis of silver?
"Times like these will identify weaknesses in your outlook and convictions and exploit them. A lot of investors are being shaken out of stocks."
SR: Manipulation, by nature, is short term. You do it for a specific purpose, in a specific time frame. Silver went from $5/ounce ($5/oz) to almost $50/oz in the last 10 years. If that involved manipulation, then it wasn't successful in the grand scheme of things. I don't think the metal market can be manipulated in the long term. That said, in the short term lower silver prices are negatively affecting the bottom line of silver producers.
TGR: You've told readers of SilverStrategies that a "triple" is coming for patient silver investors. Could you explain?
SR: The silver price can go up just as fast, or faster, than it goes down. A good example of that was the run it had in late 2010 and early 2011 when it tripled. I do expect a move similar to that after silver bottoms. There's a lot of pent-up demand. I am looking for silver to make a new high (over $50/oz) in the next 18 months.
TGR: You suggest on SilverStrategies that silver is gold's little brother and they move in tandem. Are you expecting a similar rise for gold?
SR: Similar, yes, but nowhere near the same in percentage terms. Gold might move on the order of a double when it does break out to new highs. As a guess its next stop could be around $2,500/oz, however, I stress again that precious metal prices in the short term are driven by sentiment formed as a reaction to events elsewhere, such as geopolitical, currency problems, financial crises, disruptions in the oil market and so on, therefore, it is very hard to narrow price targets to specific numbers.
TGR: You've been visiting a number of silver projects. Tell us about some of your recent site visits.
SR: I just came back from visiting Silver Bull Resources Inc. (SVB:TSX; SVBL:NYSE.MKT) in Mexico. This is a story that's been around for some time. The current management is much younger, more aggressive and much more tuned in to what the market is looking for. It has changed the story. The company drilled off a large silver deposit near surface, which will likely become an open-pit mine. It is sporting an oxide resource, depending on its cutoff, north of 100 million ounces (100 Moz).
TGR: Should it be easy to recover?
SR: Not necessarily. Most silver deposits are sulphide deposits recovered traditionally through a flotation method. This one, being an oxide deposit, will probably be heap leached. Silver does not usually recover well in a heap leach. The company will have to make some adjustments to the process to increase recoveries and keep production costs under control.
That's the biggest question for this company at this time. It's going to be putting out a preliminary economic assessment (PEA) sometime this year. Assuming it's favorable, this is likely the lowest hanging fruit in the silver space for a takeover by a larger company.
TGR: What's the earliest this deposit could be mined?
SR: That question can be answered after the PEA. It can be mined very quickly if money were no object because it's on surface and most likely will be mined as an open pit.
The company also has a very sizeable zinc deposit of more than 2 billion pounds (2 Blb). The zinc can be mined separately, sold forward to minimize dilution or optioned for financing. The zinc will make the overall proposition a lot more attractive.
TGR: Could it change the overall economics of the project?
SR: Undoubtedly. There is 2 Blb zinc sitting virtually on surface with an overall grade that is sufficiently high to be economic as a standalone project in the current market.
TGR: Have you made any other recent site visits?
SR: I visited Huldra Silver Inc.'s (HDA:TSX.V) Treasure Mountain project east of Vancouver a few months ago. This company is part of a crop that I call the next generation of silver producers. Treasure Mountain is an older project that last attempted production in the 1980s. It is a high-grade deposit in a narrow-vein, underground mine. The average grade is about 700 grams per ton, plus close to 10% lead-zinc.
Treasure Mountain is in production now, but the market is not showing any recognition of that.
TGR: What other companies are you following now?
SR: Global Minerals Ltd. (CTG:TSX.V; DPF:FSE) has the Strieborná silver project in Slovakia. The company has some underground workings and is focusing on a vein that has not been exploited previously.
"In my mind, there are no questions. There are a number of years left in this bull market, and the best is yet to come."
I have known Global Minerals CEO Bill Pincus for some time. Investors should know him from Esperanza Resources Corp. (EPZ:TSX.V), which made several discoveries in this cycle. Esperanza is now on the path to becoming a producer.
Strieborná, a silver-copper deposit, has about 30 Moz, but the resource dates back to 2008. Global Minerals has done some drilling on top of the existing resource, which perhaps one of these days will be updated. The copper is high grade. One percent copper is usually economic on its own. Most copper mines today are mining below that grade. Global Minerals is working on metallurgy and will be putting out a PEA this year. We'll see how the numbers stack up for the next step.
TGR: How important is it that the project is in Europe?
SR: It's very important for geopolitical reasons. Europe does not have a lot of silver deposits. The costs are probably higher due to being in euros, but there's a greater likelihood that it gets developed.
TGR: Are there some names that are in production that investors should be paying attention to?
SR: Santacruz Silver Mining Ltd. (SCZ:TSX.V; 1SZ:FSE) and Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE) are new producers this year.
Santacruz just went into production at its Rosario property in Mexico. I like the management there. I like the pipeline of projects that will be coming down the pike, too.
TGR: Rosario was on schedule and under budget. That's almost unheard of these days. Any chance that happens again with San Felipe or Gavilanes?
SR: It's hard to say, but Santacruz has a track record of frugal management that does good planning and estimates. The reason I like the company is the management. Its top two people are Mexican nationals who have been in the mining industry for some time. The chief technical person, Francisco Ramos, built a number of mines that have been successful. Because it's a Mexican company, it doesn't have a lot of issues with locals, permits and costs that a lot of companies operating in Mexico have had.
TGR: What's driving Avino Silver?
SR: Avino has been around for some time. The company has one of the best share structures I've seen at a producer, with about 27 million shares outstanding. That is important in this environment of scarce financing for juniors.
Cash flow is also very important and Avino has it. The company is going to produce 700,000–800,000 oz this year. It just announced a few weeks ago that it doubled its mill capacity. It has another larger mill and mine that it plans to put into production.
TGR: We've spoken about Minaurum Gold Inc. (MGG:TSX.V) before. What's new at that company?
SR: A few things distinguish Minaurum from the rest of the junior explorers. The company has two top geologists as directors: Peter Megaw, perhaps the best silver geologist in Mexico and a top carbonate replacement deposit expert who has contributed some projects to the company; and David Jones, a geologist with a lot of experience who's regarded to be a top skarn expert.
The next project Minaurum is going to drill is in the Guerrero Gold Belt. The Guerrero has produced recent successes such as Newstrike Capital Inc. (NES:TSX.V) and Cayden Resources Inc. (CYD:TSX.V; CDKNF:NASDAQ). Osisko Mining Corp. (OSK:TSX) has staked a vast land package in that area and has been drilling aggressively. Torex Gold Resources Inc. (TXG:TSX) made a discovery.
David Jones, who works with most of these companies, also discovered the Los Filos mine, a gold mine that Goldcorp Inc. (G:TSX; GG:NYSE) has in the area. Minaurum has David Jones on board; he discovered basically the whole belt.
TGR: How would you compare Minaurum's Adelita project to other silver-copper-gold deposits in Mexico?
SR: Adelita has a copper-gold deposit that is a skarn. There are some indications that there's a porphyry there as well. That one had some very impressive intercepts—100 meters of 1% copper, intercepts on that scale—which to me means that there is certainly a discovery there and there will be a lot of interest in that project.
A similar intercept by Colorado Resources Ltd. (CXO:TSX.V) in Canada, which was a couple hundred meters of close to 1% copper, sent that stock flying. Minaurum hasn't gotten the credit for this yet mainly because the drilling was conducted by its joint-venture partner at the time, which has since walked away because it couldn't finance it. Minaurum has that project back on the books. At some point, the value of that project is going to be recognized.
TGR: What about companies outside of Mexico?
SR: United Silver Corp. (USC:TSX) has a project in Idaho that's close to production.
In Canada, my choice is Huldra, particularly because of the grade. The grade is substantially higher than the industry average. It's more on par with Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE) and another company called Excellon Resources Inc. (EXN:TSX). Huldra should have no problem making money at current prices or even at somewhat lower prices. On the flip side, when the market turns, which absolutely will happen at some point, the margins should be very impressive.
TGR: Do you have some final words for silver investors?
SR: This is the time that investors find out who they are and why they are in the market. Investors need to think about why they buy or invest in silver companies. In my mind, there are no questions. Nothing has changed in the macro picture. We will see much higher silver prices in years to come. The cycle isn't played out by any stretch. There are a number of years left in this bull market, and the best is yet to come.
TGR: Thanks, Sean.
Sean Rakhimov's writing has appeared on such Internet portals as Le Metropole Café, 24hGold, 321gold, Kitco, Gold Seek, Gold Seiten and The Gold Report. He previously designed financial systems for the investment banking business, learning about options trading, securities lending, payments processing, clearing and settlement, fixed income securities and margin transactions. He launched his website, SilverStrategies.com, in 2004 and has been focusing exclusively on the silver sector since 2001.
Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his 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: Global Minerals Ltd., Santacruz Silver Mining Ltd., Silver Bull Resources Inc., Newstrike Capital Inc., Cayden Resources Inc. and Goldcorp Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Sean Rakhimov: I or my family own shares of the following companies mentioned in this interview: Santacruz Silver Mining Ltd., Huldra Silver Inc. and Minaurum Gold Inc. I personally am or my family is 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.