The Gold Report: The Washington D.C.-based Silver Institute reports that net silver demand has exceeded net silver supply each year since 2004, with a supply deficit of 113 million ounces (113 Moz) reported in 2013. Why hasn't that trend translated into dramatically higher silver prices?
Sean Rakhimov: First, I don't put much faith in these numbers. For instance, CPM Group has somewhat different numbers. Either way, silver supply and demand have been roughly in equilibrium, in my opinion, over the past decade or so. Second, silver manifests itself as a precious metal in times of crisis or uncertainty. When it's business as usual, silver acts more like a base metal and trades more on supply and demand numbers. Silver prices will respond during a crisis as its perception changes from an industrial to precious metal. That's when you will see more of what we saw in 2011 when in the space of about six months silver went up three times. Another period like that is coming.
TGR: In early June we started to see stronger precious metals prices and that has carried through. Is this a trend?
SR: It is the beginning of a trend. Precious metals characteristically start going up after a prolonged decline, yet early in the reversal they rarely inspire any confidence because the last dozen or so similar moves fizzled after a 10–20% move. This could be one of those. Silver is at $21 per ounce ($21/oz) now, maybe next week it will test $18/oz again. It's anybody's guess but I believe that toward the end of the year we'll probably see higher numbers—maybe substantially higher.
TGR: Is there a telltale sign that shows investors that this upturn is real?
SR: There isn't one that I use. It's more of a gut feeling.
TGR: The existing silver fix mechanism expires on Aug. 14, 2014, and methods to replace it are currently being reviewed by the London Bullion Market Authority. Is a new silver fix system likely to yield stronger silver prices?
SR: It's likely. This new replacement for the silver fix would, at least for the next year or two, have less tinkering with it than had historically been going on with the fix. On that basis, the price should become more volatile. On balance it's probably going to be positive for the silver price.
TGR: What are your thoughts on the silver space?
SR: In this semi-stealthy firming up of silver instruments and investments, there is not much fanfare. Silver is certainly out of favor at the moment, which leads me to remember that it's always darkest before the dawn. And I believe that this is going to reverse itself in short order.
Lately I've been thinking about some passages from the thinly disguised biography of Jesse Livermore, Reminiscences of a Stock Operator by Edwin Lefèvre He wrote, "There's a lot of early bulls in a bull market." I've been an early bull in a bull market for precious metals going back to the early 2000s. Many people exit along the way but Livermore's idea was that investors have to stick with it for the entire cycle. That's what I've been telling myself. Of course, convictions are tested along the way, such as during the last couple of years.
Silver is a little like water in that if you tell people you should invest in water, the first thing people do is look at you like something is wrong with you! Yet fresh drinkable water is a scarce resource. Silver is so familiar that it lulls people into this idea that it's not important. Unsophisticated people align it with gold, yet the fundamentals for the two metals could not be more different.
TGR: What makes silver special?
SR: If there is one adjective to describe silver, it's "indispensable." There are no adequate replacements. It is an extremely versatile metal, perhaps the most versatile in the periodic table. Silver can do a lot of good, too. For instance, it is being used more and more in medical implements that come in contact with the human body because silver kills bacteria in single-cell organisms. Silver is also used in the food industry to preserve and process foods like meat and dairy products.
But long before silver was improving our health and food safety, it was the world's currency. The word for silver is synonymous with money in 52 languages.
TGR: In April 2011 silver almost reached $50/oz before undergoing a dramatic correction. Investors' knees would surely start to wobble if we saw those prices again. How would you play those kinds of price gains?
SR: It all depends on the character of the move. Investors have to look at the volume, speed and market sentiment in order to determine the direction at that point.
TGR: What does the next leg up in the silver price look like?
SR: My outlook for silver for the next two or three years is somewhere between $50 and $100/oz. It could be shorter; it could be longer, but that's not critical. I'm going to stay with it for the cycle; it could be another 10 years to the end of the cycle. I do not expect this next leg to be final but I expect it to be a substantial run comparable to 2010–2011 when silver went from roughly $10 to $49.50/oz. The next move could go from about $20 to roughly $100/oz, but that will take time. Am I going to take money off the table along the way? Maybe in some stocks that got ahead of themselves or that are not responding to the price move. But I would not touch any of my physical silver.
TGR: What are the next three key resistance levels for silver?
SR: I think $26/oz will confirm that the trend has reversed. If we exceed $26/oz on good volume and strength, then we're off to the races. From there, the next resistance level would be $30–32/oz. If we reach beyond that level, it becomes $50/oz. And if we take $50/oz convincingly, then there's a good chance that this move is going to have some serious legs.
TGR: The Performance Report on SilverStrategies.com monitors 27 silver equities. Since early June, 26 of them are up, some more than 40%. June is typically a soft month for precious metals equities. What's supporting those bids?
SR: One thing is a possible top in the mainstream market. Another is that precious metals are up roughly 15% in the last month or so and stocks usually have an exaggerated move versus the metal price. And most of these stocks are coming off depressed levels. There was something of a vacuum so stocks tend to jump even on low volumes. Most of the sellers who wanted to sell did. On the flip side, it doesn't take a lot of money to acquire a lot of stocks. Again, this behavior is typical for the beginning of a larger move.
TGR: What are some small-cap silver names that you like in a rising silver price environment?
SR: I like companies that have demonstrated growth, like SilverCrest Mines Inc. (SVL:TSX; SVLC:NYSE.MKT) and Santacruz Silver Mining Ltd. (SCZ:TSX.V; SZSMF:OTCQX; 1SZ:FSE).
TGR: What did you make of the Q1/14 results from Santacruz? Is the company poised to build on those?
SR: Santacruz has stated its production numbers from the current operation and it looks as if it's getting on track. Its production guidance indicates that, too. More important, the company has a lot of room to grow. It's two years old. It's already in production. Is it going to make it or not? Santacruz is almost over the hump.
TGR: The company lost $0.02 a share in Q1/14. Will it break even or maybe even make money in Q2/14?
SR: That's not how I think about it at this stage of development. Most junior mining companies do not make money until their fifth or even eighth year. And in this environment very few companies have been making money. Unless it's a larger company with established operations and better cost control, it's difficult for a startup to pin numbers to something and say, "Okay, this is the benchmark." Santacruz is not there yet. Do I expect it to make money this year? Maybe it will break even. But does it have upside? Yes.
TGR: What about SilverCrest?
SR: SilverCrest is implementing a transition to underground mining at Santa Elena, which at full ramp up should nearly double production from the current level. So next year bottom-line numbers should get a substantial bump despite the higher mining and processing costs from moving to underground mining and milling operation. That should result in better valuation due to rerating based on the larger operation or at the very least on greater earnings. Now if I am correct about improving metal prices going forward, the upside could be very rewarding. Plus SilverCrest will almost certainly be active in the merger and acquisition space on either side of the deal. It could be a juicy target for a larger company while it looks to add another mine sooner rather than later.
SR: Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) is another company I'm watching. Excellon is a junior producer that has been around for a while and has a handle on its deposit's cost structure and grade.
TGR: How would you compare La Platosa in Durango state, Mexico, to other silver assets belonging to companies in this market-cap range?
SR: It certainly is one of the higher-grade assets. In recent quarters Excellon has been mining 600–800 grams per ton (600–800 g/t) silver, whereas the average for Mexico would probably be closer to 200 g/t. However, La Platosa has had other challenges such as underground water issues, which factors into its costs. Excellon is still chasing the meat of the deposit; it has the tiger by the tail but it is still looking for the tiger itself. Excellon believes it is moving in that direction. In a rising metal price environment, such as the one I expect next year, higher grade may yield some oversized returns due to greater leverage to rising silver price. The gains could be significant.
SR: Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE) is producing around 1+ Moz silver equivalent a year. I have visited the operation and it looks good. The share price has reflected that, even in a poor environment for resource stocks. Avino recently acquired Bralorne Gold Mines Ltd, which owns a high-grade gold project in Canada. It is a bit of a departure from producing silver in Mexico. Can the company translate its success in Mexico to Canada? Time will tell.
The other reason I like Avino is that it's bringing the past-producing Avino silver mine back into production. That mine is in Mexico and is a stone's throw from its current operation. That should basically boost production to about 2.5 Moz annually.
TGR: What are some other silver equities with discoveries that could ultimately become company makers?
SR: The last discovery of that nature would be the Navidad deposit in Argentina that was discovered by IMA Exploration and ended up with Aquiline Resources. Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) later bought Aquiline but mothballed Navidad due to the political situation in Argentina.
In this cycle the best performers have not been the companies that made good discoveries but rather companies that have properly managed their resources and finances. Those companies have done well. Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) is on that list. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), and Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) are on it, too. Most of those companies acquired their flagship mines. They were not discovery stories, though as part of good management most assets were expanded and their respective mine lives were extended through drilling success.
TGR: Nonetheless there have been discoveries.
SR: Yes. The Chinchillas deposit in Argentina was discovered by the same group that found the Navidad deposit, a Grosso Group company called Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK). Another discovery is Global Minerals Ltd.'s (CTG:TSX.V; DPF:FSE) Strieborná deposit in Slovakia. The project has been around a long time but the entire resource is based on a vein that was not exploited in the previous precious metals cycle. Global recently made another high-grade discovery, too. I mention a company like that because it's in the heart of Europe. If we continue along this trend of increased geopolitical uncertainty, some silver deposits will become far more attractive than others.
TGR: Let's go back to your list of the best performers in this cycle. Names like First Majestic, Endeavour, Fortuna and Great Panther.
SR: First Majestic is perhaps the best silver miner at this time. It is a classic mining story. It started with one mine, built it up and bought another one. And then built that up. Along the way the company made some discoveries or acquired other projects and built those up—that model seems to work well in the mining space. That's been the path for many of the major gold producers. Ten years ago or so, Goldcorp Inc. (G:TSX; GG:NYSE) was a one-mine company. But it bought other good assets and put them into production. Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) used the same model to achieve similar success, albeit on a smaller scale. In the silver space that company is First Majestic. I expect it to get even bigger and better, much like Yamana. Bigger production means your bottom-line gets so much bigger so much faster in a rising metal price environment.
TGR: Is it a similar narrative for Endeavour, Fortuna and Great Panther?
SR: In a word, yes. All these companies acquired producing or past-producing mines and revived/improved/enhanced them over time.
Endeavour Silver is another company that quietly built-up its production profile toward 11 Moz of silver equivalent, albeit the latter part of growth came from gold. Still at that rate of production Endeavour should respond well to rising gold/silver prices.
Fortuna Silver has also been making headway with respect to its production growth closing in on the 8 Moz of silver equivalent. Fortuna has benefited from drilling success at its Mexican operation where high-grade intercepts allowed the company to ramp up both tonnes processed and ounces produced, which in turn reduces per ounce cost.
Interestingly, Fortuna is currently valued at a premium to Endeavour despite producing in round numbers 3 Moz of silver equivalent less annually. This likely has to do with excitement regarding continued impressive drill results in Mexico, as well as the fact that Fortuna's other producing mine is in Peru and therefore is not subject to increased royalty/taxes enacted in Mexico in 2014.
Great Panther is one in the group that hasn't accomplished a major push to get to the next level in terms of scale (not for lack of trying) and needs to do so. The company had its share of challenges at both operating mines and was able to overcome them.
TGR: Perhaps one more silver name?
SR: Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) is a relatively new silver company with what could be the best deposit in the space—the high-grade Escobal deposit in Guatemala. Tahoe is one of the larger silver producers, targeting 20 Moz per annum, and is very similar to Goldcorp in its earlier days. In fact, the people running the company and its flagship project came from Goldcorp. Tahoe has been in production for about two quarters and it is already making money. As was the case with Santacruz, it is a bit premature to talk about benchmark numbers in terms of performance, yet all indications point to a very successful future. As long as geopolitics hold together, this is one of the better deals in the sector.
TGR: If silver rises in excess of $50/oz, many boats will float. How do investors sort out the pretenders?
SR: You look back and see which companies were profitable at sub-$20/oz silver. If they are in the black, that's an indication of how they run their operations. In the short term it is not a given that the "best" company will be the best performer. But overall, that would be a good problem to have.
TGR: Parting thoughts?
SR: If silver were oil, people would have some definite ideas about why it is important. I don't think silver has that characteristic due to its recent history. That fools people into thinking that silver is not a good option, even when it is. Silver's stigma as gold's poor cousin may well morph into gold's "better" cousin over time due to its vastly superior industrial utility.
TGR: Thank you for talking with us today, 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 recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Excellon Resources Inc., Fortuna Silver Mines Inc., Great Panther Silver Ltd., SilverCrest Mines Inc., and Tahoe Resources Inc. Goldcorp Inc. is not affiliated with The Gold Report. Streetwise Reports does not accept stock in exchange for its services.
3) Sean Rakhimov: I own, or my family owns, shares of the following companies mentioned in this interview: SilverCrest Mines Inc. and Santacruz Silver Mining Ltd. 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: First Majestic Silver Corp., SilverCrest Mines Inc. and Santacruz Silver Mining Ltd. sponsor banner ads on the website. 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. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.