Some Junior Silver Miners Are Heavily Underpriced

Monday, July 27, 2009

It's summertime and the bloggin' ... strays a little from my usual diet of central bank watching, calling for a revival of the gold standard and criticizing the excesses of greed.
Having correctly forecasted the current crisis of the Western world since 2005 and fearing the coming period of hyperinflation due to central banks more than willing to monetize the debt I have shifted portfolio contents accordingly. While I have fared well with my gold stocks, Redback Mining (RBI.TO) still being my long term favorite - reported a new high-grade discovery today - since I got in at C$1.50 I had spent the better part of 2007 in Vancouver, focusing on silver stocks.
Taking Ted Butlers arguments that there is less silver than gold above ground with more than just a grain of salt, I nevertheless believe that silver will outperform gold in the long run as it has also industrial uses as the best electric conductor at dirt cheap prices.
The strange thing about the former monetary metal is where has it gone? Not even the Mexican central bank reports its silver holdings and neither does the People's Bank of China or the Reserve Bank of India, 2 countries that had been on a silver standard before WW2.
Recycling experts say most silver used in appliances does not get recycled, citing cost concerns. The catalytic process becomes a lot more interesting when one looks at e.g. platinum, currently traded at $1,214.
This amounts to a massive loss of mined silver although it cannot be quantified.
There are more fundamentally positive reasons for silver. The gold/silver ration stands at 1:68 at the time of writing. In the last 2000 years this ratio was closer to 1:15 until US president Nixon closed the gold window.
According to the Mogambo Guru silvers historic record price was $1,012 per troy ounce:
The historical high for silver was set 532 years ago in 1477, topping at (using the purchasing power of 1998 dollars) a princely $806 an ounce. By comparison, the price of silver less than $19 an ounce today, and was only about $5 an ounce in 1998, after having bottomed at under $4 an ounce in 1992.
Now, fast-forward to today as our 2008 dollars, which have fallen 50% in purchasing power since 1998, means that the all-time high price of silver, set in 1477, now stands at $1,012 an ounce, measured in the buying power of 2008 dollars!
In such a long term perspective the Hunt brothers' failed cornering of silver with a high at $50 appears quite tame.
As I live in a country that punishes silver bullion investments with 20% VAT I get my ounces through investments in silver miners and the ETF of Zuercher Kantonalbank.
I prefer junior silver miners as they offer the biggest bang for the buck after the worst crash of miners in the last 80 years in 2008.
Most companies I follow have yet to recover to their highs made in 2007 or early 2008 when silver spiked to $21, only to fall back to $14 within a week.
A silver bug in Vancouver has saved me a lot of work at comparing junior silver producers.
Before I report on his findings I feel better when informing potential investors that the whole silver market, no matter whether physical or mining shares, is a tiny, tiny speck in the world of investment instruments. But this is also where the biggest gains of the future may be made. Just imagine once the mainstream mutual funds start to allocate said miners in their asset allocation. A few billion will propel gold and silver miners to the moon and maybe even further.

GRAPH: The bunch of junior miners resembles a minefield. Yesteryear's production is not a guidance for the future as ECU Silver, First Majestic and Genco Resources prove this with wild swings in annual production. Click graph for a larger image.
A look at net income shows that miners often need many years to arrive at a positive net income due to the huge outlays until production starts.

GRAPH: Impact Silver is the only member of this peer group consistently recording growing net income. Click for a larger image.
If you want to dive deeper into the key figures of these 8 junior silver miners, download an Excel sheet here.
Find a complete list of silver companies here and take 2 minutes to read the pro's and cons in silver investing.
DISCLOSURE: Long Impact Silver, Endeavour and bullion.

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