The Ormetal Report

Silver stocks, there ain't too many! -

It may not be yet the time to buy your limit of silver stocks because it is not sure we have reached the end of this correction. But by the end of the summer or early fall, the chances are very good that we will see higher prices on both the metals and the stocks. So, now is the time to follow the silver plays, take initial positions and get ready to move in with more dollars when the new trend is confirmed. Here are the ones you should follow:

The premier candidate for all portfolios is Pan American Silver (PAA on the TSE, PAASF on Nasdaq National Market). It is a Canadian company that has the large US company Asarco as one of its shareholders. PAA has a relatively small market capitalization and is currently valued at US$165M. It has more than US$48M in short term assets, including US$43M in cash. The company is producing approximetely 3 millions ounces of silver per year with some zinc, lead and copper from its only producing mine, the Quiruvilca in Peru. The mine has reserves for at least 6 years of production at an average grade of 6.53 ounces per ton.

Pan American Silver is getting ready for the coming rise in silver prices and has a string of silver properties that will become mines when prices are higher:

• the Hog Heaven, Montana where a well defined silver resource of 48.7M ounces grading 4.3 ounces per ton will be economic at a silver price of US$5.40
• the Waterloo, California, where a proven and probable reserve of 101M ounces grading 2.71 ounces awaits a silver price of US$6.50 before it can come on stream.
• the Hardshell, Arizona where approximetely 67M ounces grading 3.35 ounces per ton are estimated and need a price of US$7.50.
• the Capoose in BC with 33M ounces and the Black Pine in Montana with 7M ounces also need higher prices but will be brought to production when these prices come.

Pan American silver is also active on the exploration side. It has 4 properties where exploration programs are on-going:

• the Zacatena, Lucita and Valenciana in Mexico where proven and probable reserves are already at 18M ounces combined.
• the Maragua, Bolivia where further drilling is planned in 1997 to improve a resource currently approaching 20M ounces of silver.

As you can see, Pan American Silver is ready for much higher silver prices - and as they come, the profits and the stock prices will increase as well. They have more than 300 million ounces of silver in reserves and translated into gold, this is the equivalent of 4 million ounces of gold, a really nice asset for a market capitalization of less than $120M net of short term liquidities. Wait until the gold/silver ratio gets to a more reasonable 35:1!

But there is one wild card that could allow PAA stock price to move substantially before the price of the metal does the same. And it could be the recent announcement of a major acquisition in Russia, the Dukat mine which hosts a resource of 400M ounces of high grade silver. Unfortunetely, last week the press announced that the Dukat mine had been finally awarded to Madagan Silver and Gold, a small russian miner. Pan American Silver is still saying that it is completing the negotiations for the acquisition. We should know soon the outcome of this tender. This leads us to my second favorite.

Silver Standard (SSO on the VSE and SSRIF on Nasdaq) is also a pure Canadian Silver play which has as one of its shareholders, the large canadian corporation Teck Corp. Silver Standard has a current market capitalization of C$78M or ($US 56) so it has approximetely 33% of PAA's market cap. It has also C$15M in cash, which is 25% of its market cap. Its silver reources are larger than PAA relative their respective market caps:

• SSO's main assets is the Lunnoe and Arylach deposits in Russia which contain a proven and probable resources of 10.4M tons grading 439 g/t silver and 2.07g/t gold, or 146.8M ounces of silver and 692,000 ounces of gold at Lunnoe and some 30M ounces of silver at Arylach. The deposits are already equipped with a partially completed processing plant. The project is undergoing a feasibility study by Kilborn Pacific and the preliminaries should be out next month. Silver Standard owns 50% of Geolog, the russian company that owns the 100% interest in these deposits. What is interesting is that one of Geolog other major shareholders with 25% is Madigan Gold and Silver, the same Madigan who apparently got the Dukat Mine. I am speculating here, but could it be that SSO has a chance of participating in the largest above ground silver resource in Russia? I don't think so.. but who knows. Back to Lunnoe, it is possible that we see production there in 1998 at a rate that could be as much as 10M ounces per year (5M net to Silver Standard)
• SSO's next silver assets is the Mudgee project in Australia where a indicated and inferred resource of 18.8M tons grading 2.9 ounces per ton silver exist. Silver content is approximetely 60M ounces. Additional work is planned in a newly discovered high-grade zone. Silver Standard has an agreement to earn a 100% interest in this deposit, subject to a 2% NSR (net smelter return) and a 1% royalty.
• the third major project is the El Asiento project in Bolivia where exploration drilling has returned encouraging results in the last 6 months. This could develop into an meaningful high-grade resource. No reserves have yet to be established, but two silver zones have been defined with some intercepts containing 1492 g/t silver over 8 meters, 216 g/t silver over 16 meters and 261 g/t silver over 22 meters.
• Silver Standard also has a suite of 3 Mexican properties, the San Acacio, La Morelense and Acazaz and one Peruvian property, San Emilio which are at the early stage of exploration. The San Acacio has a drill-inferred resource of 14.4M ounces which need higher silver prices to be further developped. Exploration is on-going on the 3 other properties.

As you can see, Silver Standard is also getting ready for higher silver prices and could become a larger producer than Pan American Silver if Lunnoe comes into production next year. SSO's plans are to acquire in-ground silver resources of at least 250 millions ounces by the end of 1997 and, if silver prices indicate profitable production, to become a significant producer by 1999. I don't own Silver Standard yet in the Goldbug Model Portfolio, but I intend to purchase a position in the months ahead.

My third contender for a position in a gold and silver portfolio is International Avino (IVV) which I described in great details in the March 2, 1997 issue of the Goldbug's comment and here as well. Altough IVV is more speculative than PAA and SSO, it offers much more leverage when/if silver prices do what we expect. International Avino changed its name in September 97 to Avino Gold and Silver and now has the symbol (ASM)

Another pure silver play that is worth watching is First Silver Reserve (FSR on the VSE). I am just starting to look into this one and don't have a solid opinion just yet. They are a small producer and owns one property, the San Martin silver mine in Mexico which is currently producing 2.5M ounces of silver per year. The company is currently working on an expansion program that could triple production by next year. Cash costs are extremely low at $2.47/ounces and the mine is profitable. Reserves seems to be in the 20M ounces range and are showing good possibilities for expansion. An exploration program is progressing. The company is also searching for new properties. FSR has 38M shares fully diluted. The stock is C$1.25 for a market cap of $C48M which seems to be a bit expensive when compared to PAA and SSO. However if they are successful in expanding the reserves, it could be another story. I am following it.

Two other canadian silver mining companies that you may want to watch are United Keno Hills (UKH on the TSE) and Clifton Mining (CFB on the Alberta stock Exchange). UKH had some financial problems lately and the mine is currently shut down. But if the company can come with the money to move back into production, it should get back to much higher price levels. Clifton is a very small operation with only a small silver reserve. However, there seems to be potential there in Utah and their small mine, coming in operation later this summer, could turn out some interesting numbers. They deserved some attention, but these two are not my favorites. I could change my opinion on Clifton if they are sucessful in upgrading their reserves.

The next silver play that is worth considering is Sunshine Mining (SSC.N) which is trading at US$0.81. SSC has always been considered the silver blue chip by US brokers.. but in reality it looks like a poor proxy to the Canadians offerings. SSC has a lot of shares outstanding, more than 260 millions common shares with some 7.2 prefered ones. The company has $30M in short term assets but also US$48M in short and long term debt. Properties, plants and equipment are valued at US$70M. They have 42M ounces of silver in proven reserves at their Sunshine and Revenue Virginius Mines in Idaho - and they are producing some 3M ounces per year. Their future is in the newly acquired deposit in Argentina - the Pirquitas, where a proven resource of 20M tons grading 5.7 ounces has been identified. That is more than 118M ounces of silver. Additionally, a inferred resource of 193M ounces of silver has also been identified. The deposit also contains some 120M pounds of Tin. If this deposit comes into production, SSC will definitely participate in a major way in the coming silver bonanza. Another one to follow.

Hecla Mines (HL.N) and Coeur D'alene Mines (CDE.N) are two old silver stocks that everybody will remember. Altough they are large silver producers, they are sort of a mixed bag producing also large quantities of gold. Both companies had large losses last year due to major writedowns. CDE looks like the better choice here with close to 110M ounces of silver and more than 3M ounces of gold in reserves. But it has a very complex market capitalization which will cause some dillution. Both will participate in a silver rally, but they do not enjoy the same leverage as the other silver stocks.

Of course there are also several Canadian gold companies that produce large quantities of silver and will also win big with higher silver prices. The Placer Dome, Agnico Eagle, TVX Gold and others will all benefit, but they are mostly leveraged on gold.

One very conservative Canadian company that I like very much is Prime Resources (PRU on the TSE) which has a market capitalization of C$864M. Prime has reserves of 2M ounces of gold and 94M ounces of silver. They produce 312,000 ounces of gold and 12,000,000 ounces of silver per year. And they are quite profitable with net income of $0.55 per share in 1996. Although the leverage cannot match the one offered by the smaller market caps, PRU will appreciate substantially in the years ahead. Prime is owned partially by Homestake.

I am constantly looking for the best way to participate in this market. As silver prices progressively move higher in the years, there is no doubt that more new companies will try to join this bandwagon, so we should have more on our plate as time goes by.

Enjoy the silver bonanza if and when it comes.