Scouring The Silver Sector
In what’s not so much a case of Hi Ho Silver as “oh no!” silver, the grey metal has slumped on global markets after a couple of largely unexplained ‘flash crashes’ including a 7% dumping on July 7.
Not since the Hunt Brothers cornered the silver market in the 1970s has there been such action in the oft-overlooked metal. The sell-off was attributed in part to a computer glitch and also to hedge fund activity (the latter being shorthand for no-one has a clue). The sell-off comes at an inconvenient juncture for a handful of ASX-listed resource juniors who are seeking to further silver projects (typically associated with lead and zinc) to feasibility or construction phase.
Like gold, silver is a store of value and historically has followed gold’s movements. But rather like Dannii Minogue, silver has lived in the shadow of its better-known ‘sister’.
Like Dannii, silver is versatile: it can’t sing or judge talent shows but it has numerous industrial uses because of its conductive, anti-corrosive and antibacterial properties.
The silver price has slumped 8% over the last month to around $US15.80 an ounce ($20.70/oz.), taking the decline over the last 12 months to more than 20%.
The gold price has retreated 4% over the last month and 10.5% over the last year, to around $US1210/oz. ($1588/oz.). Historically, gold has traded on a ratio of 27 times to silver (in other words, one Kylie is worth 27 Danniis).
Currently, that ratio has blown out to 76 times. So that means ‘Dannii’ should be worth almost three times as much as its current price in relative terms – or that ‘Kylie’ is overvalued.
We’ll never know for sure.
In the case of both gold and silver, investors have tired of the theme of precious metals as a hedge against geopolitical risk and the inflationary hazards of central banks printing too much money.
Not even North Korea’s missile misbehaviour moved the metals.
With silver, there’s a sharper focus on ‘real’ supply and demand, given the metal’s myriad industrial uses.
The Silver Institute estimated a 20 million ounce physical global silver deficit in 2016 – 1.027bn ounces of demand compared with 1.007bn ounces of production - the fourth year of a shortfall.
Jewellery demand in China and India remains strong, as does demand for silver in electronics (which should put silver in the wonder metal category as graphite or lithium).
Locally the undisputed leading silver producer is the Cannington mine, once owned by BHP Billiton and now by South32 (S32). With annual output of 16 million ounces, it lays claim to being the largest and lowest cost silver-lead mine in the world.
There’s daylight between Cannington and a group of putative producers, who are positioning themselves with some bold product claims. Investigator Resources (IVR) claims its Paris ground in South Australia is the “best underdeveloped silver project in Australia”, even if it is far from a decent boulangerie.
Silver Mines (SVL) asserts its Bowdens project near Mudgee in NSW is “one of the largest undeveloped silver deposits in Australia and one of the largest globally.”
Not to be outdone, Moreton Resources (MRV) chirps that its Granite Belt project near Texas in south-east Queensland is the “purest near term leverage to silver on the ASX.”
Bowdens, discovered by Rio Tinto predecessor CRA in 1989, is subject to a soon-to-be-completed feasibility study due by the end of calendar 2017.
Bowdens currently is a 182 million ounce resource (silver equivalent, allowing for lead and zinc content) grading an average 64 grams a tonne. The project initially has been costed at $150-200m, based on a two million tonnes a year operation over a minimum 17 years. Bowdens has changed hands more time than a Captain Cook 50c coin, having been owned by CRA, Silver Standard, Golden Shamrock and Kingsgate Consolidated. Last year, Silver Mines acquired the asset from the troubled Kingsgate for a knock-down $25m.
Similarly, Moreton Resources is testing the theory that the first one or two mine owners are never the ones to turn a quid.
Moreton’s Granite Belt project in Queensland is based around the Twin Hills mine, which produced 1.5 million ounces under two owners – Macmin Silver and Alcyone Resources. Sadly, the mine got the better of both companies because of processing issues, “overly ambitious” targets (Moreton’s words) and two one in 100 year storms (which we guess makes them one in 50 year events).
Moreton stresses the issues have nothing to do with the actual ore body.
The company is awaiting Qld government mining approval – which it believes to be imminent. Within 12 weeks of this assent Moreton plans to re-start the mine as a 90,000 oz. a month producer. This will be in a staged process starting with exploiting silver-enriched ponds and in-situ heap leaches and stockpiles.
To realise the dream, Moreton is in the throes of a fully underwritten $4.66m rights issue, at 1.1c apiece.
The project assumes an average $A silver price of $24.25/oz. over eight years, with all-inclusive costs of $14/oz.
Elks remains confident of silver price in in the “high 20s”, or the high 30s in $A terms. “I’m more bullish on silver than gold,” he says. “The fundamentals of silver are sound because it is a consumable metal.”
For Investigator, Paris beckons as a 42 million ounce resource (averaging 139 g/t), with 55,000t of contained lead thrown in. Adding some ooh-la-la to the Paris story, Investigator is backed by Chinese giant CITIC, which has an 11% cornerstone stake. With market valuations of $15m (Investigator), $28m (Moreton) and $47m (Silver Mines), the trio aren’t exactly priced for a Silvereldorado.
But if the silver price doesn’t take inspiration from Dannii’s career hiccoughs and bounce back from the latest setback, capital will dry up faster than an X Factor Australia talent pool.
Even before the silver slump, IPO candidate Manuka Resources deciding to access debt markets rather than pursue a $12.5m equity raising. Manuka acquired the Wonawinta Silver Mine in NSW from Cobar Consolidated, which went into liquidation in March 2014.
Further afield, White Rock Minerals (WRM) recently released a maiden resource for its Red Mountain zinc-silver project in Trump-loving Alaska. Arguably, the greater driver of value is the company’s Mt Carrington gold project in NSW (this company is covered by IIR).
And Santana Minerals (SMI) reports encouraging grades at its Cuitaboca project in Sinaloa, Mexico. Chaired by ubiquitous industry figure Norm Seckold, Santana is earning an 80% interest in the project by funding the drilling program.
Mexico is the world’s biggest silver producer, accounting for 20% of global output. So at the very least, Santana is hunting in silver elephant country.
The New Criterion is authored by Tim Boreham.
Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.
Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small to mid cap stocks in an accessible and entertaining manner for both retail and professional investors.
Disclaimer: The author nor Independent Investment Research have received a fee or any kind of inducement for this article. The New Criterion is not intended as specific investment advice and readers should contact a licensed financial adviser.