28th of April 2010 0
Junior Exploration Companies Stand to Profit from Silver Bull
Gold Investments managing director, Mark O’Byrne, is optimistic about silver’s future and believes that silver will surpass $US 20/oz in 2007, $48.70/oz (non-inflation adjusted) before 2012, and $130/oz (inflation adjusted) in the next 8 years. In his May 2007 article, “Why the Silver Price is Set to Soar”, O’Byrne pens a convincing argument for why silver, one of the most undervalued commodities, is in the early stages of a long-term bull market.
O’Byrne lists several fundamental reasons for the emerging silver bull. The most convincing of his arguments, and the one most likely to effect the price of silver over the long-term, is the increasing gap between the near depleted above-ground supply of silver and the rising industrial demand.
O’Byrne reports that the industrial uses for silver, including in the auto, medical, and electronic industries, have increased since 2001 to a record high in 2005. He cites the most recent report from London-based researcher GFMS Ltd., which predicts a 6% growth rate this year in industrial uses of silver. This increasing industrial demand for silver can be linked to the economic growth of countries like China, and India, as well as with economically developing places like Brazil and Eastern Europe.
In March of this year, CBS MarketWatch’s Kevin Kerr, concluded “industrial demand [for silver] has been outstripping mining supply for the past 15 years, driving above ground supply to historically low levels.” O’Byrne believes the supply and demand gap “hasn’t resulted in significantly higher prices yet because the world has been able to fill the gap with inventories and official government stockpiles.” But, now all those stockpiles are dangerously close to running out.
CPM Group reports that between the years 1900 and 1990 the above ground silver supply was diminished by 65% (from 12 billion oz. to 2.2 billion oz). By today’s estimates, the supply of above ground refined silver now stands at a paltry 300 million oz.
Mark O’Byrne believes that the inelastic nature of both silver supply and demand “is another powerfully bullish aspect unique to silver.” The inflexible supply implies that significant mine supply cannot be expected to exert any downward pressure on value after silver rises in price. “It is extremely rare,” writes O’Byrne, “to find a commodity that is price inelastic in both supply and demand.”
A large majority of the investing public and financial services industry, says O’Byrne, “remains ignorant of the fundamentals in silver.” When considering all the evidence for the long-term silver bull, getting into the market at this stage will most likely pay off in a big way for smart investors. One of the ways O’Byrne suggests that investors can get in on the bull is by buying stock in silver exploration companies. Yale Resources is one such company whose unique properties deserve a closer look from investors.
Earlier this month, Yale released the results from their phase one drill program on its Zacatecas Venture silver project in Mexico. Much of the results confirmed Yale’s expectations of an average 200-300 grams per tonne silver; however, to management’s surprise, one hole on the Mina San Jose property showed an intercept of 1,340 grams per tonne over 0.8 metres.
The properties, under option from Impact Silver Corp., lie in Mexico’s Zacatecas mining district. The region hash a rich silver production history dating back to the Spanish Colonial era with past production estimated at 1.2 billion ounces. Penoles’ Fresnillo Mine, ranked as the world’s second largest primary silver mine (33.93 Moz Ag) in 2005, is also located in the Zacatecas mining district.
GFMS Ltd.’s survey of the silver market reports that in 2006 Mexico was the world’s second largest silver producer (15%), just shy of first place (Peru, 17%). The major production states include Zacatecas, Durango, and Chihuahua.
Yale Resources president and CEO, Ian Foreman P.Geo. says, “Mexico is very well known for its historical resources, long history of mining and exploration, for being a mining friendly jurisdiction, and it is politically stable.”
Yale’s involvement with the Zacatecas project began last October when the company signed a letter agreement with Impact Silver Corp. [IPT- TSX-V], whose portfolio of advanced silver projects in Mexico includes two currently producing mines and a 500 tpd processing plant at Royal Mines in the Zacualpan Silver District. The terms of the agreement require Yale to reimburse Impact the property purchase cost and perform a minimum of US$ 100,000 exploration work within 18 months in order to earn a 65 % interest in the venture.
Each of the four properties Yale has optioned contains old workings, including a series of adits, left over from the days of the Spanish colonialists. Beside each of these adits are fortuitously located dumps with mineralization that Yale’s management assumes was uneconomical to the Spanish. “So we’ve gone in and sampled a lot of those dumps,’ said Foreman, “and the average grades come back 200-300 g/t silver, which a lot of companies promote as being economical underground and this is sitting on the surface.”
Having these mineralized dumps on the surface near the adits is really unique. It provides Yale with the knowledge that mineralization does exist at a certain depth and “it gives us a good idea as to what the low grade material is because you assume they’ve taken out the core which would be the high grade material.” The surface dumps also make it easy for Yale to start generating some cash flow relatively soon to advance the project. Its partner, Impact, is under an option agreement to purchase the Veta Grande Mill, which lies in close proximity to the Zacatecas project. Once everything is finalized, the two companies plan to use the mill to process the surface mineralization.
Zacatecas is one of four projects Yale is advancing throughout Mexico. Others include La Verde Grande mine (copper-zinc-silver-gold), Carol (copper-zinc) and Urique (gold-silver). These projects are evenly distributed between grassroots and advanced stage. The La Verde Grande mine is the company’s newest and most advanced stage acquisition. Historical documents claim there are 460,000 tonnes of copper-zinc-silver-gold mineralized rock here, which at today’s metal prices (as per Kitco.com on June 26th) would have an in-situ value of approximately $250 per tonne (not 43-101 compliant). The in-situ value of such a resource would be approximately $115 million. Yale’s market capitalization, however, is approximately $7.2 million suggesting that a robust drill program on the property to shore up the resource could add significantly to shareholder value.
The silver bull market is still in its infancy, and the likely long-term effects of the supply-demand gap on silver prices is bound to pay off for juniors like Yale Resources whose unique operations place them in prime standing to benefit from silver’s strengthening position in the commodity market.
This article is intended for informational purposes only and should not be considered as a recommendation to buy stock in any company. Although the author has made efforts to verify the information contained herein, the accuracy of all the information cannot be guaranteed. As always, it is recommended that you commit considerable time to completing your due diligence before buying stocks in publicly traded companies. A fee has been paid for the creation and distribution of this article.