David H. Smith: "The Silver Manifesto" was written to inform and
appeal to precious metals investors with all levels of experience. A lot of
our new subscribers are getting connected with the silver story, but there
are others who have been in the trenches for quite a while. David and Chris
wanted to make the fundamental case for silver a compelling one. The debt
bomb is technically the piling on of derivatives and central-bank-induced
debt from ultra-low interest rates and quantitative easing.
We almost had a global economic collapse in 2008, yet the overhang is
still there. We also have other information benefitting silver and that's the
"love trade," which we will talk about later. Your readers are
likely well versed in the idea that they have to be prepared for the coming
debt bomb by owning some physical precious metals and a few mining stocks.
It's folly for anyone to think that they can wait until the bomb explodes to
take action.
TGR: The Federal Reserve and other central banks around the world
have done an exceptional job of kicking the can down the road. Why can't they
continue?
DS: At some point the piper has to be paid. In mid-March, some top
European officials said that 95% of the euros loaned to Greece would never be
repaid. Growing global debt is causing a lot of repercussions in the market.
In March, the German central bank issued five-year negative interest rate
bonds. People who bought those bonds are going to pay the bank to own them.
Who would have thought that was possible? I like "Currency Wars"
author James Rickards' snowflake analogy, where one small event could set off
an avalanche and bring down the whole mess before the central banks can
react.
TGR: What event could set it off?
DS: It could be Greece leaving the Eurozone and creating a
mini-panic, a shooting war in the Ukraine between the U.S. and Russia, or a
run caused by a major European or U.S. bank going under. It could come in a
lot of forms. We could literally go to bed one night and wake up the next
morning looking at a potential global collapse. The question I have is: How
many of us would have the courage to buy silver $10 an ounce ($10/oz) higher
and gold $200/oz higher on that day, assuming we could find any?
Central banks think they can control bank runs or a credit contraction by
pumping money into the system, or through capital controls, but they are
playing with fire. As evidence, I would point to an excellent study done by
Dr. Antal Fekete a few years ago—not long before the 2008 crisis—where he
demonstrated that it was entirely possible to have hyperinflation, with the
price of derivatives spinning out of control, and deflation—where
money/credit drained from the system so fast that it overwhelms central
banking's ability to cope.
TGR: Do you risk marginalizing yourselves with this apocalyptic
narrative?
DS: I don't think so, because we're simply saying that the debt
that has been created is not going to be paid off. I could see something of a
slow-motion implosion where we have degradation over time by inflation, which
is basically a tax on savers. We could have a series of devaluations and debt
write-offs that would cause people to lose a large percentage of their
financial security. It wouldn't happen over a few days but rather over years.
TGR: What are some things that every silver investor needs to know
about the market?
DS: First, silver is called the restless metal for a reason—it has
a much greater volatility than gold. People have to plan for and expect that.
Second, it has a stronger correlation to the price of gold than most people
realize, as much as 90%, according to work done by Adam Hamilton of Zeal
Intelligence. If we see gold moving up while silver is quiet, silver is
probably getting ready. Third, whereas gold movement into China and India
gets most of the headlines, silver is also being accumulated in massive
amounts by these countries. Last year it's estimated that India bought around
28% of the world's newly mined silver. And fourth, as David Morgan likes to
say, about 80–90% of the potential of the entire bull run can be available to
investors during the last 10% of the time it takes to complete the cycle. David
has studied this topic in depth. There will be some outsized gains available
if people are willing to step up and take calculated risks. I hope to be one
of those people.
TGR: You have talked about what you call the Tsunami Return Wave.
Would you please explain?
DS: I use the analogy of a tsunami wave to describe what gold and
silver did leading up to their 2011 cyclical tops. The initial wave came in,
concomitant with the financial destruction in 2008–2009, crested and then
withdrew—a process that's been going on for almost four years. That wave is
going to return, only this time it will be due to massive dislocations in the
financial system. It's going to bring back all the unfinished business,
causing huge demand for physical gold and silver in both the Fear Trade and
the Love Trade, as Frank Holmes calls them.
It will be financially devastating for those who hold only paper assets,
but if you have a "gold and silver lifeboat" and can ride the wave,
you will have afforded yourself some important protection. Another corollary
is that due to the devastation visited upon the mining sector during the past
few years, many exploration companies—the new supply generators needed by the
majors to replace their production—have simply blown away. As if this was not
enough, a number of big projects have been cancelled, a lot of producers have
been high-grading just to keep the lights on, thereby rendering much of the
low-grade properties unprofitable at anywhere near today's prices, and new
exploration budgets have been sliced to the bone.
At some point, we are going to see an epic collision between the precious
metals' tectonic plates of supply versus demand. This interplay should lead
to stellar profits for investors who have positioned themselves ahead of
time.
TGR: The silver spot price has hovered around $16/oz for a couple
of months. It dipped well below that in December. What are some ways
investors can play the volatility in silver?
DS: You could play the silver-gold spread when it's between 65 and
75 to 1, where one ounce of gold buys 65 or 70 ounces of silver. But I
personally prefer adding to positions in mid-cap producers that seem to be
underappreciated by the market.
Another tactic could be for high-risk investors to do swing trades,
trading leveraged exchange-traded funds (ETFs), like ProShares Ultra Silver
ETF (AGQ:NYSE.ARCA) and Credit Suisse AG VolicityShares 3x Long Silver ETN
(USLV:NASDAQ). Those vehicles are leveraged to the price of silver so if
you're right they'll go two to three times as fast as silver on the upside.
If you're wrong, it will go two to three times faster against you. They're
not for the faint-hearted.
TGR: What are some mid-cap silver producers that can generate cash
at $16/oz silver?
DS: The more successful mid-cap junior producers have been able to
cut back their all-in costs substantially. First Majestic
Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) has reduced its costs to that
range. Alexco
Resource Corp. (AXU:NYSE.MKT; AXR:TSX), which closed its Bellekeno mine
until silver rises above $20/oz, has moved its cost structure way down and
could develop its low-cost Flame & Moth asset.
Another one I like is IMPACT Silver Corp. (IPT:TSX.V). I have visited the
property and the company is very well run. Just getting back to where it was
last year would make it a five-bagger. IMPACT was a $2/share stock, and in
2011 it traded at over $3/share. It's now around $0.22/share.
Another case that's underestimated by the market is Endeavour Silver
Corp. (EDR:TSX; EXK:NYSE; EJD:FSE). Bradford Cooke and Godfrey Walton are
solid managers. I've visited the El Cubo mine. It's a complicated story, but
the company has worked out a lot of the operational kinks, and is now
planning a big increase in production. If Endeavour continues to find new
silver, which is highly probable, things will turn out just fine. Endeavour
Silver was one of the leaders during the silver price run up into 2011. It's
a good one to keep an eye on.
TGR: How is First Majestic handling the volatility in silver
prices?
DS: It has five mines in Mexico and on a couple of occasions First
Majestic management has held back production to sell at higher prices.
Endeavour Silver has done this also. The company is flexible on its feet. I
believe that First Majestic will be one of the leaders when silver
re-establishes its secular uptrend.
TGR: Alexco renegotiated its streaming deal with Silver Wheaton
Corp. (SLW:TSX; SLW:NYSE). Your thoughts?
DS: I've seen a couple of fairly negative articles about that
stream. However, I was in the audience at a recent conference when the Alexco
CEO, Clynton Nauman, gave a presentation about Silver Wheaton and the
agreement. I spoke with him at length afterward and came away impressed with
what the company has done. It has an option on whether to take that
renegotiation or not. If it does, it will be protected on the downside but
give up some silver price upside. If it doesn't, it will enable Alexco to
handle more risk by doing it alone. It is bringing in several million dollars
annually from Alexco Environmental Group, a subsidiary that conducts
reclamation work on mining properties. I'm comfortable not only holding my
position in Alexco, but adding to it on any price weakness.
TGR: Did Nauman talk about the potential sale of its environmental
remediation business?
DS: I would be surprised if Alexco has it for sale. It's been very
profitable and has a long-term contract with the Yukon government to continue
cleaning up the zinc residue at Keno Hill, which was left in quite a mess
after decades of silver mining by previous operators.
TGR: Silver Wheaton recently raised $800 million ($800M) in a
bought-deal financing, which it used to buy 25% of the byproduct gold from
Vale S.A.'s (VALE:NYSE) Salobo copper-gold mine in Brazil. What are your
thoughts on that deal?
DS: Silver Wheaton added this 25% gold stream with Vale to an
initial 25% stream it bought in 2013. Salobo is Brazil's largest copper mine
and is expected to run for 40 years. Chris Marchese recently did an updated
and comprehensive fundamental review on Silver Wheaton for subscribers to The
Morgan Report. In his view, the Salobo gold stream attributable to Silver
Wheaton could double and even triple by early in the next decade. The
fundamental analysis for Silver Wheaton is really compelling. It's an
interesting company to watch.
TGR: CIBC World Markets has a target price of $31 for Silver
Wheaton. Is that reasonable?
DS: Yes. You're going to need to see higher silver prices, but
given its silver and gold streams I don't see where that would be
unreasonable at all. As recently as early 2013, Silver Wheaton traded around
$34/share. Looking at the chart, it's got a triple top between $27 and
$28/share. Once you get above $28/share, I'd say it's all clear technically
for a challenge at the $30 range or better.
TGR: Are there other silver companies you would like to discuss?
DS: Over the past few years I've whittled down the companies that
didn't look as if they would bounce back strongly. It's an art as much as a
science. I will say this: Investors should strongly consider overweighting in
quality gold and silver streaming and royalty companies. It removes much of
the risk. Those companies have binding agreements to stream mined gold and
silver at a specified price, regardless of whether there is a mine collapse,
geopolitical risk or whatever else with the operators.
TGR: What are some royalty and streaming companies you own?
DS: I am a long-term shareholder of Sandstorm Gold
Ltd. (SSL:TSX; SAND:NYSE.MKT). Sandstorm Gold is relatively unknown
compared to well-known streamers, like Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE). The Sandstorm management team includes people
who gave birth to Silver Wheaton, so they are not one-trick ponies.
A relatively new one is Osisko Gold Royalties Ltd. (OR:TSX), which bears
watching. It has some compelling streams and royalties. During the near panic
in early March, Osisko fell to $12/share and I bought a tranche. It is almost
$14.50/share now.
TGR: When we talked with you for your July 2014 interview, you
discussed the Precious Metals Four, which included gold, silver, platinum and
palladium. At that time you believed platinum group metals (PGMs) would be
the frontrunners in a rebound in precious metals prices. Is that still the
case?
DS: My premise was that PGMs would lead the rebound whenever we
witnessed a secular bull run in gold and silver. Platinum has been a laggard,
but I'm happy with how palladium has performed. I felt palladium had the most
upside potential in percentage terms. I also stated early on in my writings
that at some point the PGM bull, especially platinum, would be compromised by
the development of relatively shallow, high-grade PGM deposits in South
Africa. That could be anywhere from three to six years out, but once those
reach production, that's going to add a lot of supply to the market. But
assuming that Norilsk Nickel (GMKN:RTS; NILSY:NASDAQ; MNOD:LSE) takes as long
as 10 years to reinvent itself and develop more palladium deposits in Russia,
palladium has the potential to continue being the stronger PGM mover.
TGR: What are some platinum and palladium equities that you're
following?
DS: I have a lot of respect for Ivanhoe Mines
Ltd. (IVN:TSX), of which Robert Friedland is the chairman. Ivanhoe is
developing the Platreef PGM project in South Africa and that's the only PGM
project there that interests me. I hold shares in Ivanhoe.
I like Wellgreen
Platinum Ltd. (WG:TSX; WGPLF:OTCPK), formerly known as Prophecy Platinum,
in the Yukon, which I have visited twice. It's a robust PGM project worthy of
attention.
TGR: Wellgreen has released a preliminary economic assessment (PEA)
on the Wellgreen project. The initial capital spending requirement for an
open-pit operation would be just under $600M. Is that reasonable?
DS: I think so. It depends on how much the majors want to get hold
of the deposit. Something that few investors pay attention to and I wish more
companies did, is starting production with a smaller operation to get cash
flowing and prove to the market that it can be done. There are 175,000 tons
of tailings at the Wellgreen project that were left from an earlier
operation. Just working these tailings could prove interesting. There's a lot
to be said if you can get underway with a smaller operation and then expand. Pretium
Resources Inc. (PVG:TSX; PVG:NYSE), for example, is looking at starting
with a smaller operation, a good tactical move for any company that requires
a big-dollar capital expenditure check to get started.
TGR: Please give our readers one foolproof prediction for precious
metals in 2015.
DS: Foolproof predictions are hard to come by, but here's what I
believe: This year will mark the absolute end of the precious metals'
cyclical bear market that began in May 2011, enabling the re-ignition of the
long-term secular bull market in gold and silver. It's highly probable that
the lows in mining stocks as a whole are now in. Even if they're not, I
believe that by September it will be apparent that we're ready to start the
moving-up phase of a multiple-year bull run.
The Plan B scenario would be a new primary low to be established by late
June, with a higher low in late August. I base this analysis on what Reg
Ogden wrote in "The Ultimate Gold Stock Trader." He said that on an
annual basis, mining stocks tend to put in a secondary, higher bottom right
around Aug. 23. If we hit new lows, it's going to flush out the last of the
diehards and then turn around. Times like this remind me of what Goldcorp Inc.
(G:TSX; GG:NYSE) Chairman Ian Telfer once said: "I'm more of an
opportunist than a prognosticator." If you can "Shut out the
doubt"—a famous Clint Eastwood saying—and take calculated risks, even if
you have a position that is underwater, over time I believe that you're going
to be glad you did.
TGR: Thank you for your insights today, David.
