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Silver mine production is expected to come
in at nearly 800m ounces
in 2012, an all-time record and the seventh consecutive year of growth (per
the U.S. Geological Survey). At 2012’s average silver price, this total
represents a value of nearly $25b.
There’s a lot of money to be made mining this shiny-white metal!
With a massive capital carrot supported by
structural fundamentals that are still great, there ought to be a ton of
mining companies targeting silver in their exploration endeavors. So in my
latest silver-stock research project I took a close look at the companies on
the ground floor of silver exploration, the juniors.
By its simplest definition, a silver junior
is a non-producer that considers its primary business the exploration for
and/or development of silver-centric projects. Regardless of market
capitalization and asset base, a silver junior doesn’t generate
revenue.
While juniors don’t directly
contribute to mine supply, their role in the greater supply chain is
invaluable. The successful ones are making discoveries and proving up
deposits that will eventually
feed the supply chain. They’ll either develop their discoveries into
mining operations on their own, or be acquired by the big boys.
These juniors that find success can also
deliver legendary returns, which is what makes them so appealing to
investors. But since mineral exploration is inherently a risky business, the
odds of success are greatly stacked against these companies. Sadly, most juniors will fail. And
this is why it is important for investors to be prudent in their selection
process.
In my search for these junior-level
companies I pulled from the universe of silver stocks that list in the US and
Canada. And surprisingly I found there to be very few that actually qualified
as silver juniors. By my count, there are just under
100 juniors that consider silver their primary metal of focus.
When I stepped back to consider why there
were so few companies going after silver riches, I realized that these
results shouldn’t have surprised me considering the geological nature
of this metal. Silver is actually quite unique in its geology from an
economic point of view, as it usually occurs as a subservient mineral.
More often than not, silver occurs in polymetallic deposits that hold high concentrations of
base metals and/or gold. And at the end of the day when the ore is processed
and the metals are sold, these other metals end up delivering more revenue
than silver. The silver content tends to be a byproduct of primary lead/zinc,
copper, or gold mines.
There are of course exceptions, but it is
quite uncommon to find a polymetallic deposit where
silver would deliver the most revenue. And because of this, the vast majority
of silver mine production comes to market as a byproduct.
To put this in perspective, it is estimated
that over two-thirds
of silver mined each year comes from non-primary silver mines! And a couple
good examples of this are the operations of major copper producer KGHM Polska Miedz and major gold
producer Goldcorp.
KGHM’s three massive primary copper
mines in Poland combine to produce byproduct silver in the neighborhood of 40m ounces. Each of the Lubin, Polkowice-Sieroszowice,
and Rudna mines produce more silver by volume than
most of the world’s top-ten largest primary silver mines. Yet this
silver is subservient in value to their copper output.
The same goes for Goldcorp’s massive Penasquito mine in Mexico. Penasquito
is a primary gold producer by revenue, but its huge silver byproduct (~23m
ounces per year) ranks it as the world’s
third-largest silver mine. These four mines alone account for a staggering 8%
or so of the world’s mined silver supply. And the list goes on of mines
that produce hefty silver streams that are only byproducts to other
higher-revenue metals.
So as a result of silver’s
subservient geological nature, the odds don’t favor mining companies
discovering deposits that are silver-centric. And this somewhat explains why
there are so few mining companies actually working primary silver deposits.
Another thing I discovered in my research
is the lack of deliberateness of the companies that comprise this pool.
Provocatively most silver juniors didn’t actually start out with their
sights set on being primary silver companies.
While the majority of junior exploration
companies do start out with their sights set on a specific metal, they are
ultimately at the mercy of what the rocks hold at depth. A company may stake
its claim in a greenstone belt known for its gold deposits, in search of a
gold deposit of its own. But when drilling underneath a gold anomaly at the
surface, it may discover a thick deposit of high-grade copper. This company
would thus transform from a gold junior into a copper junior.
Overall miners certainly don’t mind
finding a deposit comprised of minerals they weren’t targeting. The
fact that they found a deposit is usually a joyous occasion. And since their
ultimate goal is the almighty dollar, they tend to be mineral agnostic if
whatever they find can generate investor interest and ultimately a profit.
There are countless examples of juniors
shifting metal focus based on the results of their exploration work. And on
the silver front, more often than not those companies that do start out
looking for silver are usually the ones switching to another metal. They find
primary gold or base-metals deposits, and run with them.
Of the nearly 100 silver juniors, of which only half actually have
“Silver” in their names, very few started out as silver
companies. Most in fact started out as gold or base-metals companies that
stumbled upon primary silver deposits. And of those companies that did start
out as silver companies, many did so as a result of a spin-off or structured
start-up. They already had their silver projects and didn’t have to
find them.
A good example is mega-junior Tahoe
Resources. Tahoe’s Escobal project in
Guatemala holds one of the world’s finest primary silver deposits. This
project is currently under development, and when it achieves commercial
production in 2014 it will be one of the world’s largest and
lowest-cost primary silver mines.
Tahoe is one of the rare juniors that
started off as a silver company when it went public on the TSX in 2010 (it
now has a listing on the NYSE as well), but it was a structured start-up
courtesy of Goldcorp. A subsidiary of Goldcorp actually discovered Escobal while looking for gold. And it is only thanks to
the fact that Goldcorp desired to stay gold-centric that it established Tahoe
Resources, thus allowing silver-stock investors to take part in this beauty.
Perhaps the most surprising thing I
discovered about silver juniors is their size. Now I didn’t expect
these companies to be huge. With an ounce of silver generally worth about one-fiftieth that of gold,
the value of a primary silver deposit is typically worth a lot less than a
primary gold deposit (most silver deposits don’t hold 50x the resources
by volume of an average gold deposit).
Because of this it is of course logical that on balance silver juniors are going to have smaller
market capitalizations than gold juniors. But after running the numbers,
“junior” is an understatement in describing these stocks. If I
exclude Tahoe Resources, a huge top-side outlier (~$2.5b market cap), the average market cap of the junior silver stocks is only
about $29m.
Taking it a step farther, if I exclude just
the four largest by market cap (Tahoe, MAG Silver, Orko
Silver, and Bear Creek Mining) the average drops to about $17m. These stocks
are tiny! Check
out the pie chart below to get a good visual read of just how small the
silver juniors truly are.
The market caps of the nearly 100 silver
juniors were updated through last week, and this breakdown is simply
mind-blowing. At the top are an elite group of $100m+ companies. These
juniors own large deposits in relatively geopolitically-safe regions. And they
collectively hold 1.7b ounces
of silver resources. But as you can see, this group is the smallest with only
a 6.3% share of the total population.
Next are those silver juniors in the $50m
to $100m range, and again this group towards the top is sparsely populated.
Interestingly it is well understood that stocks with market caps between $50m
and $300m are labeled as micro-caps. The fact that most of the largest silver juniors are
micros puts their collectively small size into context.
At under $50m you get into the realm of the
nano-caps, which is where the majority of the
silver juniors reside. Amazingly 86% of all silver juniors have markets caps
of less than $50m! And as you can see, only a small fraction reside in the
top half of this range.
Incredibly the largest group of silver
juniors sport market caps under
$5m. We’re talking penny-stock
realm here! While most of these companies may be sniffing a potential silver
deposit, they don’t yet have a compliant resource base. And not
surprisingly, most have very limited working capital and thus meager work
programs. These juniors are the riskiest of risky!
And speaking of risky, one of the major
takeaways for me is that this sector is not for the risk-averse. Investors
need to be keenly aware of what they are getting into if they decide to put
their capital to work in this sector. While the reward side of the
risk/reward trade can reap fortunes if you pick the right stock, the risks
are extreme.
The biggest risk of course is a company
failing to find and/or develop an economically-feasible silver deposit, which
is the most common outcome for most juniors. But there are also
non-company-specific risks that come with nano-caps.
One big high-level risk is where these
stocks trade. Interestingly only about 15% of silver juniors have primary
listings in the US, with most of these being on the OTC Bulletin Board. Sadly
an overbearing regulatory environment (primarily Sarbanes-Oxley) turns most
start-ups away from listing in the US. And this is a big reason why the
majority of silver juniors take their shots at tapping public venture capital
on the TSX Venture Exchange. Though not ideal, thankfully US investors can
still own most TSX-V stocks via the Pink Sheets.
But whether TSX-V, OTC BB, or PNK, all of
these exchanges/platforms come wrought with volatility and liquidity issues.
Many of these stocks simply lack exposure, and thus capital volume. And as a
result it doesn’t take much action to move them violently in either
direction. And unfortunately the downside action is amplified in a tough
environment like we’re in today where junior resource stocks are highly
out of favor.
The nice thing about juniors though is
their fortunes can change in the blink of an eye. All it takes is some upside
momentum in the price of silver and renewed interest in resource stocks for
investors to once again glom onto juniors. And when this happens, the
breakdown of this pie chart can look radically different.
If you can stomach the inherent risks of
trading on the frontier junior exchanges/platforms and accept the
company-specific risks that come with the micro- and nano-caps,
then junior silver stocks may be just for you. As daunting a picture as I
have painted, there is enormous upside potential in this sector. Even though
a lot of these nearly 100 stocks are junk, there are some quality companies
working on quality projects that could pan out nicely. And if you pick the
right ones at the right time, there are some legendary gains to be won.
At Zeal we recently completed an intense
research project that poured over the universe of junior silver stocks. And
the product of this research is a hot-off-the-presses report
that profiles our favorite dozen. The stocks in this 23-page report range
from small nano-cap speculative plays to some of
the micro-cap elite. And we believe that all have huge potential to thrive in
silver’s ongoing secular bull.
We also publish acclaimed weekly
and monthly newsletters that offer contrarian market analysis
and trade recommendations. And interestingly one of the stocks we just
recommended in our weekly newsletter, a silver junior that was profiled in
this report, was recently bought out for a whopping 72% premium. Join the big
silver companies that also think the juniors are cheap, and buy
your report today!
The bottom line is silver’s
secular-bull-driven demand has led to a huge increase in silver-mining
output. And the mining companies have been rolling in the dough selling their
silver at near-record-high prices. This silver renaissance has not only
turned on investors to the producer companies, but the juniors that have a
huge role in developing the next generation of mines.
But as a result of
silver’s subservient geological nature, investors are finding a
sparsely populated junior market. With primary silver deposits few and far
between, the population obviously isn’t as robust as one would hope.
And adding to the precariousness of silver juniors are depressed market
conditions and generally smaller deposit values, which makes most of them nano-cap in size. Thankfully even amongst this trifling
group is an elite bunch that ought to thrive with their underlying metal.
Scott Wright
December 29, 2012
At Zeal our research has zeroed us in on an
elite group of mining stocks that consider silver their primary play. We
recently published a detailed fundamental report profiling our dozen
favorites. And in our acclaimed weekly and monthly newsletters,
we’ve been buying some of these stocks in anticipation of what should
be a major upleg in the coming months.
While some of our positions already have
excellent unrealized gains, there should still be a lot of room to run. Join
us at Zeal, where we have a track record that boasts average annualized
realized gains of +34.8% (634 stock trades) since 2001. To find out which
stocks we are trading, subscribe
today! And to get the full list of our favorites at your fingertips, buy your report today!
Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the
volume of feedback I may not have time to respond personally, but I will read
all messages. Thanks!
Copyright 2000 - 2012 Zeal Research (www.ZealLLC.com
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