Silver mining executives polled at 2012 Prospectors and Developers Association of Canada agreed: the fundamentals behind silver are strong. "We are in a long-term cycle that's going to bring silver prices higher and higher," says Lenic Rodriguez, who sees "definite increased demand from different new applications as well as investment demand." As for those applications, he says, "Forget about photography. I'm talking about new uses. Silver has become a strategic metal. It's required in almost every modern necessity—the electronics, the solar panels and all the new medical uses, such as biocides. No known bacteria can live in a silver environment, so silver is starting to be used also in hospitals. Numerous important applications are very useful and needed in our modern world, and new uses are coming about almost every day."
Ross Beaty concurs. Last year, he says, demand for industrial uses climbed 17% despite silver hitting such high prices—up to nearly $50/ounce (oz) last April. Price doesn't matter in many of the new applications because even though silver is critical, he says, particularly in such digital products such as cameras, cell phones and computers, it's needed in only small amounts. Those little bits add up, though; because the pace of introduction of new digital products is exploding, Beaty sees "silver consumption increasing dramatically." He says, "Silver is getting lots of attention and I think that's going to continue. It's a wonderful metal with great fundamentals that will continue to manifest themselves in years ahead." In short, Beaty says, "There are some very good legs behind silver, as for gold. So, I'm bullish on both."Investment Demand Booms, Too
Of course, the investment side of silver has grown exponentially, too, with people buying silver coins and bars in record numbers. According to Rodriguez, "the number of Canadian Maple Leaf silver ounces and U.S. Silver Eagles exceeds the production of both Canada and the U.S. That's just the retail market. There's not enough silver to supply the demand even for the small investors who buy just two or three troy ounces of silver. Can you imagine what's going on with the actual large investor base that's investing in exchange-traded funds?" he asks. "That should tell you a lot about the potential of silver."
Drawing on data from the World Silver Survey 2011, the Global Source Institute indicates that mine production of silver approached 736 million ounces (Moz) in 2010, with "total supply" about 1,057 Moz. At the same time, industrial application demand reached 487.4 Moz, up from 349.7 Moz in 2001, with fabrication of coins and medals at 101 Moz, up from 30.5 Moz in 2001. Demand for silver jewelry—at 167 Moz in 2010—remained fairly level, while photography demand, at 72.7 Moz, dropped sharply from 213.1 Moz in 2001, and silverware demand, at 50.3 Moz, fell from 106 Moz in 2001. The Global Source Institute pegged total silver demand at 1,056.8 Moz in 2010, up 20% from 2001.
"Half of silver's demand and the real price fight," according to Beaty, come via investors buying it as a store of value. If both industrial and investment demand remain strong, he expects silver to outperform gold. "I don't know what price it's going to get to but it's going to be very, very strong with synchronous growth in both of silver's dominant markets," he says.
Whether that strength manifests itself in significantly higher silver prices this year, though, remains to be seen. "With the elections and everything that's coming," Mike Callahan expects the government "to spin out good employment and growth numbers—put its best foot forward, to show growth and jobs being created whether they actually are being created or not. In that situation, I don't see metals prices changing a whole lot. But while I think silver prices will be flat, that's my view for 2012." Next year is something else. "I think we're going to see a jump," Callahan projects, "with another run in both silver and in gold."
Jorge Ganoza offers another perspective on silver's strength. "I think for developers, silver carries a better premium than gold, and because there are no large inventories of silver, there's potential appreciation." He also points out that "silver assets of scale are truly a rare commodity compared to gold." In addition, he notes, "When the price retreats, it becomes an opportunity for us because valuations go down on properties we're looking at."A Byproduct Commodity
Beaty notes that silver's supply realities differ from gold's as much as the demand realities do. Despite its status in the precious metals galaxy, "The lion's share of silver production comes from zinc, lead, copper and gold mines," Beaty points out. "With very few true silver deposits in the world, you have to look at what's going on with those other metals. We're in quite a bullish phase now, and a lot of new mine production is coming on in gold and zinc and copper, which will bring a lot of silver to the market." Three of every four ounces of global silver production is a byproduct of zinc, lead, copper and gold mining.
As a byproduct metal, silver is mined in more than 30 countries on five continents, from Australia and China to South Africa and Sweden. Brent Cook calls attention to "a really interesting silver resource that Global Minerals Ltd. (CTG:TSX.V; DPF:FSE) will be drilling out this year." Its Strieborná deposit, located in an historic mining district near the town of Roznava in eastern Slovakia, contains 14.3 Moz silver and 48.1 million pounds (Mlb) copper Measured and Indicated and 8.7 Moz silver and 29.8 Mlb copper Inferred.That said, two Latin American nations account for fully one-third of the world's silver production—Mexico with about 105 Moz and Peru with about 124 Moz. And they have been leading silver producers for more than five centuries.
Until fairly recently, Mexico had only three mining companies, Rodriguez says, which "were actually quite private, owned by very wealthy Mexican citizens." Once laws relating to foreign direct investment changed, the floodgates opened. Since that time, mining has become Mexico's second-leading generator of foreign investment, he says, with "more than 300 Canadian mining companies exploring and producing there now. That has produced enormous wealth in Mexico that the other three large Mexican companies could not generate. The country—about triple the size of Texas—is too big. It's largely unexplored. All these Canadian companies have done a wonderful job of finding new resources and putting them into operation."
Mexican Bonanza
Rodriguez also stresses that miners are "the second largest generators of employment in Mexico." In fact, he notes, "for every direct mining job produced anywhere in the world, 5 to 10 indirect jobs are created as well." And the industry's positive influence doesn't stop there. Rodriguez says, "Foreign mining companies operating in Mexico in general are very conscious of their social responsibilities. We participate with our communities. For instance, as my company, Aurcana Corporation (AUN:TSX.V), inaugurates the second expansion at La Negra on March 31, we will be donating space for a clinic for the town of Macon, and we will be showing people how to build their own permanent housing. We have proprietary technology using concrete blocks whereby people can build houses very inexpensively, maybe $2,000 each. Although mining is the best paid job in Mexico, it's tough work, and our miners are very committed, very hard-working people—as our results attest."
Since the legislative changes, increases in metals prices over the past decade also have prompted companies to put old mines back to work. As Ganoza puts it, "The emergence of higher prices in silver space resulted in the restart of small producers." Reopening mines that had been shuttered is rebuilding and revitalizing towns, creating thousands of jobs and hundreds of spin-off businesses.
One of those reopened mines is now Silvermex Resources Inc.'s (SLX:TSX; GGCRF:OTC) prize property, the La Guitarra mine. Located in the Temascaltepec Mining District, where mining dates to pre-Columbian times, La Guitarra has a checkered past with a number of different owners. Silvermex restarted operations there in April 2010 and the mine has been coming on strong ever since. Through extensive redevelopment and application of operational efficiencies, La Guitarra achieved optimal output of 800,000 ounces (800 Koz) of annual silver equivalent at 320 tons/day in November 2011, ahead of schedule. That was ramp-up work, getting the mill running at full capacity.
For the time being, Callahan sees "the opportunity to have more deposits like La Guitarra, because the district is pretty consistent with gold and silver," and expects to "produce somewhere in the 0.75–1 Moz range of silver equivalent in those deposits." He says that Silvermex's current focus is to "take the production to wherever it can go, drill and grow the resource, generate cash flow and grow the district."
The company has an advantage, Callahan says, in that "not only do we own this mine, we own the entire district. That's unique for a company our size. This asset really should have been in the hands of one of the bigger players because it deserves that kind of attention and investment."
Speaking of bigger players, Callahan spent 20 years with Hecla Mining Co. (HL:NYSE) in various capacities including vice president of corporate development before joining Silvermex. Commenting on the recent addition to the Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) portfolio, he says, "Minefinders Corp. (MFL:TSX; MFN:NYSE) had been a target for the majors for a long time. When I was with Hecla, everybody was looking at Minefinders. It was inevitable that at some point somebody would make that jump, and I think Pan American Silver probably has the best capability to do it right now, and its share price is strong."
The Big Deal
Everyone, of course, has heard about Pan American Silver's latest acquisition. The world's second-largest primary silver miner and Minefinders jointly announced their deal on Jan. 23. The $1.5 billion takeover adds about 4.25 Moz silver production from Minefinders' Dolores mine in Chihuahua, Mexico, to Pan American Silver's portfolio. With the addition of the Minefinders assets, the combined production of all of Pan American Silver's properties is expected to exceed 50 Moz by 2015.
Does Beaty anticipate more acquisitions in the silver space in the next 6 to 12 months, involving either his company or others? "It might happen," he says, although, "there's a lot less deal traffic in silver than in gold." That's partly because "there are very few silver companies—only a 10th or a 20th as many silver companies as gold companies, for example," and partly because "there are very few good silver properties, most of which simply aren't for sale. That's not to say deals won't come," Beaty continues, "but it's also much easier said than done to create a merger that works. I've done many, many of these in my life. Every one is hard work. They require social compatibility, synergies that are real, value propositions from both sides and both shareholders. That's very rare. So even though a lot of investors would love to see them, you really don't see a lot of these deals. They're very hard to create and carry through to execution."
Cook doesn't see many opportunities for combinations on the horizon, either. "I'm trying to see what's out there that I'd want to buy," he says. He notes that Mirasol Resources Ltd. (MRZ:TSX.V) has its Virginia Silver project in Argentina's Patagonia region, "which is coming along pretty well and is something that would interest a major."
Although it isn't in the Latin American geography, Cook notes that Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) owns part of Coeur d'Alene Mines Corp.'s (CDM:TSX; CDE:NYSE) Rochester deposit in Nevada, which has produced more than 125 Moz silver and 1.2 Moz gold since production began in 1986. In his view, "That's certainly an M&A possibility."
Getting back to the merger and acquisition scene in Latin America, Callahan sees few large players and numerous companies producing in the 1 Moz range in Mexico. "There needs to be some consolidation there," he says, "because each of those individual companies has its own overhead, management in Vancouver, Toronto or wherever it might be. The challenge is to consolidate two or three of those rather than have a major come in and pick them off one by one." As Callahan sees it, "That makes a lot more sense and creates more value for shareholders."
Does he picture Silvermex involved in such a consolidation? "It depends," Callahan says. "Whatever is best for our shareholders. But we are certainly active in looking at that whole group. That was one of the reasons I came into this group, after being in corporate development at Hecla, looking at acquisitions, understanding Mexico. We felt that if we put the right team together, we could do some key acquisitions and grow a midtier silver producer that would compete and produce 4–5 Moz, whatever the number may be.
"There's no magic number," Callahan continues, "but that's one area of focus, to look at assets that are in the hands of private individuals, families or other producers that are our size. La Guitarra was our first transaction and that was just a foundation for us to build and do something else."
Callahan says that Silvermex is keeping an eye out for properties in Mexico, Canada and the U.S. In addition, Callahan explains that Silvermex is spending money on its Plomosas project in the Rosario Mining District in Sinaloa and doing metallurgical work on the Peñasco Quemado project in Sonora. "All those things deserve our attention," he says. "If we picked up something somewhere else, we don't have the management team right now to go and manage that."
Ganoza goes back to his point about the number of smaller producers lured into the space by rising metal prices. From his perspective, many of these emerging producers restart a mine thinking that Pan American Silver or another major will come along to scoop up their companies. "That is not happening, and I don't think it's going to," Ganoza says. "That's a flawed thesis. When you think about growth, you're thinking not only about adding ounces to your annual production, but also about running a business. You cannot run a business in this environment with scarcity of talent and an atomized portfolio, little mines, each one producing 1.5–2 Moz. You need critical mass. If you don't have scale, how are you going to attract the talent to run the mine, mitigating the risks? You can't. You're looking for that transformational asset instead of amassing small, 50–100 Koz/year producers."
Speaking for Fortuna, he continues, "We never came into this business with the idea of putting something together and waiting for someone to take us out. When we look at acquisitions and growth, we consider how a new project affects our property portfolio. Is it improving the quality of the portfolio? When we look at what we have and what's out there, we ask whether it's accretive to the portfolio. Is it bigger and better than what we already have? When we look at the ounces—whether it's an M&A opportunity, an acquisition opportunity, an early-stage exploration project—we reflect upon the quality of the ounces. Are these ounces in a jurisdiction where we believe we can permit a mine? Do they provide good, healthy margins? Our cash cost is roughly $0.30/oz, narrowed by better grades, so we have very healthy margins. We are a low-cost producer, so we focus on that."
Ganoza says that Fortuna also has a strong regional focus. As he puts it, "We believe we can see opportunity in the region where others don't, so we're looking aggressively in Peru and Mexico. Our team is seasoned, not just in mining but also in Latin American mining. We'll look in Chile, and we'll look in Argentina if it's compelling. We've been presented with opportunities in Slovakia. Would we go to Slovakia? Yes, but it would have to be truly a compelling opportunity because we have a lot of things to look at in our backyard."
Asset Quality and Economics Count
As Ganoza observes, "Silver assets of scale are also truly a rare commodity compared to gold. For example, for our growth going forward, we reflect upon whether we should look at acquiring gold assets as well. Pan American Silver bought a gold mine, right? There are a lot of emerging silver producers, but you have to look at the asset." Asked whether the size or grade of the asset is more important, Ganoza responds quickly, "Quality, certainly. In this business, grade will make a miner out of a donkey."
In his view, that quality-of-assets question weighs heavily in any search for acquisition targets. "I think it has to do with valuations, quality of assets and a strategic view of the quality of assets. If you're Hecla, Pan American Silver, Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ) or Coeur d'Alene Mines and you're looking to grow, you want to increase your production but you don't want to atomize your property portfolio to do so."
Cook points out another factor that applies equally to individuals investing in juniors and to majors shopping for acquisition opportunities. "What I think is really important," he says, "is, 'Who's going to find the deposit that's economic?' Not just build up a resource. The more economic it is, the higher the margin, the more valuable that's going to be. It's not so much grade or tons; it's about margins. That's where the leverage is—in the higher-margin deposit. That's what Pan American Silver, First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) are going to buy.
Cook, whose on-site prospect analyses have taken him to virtually every mineral deposit type in more than 60 countries, agrees that Mexico "is one of the best places in the world to be looking for, developing or building a silver deposit, but it's tough to find new deposits there." He cites a discovery by MAG Silver Corp. (MAG:TSX; MVG:NYSE)—one of the "almost pure silver company" plays he likes—as an exception. A major landholder in Mexico's Fresnillo Trend, MAG wholly owns more than 100 square miles of prospective ground throughout Mexico. Its 2005 discovery of the Valdecañas Vein at its Juanicipio property—probably the best high-grade silver discovery in quite some time in Cook's view—has transformed the Fresnillo Trend, one of the world's oldest and most prolific silver districts.
Moving south, Cook talks about two other companies. Tahoe Resources Inc. (THO:TSX) in Guatemala has "arguably the best silver discovery at least since MAG's discovery in Mexico," he says. Tahoe's Escobal Project has an NI 43-101-compliant resource of 245.2 Moz silver equivalent Indicated—representing a 144% increase from the previous resource estimate—and 71.7 Moz silver equivalent Inferred.
Ganoza concurs about there being "few major discoveries of a bigger size in the silver space." Like Cook, he also points to Tahoe as "one remarkable example."
When it comes to big silver, Rodriguez brings the discussion north, enthusiastically discussing the imminent startup of Aurcana Corporation's Shafter pure silver mine, second largest in the U.S. "We're two months ahead of schedule. About $1 million (M) under budget in 13 months is probably a record in the mining industry." Located in Presidio County, Texas, Shafter isn't a new discovery, but an old property that Aurcana brought back to life after it acquired the mine from Silver Standard in mid-2008.
Even without that asset in production, Rodriguez has ample reason to take pride in what his company has accomplished in less than three years with its La Negra mine in Querétaro, Mexico—"the original asset that launched Aurcana." In Q411, Aurcana reported the largest quarter for silver production in its history, 265 Koz. Its silver production for 2011 increased 20%, to more than 1 Moz. Silver equivalent increases grew 28%, to 1.7 Moz in 2011. The average grade of silver increased and the company also reported a 52% increase in mineralized materials stockpiled.
"We have concentrated on improving operations," Rodriguez says, "which we have done consistently since I took over as CEO in May 2009. At that time, our share price was $0.08/share and market cap was $8M. Today Aurcana is trading at $1/share, so already a multiple of 12 times to investors who were with us two and one half years ago. Our market cap has increased to about $600M, so more than 70 times. The market is realizing what we are achieving."
And, he adds, "That's without the Shafter silver mine, which is one of the largest silver mines in the world and in a question of weeks will become the second largest silver producer in the U.S. Hecla's Greens Creek mine in Alaska is the only other one in the U.S. that has bigger production than Aurcana's Shafter silver mine will have," Rodriguez says.
"But that's this year. We have plans already underway to increase production next year that should give us more than 6 Moz just from Shafter. Shafter is a pure silver mine. No byproducts. And within weeks, Shafter will have a stock deposit of 2,500 tons per day (tpd). We'll be releasing a stream of very good news from Shafter."
Getting back to Latin America. . .Pan American Silver acquired Aquiline Resources' Calcatreu gold development project in Argentina. Pan American Silver awaits its payoff as it waits for the government in Chubut Province to overturn its open-pit mining ban that would enable moving forward with Navidad. The property may yield 19.8 Moz annually during its first five years—once it gets underway. Early this year, a new law passed by the legislature in the neighboring Rio Negro Province went into effect that now allows for the use of sodium cyanide in mineral processing, which is critical to the recovery of gold at Calcatreu.
In a recent interview, Pan American CEO Geoff Burns acknowledged that the company's stock doesn't reflect Navidad's potential value due to inflation and protectionism in Argentina as well as slower-than-expected progress toward legislation to allow open-pit mining. In additional to operational restrictions, miners operating in Argentina are now required to repatriate revenues and convert them to Argentine pesos, which also means exposing capital held in Argentina to the risk of devaluing Argentinean pesos. Furthermore, Argentina is considering imposing royalties as high as 12%.
This brings the question of jurisdictional risk front and center. Just how big a concern is that for companies operating mines in Latin America? The Gold Report's companion story delves into this topic.
The Gold Report Publisher Sally Lowder, in some cases joined by Brian Sylvester, conducted the interviews on which this article is based during the 2012 PDAC International Convention, Trade Show & Investors Exchange, held March 4–7 at the Metro Toronto Convention Center. The annual event, sponsored by the Prospectors and Developers Association of Canada, drew nearly 28,000 attendees from 120 countries last year.
Gifted Geologist and Entrepreneur Ross J. Beaty, loved by investors for whom he's created more $4 billion in shareholder value over the years, currently serves as executive chairman of Alterra Power Corp. and chairman of Pan American Silver Corp.—but he's founded, developed and divested a number of other public mineral resource companies over the course of 38 years in the international minerals industry. Born in Vancouver, Beaty has a degree from the Royal School of Mines, a Master of Science with Distinction in mineral exploration from the University of London, and bachelor's degree in geology and a law degree from the University of British Columbia. Working in 50-plus different countries over the years, he speaks English, French and Spanish, as well as some Russian, German and Italian. Beaty is a past president of the Silver Institute in Washington, D.C., a fellow of the Geological Association of Canada and the Canadian Institute of Mining, a recipient of the Institute's Past President's Memorial Medal and a founder of the Pacific Mineral Museum in British Columbia.
Michael H. (Mike) Callahan has been the president of Silvermex Resources Inc. since November 2010, and began serving as a director a year earlier. Prior to Silvermex, Callahan spent 20 years with Hecla Mining Co. He joined the company in 1989; served as a senior financial analyst, financial manager of its Silver Valley operations in northern Idaho and director of accounting and information services. While serving as president of Minera Hecla Venezolana and leading Hecla's Venezuelan operations, he also assumed duties as Hecla's vice president of corporate development, after which he returned to Idaho as vice president of Silver Valley operations.
Renowned Exploration Analyst and Geologist Brent Cook, whose weekly Exploration Insights newsletter covers geology and discoveries worldwide and calls attention to junior mining and exploration investment opportunities, brings more than 30 years of experience in more than 60 countries to bear on his work. Cook's knowledge spans all areas of the mining business, from the conceptual stage through detailed technical and financial modeling related to mine development and production. His credentials include service as principal mining and exploration analyst to Global Resource Investments, where he provided analysis to retail brokers and two in-house funds.
Jorge A. Ganoza Durant, whose work has earned him a spot among "Casey's NexTen"—an exclusive collection of the "top 10 rising stars in the natural resource sector," is president and CEO of Fortuna Silver Mines Inc. since January 2006, and a director of the company since December 2004. Ganoza holds a Bachelor of Science in engineering from the New Mexico Institute of Mining. A fourth-generation miner from a Peruvian family that has owned and operated several underground gold, silver, and base metal mines, he's a geological engineer who has amassed more than 16 years of experience in exploration, mining and business development throughout Latin America, working for a number of private and public Canadian junior mining companies in Panama, Guatemala, Nicaragua, Honduras, Mexico, Dominican Republic, Haiti, Peru and Colombia.
Lenic M. Rodriguez, a Mexican businessman residing in Vancouver, has been the CEO and the president of Aurcana Corporation since May 2009 and has been a director of Aurcana since 2006. He has over 15 years of experience in top management with one of Mexico's 10 largest corporations. He has also served as a director of Alberta Star Development Corp. Rodriquez is a magna cum laude honors business graduate from one of Mexico's top Universities, Universidad IberoAmericana. He holds a Master of Science and a Bachelor of Arts in business administration.
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