Commentaries, Silver

Profiting from Silver Mining in the Age of Resource Nationalism: Sean Rakhimov


Source: Brian Sylvester of The Gold Report  (10/26/12)

Sean Rakhimov Resource nationalism is becoming a growing problem for many mining companies. In this exclusive interview with The Gold Report, Sean Rakhimov, editor of, shares his insights for safely investing in silver mining companies in a volatile world.

Companies Mentioned : Alexco Resource Corp. : Aurcana Corporation : Coeur d’Alene Mines Corp. : Dolly Varden Silver Corp. : Excellon Resources Inc. : First Majestic Silver Corp. : Fortuna Silver Mines Inc. : Global Minerals Ltd. : Goldcorp Inc. : Hecla Mining Co. : Huldra Silver Inc. : Santacruz Silver Mining Ltd. : Silvercorp Metals Inc. : SilverCrest Mines Inc.

The Gold Report: You have written that the pace of global resource nationalism is gaining momentum, affecting the supplies and prices of many commodities. You believe resource nationalism in all of its current forms is likely to affect silver more than other metals, particularly investable silver. Would you explain why?

Sean Rakhimov: The effect of resource nationalism on the physical supply market has not been significant yet, but I do think it’s going to affect future supply. Large-scale projects like the Navidad in Argentina owned by Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), the Corani and Santa Ana projects in Peru owned by Bear Creek Mining Corp. (BCM:TSX.V) and most recently the Malku Khota project in Bolivia owned by South American Silver Corp. (SAC:TSX; SOHAF:OTCBB) are already affected.

Combined, these projects represent about a billion and a half ounces that were expected to be coming on-line at this time. Yet sales are nowhere on the horizon and it’s largely due to the actions of the governments where these projects are located.

TGR: If you had to take a guess at which one of those is least in jeopardy, which would you choose?

SR: It’s a bit of a toss-up between Navidad and Corani. Navidad is higher grade and would likely bring more revenue to the government of Argentina, so the government may reconsider. On the flip side, Peru is largely a mining country. Mining makes up a large part of the economy compared to Argentina. These projects are so remote that I don’t necessarily buy some of the arguments and reasoning why their development has been held up.

These economies need additional money. Large-scale projects such as the ones in question would generate thousands of jobs and bring hundreds of millions of dollars of investment. Logic would suggest that respective governments should soften their stance, yet Argentina is still going full tilt to the other side where it is not only tightening screws on mining but also is creating obstacles for any foreign business.

TGR: Can we go back to your original thesis of how resource nationalism is going to affect investable silver?

SR: Venezuela has been on that path of resource nationalism for the longest time. Ecuador is on that list as well as other countries. I think any new money coming into the sector will likely be diverted away from those countries. Look at Bolivia, for example. It has a number of operating mines, but it turned around and nationalized the exploration projects.

TGR: Why did Bolivia nationalize South American Silver’s silver project instead of a project that it could take over that doesn’t need developing?

SR: I don’t have the definitive answer. Most likely it was a political decision to appease a certain constituency. In addition, the decision had a pragmatic element in that if you nationalize an operating mine, the implications in the international trade circles are further reaching and more negative. It could lead to some trade sanctions by other countries and so on.

TGR: In an article entitled “Shrinking Silver Space” on, you argue that silver investors are largely limited to Mexico, Canada, the U.S., Europe and to a lesser extent Australia. To the casual investor that seems like a fair number of choices. Isn’t that enough?

SR: It may be enough, but I think the underlying theme here is that perhaps it is advisable to avoid the jurisdictions we mentioned earlier. Their actions demonstrate that your money is at a greater risk if you’re investing in those jurisdictions

The key thing is that some monster projects located in risky jurisdictions are not coming on-line and future silver supplies are going to be affected. Silver supply growth may not be there a few years from now.

Right now the supply is growing about 3% a year, but I don’t see a lot of big projects coming on-line. The last big one that came on-line was Penasquito, owned by Goldcorp Inc. (G:TSX; GG:NYSE) in Mexico. And the next one is supposed to be the Escobar project in Guatemala.

Lack of silver supply growth is going to be significant because the demand is increasing at a healthy pace. I liken this event in some respects to what’s going to hit the uranium market at the end of this year when Russia stops its megatons to megawatts program, which would probably take away a good portion of the current uranium supply worldwide. Another event with similar implications is the mining labor unrest in South Africa. That affects the platinum and gold markets, but the major impact is squarely on the platinum market. These are major events for the sectors.

TGR: Do you think the resource nationalism is going to result in a significant rise in silver prices?

SR: Over time, yes. We’re not going to get a billion and a half ounces of silver from the aforementioned projects in countries with unfriendly mining jurisdictions. That’s one and one half years of annual worldwide supply.

TGR: Do you think that we’re ever going to get to what Eric Sprott is saying, that eventually silver will return to its historic 15:1 silver-to-gold price ratio?

SR: I think it’s in the cards at some time toward the end of the cycle, probably by the end of this decade.

I don’t have a more specific time frame. That’s mainly because this cycle is different from a number of previous ones from recent history; this one is a worldwide crisis and we’re talking about systemic problems with the global currencies. The four dominant currencies in the world—the U.S. dollar, euro, British pound and Japanese yen—are shaky. We’re talking about 80% or so of the currency market. This cycle has been going on for a long time. If this were an ordinary cycle, I think things would have been played out by now. We’re about 10 years into it.

TGR: Is this the beginning of a seismic shift?

SR: Yes, this cycle is larger and more severe by an order of magnitude, and because of that it may take longer. There’s a lot more at stake and a lot more powerful forces are involved. These forces will be much more active in trying to affect the outcome or timeline of events and they have already.

TGR: One of the interesting features about is that you take some companies to task for things that you believe were not in the best interest of shareholders. One of your favorite targets is Hecla Mining Co. (HL:NYSE) and you suggest that it “successfully squandered its vast advantages over other silver companies when the current cycle began more than 10 year ago.” But more recently Hecla has taken a different tack and it is borrowing its strategy essentially from a competitor and other larger companies in the precious metals space. Can you tell our readers about that?

SR: Hecla used to be the household name when people thought about silver companies. But look at it today. It’s trading at $1.7B market cap and probably a half dozen companies that either didn’t exist or were half its size 10 years ago have outgrown it.

Its management did not adjust when the boom times started, so today it doesn’t have much of a growth pipeline. Take a look at its closest competitor, Coeur d’Alene Mines Corp. (CDM:TSX; CDE:NYSE). Both companies started in the Silver Valley in Idaho. Coming into the cycle both firms were established companies, roughly comparable peers. In that timeframe, Hecla didn’t do much and has little to show for the last 10 years.

But look at Coeur d’Alene Mines. It went into Mexico and bought Palmarejo, one of the top 10 silver-producing mines in the world. It also built mines in Bolivia and Argentina and extended its reach into Australia. Management completely reinvented the company, despite not being known as a risk-taking company or at the cutting edge of anything coming into this cycle. It was an obscure company, but it certainly handled things better in this cycle than Hecla. No wonder that today it has about $1B more in market cap than Hecla.

TGR: Hecla recently took a step to possibly develop its pipeline of projects. Tell us about that.

SR: Hecla recently made a strategic investment in another junior company and that was a good move. The company is Dolly Varden Silver Corp. (DV:TSX). That project is in northern British Columbia and is a high-grade underground past-producing mine. It’s a small mine but underground mines usually start small and then can grow to significant size. Hecla’s familiar with that. It’s the company’s bread and butter, underground mining. It’s good to see it making adjustments to the game plan here.

It may be worth noting that Hecla also made a bid for U.S. Silver Corp., which is in the Silver Valley. But it didn’t happen despite Hecla offering a higher price than RX Gold & Silver Inc. (RXE:TSV.V), the company that ultimately succeeded in the bidding.

Dolly Varden has promise. The paths it is pursing geologically are very similar to Eskay Creek in terms of its origins. The hope is that the company will find deposits that are similar or comparable to Eskay Creek. Now that Hecla made that cash infusion, Dolly Varden has the funds to actually do some work on the ground.

TGR: Some silver producers are generating significant cash flow as silver prices hover around $32/ounce. Are there producers that you are more fond of than others?

SR: One producer I’m very fond of is First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). The company has grown throughout the cycle to become a very significant player. I think it will soon become a major in this space, certainly a growth company. It has been very aggressive in building the company. The company made a number of acquisitions and built mines, expanded them and has a very healthy pipeline of projects to grow the company and production.

TGR: OK. What about another one?

SR: Coeur D’Alene would fall in that camp as well, though it’s a major and that’s not an area where I spend a lot of time.

In the smaller companies, one of the companies I like a lot is SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT). This is a company that I’ve followed for a very long time and is another company that was victimized by resource nationalism. It had a major silver project in El Salvador years back, but the government wouldn’t let the company develop it.

So SilverCrest came to Mexico and got back to work. Since then it made a discovery, built a mine and that mine is now in production. SilverCrest is making about $3 million (M) a month at current metal prices.

TGR: Do you think that that’s fully priced into the stock?

SR: That may be fully priced into the stock. That’s hard to call mainly because the price of the metal moves and that changes the bottom line on a weekly basis, or what the bottom line would be based on that price.

TGR: Are you getting the La Joya exploration potential for free with that?

SR: Absolutely. I believe that the expansion of the Santa Elena mine to go underground and to build a mill is not priced in. Granted it is at least a year away for that expansion to come on-line, but I believe the current plan is to finance that mill out of cash flow. I don’t think the expansion is priced in because that would take them toward about 5 million ounce (Moz) silver production, on par with a company like Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX) that is trading something like $400–600M in market cap. Another company in that range is Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), although Fortuna has a base metal segment to it.

There’s certainly room for growing the valuation of SilverCrest based on that expansion and because the La Joya project is going to be very big. The company already has about a 100 Moz silver equivalent, the equivalent coming half from gold and half from copper. So 75% of value is in precious metals, between silver and gold. I believe it should come out with a new resource calculation sometime this year, which I expect to significantly increase the overall resource. I believe SilverCrest is getting no value for La Joya, which is common for producing companies. They get very little value for assets that are not in production once a company is valued on a cash-flow basis.

TGR: Are there any other producers you want to talk about?

SR: There are two new ones that I am tracking closely. One is a company called Huldra Silver Inc. (HDA:TSX.V). It will likely declare commercial production early in 2013. This is a high-grade mine in British Columbia.

TGR: What sort of production is the company looking at for its first year?

SR: Something on the order of 2 Moz. This is a very good project and it’s very high grade.

There are other companies that are in the same group. One would be Excellon Resources Inc. (EXN:TSX), which has a mine in Mexico. Two other companies in the same category are Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT), which is in Canada, and Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE), which operates mines in China. The reason I bring those three companies up is that they’re all high-grade underground silver-lead-zinc mines. Huldra would be another one whose ore grades are somewhere around 800–900 grams per ton, which is quite high for the industry.

TGR: Why haven’t investors heard of Huldra Silver?

SR: It’s a very young company. It started, or re-started, in March 2010, and we haven’t had the best resource markets since then, with the exception of that brief silver spike through $49/ounce (oz). It also has had a very tight share structure with not a lot of stakeholders. The new management team has done a good job. It came in and took things over, and in two and a half years the company went from a dormant project to one with over 100 employees. The mine is operating and the mill has been built and is running as we speak. Another impressive accomplishment is that the management got the mine permitted in British Columbia in a very short time.

TGR: Do you think some of these midtier and larger silver producers will use some of their burgeoning cash flow to pick up some underpriced assets?

SR: Absolutely. Usually the mergers and acquisitions in the sector happen in waves, often at the top or bottom of the market. We had an intermediate term top when gold hit $1,800/oz in spring 2011 and silver hit $49/oz.

When the cycle is topping, large companies are usually flush with cash and they’re looking to grow the company because that’s the expectation from the market and investors—to demonstrate future growth. Companies have two ways to spend it: dividends and growth—buy somebody, increase production. Larger companies’ balance sheets are in much better shape than exploration companies or junior companies. In addition, their valuations are higher, trading at several times better valuations than juniors. So these firms go for value and buy companies that are trading very cheaply.

TGR: What are some companies that are trading very cheaply? Are there some potential takeover targets that you think might be enticing?

SR: Merger and acquisition activity dovetails with what I have been saying about resource nationalism. A lot of capital has been flowing into Mexico and other “safe” jurisdictions.

As far as takeover targets go, Global Minerals Ltd. (CTG:TSX.V; DPF:FSE), which is advancing a past-producing silver project in Slovakia, could be a possibility. The project is growing and Europe doesn’t have many large-scale projects in the silver space. So Global is probably the next silver mine in Europe and it would be good acquisition target.

The Mexican story that I like a lot is Santacruz Silver Mining Ltd. (SCZ:TSX.V). It raised $20M at $0.90/share in April 2011 in a weak and declining market. In the initial public offering (IPO) the company did not offer any warrants, and yet it was fully subscribed. When was the last time you saw a junior exploration company do a $20M IPO?

The company has done very well since. It is rapidly advancing one of its projects toward production. There are a lot of reasons to like this company. Santacruz has three projects and all are good grade with significant size potential.

Santacruz is already building a mill at its first, smaller Rosario project. It plans to be in production within a year of the IPO and eventually to be producing 2 Moz/year from this project. That’s significant. The other two projects are larger and there aren’t a lot of these types of projects to be had. There aren’t a lot of producing mines with good grade and decent mine life, therefore, Santacruz’s Gavilanes and San Felipe projects can potentially provide a growth pipeline.

TGR: You once told us that you never sell silver bullion, but is now a good time to buy it? Or would you wait?

SR: It’s always a good time to buy silver. I don’t do much timing as a trading strategy. I think you should be buying silver when you have excess cash.

TGR: Is silver any closer to being purchased as a reserve currency by the world’s central banks, as you once speculated it would be?

SR: I think silver will be purchased at a point where gold is priced out of range for small central banks. The central banks are well aware of the gold/silver ratio, which is around 50:1 now and should be going down. The trend is in that direction and, as I mentioned earlier, I expect it to hit 15:1. I’m not sure how exactly it will play out. As discussed earlier, this is a much larger cycle than the last several, and a lot more is at stake here. And there will be a currency crisis. We’re beginning to see governments around the world buying gold to add to their currency reserves and gold is still within central banks’ price range. But if gold goes to, say, $5,000/oz, as is routinely forecasted by many these days, are we going to see governments continue buying it as they do today? I don’t know. Maybe they’ll buy silver, maybe they’ll buy palladium. But at some point I expect countries to buy silver because, in addition to being a precious metal, it is also a strategic metal like the rare earths or uranium. Silver is an important industrial commodity and countries that don’t have any will have to either source it elsewhere including the open market or export manufacturing to some place where silver is available.

TGR: Thanks for your time.

Sean Rakhimov launched his website,, in 2004. His writing has appeared on such Internet portals as Le Metropole Cafe, 24hGold, 321gold, Kitco, GoldSeek, Gold Seiten and The Gold Report. He previously designed financial systems for the investment banking business, learning about options trading, securities lending, payments processing, clearing and settlement, fixed income securities and margin transactions. Rakhimov is constantly looking for value opportunities in new and established stock stories.

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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Aurcana Corp., Global Minerals Ltd., Goldcorp Inc., SilverCrest Mines Inc. and Fortuna Silver Mines Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Sean Rakhimov: I personally and/or my family own shares of the following companies mentioned in this interview: SilverCrest Mines Inc., Huldra Silver Inc. and Santacruz Silver Mining Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.