Finding Opportunity in Silver, the Devil's Metal: Chris
Source: Brian Sylvester of
The Gold Report
Silver has been called the most volatile of metals. But
volatility produces opportunity, according to Chris Thompson, a
top-ranked StarMine analyst with Haywood Securities. In this
exclusive interview with
The Gold Report
Thompson forecasts a strong year-end for the devil's metal,
despite price weakness so far in Q2/12, and shares the names of a
select group of companies that stand to profit.
The Gold Report:
Chris, Haywood Securities' estimated silver price for 2012 is
$36/ounce (oz), but the "devil's metal" has averaged less so far
in 2012, closing above $36/oz only once. Are you expecting a
significantly stronger second half for silver?
Silver performed relatively well in Q1/12. We hope that the
silver price will find support at current levels of ~$28/oz
through Q2/12 and Q3/12, with potential for a strong Q4/12.
Looking at the silver price right now, I see that it's
struggling to hold its head above $28/oz. If we do see a
significant breakdown from $28/oz, it may somewhat compromise our
forecast for this year averaging $36/oz.
Do you think investors shy away from the silver space given its
overall size and susceptibility to manipulation?
Silver is often referred to as the most volatile of all precious
metals. In that sense, it's not for the faint-hearted investor.
However, with volatility comes opportunity as long as timing is
right. The benefit that silver provides is that it finds value as
a store of wealth, as well as an ingredient used in industrial
applications, so it offers investors a dual benefit where silver
fundamentals benefit from economic growth as well as economic
In an April 23, 2012, research report, you told investors to
"look for quality over quantity" when it comes to silver
equities. What makes quality?
A lot of investors look at the size of an in-situ metal resource
hosted by a project when looking for a value opportunity
presented by exploration and development-stage companies. They
tend to ratio that against the enterprise value (
) of that company to derive a valuation.
Silver is often mined with other metals as by-products. Just
recognizing a straight EV dollar/ounces in the ground valuation
can be a little misleading. Also, silver is inherently more
challenging to recover metallurgically than other precious
metals, which influences operating costs and recoveries.
When you layer these peculiarities into the picture, it
becomes a complicated story and one that really cannot be valued
based on a straight EV dollar/ounce in the ground valuation. We
also look at size potential. We look at operating margins on the
tonne, as well as jurisdiction. It's a sector where participants
should be evaluated on a number of factors rather than just how
much silver they have in the ground.
What sort of opportunities is the volatility creating?
Silver has broken down from its highs in Q1/12. The sector has
sold off, which has been exaggerated in some instances. If you're
a believer in silver holding its head above the $28/oz mark,
opportunities exist where equities have been beaten up more than
they should have been based on weakness in the silver price. When
the silver price exhibits volatility, volatility in equities is
exaggerated, and that creates opportunity.
The performance of equities has lagged their underlying
commodities in the precious metals space for almost 18 months.
Why don't the equities respond the same way when the commodity
We've definitely seen a dislocation between equity valuations and
metal price since late 2010. The Toronto Stock Exchange Venture
Index is currently at about the same level it was in in the
middle of 2010 when the silver price was $17/oz and gold was
$1,200/oz. Equities, whether they're exploration, development or
even cash-flowing equities, haven't reflected strength in metal
prices for some time now.
They are, but only to the downside.
In the last six months, we have seen a lot of worry and concern
about operating costs; capital costs; and jurisdictional,
geopolitical and permitting risk. It's not just a story of metal
prices anymore. Performance now relates to a whole host of other
factors that determine how quickly and easily development-stage
projects can advance to production or exploration-stage projects
can advance to development.
Do you expect more mergers and acquisitions (M&A) in the
silver space, perhaps based on this garage sale effect that's
going on right now in the equities space? What market factors
prompted that conclusion? Is that conclusion unique to the silver
space among precious metals?
We have to look at the industry from two points of view. First,
we have to look at it from an acquirer's perspective. What
companies are positioned to purchase assets? What companies are
looking to grow their production profiles through making
acquisitions? Second, you have to look for prospective
acquisition targets. What companies have good-quality assets that
are suffering in today's market because of lack of funding and
weak investment sentiment for development- and
What we find in the silver sector is that despite the current
soft silver price, operating margins that a lot of silver
producers are enjoying are some of the best in the sector. The
average industry cash costs for silver producers are less than
$10/oz, which implies a healthy operating margin at a silver
price of ~$30/oz. A lot of silver producers are generating
significant cash flow in this environment.
Realizing that investor sentiment in the mining sector is
weak, a lot of companies that are trying to advance exploration
projects or development-stage projects are battling to finance
the advancement of their development and exploration plans. You
coined it-it is pretty much a garage sale out there for
exploration and development stories. The acquirers have healthy
treasuries and the ability to generate additional cash flow to
support larger treasuries and the targets are being starved of
funds to develop their project-it's a buyer's market.
Endeavour Silver Corp. (EDR:TSX; EXK:NYSE;
, recently paid
AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE)
$200 million (
) for AuRico's El Cubo gold mine and a couple of other smaller
exploration projects in Mexico. Do you believe AuRico will use
that cash for M&A?
I can't talk about AuRico, but I can talk about Endeavour.
Endeavour is an emerging midtier silver producer. It is currently
working toward delivering upward of 5 million ounces (Moz) silver
production annually over the next two years. Endeavour and other
emerging midtier companies are growing their production base
through acquisition. What seems to be a more common acquisition
target in the sector right now are not development-stage or
exploration-stage projects, but companies with operations.
Endeavour's purchase of the AuRico assets fits very well into
this focus and is not a surprise. First Majestic Silver Corp.
(AG:NYSE; FR:TSX; FMV:FSE) used the same sort of strategy by
acquiring Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC). There
is, especially in the emerging midtier subsector, a consolidation
El Cubo's total resource is 1.14 Moz gold and 53.5 Moz silver. At
$1,600/oz gold, that's $1.8 billion (
). At $30/oz silver, that's another $1.6B. That's a total of
$3.4B in all categories. Even just the proven and probable
reserves of 322,000 oz (322 Koz) gold and 18.5 Moz silver amounts
to more than $1B. It seems like quite a bargain. Why did AuRico
do that deal?
I would argue that this is not a core asset for AuRico. AuRico
has a relatively aggressive production growth plan. It is guiding
toward more than 500 Koz gold production by 2014. Obviously, this
comes with significant capital cost commitments. As far as silver
valuation is concerned, Endeavour will pay about $250M for the
asset and some exploration projects. Layering that into a reserve
base of about 38 Moz silver equivalent (Ag eq), it is paying
about $6.75/oz Ag eq. This is a little expensive, but understand
that it's a producing asset. The same calculation using the
resource base arrives at about $1.70/oz Ag eq, which is fair
value for an asset portfolio that includes an operating mine. The
value opportunity for Endeavour will be its ability to turn the
operation around economically.
What about the exploration potential of the other two projects
that were part of this deal-Quadalupe and Calvo?
They present blue-sky opportunity for Endeavour. More important,
Endeavour can generate value for the company by improving the
operating efficiency of El Cubo, bringing down cash costs, adding
ounces at the operation and developing the exploration
Did you raise your target on Endeavour after that deal was
No. We still have a target of $10.50/share for Endeavour. We're
waiting for the company to finalize the transaction, as well as
provide more details about how it's going to be financing the
You were recently awarded the 2011 StarMine No. 1 Stock Picker
award for the Canadian metals and mining sector. Congratulations.
What are some of your favorite picks among the primary silver
I define a primary silver story as one that's more valuable for
its silver metal value than other metals using Haywood's
long-term metal price assumptions. We regard
Bear Creek Mining Corp. (BCM:TSX.V)
as a company that's of interest primarily because of the
development potential offered by its flagship asset, the Corani
deposit in Peru. In time, Corani could offer +10 Moz silver
production annually supported by byproduct credits. There are not
too many projects at the feasibility stage of development that
can offer that sort of annual silver production potential. Bear
Creek is our preferred large-project developer.
It's a world-class deposit, but Bear Creek is having permitting
problems that are preventing its low-cost Santa Ana silver
project from moving to production. It can't bring Corani to
production without the cash flow from Santa Ana. What's the
likelihood of Bear Creek finding a joint venture (JV)
There's concern relating to Bear Creek's ability to finance
Corani. The company is in the throes of applying for permits for
Corani. We do regard this asset as being financeable. Also, we do
regard Peru as a world-class jurisdiction for exploration and
project development in the mining space.
What are the estimated costs to bring Corani to production?
We're looking at just under $575M.
And it could do that without a JV partner?
Preferably it would like to sell the project for the right price,
but the company isn't waiting to be acquired. It is aggressively
developing the project to production. The company has just under
$100M in cash. Santa Ana was the company's second-tier project.
The advantage of Santa Ana was it is a relatively cheap mine to
build and bring into production.
Bear Creek recently hired Renmark Financial to do some investor
relations. Will that be enough to change the perception of the
company in the marketplace?
We need to see a rebuilding of investor confidence in Peru as a
favorable jurisdiction for mine development. The company can't do
much more than what it's currently doing to develop Corani. The
company needs to continue to promote the benefits of Corani, as
one of the world's largest undeveloped and economically viable
silver projects, and work with the local communities.
How about some other primary silver producers? Would you put
Kimber Resources Inc. (KBR:TSX; KBX:NYSE.A)
in that category?
Kimber, with its Monterde project in Mexico, is a very
interesting company. Monterde is a development-stage gold-silver
deposit. Based on the company's current stock price, and what the
project can offer, it is cheap. We know the company is in the
throes of putting together another resource update for Monterde.
We see Monterde as being a very attractive potential acquisition
target for a midtier silver or gold producer. There's a large
gold silver resource with a high-grade core, which has been the
focus of the company's current deep drilling program. It's a neat
little project from an acquisition perspective.
Who are the would-be suitors?
There is a small group of companies: Endeavour Silver,
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX;
First Majestic Silver Corp. (FR:TSX; AG:NYSE;
, a company with operations in Mexico that knows the
jurisdiction. It's an asset that would look good in the portfolio
of a midtier producer-a company that is aiming to tag on 2 Moz
silver production annually with a good gold credit. The challenge
is that this group hasn't yet showed any interest in buying
projects-just operating mines.
Kimber has had some good drilling results at depth at Monterde.
Could those results change the picture for a potential
They support the high-grade potential offered by Monterde at
depth. Monterde has been mistakenly perceived by the marketplace
as being a low-grade project. The drill results that the company
has released over the last six to eight months suggest there is a
high-grade core at depth. It's going to be very interesting to
see what comes out when the company releases its revised resource
estimate, which is anticipated in the next month or two.
We've seen some recent examples of nationalization, most notably
in Argentina. The Argentinian government recently expropriated
the assets of
Yacimientos Petrolíferos Fiscales (
YPF:NYSE), which is a Spanish oil company. Could there be ripple
effects felt in the mining industry?
It paints Argentina in a poor light as a prospective jurisdiction
for mining and exploration. It's very unfortunate this has
happened. It creates a lot of uncertainty, worry and fear over
development of any resource-based asset in the country. We do
like the exploration potential that the country offers. We follow
a number of companies in Argentina, one of which has a very
substantial land position in the Santa Cruz province.
Mirasol Resources Ltd. (MRZ:TSX.V)
. It's unfortunate. It's these issues that really are beginning
to have an overriding influence on the sector and, in many
senses, taking away some of perceived opportunity that higher
metal prices offer.
Do you see that having a direct effect on the share price of
companies like Mirasol?
It creates uncertainty with regard to how easy it would be for
Mirasol, or any company in a similar position, to advance the
development of an asset in Argentina. I do see this development
as being damaging to the share prices of companies active in
Argentina based purely on the uncertainty that comes with this
sort of geopolitical risk.
Tell us about Mirasol's flagship project and why the company
When we look at an exploration-focused company, we have to be
satisfied with the team and the property portfolio that the
company offers. Mirasol has a very well qualified, experienced
exploration-oriented team and a very attractive property
In addition to that, the company has a JV with a major silver
Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE)
. Coeur d'Alene is earning a 61% interest in the Joaquin project,
with Mirasol being the JV partner. The Joaquin project is
arguably the most important development-stage asset that Coeur
d'Alene Mines has, something that is needed to grow its
Do you believe that Mirasol is a potential acquisition target
given the size and scope of Joaquin and Coeur d'Alene's majority
I think so. We've always looked at Mirasol as being a potential
acquisition target. We know Coeur d'Alene's interest in Joaquin
and see that as potentially being a trigger for an acquisition
based on consolidation of ownership. We also recognize that the
company has a very attractive land position, which ranks as one
of the most prospective jurisdictions for precious metals
There are a number of interesting silver explorers, even some
developers, on Haywood Capital's Watch List. Which ones are you
following most closely?
Soltoro Ltd. (SOL:TSX.V)
could potentially deliver a significant resource base at its El
Rayo project in Mexico.
International Northair Mines (INM:TSX.V)
may deliver a maiden silver resource at its La Cigarra project in
Mexico in mid-year.
Developers Kimber, Bear Creek,
South American Silver Corp. (SAC:TSX;
MAG Silver Corp. (MAG:TSX; MVG:NYSE)
Extorre Gold Mines Ltd. (XG:TSX; XG:NYSE.A;
Tahoe Resources Inc. (THO:TSX; TAHO:NYSE)
may offer development opportunities in the space, as well as
producers Endeavour Silver, Fortuna Silver and
Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX)
may offer growing production growth profiles.
How far away is Aurcana from being an American silver
Aurcana is in production. It has two assets, the La Negra asset
in Mexico and the development-stage Shafter project in Texas. Our
understanding is that it's in the process of commissioning
Shafter right now. We're also anticipating a revised resource
estimate on La Negra. We're looking at a company that can deliver
just over 4 Moz/year silver production at a little north of $8/oz
Tahoe Resources is a very big resource at this stage.
Tahoe is a very interesting company. It's a development-stage
story at the moment, but it offers potential to be a near-term
producer. The company recently announced a revised resource
estimate that showed a 50% increase in Indicated silver resource
to 367.5 Moz.
But it comes at a price. The market cap for Tahoe is ~$2.6B.
That's what you pay right now for one asset that can deliver $20M
silver/year and a potentially higher production rate with further
development. Escobal also offers potential to achieve good
It's a company we're watching very closely. We want to see the
company get its permits. The permit is a very important milestone
because it will remove a level of jurisdictional risk.
What approach to silver equities, especially those in the
exploration and development phases, will best serve the average
Looking at silver equities is no different from looking at
equities focused on developing, advancing and exploring for other
metals. One of the most important attributes of any company is
management. You need a good team that can deliver efficiencies in
what is a relatively challenging time for mining based on a lot
of cost creep and margin squeeze. It's all about the team. In
silver we look for quality over quantity. Look at the ounces in
the ground that will work from an operating perspective rather
than just the size of the inventory.
High grade, too?
Grade, good metallurgy, safe jurisdiction. As I've said before,
people throw out silver projects in many senses as offering size
potential, but there is no value in having hundreds of million
ounces silver in situ in the ground if you can't mine them
profitably. Also, be wary and recognize that silver is arguably
the most volatile of all precious metals and equities, by
extension, are also volatile.
Thanks for your time and insight.
was trained in South Africa and has over 20 years of industry
experience working as a geologist for major through to junior
mining/exploration companies, in addition to a stint working as
a mineral economist for the South African state. He has a
bachelor's degree from the University of the Witwatersrand, a
graduate degree in engineering, a master's in mineral economics
and a PGeo designation. Thompson has been with Haywood
Securities for over six years and specializes in junior
exploration and the silver and PGM sectors. Thompson was
recently awarded the 2011 StarMine No. 1 Stock Picker award for
the Canadian metals and mining sector.
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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:
2) The following companies mentioned in the interview are
The Gold Report:
Fortuna Silver Mines Inc., Silvermex Resources Inc., South
American Silver Corp., MAG Silver Corp., Extorre Gold Mines Ltd.,
Aurcana Corp., Kimber Resources Inc., and Tahoe Resources Inc.
Streetwise Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) Chris Thompson: I personally and/or my family own shares of
the following companies mentioned in this interview: None. 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 story.
4) Haywood Securities Inc. has reviewed lead projects of
Endeavour Silver Corp. (EDR-T), Bear Creek Mining Corp. (BCM-V),
Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V)
and a portion of the expenses for this travel have been
reimbursed by the issuer.
5) Haywood Securities, Inc. or one of its subsidiaries has
received compensation for investment banking services from
Endeavour Silver Corp. (EDR-T), Bear Creek Mining Corp (BCM-V),
Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V)
in the past 24 months.
6) As of the end of the month immediately preceding this
publication either Haywood Securities Inc., one of its
subsidiaries, its officers or directors beneficially owned 1% or
more of Bear Creek Mining Corp. (BCM-V) and Mirasol Resources
7) Haywood Securities Inc. or one of its subsidiaries has managed
or co-managed or participated as selling group in a public
offering of securities for Kimber Resources Inc. (KBR-T) and
Mirasol Resources Ltd. (MRZ-V) in the past 12 months.
8) Haywood Securities Inc. pro group holdings exceed 10% of the
issued and outstanding shares of Mirasol Resources Ltd. (MRZ-V).
9) An individual officer or director of Haywood Securities Inc.
or one of its subsidiaries owns >10% of Mirasol Resources Ltd.
(MRZ-V) outstanding shares.
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