Review: SST becoming "Silver Wheaton Jr."Silverstone being groomed as "Silver Wheaton Jr.";
"Imitation is the sincerest form of flattery"
Background
The news from February 21, 2007 is that Silverstone Resources (SST on the Toronto Venture exchange) reached an agreement which was later finalized to buy all the silver production from sister company Capstone Mining (CS-Toronto) for 10 years. The agreement is for Silverstone to buy the silver at a discount over time. In return, Capstone gets upfront money and warrants in Silverstone. Silverstone gets to sell the silver at a profit and benefit from higher silver prices in the future.
The real story behind the story is that Silverstone is being groomed to become "Silver Wheaton Jr". Overnight, Silverstone is becoming an active silver producer instead of a seemingly barely-active silver exploration company. Silverstone will have credited to its books an estimated 1.2 million ounces a year of silver, up from 0 ounces of silver in 2006. The management of Silverstone is obviously setting this up to follow the Silver Wheaton model, giving Silverstone the premium for the same silver which is lost in the shuffle among various other metals produced at Capstone's Cozamin mine in Mexico. In addition, this silver will be 100% silver, not silver plus zinc or silver plus copper, making Silverstone a rare company with 100% of revenues from silver sales. Welcome to "Silver Wheaton Jr." Capstone benefits from all this by getting substantial upfront cash and shares from Silverstone, and will benefit from the higher share price obtained by Silverstone in the future. Capstone will employ this cash in some manner to benefit shareholders, very likely a major acquisition to come. Any future acquisition by Capstone of a mine with silver byproducts is likely to lead to another similar deal to sell that silver to Silverstone. In this way, there is a synergy between the two companies where the growth of one company adds to the growth of the other.
But, back to this first deal with Capstone. These 1.2 million ounces are just for starters and compare to Endeavour Silver which had 1.65 million ounces of silver production in 2006. However, the market cap of Silverstone is only a fraction of that of Endeavour, and is subject to substantial increase (ie., in my humble opinion the stock price will have to increase along with the company's increasing silver production levels).
The news release was limited to the facts of the letter of agreement and did not attempt to communicate management's vision or intentions regarding the "big picture" of what they are going to do with the company. The 1.2 million ounces of silver production is the beginning, not the end, of what management intends to accomplish. Silverstone can now focus on similar deals with other companies to buy silver production. The silver credited to the books of Silverstone will increase substantially with production levels that will put it into the same league as Endeavour Silver and First Majestic Silver. However, the business model is nearly identical to that of Silver Wheaton. Let us welcome the next intermediate cap silver "producer" in the same 'vein' as Silver Wheaton, a company currently sporting the price of a low cap silver company.
How Silverstone can double or triple its silver production overnight
I will do the modest arithmetic for you all. Silverstone has contracted to receive about 1.0-1.2 million ounces of silver per year from Capstone. That was deal #1, a deal which turned the company into a silver "producer" overnight. Now it is presumably negotiating deal #2 with one or more other companies. I figure that anything less than 1 million ounces of silver per year for deal #2 would not be worth doing, it is too small. Assuming that deal #2 is for exactly 1 million ounces of silver per year, that effectively doubles Silverstone's overall silver production (from 1.0 to 2.0 million ounces of silver per year). If deal #2 instead involves 2.0 million ounces, that effectively triples Silverstone's overall silver production (from 1.0 to 3.0 million ounces of silver per year). Once the news is out, the market will become further convinced that Silverstone management is serious and capable of rapidly ramping Silverstone up the production growth curve using the Silver Wheaton model. I am betting that the market response to this is going to be fantastic, just as it has been for Silver Wheaton.
Silverstone can reasonably double or triple their revenues practically overnight with the stroke of a pen, and this is why the market for Silverstone stock is resisting the downward pressures seen elsewhere among most resource stocks. The stock hit a mid-day all-time high on May 23, 2007 of $2.80 Cdn a share. Even a "mere" 100% increase in silver production will likely set the market on fire. I expect the stock price to jump up significantly on the news of an agreement with some new company. This new company, whoever it is, is likely to bring with it a whole new set of investors and a major wave of new interest in the company. I try not to get too emotional about the companies I invest in but the fact is I am really excited by the progress I see happening with Silverstone.
"Imitation is the sincerest form of flattery"
According to the New Dictionary of Cultural Literacy (2002), to imitate someone is to pay the person a genuine compliment. Obviously, Silverstone is indebted to the business model pioneered by Silver Wheaton. No effort is being made here to suggest that the present size or progress of the two companies is similar. Obviously Silver Wheaton is way ahead in terms of market cap and number of silver agreements it has negotiated. The progress of Silver Wheaton serves as proof that a company with 100% of revenue from silver sales will be strongly embraced by the marketplace. Silverstone investors will be watching Silver Wheaton in the future, and perhaps some Silver Wheaton investors will pay attention to Silverstone. While Silverstone doesn't have the same size as Silver Wheaton, it has is the greater leverage of a small cap company. It is easier for a small cap company to double or triple its revenues and stock price than a big cap company. And perhaps Silverstone can improve upon the Silver Wheaton business model if that's possible.
Tooclassy