Silver bulls' faith may be well rewardedBeaty: Silver bulls' faith may be well rewarded
By: Dorothy Kosich
Posted: '26-SEP-05 03:00' GMT © Mineweb 1997-2004
POST FALLS, Idaho--(Mineweb.com) While Pan American Silver Chairman Ross Beaty concedes that "mining is a very, very risky business," he believes silver bulls are now in a good position to reap the financial rewards for their faith in what he feels is the most beautiful of precious metals.
In a presentation to Pan American shareholders at the Silver Summit in Post Falls, Idaho, mining entrepreneur Beaty admitted that silver companies and silver prices had a rough time during the 1990s. In fact, Beaty still feels most of the silver junior mining companies who "are hearing selling dreams will be gone" in the next decade.
Nonetheless, Beaty insisted that "silver has really strong demand fundamentals." For instance, the supply of silver "is relatively constrained," and "inventories are going down." In the meantime, Beaty noted that the "same secular structural reasons that have caused" base metal prices to go up 30-40% have also caused silver prices to increase. Silver currently trades around $7/oz on NYMEX. Beaty told shareholders that the U.S. dollar and industrial production growth will be key drivers in the price of silver, along with the increased investment demand that "may catalyze sharp upward prices."
Beaty explained that silver mine production is flat and is expected to remain static in 2006.The fact that only 22 to 23 pure silver mines operate worldwide "does tell you how rare silver mines are," he added. Meanwhile, the U.S. government stockpile is gone, and India sold 20 million ounces of its silver stockpile this year. Chinese industrial demand for silver is "growing very rapidly," according to Beaty. Several new major uses of silver are on the horizon including plasma televisions, water treatment, replacement of copper-arsenate wood preservative, and superconductors.
"I do not need to subscribe to theories that have a disastrous scenario" to be bullish on silver, Beatty declared. However, he added, "I am very bearish on the U.S. dollar. ...I do not see this debt spiral ending. ...that is bad for the dollar, good for metals."
Passionate silver bulls, such as columnist Ed Steer, admit that even they hold stock in Pan American Silver. In a recent editorial for the website Financial Sense, Steer declared that "it would be my bet that virtually every shareholder in Pan American Silver (and every other silver company for that matter) just wishes that silver companies would spend as much time trying to bring the silver price manipulation to an end as they spend time digging our silver out of the ground at a loss."
Nevertheless, Steer added, "After skewering Pan American Silver in general and Ross Beaty in particular, some may ask why I hold shares in this company at all. Well, there are some very good reasons....it is a big producer, it has big reserves, and it is a very liquid stock...and it is Canadian based with no mines in the United States. ...Pan American Silver belong in everyone's silver portfolio...as does Silver Standard Resources."
Vancouver-based Pan American has probable and proven reserves of 154.7 million ounces of silver. Measured and indicated resources are estimated at 240.5 million ounces. Three properties are currently under development, including Alamo Dorado in Mexico, which has 44 million ounces of proven and probable silver reserves and 9 million ounces of M&I resources of silver. The $76.6 million Alamo Dorado project, which is expected to begin commercial production in late 2006, is expected to produce an average of 5 million ounces of silver annually at a cash cost of $3.25/oz.
Pan American has temporarily closed its San Vincente mine in Bolivia in an effort to expand it to 3 million ounces of annual silver production by mid-2006, according to Beaty. Nevertheless, Beaty--who worked as a geologist in Bolivia throughout the 1990s--concedes that "Bolivia is a very tough country" due to political blow-ups and strife. To mitigate risk, however, Beaty said Pan American deliberately keeps a low profile in Bolivia, which has resulted in "no delays, no hassles at all" for San Vincente.
While Pan American is striving for a 50 million ounce annual silver production target, Beaty believes the company will achieve 22 millions of production by 2007 or 2008.
Beaty told shareholders that Pan American has to "sink or swim on the basis of financial results." Despite the rise of silver prices, Beaty explained that cash costs have also risen, "all local costs have gone up 15%." Oil and shipping charges have also soared. Even the wood used in underground mines has increased 40%, he added. At the present time, Pan American considers controlling costs at its Mexican mine a high priority. Some currency costs have been hedged, but not oil prices, Beaty said, "because we are not good at that."
Investors should also keep in mind that 2 million ounces of silver are usually in process pipeline between the actual mining and the day the bullion or concentrate is actually paid for by refiners, Beatty explained. Meanwhile, "if the U.S. dollar goes down it costs us money." To fix these dollar costs would require Pan American to buy a year's worth of operating costs, an option that the company has yet to exercise, he added.
Beaty estimated that Pan American has 38,000 shareholders holding 66.9 million shares, and does not believe in dilution "by issuing a bucket of shares." He estimated the current stock price to be $17.05 per share on NASDAQ. The company doesn't hedge silver and has no debt. Options are traded on CBOE, AMEX, PSX, and MX. The company is also listed in the Philadelphia Gold and Silver Index. As of June 30, 2005, Pan American reported $79 million in cash and short-term investment.