Silver Juniors with Cash Flow
Silver Exploration Companies Aim for Positive Cash Flow
Jason Hommel
Mining is a risky business. Mining is an impossible business if the prices of the metals are too low.
Silver mining has been especially risky during the
previous 24-year bear market in silver, from 1980 to 2003. At $5-6/oz.,
there are no major, public, silver mining companies that are cash flow
positive. Most silver mining is a byproduct of other metal production,
such as gold, copper, and zinc, which are profitable to mine. The
little silver that comes to market from primary silver mines is mostly
mined at a loss by the silver miners. A few profitable silver mines
exist in the world, but they are owned by very large companies such as
BHP Billiton, which you can't really buy for the silver exposure,
because silver is such a tiny portion of the overall value of the
company. BHP has a market cap of $61 Billion. Or, other profitable
silver mines are so small, or privately owned, that you can't buy stock
in them, either.
Silver exploration mining companies are inherently
risky, because silver mining simply is not profitable for the vast
majority of silver companies, and silver mining projects, at current
low silver prices. To survive until higher silver prices arrive, a
silver exploration company must be able to continually raise capital
for ongoing exploration expenses by issuing new shares. If it cannot,
the officers and directors must forgo salaries, or live off of savings,
or even in many cases, loan money to the company just to keep things
going and keep from going out of business! I know of at least four
companies whose presidents and principles have loaned money to their
companies out of their own pockets to keep the company going. Such is
the devotion, dedication, belief, and support these brave men have
given to be in the hard business of exploring and developing a silver
mining company.
But things are changing. Now, the silver price has
risen from $4.50/oz. in June 2003 up to $6.95 as of Monday, March 1,
2004. And many silver exploration companies have just completed share
offerings, or private placements, for exploration and development.
My investment outlook is one of much higher silver
prices, up to and over $50/oz. I believe that silver mining will once
again be a fantastically profitable business, the kind of which builds
family dynasties and massive fortunes. I think the best way to invest
based on my outlook is to buy silver companies with title to the most
ounces of silver in the ground, because that is where the leverage is
obtained. My investment strategy will not be the best strategy if
silver prices will level off around $6-7 or even $9-10/oz.
But this article will not focus on my investment
strategy. The purpose of this article is to point out silver junior
exploration companies that are, or are soon to be, cash flow positive.
The reason I'm focusing on this aspect is that not everyone is as
bullish on silver as I am, and may have different concerns. Other
investors may be more timid about investing in silver junior
exploration companies due to the high risks inherent in the business.
But a lot of other investors may be looking for explorers that are cash
flow positive, as this tends to reduce risks.
Before I start, let me discuss why silver junior
mining companies present such a good investment opportunity right now.
Most of the investment world has completely ignored silver and silver
miners, and for good reason. There were no profits to be made from
silver mining for a long time. To stay away from the sector was a wise
decision for the short term. And this fact has caused the prices of
silver mining properties and companies to be driven to extremely low
levels, bankruptcy levels.
However, there are widely different prices for
silver properties. I believe the most expensive silver properties to
invest in are the ones held by the biggest and most widely recognized
companies that you can buy stock in, such as Hecla mining (HL), Barrick
(ABX), and Cour d'Alene (CDE). The PE (price to earning) ratios of
these companies are very high, around 40-50 or higher, meaning the
price or market cap of the company is significantly higher than what
they earn. I believe the properties that are among the cheapest
(besides those that become available during bankruptcy proceedings) are
those historical silver mines that have never been properly explored,
and are privately owned. Some of these properties have recently been
sold for a projected PE of about 1-3, which I find amazingly cheap.
For example, Pan American Silver (PAAS), on February
9th, 2004, announced that they bought the Morococha silver mine in Peru
for US$35 million. See
http://biz.yahoo.com/djus/040209/0815000390_2.html According to the
press release, the historical production of this mine was 3.5 million
oz. of silver per year, at a cash cost of below $3/oz. This means that
at $7/oz, the cash flow of this mine will be the following: 3.5 mil x
$4/oz. profit = $14 million per year. Not bad for a $35 million
purchase price, especially if the price of silver continues to go up as
I expect. That PE ratio would be $35/$14 = 2.5 (Just in case the
purchase price was in Canadian, the deal is even better as follows:
$26/$14 = 1.85)
As another example, Mexgold (MGR.V) on Feb 27th,
2004 issued a press release proposing to buy the El Cubo gold and
silver mine. See
http://biz.yahoo.com/cnw/040227/mexgold_el_cubo_mine_1.html According
to the press release, the purchase price for the mine is $13.5 million
plus an additional $7 million. With capital spending and upgrades,
Mexgold expects to produce up to 100,000 oz. gold equiv/year at
$190/oz. cash cost. At $400/oz, that may mean $210/oz. net profit, or
$21 million positive cash flow/year, and yet, the purchase price was
$21.5 million. This gives a PE ratio of about 1.
Now, I don't present these examples to show that
PAAS and Mexgold are the best investments out there. For example, if
you buy Mexgold stock, the market cap of Mexgold is about $125 million
at $3.19 Cdn/share, not the $21 million they are paying for their mine,
so your projected PE price if you buy Mexgold stock, if you only
consider that one acquisition, is about 6.
Although that may well be an excellent investment
opportunity, the point of presenting these examples is to show you that
you can do what PAAS and Mexgold and other silver exploration companies
are doing, and you can buy cheap silver mines, too, just as they are
doing. But if you are going to do it the easy way, by buying stock, (as
opposed to traveling to Mexico yourself to scout out properties) you
have to buy the juniors or explorers to do it.
So, my point is that if you buy the silver junior
explorers, then you, too, may find opportunities to acquire silver
mining companies at projected PE ratios of about 1-2 or maybe even less!
And the reason why these investment opportunities
exist is that silver mining has simply not been profitable during the
24-year bear market in silver prices. And not all silver mining
property owners believe we will ultimately have much higher silver
prices, as they have been discouraged by the long bear market.
To survive during the bad times in the silver
market, several companies have had plans in place to become cash flow
positive so they would not have to rely on share dilution and financing
to fund development and company growth. A company that is "cash flow
positive" means that it:
* should be safer for investors.
* will be less likely to go bankrupt.
* will be able to fund their own growth and development of projects.
* will be more likely to attract investment capital for further development.
* will be less eager to
raise capital that dilutes the value for current shareholders and
management.
So… Here are a two explorers that are cash flow positive.
Golden Eagle (MYNG.OB) (I own shares.)
Market Cap --I have not been keeping track… about $50-100 million?
Golden Eagle is the last gold stock that I own. It
has the lowest grade gold ore, and the largest exploration potential
size of resources that I've ever seen. And yet, they recently became
cash flow positive from their start-up gold mining operations. They
have one single 3500 ton per day plant, and could potentially build 20
such plants on their huge properties. I bought the stock due to the
potential size of their resources, which should provide the greatest
leverage as gold prices increase. Golden Eagle has been intending to
release resource and reserve estimates since mid-December, but they
have not yet released complete resource data, as was explained on March
1 here: http://biz.yahoo.com/prnews/040301/lam088_1.html
I'm holding until I can get a better picture of their reserves, and market cap.
--Cash flow positive from gold mining.
TVI Pacific (TVI.TO TVIPF.PK) (I don't own shares.)
www.tvipacific.com
Dianne (IR) Phone: (403) 265-4356
344 mil fully diluted Oct. 7th, 2003
@ $.305/share Cdn x .75 US/Cdn = $.228 US
$79 million Market Cap
--TVI Pacific is one of the only silver mining
companies that I know of that actually is cash flow positive from
selling silver. They produce a dore silver bar. They own a drilling
company with 20 rigs. They have many silver properties in the
Phillipines. They also have a 2.5% royalty on the Rapu Rapu project
that they project will bring in about $1 million/year in revenue. Due
to my difficulty in attempting to quantify their resources, I passed on
investing in TVI. I should note that at the time I first investigated
TVI Pacific, it was at $.08/share, and now it's at $.30/share.
Here are six explorers that should, or may, quickly
become cash flow positive within the year or sooner with specific
projects (listed by market cap, biggest first).
Sterling Mining (SRLM.PK) (I own shares.)
www.sterlingmining.com
RDemotte@aol.com Ray DeMotte 208/676-0599
just under 10 mil shares fully diluted (early Jan. 2004)
@ $13.00/share
$130 million Market Cap
--Sterling Mining announced on January 26, 2004, a
plan to acquire the "Baroness Silver Tailings Project" in Mexico, see
http://biz.yahoo.com/bw/040126/265110_1.html
Important quote: "The Baroness Tailings Project,
should it meet our investment criteria, offers the exciting possibility
of near-term silver production. Any Sterling profits realized from
Baroness operations would be reinvested in additional silver
exploration efforts, principally at the Sunshine Mine."
I did not buy Sterling for this particular cash flow
project, I bought it for their underlying silver properties, and for
their acquisition of the Sunshine Silver Mine.
Clifton Mining (CFTN.PK) (I own shares)
www.cliftonmining.com
clifton@cliftonmining.com 801-756-1414 (303) 642-0659 Ken Friedman
45 mil shares fully diluted (Oct. 2003)
@ $2.08/share US
$94 million Market Cap
--Clifton has 25% ownership of a biotech firm that
makes a colloidal silver. On Feb 27th, 2004, Clifton announced their
colloidal silver product was successfully tested "effective against
all… ailments" such as " malaria, fungal infections, ear infections,
measles, septic ulcers and a number of serious viral problems" in human
subjects in West Africa. See
http://biz.yahoo.com/prnews/040227/ca091_1.html
If or when this amazingly effective medical product
reaches wider market acceptance and use, it should provide great cash
flow positive potential to fund development of Clifton's mining
properties. Clifton has a silver deposit that may have up to a billion
oz. of exploration potential that is currently being explored by their
joint venture partner, Dumont Nickel.
Formation Capital (FCO.TO FCACF.PK) (I own shares.)
www.formcap.com/frhome.htm
inform@formcap.com 604-682-6229
Over 150 mil fully diluted, Dec. 2003
@ $.56/share x .75 US/Cdn = $.42
$63 million Market Cap
--Formation Capital bought the Sunshine refinery in
Idaho. They own a large cobalt project, and bought the famous Sunshine
silver refinery to process the cobalt. But before they get started
mining cobalt, they will again process silver and gold at the refinery,
as they announced on Jan. 13, 2004 here:
http://biz.yahoo.com/bw/040113/135256_1.html
First Majestic (FR.V FMJRF.PK) (I own shares.)
www.firstmajestic.com/s/Home.asp
info@firstmajestic.com
15.8 mil shares fully diluted (Jan 30th, 2004)
@ $1.49/share Cdn x .75 US/Cdn = 1.12
$17.65 million Market Cap
--On Jan 13, 2004, they acquired the La Parrilla
Silver Mine, in Mexico, which they expect to be producing in a few
months. The total purchase price was for $3 million. See
http://biz.yahoo.com/cnw/040113/first_majestic_mexico_1.html They
expect to produce within 4 months, producing 175,000 tonnes a year at
300g/t silver. Translated, this is 1.8 million oz. of silver per year,
at a cash cost of $3/oz. At $7/oz. silver, this could be a profit of
$4/oz., or 4 x 1.8 million, or $7.2 million per year. Not bad for an
acquisition cost of $3 million! That's a PE of less than one, or .41
for the acquisition, and a PE of $18/$7 or 2.6 for investors who buy
stock! Important Quote: "Management is very excited by this opportunity
to acquire the first cash flow producing asset for the Company." The
company's web site contains a very important quote on the main page.
This latest acquisition is "anticipated to be the first of several
acquisitions over the coming months."
Nevada Pacific Gold (NPG.V NVPGF.PK) (I own shares.)
www.nevadapacificgold.com
dhottman@nevadapacificgold.com (604) 646-0188 David Hottman
43 mil shares fully diluted (Nov 26th, 2003 including recent PP)
@ $1.19/share Cdn x .75 US/Cdn = $.89 US
$38 million Market Cap
-- Nevada Pacific Gold, on Jan 7th, 2004, announced
the pending acquisition of two gold mining properties that will be cash
flow positive. See
http://biz.yahoo.com/ccn/040107/e2092fcd7484fe968a63b27a2a72060c_1.html
Important quote from article, "Cash flow from future gold production
will create a solid foundation for the Company and fund gold
exploration in Nevada." Their press release indicates 2003 production
of 45,000 oz. of gold. If their cash costs were, on average, $200, then
the cash flow could be about $9 million per year. Cash costs for the
smaller of the two mines was "reported to average US$108." If Nevada
Pacific earns $9 million for 2004, that gives a projected PE of $38/$9,
or 4.2.
I bought Nevada Pacific Gold for their silver
exploration property, Amador Canyon, which may have an exploration
potential range of from 200 million to 1000 million (or a billion)
ounces of silver.
Cabo Mining (CBE.V CBEFF.PK) (I own shares.)
www.cabo.ca
jav@cabo.ca (604) 681-8899 John Versfelt, President
18.9 mil shares fully diluted (Feb 9th, 2004)
@ $1.15/share Cdn x .75 US/Cdn = .86
$16.3 (to $33.5) million Market Cap
--Cabo recently announced two private placements for
$5 million, one at $.75/share, the other at $.83/share, for a total of
$10 million. The first PP will add 10 million fully diluted shares, the
second will add another 9-11 million shares, depending on if it is $5
million or $6 million. Adding in those shares will mean there will be
up to 38.9 million fully diluted shares x $.86 US, or $33.5 million
market Cap.
--Cabo has two Drilling Companies under contract to
be acquired. Drilling companies make money in the risky world of
mining, whether they hit a strike or not. The drills don't turn unless
they are paid. With the metals prices rising, and a lot of capital
being raised to drill projects, drilling companies should surely be
"cash flow positive".
I didn't buy Cabo for the drilling companies, my
focus was on their silver property in Cobalt, Ontario. But many who
invested in Cabo were excited by the prospect of a company quickly
becoming "cash flow positive". And this is why I was motivated to write
this article, to focus on the "cash flow positive" explorers.
Klondike Gold (KG.V KDKGF.PK) (I own shares)
www.klondikegoldcorp.com
70 mil fully diluted (Nov. 2003)
@ $.22/share Cdn x .75 US/Cdn = .165
$11.5 million Market Cap
-- Klondike has many silver and gold properties.
Some of the people are also involved with GNG.V, Golden Goliath.
Klondike has one silver property that could be producing within weeks.
I'm not an investment advisor, and this article is
not intended as investment advice. This article is intended to motivate
you to do further research into silver mining stocks as you may feel
appropriate. Always do your own research to confirm what you read on
the internet.
None of the companies in this article has paid me to
write this article. I own shares of MYNG.OB, SRLM.PK, CFTN.PK, FCO.TO,
FR.V, NPG.V, CBE.V. I do NOT have any shares of BHP, HL, ABX, CDE,
PAAS, MGR.V, or TVI.TO.
Prices for this report are accurate as at the close of Tuesday, March 2, 2004.
I write a free weekly silver stock report. To
receive this report in email, please sign up at www.goldismoney.com.
March 4, 2004
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
Goldismoney.com
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