Sterling Mining
Jason Hommel
The stock of Sterling Mining (SRLM--pink sheets) has
been a big winner in 2003, moving up from a base of about 50 cents a
share in the summer, to hitting a high of $10 share by November. That's
up by a factor of 20! A twenty-bagger! In about 6 months! Today, at
$7.25/share, they have just under 10 million shares, with a market cap
of about $75 million.
So, why did the shares move up so much? Is it too
late to buy? Is the moved played out? Are the shares tired? Has a top
come in? Is the momentum lost? Will the shares now trade in a range?
Those are the questions that befuddle the technical investors. I don't
concern myself with such things, and this article will not address any
of those questions. I look only at value, the fundamentals. I ask,
"What do you get?" and "What are you paying?"
The fundamental story is that Sterling Mining
acquired the rights to the Sunshine mine, and continues to acquire more
silver properties in the Cour d'Alene silver valley, in Idaho, U.S.A.
The Sunshine Mining company went bankrupt due to
their debt burden, and perpetually low silver prices. This is what
creates the opportunity for silver investors today. Sterling Mining
bought the property because they were willing to offer cash, while
other major mining companies wanted to spend too much time doing their
due diligence.
In the real world of real and limited assets, it's
"first come, first served". That's the rule whether applied to buying
silver bullion, or buying land rights, or participation in private
placement opportunities. Whoever shows up with the cash first gets to
buy it.
Now, when Sterling Mining leased the Sunshine
property, I didn't know the Sunshine mine from a hole in the ground. I
was fortunate enough to own a little stock of Sterling back at 61
cents/share. My initial decision to buy Sterling Mining stock was based
on seeing a banner ad at David Morgan's web site, silver-investor.com,
and by reading about management's philosophy of acquiring silver
properties at low prices while silver is still cheap. I, myself, due to
my ignorance, wondered whether it was too late to buy more after the
stock had moved to 83 cents after they announcement of the acquisition
of the Sunshine mine. And, I kicked myself for not buying any at 50
cents/share. In the end, I had to force myself to ignore my jealousy of
other people's good fortune (those who bought before me), and I had to
buy the stock on the merits of the situation at the time. And so, I
bought more at 90 cents, and more at $1.10. Again, I bought at $2.40,
and again I bought at $3.60. The more I learn about the Sunshine Mine,
the more I keep buying. It was difficult to buy into a rapidly rising
market, and each decision was a new decision. But obviously, those were
the right decisions. I bought, knowing little more than the "silver
resource" totals listed for the Sunshine, which are 185 million oz. of
silver. I divided the current market cap by those silver ounces, to get
a "cost per oz. in the ground." I could hardly believe the math and
good opportunity, but I realized it was a good value. But the more I
learn, the more I realize the great value of Sterling Mining.
The Sunshine Mine produced 360 million ounces of silver over 100 years of fairly continuous production.
In 1993, the Sunshine Mining Company, with 200
million shares, and $100 million in debt, and with the price of silver
ranging between $3.70 and $5.30/oz., had a market cap of $500 million
dollars!
In contrast, Sterling Mining now owns a 15-year
operating lease on the Sunshine mine with option to buy it outright by
paying $5 million more, which they can choose to exercise at any time,
no rush. And Sterling Mining has no debt. At $6.55/share, with just
under 10 million shares fully diluted as of December, 2003, Sterling
Mining has a market cap of about $75 million. I believe they will have
no trouble raising the $5 million (with little dilution) to exercise
the option to buy the mine.
So, does significant upside potential remain? Is $75 million less than $500 million? You bet!
But look at the other advantages of Sterling Mining:
Very low overhead. Better land position. Sterling continues to acquire
property in the silver valley.
And the silver bullion market is in a much better
position, with a higher price, with 13 years of deficits, a smaller
silver supply, and investors are waking up to the silver story now with
the availability of information on the internet. Investors are also
waking up to the monetary fraud of the overvalued paper dollar, as gold
continues its third year of a bull market.
Sterling Mining also owns ten square miles of land
around the Sunshine mine. Of those 10 sq. miles, only 1/4 mile was ever
properly explored by Sunshine. Sterling mining has begun a surface
exploration program around the mine using modern exploration techniques
to rectify the situation.
This brings me to the Cour d'Alene Silver Valley.
This valley produced 1.1 Billion ounces of silver historically. There
were basically three big mines, Hecla, Cour d'Alene, and the Sunshine.
In December, 2003, Hecla has a market cap of about $850 million and
Cour d'Alene has a market cap in excess of one Billion dollars! The
Sunshine mine is a lot like the other two mines, in that it has been in
continuous operation for about 100 years, and they never really needed
to do any significant exploring, they just followed the silver into the
earth. Therefore, all three of these mines have traded at a significant
premium to the stated "resources and reserves," because they all have a
strong history of proving up and adding to their reserves as they mine.
So, I was wrong to buy Sterling Mining only for the
"reserves and resources" of the Sunshine, because like Hecla and Cour
d'Alene Mining, there is likely to exist much more silver in the
Sunshine mine than the published resource figures show. The Silver
Valley is unique in that the silver is not all close to the surface,
but goes deep.
The Sunshine mine was producing silver at a profit
as recently as 2000, with cash costs around $4.00-$4.50/oz. So, unlike
a lot of silver explorers, Sterling Mining has an existing mine, with
existing infrastructure. Other companies often have capital costs in
excess of $100 million dollars to get a mine going.
Right now, Sterling Mining is listed on the pink
sheets. (SRLM) They don't have a listing on the major exchanges, and
they don't have a bulletin board listing either. Why not? Those cost
money. Right now, management is still focused on spending their money
on land acquisitions and consolidating their position within the silver
valley. There is a silver rush going on! And I think management is
pursuing the right strategy. I see no reason to rush for an Amex
listing and become a fully reporting company at this time. The assets
of this company are not in the financial balance sheet, but rather, in
the ounces of silver in the ground that they are rapidly buying. They
are in the process of acquiring land all around the Sunshine, and
making their property contiguous, buying properties that are adjacent,
or next door. I think it matters very little whether they had $1
million or $1.1 million cash in the till in the last quarter. (Ray
Demotte, president, says they have about $1.1 million cash now, in
December, 2003.)
Nevertheless, Sterling Mining is committed to moving
up to another exchange by next year, and also they will be slowly
increasing their marketing efforts. However, their priority will
continue to be to acquire cheap silver prospects, resources and
reserves.
The company has not even yet spent money on booths
at the gold shows. Personally, I think spending money on marketing is
well worth it. The more they tell investors their story, the more money
they will receive when they issue shares, and the better deal they will
get for existing shareholders. As a shareholder, this is my motivation
for writing about the company.
Sterling Mining has other good silver properties in
addition to the Sunshine Mine. All total, they have perhaps up to 500
million oz. of silver "exploration potential" that they might have
within all their various properties in the silver valley.
So, how cheap is the "silver in the ground" that you
are buying when you buy Sterling Mining stock? At just under 10 million
shares, at $7.25/share, with a market cap of $75 million divided by up
to 500 million, that's 15 cents/oz. of silver in the ground. I like to
calculate things in terms of silver to silver, so I divide the market
cap by the silver price, and I get a market cap denominated in silver,
which is $75 million / $5.76/oz. = 13 mil oz. of silver market cap.
Then, I divide the oz. in the ground, or 185 million or 500 million
(exploration potential) oz., by the 13 million oz. market cap. This
gives a range of 14.2 to 38 oz. of silver in the ground that you get
when you spend the equivalent of one oz. of silver (or each $5.76 that
you spend) on Sterling Mining stock at $7.25/share.
Ray Demotte, president of Sterling Mining, looks at
it in a similar way. He says that with the 185 million oz. of silver in
the Sunshine, and with just under 10 million shares, that's 19 oz. of
silver per share. So, to keep that figure constant or rising, he
figures that with every share he issues to raise capital for expenses,
he'd better buy up to (or explore and find) 19 more oz. of silver in
the ground, or more, to keep growing the silver resources for his
shareholders. That's the kind of management perspective I love. He is
keeping dilution to a minimum, while growing the company by acquiring
silver assets.
Ray Demotte says that a lot of his existing
shareholders are continuing to buy stock. They tell him that they are
"tired of holding paper money." I believe we are witnessing the
beginning of monetary demand for silver, as investors pour money into
silver stocks first.
Monetary demand for gold and silver will cause silver prices to explode beyond belief.
Just look at the amount of dollars out there that
could buy gold. $20 trillion in bonds plus $9 trillion in M3 = $29
Trillion. A mere 1% of that is $290 Billion, which, at $400/oz., is a
massive demand of 22,549 tonnes of gold. Yet annual gold demand is a
mere 4000 tonnes, which exceeds the 2600 tonne mine supply. Do you
understand what those figures mean? That means that far, far less than
1% of dollars, in either bonds or M3 can buy gold, because there simply
is not nearly that much gold available. And how much silver is
available for monetary demand? Nothing, because we have deficits. But
there is 62 million oz. of silver registered for delivery at the COMEX,
which, at $6/oz, is worth $372 million dollars. So, if about 1/10th of
1% of 1% of paper money tries to buy that silver, it will be gone.
Therefore, long before 1% of U.S. paper dollars
tries to buy gold, such buying power will force the price of gold to
head up well over $1000/oz., and silver up over $50/oz. !!!
Some people think they can capitalize on that
inevitable gain by buying paper futures contracts. But I believe paper
futures contracts will default, since they promise to deliver more
silver than I think exists in deliverable form. Therefore, I believe
the best ways to profit from the inevitable trend is to buy physical
silver bullion, and buy silver stocks which have plenty of silver in
the ground for what you are paying, such as Sterling Mining.
I publish a free weekly silver stock report on 90
silver stocks. To receive an email notice of when and where it is
published, please sign up at goldismoney.com
Disclaimer:
I own shares of SRLM.PK.
I have not been paid by the company to write this article.
December 29, 2003
For more information:
www.sterlingmining.com
Ray DeMotte
RDemotte@aol.com
(208) 676-0599
(208) 676 1629
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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