Published March 21, 2012
| Wall St. Cheat Sheet
Eric Sprott, legendary gold and silver investor and chairman of Sprott Inc., famously issued an open letter to 17 of the world’s largest silver producers last year. The letter is well-known to the precious metals community because it challenged the mining industry to limit silver sales until prices increased. Unlike an OPEC style cartel, Sprott advocated that miners simply hold a portion of their cash reserves in the form of silver, in order to protect themselves and shareholders from irrational price corrections that take place too often in the silver market. Endeavour Silver not only heeded Sprott’s advice, but has already benefited from it.
Sprott’s “Call to Action” letter suggested, “Instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver outside of the banking system. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals.” Furthermore, holding silver instead of cash as a form of savings allows silver miners to convert their silver into cash at an opportune time.
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Endeavour Silver, a mid-cap silver mining company with operations in Mexico, is a perfect example of Sprott’s letter. The company has been parking excess cash in silver and gold on a short-term basis since 2008. Instead of falling victim to the volatile silver market, Endeavour “elected not to sell a significant portion of its metal production on the basis that the gold and silver prices were experiencing a major correction and the Company would be better served to hold the unsold metal in inventory until such time as the metal prices rebounded,” the company said in its earnings release on Tuesday. Endeavour held 980,000 ounces of silver and 5,400 ounces of gold at the end of 2011, compared to only 127,000 ounces of silver and 957 ounces of gold at the end of 2010.
Silver prices were quite volatile in 2011. After opening the year at $30.63 per ounce, silver climbed to nearly $50 on April 28. However, prices were beaten down to $26 by December and ultimately closed the year at $28.18. This year, silver prices rebounded to $37 per ounce in February and provided Endeavour an opportune time to sell its silver holdings. The miner explained, “Metal prices did rebound in Q1, 2012 and management subsequently sold most of the metal held in inventory at prices significantly higher than the December prices.” Since gold and silver are considered to be real money in many nations worldwide, they can be liquidated easily when the need or opportunity arises.
As more companies and investors realize the benefits of savings in the form of physical gold and silver, the trend of protecting wealth from devaluing fiat currencies will increase. McEwen Mining, a mid-tier silver and gold producer in the Americas, recently announced it held around one-third of its $78.8 million treasury in physical bullion, predicting that gold and silver will hit $5,000 and $200 an ounce by the middle of the decade, respectively.
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Disclosure: Long EXK, AG, HL, PHYS
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