Published April 20, 2012
| Wall St. Cheat Sheet
In precious metals, it has been a trying time for miner investors. Despite gains in bullion prices, gold and silver miners have lagged behind. Since January 2011, the SPDR Gold Trust has gained 15.5 percent, while the iShares Silver Trust has increased 2.5 percent. However, miner ETFs such as the Market Vectors Gold Miners and the Global X Silver Miners have both fallen 23 percent in the same period. While it may appear to be all doom and gloom in the mining stocks, the companies themselves are signaling better days ahead.
As we have discussed before, 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. Instead of falling victim to wild market swings or placing cash reserves in risky banks, Sprott suggested that miners store reserves in the form of physical precious metals. Endeavour Silver, a mid-cap silver mining company with operations in Mexico, has been employing this strategy quite effectively.
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Silver prices came racing out of the gate in 2012. In the first two months of the year, silver surged 32 percent from $28 to $37 per ounce. As a result, Endeavour elected to sell most of the precious metal inventory it accumulated in the fourth quarter of 2011, when silver prices tumbled. By the end of March, silver prices fell 15 percent, leading Endeavour to stockpile production again. In a recent news release, the company explained, “However, gold and silver prices corrected sharply once again in March 2012 so Endeavour management once again chose to accumulate its precious metal production in Q1, 2012 rather than sell at depressed prices. Management plans to monitor precious metal prices closely and sell some (or all) of the silver and gold inventory at appropriately higher metal prices, or if the need arises for more cash.” Endeavour finished the first quarter with an inventory of 925,100 ounces of silver and 3,927 ounces of gold.
The fact that Endeavour has the confidence to choose when to sell its metals production should be one indication that gold and silver prices are not done climbing higher. In a recent interview with SilverDoctors, First Majestic Silver’s CEO Keith Neumeyer said, “I’m a tripe-digit silver guy. I think we’re going back to a ratio of silver to gold in the 20 range, and it will probably overshoot that. I wouldn’t be surprised if we saw a 10-1 ratio on a spike then level out to the 20-1 ratio range. This obviously puts silver at a much higher price than it is today. I’m very excited about the future of the metal.” Neumeyer goes on to explain that First Majestic also invested $10 million into Sprott’s Physical Silver Trust, a fund that trades on the NYSE and offers a physical redemption feature on a monthly basis.
While some critics may claim that the gold and silver bull market is dead, it speaks volumes to see miners put real money where their mouth is. Other miners such as Eldorado Gold Corp. are also signaling better times ahead by investing heavily in future projects. The Canadian international gold producer has seven operating mines, with three mines under construction. In the next five years, Eldorado plans on expanding gold production by roughly 160 percent. Even though gold and silver bullion prices are currently taking a breather, miners are still preparing for a robust industry.
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Disclosure: Long EXK, AG, HL, PHYS