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Looking for a silver lining in ‘unsustainably low’ metals prices

Now is the time to be looking for quality projects that are fundamentally undervalued. Investor pessimism is at all-time highs and commodity prices are unsustainably low. When the market turns — and it always does — advanced-staged...


Now is the time to be looking for quality projects that are fundamentally undervalued. Investor pessimism is at all-time highs and commodity prices are unsustainably low. When the market turns — and it always does — advanced-staged projects will have the best leverage to their respective commodity.

Silver has been dubbed the “Devil’s Metal” because it is vastly more volatile than gold. The shiny metal underperforms gold on the downside and outperforms on the upside. Since it is still inextricably linked to gold, many pundits believe any significant gain in the gold price should translate to far better returns in silver.

Investment demand currently remains the single most important driver of prices in the silver market since it is widely held by investors in exchange-traded funds. Despite this fact, industrial use of silver including jewelry, accounts for up to 75% of global silver demand. Comparatively, gold’s non-investment demand tallies only about 58%.

What is surprising is the fact that the industrial demand for silver outstripped supply last year and is expected to do so again according to Metals Focus, a precious metals consultancy. Currently, most analysts are very negative on precious metals from the investment perspective, especially in the near term.

At current prices, many gold and silver operations are not profitable. BMO Research reports that on a global basis, almost half of gold production is unprofitable at current gold prices. I believe the same is true for silver. This situation is not sustainable over the long term.

A recent report by SNL Metals & Mining indicates that gold discoveries made since 1999 might eventually only replace half of the gold produced over the same period. In my opinion, this reserve replacement shortfall is not limited to gold. It is also taking significantly longer to bring mines into production. According to SNL Metals, between 1985 and 1995, 27 mines with confirmed discovery dates began production an average of eight years from the time of discovery. The time from discovery to production increased to 11 years for 57 new mines between 1996 and 2005, and to 18 years for 111 new mines between 2006 and 2013.

A time will come when looming supply shortages will become apparent to investors and precious metals will surge back into favour. Unfortunately I don’t have a crystal ball to tell you when this will happen.

A strong turn in the silver price will underscore the fact that there are only a select few advanced-staged silver projects that are poised to capitalize on a bull market. Couple this with the fact that larger producers will be hungry to acquire more quality silver ounces to replenish their depleting reserves and you have a recipe for success, and happy shareholders. All it will take from the investor’s perspective is a little patience. Until then, look for companies that have advanced-staged quality assets that will thrive in a bull market. Many of them are on sale now.

After completing a 9,000-metre (37 hole) drilling campaign this summer, Golden Arrow Resources (GRG-V) has almost tripled the indicated silver-lead-zinc resource at its wholly-owned Chinchillas deposit in northwestern Argentina. The company has increased its overall resources by about 60% with drilling that mainly focused around the deposit. Chinchillas still remains open for expansion in all directions.

The deposit now hosts 95.9 million silver-equivalent oz. in the indicated category with an additional 68.7 million silver-equivalent oz. in the inferred category. (Total indicated resources tally to 24.6 million tonnes averaging 91.3 grams silver per tonne, 0.65% lead and 0.31% zinc. The inferred resources tally to 22 million tons averaging 56.9 grams silver per tonne, 0.61% lead and 0.68% zinc.)

Naturally, these new results have positively impacted the economics of the project.

A preliminary economic assessment (PEA) released in October outlines an after-tax net present value of US$226 million using an 8% discount rate based on an 8,000 tonne-per-day production rate. The Internal rate of return (IRR) is now 24.3% with a payback period of 3.4 years. Pre-production capital costs are estimated at US$237 million and cash operating costs are slated at US$9.22 per oz. silver, without lead and zinc credits. The PEA is based on a silver price of US$22 per oz. with lead and zinc each priced at US$1 per lb. The project is still profitable at US$17 per oz. silver. Golden Arrow currently has a market capitalization of only $8.2 million! (The company recently traded at 19¢ in a 52-week range of 17-29¢; it has 41.2 million shares outstanding.)

I believe the long-term outlook for precious metals is bullish and I feel that Golden Arrow will outperform in a strong market. To receive a free electronic copy of the full Rocks To Riches Report on Golden Arrow Resources, please visit www.rockstoriches.ca

Thomas Schuster is a geologist with over 20 years of experience in the resource industry. He has extensive knowledge of the junior exploration and equity markets and has created his own equity research report, “Rocks To Riches,” which he distributes to industry brokerage houses. Schuster has worked as a mining analyst with investment firms including Fraser Mackenzie, Pathfinder Asset Management and Jordan Capital Markets. He’s also worked as an exploration geologist in the Timmins mining camp in northern Ontario, for companies such as Outokumpu Mines, and travelled to and reported on mining and exploration projects around the world as a reporter with The Northern Miner.

Disclaimer: All information is obtained from third-party sources and believed to be reliable, but the accuracy and completeness of this information are not guaranteed, nor in providing such information does Thomas Schuster assume any responsibility or liability for the accuracy and completeness of the information contained in the material. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities.