An Evolution in the Precious Metals Sector, Stocks of Junior Silver Companies

The Big Guys are Buying the Little Guys

We have suggested that junior metals mining, exploration and producers stocks are a very good place to invest currently. A recent phenomenon, while not unexpected, has drawn more interest to this sector. The long established major producing gold mines in South Africa and elsewhere are recording reduced production.

Their reserves are gradually being mined, and the amount of massive individual reserves is slowly, but constantly reducing worldwide. A similar effect for silver is found as uses for the metal, including some who see silver as a ‘poor man’s gold’, are increasing.

Price of Gold and Silver
Is ther a Bubble?
One of the pronounced effects of this is the continued price escalation in both precious metals. This week, records were set in absolute dollar amounts for gold and for silver. Another effect is that everywhere one goes, people are talking about the price of gold. Now some say that when this happens, there is a ‘bubble’ and that from this point on, only the ignorant are buying, and a crash is coming. In fact, for the first time in a very long time, there are actually pundits (although still a tiny minority) that say gold is in for a correction.

The Correction in Gold
Let me address firstly this idea of a ‘correction’. It is inevitable that a correction takes place. It is also inevitable that several corrections take place. There has never been any sort of commodity in which corrections don’t take place. The very increased price of gold (and of silver) make it inevitable that there will be a dramatic correction in the near future.

However, let’s put this in context. Say gold falls $200 per ounce in value. That would be quite dramatic. Yet that would represent only a 15% correction. That, when compared to history is only a moderate amount. The average cost of production worldwide currently is something around $500-$600 per ounce. There are places that have a higher or lower production cost, but let’s use the figure of $600 to understand the effect of this correction. Gold would sell after the correction for $1,100 per ounce. After deducting the cost of producing it, for every ounce produced there would be a profit of $500. Pretty attractive isn’t it, especially when profits historically on the production of gold were measured in single digits.

Similar analysis can be illustrated for silver, Gold and silver therefore remain, and will remain, as very profitable to find and mine. Add to this the increasing demand, and the decreasing supply. Guess what? If we take the worst scenario pundits predict and accept doom and gloom, on the basis of common sense, junior precious metal companies seem a very good place to put your money.

Major gold
The major gold producers also realize this. There is a continuing and escalating demand by the major companies to find and acquire junior companies with excellent reserves. The latest, but by no means the only, example is the pending $3.6 billion dollar buy-out of the gold junior Andean Resources (TSX: AND). Expansion-minded major mining companies are poised to gobble up more asset-rich gold explorers.

“For the balance of 2010, we expect the reserve-hungry senior and mid-tier producers to continue focusing their attention on resource-rich junior producers and developers,” says Toronto-based lead mining analyst, Michael Jalonen.

Some Thoughts on Silver
Often referred to as the ‘poor man’s gold’, silver is recently matching gold in price escalation. I thought I would mention a few silver stocks that to us seem under priced. All three companies are currently continuing to explore discovered areas thought to contain silver, All are active in Mexico. All have experienced management. All have good potential.

We own the stocks mentioned.

Orko Silver (OK) is a company in middle Mexico with an amazing JV agreement. Essentially they think they have a very large deposit, continued work on the project is positive, and they have their JV partner spending 100% of the costs. Nice deal if you can get it.

Arco (ARR) is in Southern Mexico with a large land position containing historically mining areas, they have a loyal established work force and infrastructure, and recent drill results are quite encouraging. The stock price has been beaten down about as far as it can go, We have been buying at these prices in light of the recent news releases.

Soltoro (SOL) also in middle Mexico has a large land position, good drilling results, seemingly a potentially large silver deposit, and is modestly priced. They have large indicated reserves and recent news releases indicate a continued expansion of these indicated resources and a possible upgrade in categorization.