Since there was such a spirited discussion following our look at the “treasure map” of hoarders who can sell you bags of “treasure”, this latest teaser from Nicholas Vardy also caught my eye.
Why? Well, because that “treasure map” bit was all about junk silver (old circulating silver currency), and the discussion was largely of the “hell in a handbasket” variety that we’ve also seen most aggressively from Porter Stansberry most recently with his “End of America” pitch about protecting yourself from hyperinflation, higher taxes, and dollar devaluation. And much of that relates to China, as the largest foreign holders of US debt and now our perceived rival for economic leadership, particularly with the recent baby steps toward making the Yuan an actual global currency.
So the little synapses in your Gumshoe’s brain jumped all over this — if silver is a hot topic, and China is a hot topic, wouldn’t the great Gumshoe Nation wish to hear about Chinese silver? Well, wish it or not, here it comes.
The pitch is that this stock has already gone gangbusters but isn’t about to stop:
“Why this stealth China stock tripled in 2009, doubled again in the last six months, and is poised to double again by Valentine’s Day”
And there’s nothing I like more than a stock that’s supposed to go crazy within a nice, short period of time — because then I have at least a small chance of remembering to check back in a month and see what happened, even if I never own the stock.
Plus, it’s just more fun — and more ridiculous — to promise a double within a month. Though, to be fair, it looks like Vardy has probably been pushing this idea for a little while — the teaser email that I’m looking at now was sent and received just this past weekend, but the text of the ad actually says that you have to get in “before December ends.”
(So perhaps he means next December so we have almost a year to think it over, and that it’s Valentine’s Day 2012 that will bring our “double?” Yeah, I don’t think so either, more likely just an overworked marketer forgot to update the dates in the ad.)
OK, so who is this “stealth China stock” that, we presume, should be doubling any minute now? Well, you can go subscribe to Vardy’s Global Bull Market Alert ($995) if you want the answer from the horse’s mouth … but I reckon we can give it to you for free if you prefer, you’ll just have to sit through a few more paragraphs of Gumshoe blather. Here’s some more from Vardy:
“If you’re ready to move fast, this silver mining stock can make your portfolio balloon to twice its size in the next two months. Just think of how your new year would look with a recently fattened wallet, stuffed with double your money!”
Oh, so there we go — so the text was written back in December and they’re just recirculating it, and we’re still expecting that double by February 14. I don’t want to spoil the surprise, but I can tell you that right now this pick is actually down about 15% since mid-December — so we’ll be generous and let Vardy get his double from now instead of from then, shall we? Never let it be said that we failed to be understanding about poorly timed investments, since we (OK, I mean “I”) make them with some regularity.
Here are the details about our silver miner, in Vardy’s words:
“You’ve heard of cheap Chinese labor, right? Well, this company does that one better. In the quarter ended June 30, 2010, this ‘China miracle’ company produced 1.4 million ounces of silver at a cash cost of negative $6.31 per ounce!
“Its ‘Overseas Chinese’ management just inked a joint venture to acquire 70% equity interest in the high-profit Yunxiang Mining Co. Ltd., a private company in China’s Hunan Province… a deal that will boost their bottom line skyward!
“January and February are traditionally strong markets for silver. But this stock will likely leave other silver stocks in the dust. It’s 5-year net profit margin has been 41.38%, compared to an industry average of just 1.09%.”
Vardy also uses many of the standard arguments for silver that we hear over and over again — he mentions that the silver-to-gold ratio is historically high (it’s about 47 right now), and implies that he thinks it will revert to the historical average of around 15/1. We hear that a lot, though do note that those low historic ratios that we often see (12/1, 15/1, etc. — meaning it takes 15 ounces of silver to buy an ounce of gold) are very historical, they include the centuries when silver and gold were essentially strapped together at almost monetary rates of exchange, and when one or the other backed most currencies (or were most currencies, since most currency was coinage).
Over the last 100+ years the silver/gold ratio has rarely dipped below 30, and for fairly brief periods of time, and has as often spiked to over 75, coming close to 100 a couple times. So be careful about your confidence that something will return to a long-term mean, if you’re talking about several thousand years of a 15/1 average ratio it could easily go to 200/1 before we’re all dead and still end up averaging 15/1 on these kinds of historic (almost prehistoric) charts. That’s not to say that silver is a bad investment, or that there aren’t other reasons why it might continue to outpace gold, as it has for the past decade and more recently, but to a non-expert like me that particular ratio of silver to gold prices doesn’t seem all that predictive in the short term (like, less than 50-100 years).
And yes, he also mentions the silver shortages that are often teased by investment newsletters — though it should be noted that although industrial demand is certainly a key driver of silver (and not gold), the main reason for these perceived “shortages” of coins is huge spikes in investor demand. You’ll see stories about the US mint running out of silver, for example, but that just means they’re not producing silver collectible coins to sell direct to collectors — they’re still buying up tons of silver and producing plenty of bullion coins that are sold through banks and dealers. (That’s a side-effect of the mint’s Congressional mandate: they’re required to produce bullion coins in sufficient quantity to meet demand, they are not required to produce collectible coins, so when investor demand spikes they have to turn over their production to bullion coins).
Demand for silver has certainly been rising, all you have to do is look at the price to see that, but since so much of it is investor demand it’s sometimes perceived to be less steadfast — swings in investor sentiment can be much faster than swings in the actual economy that might impact demand for silver for electronics, for example.
To be clear, I own silver personally and think it is a useful part of any portfolio, largely as a hedge to maintain purchasing power. I just like to throw out the other arguments since they’re not often a part of the teaser ads or newsletter soliloquizing.
But what you want is the name of this stock, right? Well, it will probably sound familiar to some of you — it’s been a favorite of a few newsletter guys for the past couple years, this is Silvercorp Metals (SVM).
And yes, Silvercorp is the biggest primary silver miner in China, though as with most silver mines there are significant secondary metals as well — in their case it’s mostly lead and zinc, which produce enough revenue for the mine that when they talk about their cost to produce silver it comes out negative after crediting for those “byproducts.” Vardy teases that they produced 1.4 million ounces at a cash cost of negative $6.31, and I can confirm that this basic performance level is continuing — in the quarter after that (the September quarter of last year, their second quarter) they report that they produced 1.34 million ounces at a cash surplus of $6.30 per ounce.
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So it’s hard to argue with the combination of significant byproduct revenue and generally low operating costs in China, though it’s not all that unusual for silver miners to also depend substantially on copper, zinc, lead or nickel prices to subsidize their operations (which is part of why silver production falls sometimes when base metal prices fall — if nickel miners have to shut in production because demand drops, for example, the byproduct silver that they generated disappears from the market). But yes, Silvercorp is a special case in terms of the cash cost per ounce.
They’re also trying to expand and diversify away from their primary mining area, they are currently producing from four mines at the Ying Mining Camp in Henan Province, where they also continue to drill for more reserves, but are trying to develop mines in Hunan and Guangdong as well, and they’re also trying to diversify outside China and develop a mine in northern British Columbia.
The company is technically Canadian, though the Chinese operations are held in Chinese subsidiaries that they control (generally about 70% owned by SVM) but that are partnered with Chinese companies or quasi-governmental entities, so they do report reserves and resources and production data that will look familiar if you’re used to analyzing Vancouver mining companies — you can see their reserves numbers here if you like.
As a business, SVM generates numbers that look substantially better than some similarly sized non-Chinese peers like Coeur d’Alene (CDE) or Hecla Mining (HL), with particularly much better margins thanks to their low cost operations — but it’s also priced at a premium for the same reason. I wouldn’t argue against SVM and it has certainly been a spectacular performer, though I have no reason to think it will be over $20 in a month as Vardy teases.
And as I noted, several other newsletters have pitched SVM in the past, notably Matt Badiali about a year and a half ago (the stock has tripled since then) and, in an extremely aggressive and long-lived push, as the “silver under the great wall” stock teased by Sound Profits that began almost exactly a year ago (up about 60% since then). It’s an easy stock to pitch during a precious metals bull market, with the China connection and their low cash costs, so I’m sure there have been many others on board this train as well.
I don’t currently own these shares (or any other stock mentioned above, though as I noted I do own silver bullion), but I know many of the readers in the great Gumshoe Universe have been Silvercorp buyers in the past — are you still holding on? Expect a double from here? Or are the days of phenomenal growth behind them? Let us know what you think with a comment below.
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