“Better than Gold! … 3-to-1 Gains Guaranteed!”

By Travis Johnson, Stock Gumshoe, August 26, 2009

Just to be clear, when I include that “3-to-1 Gains Guaranteed” in the headline, that’s a quote from the ad — your friendly neighborhood Stock Gumshoe doesn’t guarantee anything, except that I’ll continue to do my best to dig into these fabulous teaser ads … you keep reading, I’ll keep writing, that’s the deal.

Today’s peek behind the curtain is at an ad for Outstanding Investments, the natural resources-focused letter from Agora that was a huge hit during the commodity boom (it really was the top-ranked letter for a five year period a couple years ago, and it was a big favorite of my readers for a while, too, though that ardor cooled as the commodity markets did). It’s edited by Byron King these days, though he wasn’t the guy in charge for most of the best years of the letter, apparently, if memory serves he came on board well after the commodity bulls were in control of the market (I think the prior editor was Kevin Kerr).

This ad is one that teases us about five gold investments, including several that they’ve used in their teasers for this newsletter for years, but the headline and the first few paragraphs tell us that we should instead be buying silver, which has much further to climb. So I’ll go into the gold teasers they include in a moment, but let me start with their silver bit …

“In a Good Year for Gold, This ‘Other’ Metal Will Do Even Better

In case you haven’t guessed, I’m talking — of course — about the “other” precious metal, silver. In a good year for gold, especially with the cycle we’ve just locked into right now, silver can give you even greater gains… driven by the same precise megatrends.

I’m going to show you my current favorite silver play in just a second.”

The silver argument is one many of you have probably heard before — the gold/silver ratio is way out of whack, historically (that’s the price of gold divided by the price of silver — for most of the past 25 years or so that number hovered around 40-50, but it jumped above 60 in 2005 and hit 90 last year, and remains fairly high. Not as crazy high, though, silver has come back a bit in recent months and the ratio is now int he mid-60s. I have no idea whether or not this ratio should really have any predictive power or if there is a meaningful “mean” for it to revert to, since there have been huge swings throughout recent history, but I do hear many folks citing it as an important reason for silver to climb (or, of course, for gold to fall — but most silver lovers also think gold will be going up, and Byron King is no exception.

They also go on to say that supply and demand is improving for silver, since there aren’t many pure silver mines and there are continuing to be new industrial demand drivers for silver’s conductive, andibacterial, reflective and catalytic properties — along, of course, with investor demand for silver coins as a “gold jr.” way to preserve spending power during inflation or currency crises.

The supply part of the story is particularly interesting:

“… there are only 22 pure silver mines around the world. For 15 years straight, they’ve fallen short of meeting total silver demand. In the last two years alone, they were off by nearly 76 million ounces.”

I’m not sure what the drivers of supply are behind that, but the letter claims that it has been mostly central banks selling off their silver stockpiles, and now many of them hold little or no silver … and I imagine there’s also been plenty of melting down the old silverware during years when silver’s price has spiked a bit. And of course, there are far more mines that produce silver than just those 22 “pure” silver mines — many copper, gold, nickel and other mining operations also find silver, though it doesn’t drive their mining economics, and they do produce and sell that silver as a way to offset the costs of their copper (or whatever) mining. That’s the business model behind Silver Wheaton, one of the more successful silver stocks in recent years — they buy the “silver rights” to mines where silver is a secondary metal, almost like a royalty investor.

To be clear, there are also plenty of people who think that silver is about as high as it’s likely to get, and it has had a nice run recently — there was a good Financial Times article on this today that essentially argued that silver has rallied because it’s enjoying both investor demand and industrial demand in a kind of sweet spot, but that one of those demand drivers or the other is likely to tail off because they’re rarely in concert. Not sure what I think, but it’s worth reading if you want to hear the other side.

So what is the one silver mine that Outstanding Investments wants us to buy? Here are the clues, in their words:

“The silver company you’ll find in the report is a powder keg play… with a solid track record going back to 1891. This firm recently took 100% control of Alaska’s largest silver mine… doubling its annual silver output and growing its silver reserves by 150%.

“That might sound impressive enough. But here’s the real opportunity: The mine is so rich in other minerals — gold, lead and zinc — that production of those metals alone covers the mine’s operating costs. Whatever silver comes out of the ground is gravy.

“That means the company is pulling silver out of the ground at effectively no cost, right?

“Actually, if you run the numbers, it’s better than that. For every ounce of silver that comes out of this mine, the company actually puts $7.42 of cold hard cash on its balance sheet.

“Multiply that by nine million ounces per year and you start to see the enormous potential.

“It’s like a triple play on silver. You could profit from the rising price of the metal… plus the appreciation in the share price… plus the chance for growing dividend income.

“Do this now and I see you tripling or quadrupling your money overnight.”

So who could it be? I’m not sure how to justify the $7.42 of cash per ounce of silver at the moment, not if they’re implying that they have negative operating costs, but based on all the other clues this pretty well has to be Hecla Mining (HL).

Hecla was founded back in 1891, and they did recently gain control of the largest silver mine in Alaska, and one of the biggest in the US (that’s the Greens Creek mine, on Admiralty Island — they had owned about 30%, and bought out the balance from a couple of subsidiaries of bigger miners in 2008). They also do produce about nine million ounces of silver a year (that’s close to the 2008 number, at least), though that’s at two mines, Greens Creek and their smaller producing mine, Lucky Friday in Northern Idaho. They’re also actively exploring to increase reserves at both those sites, and in two exploratory concessions in mining districts (and sometimes atop old mines) in Colorado and Mexico.

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