“The Great Bull Market in Silver Has Begun! And This Jr. Mining Company Is THE Best Way To Profit From The Surge.”

By Travis Johnson, Stock Gumshoe, November 4, 2010

That headline sits atop a teaser ad that I started receiving on Tuesday this week from Tim Fields for his Untapped Wealth newsletter.

Now, I should warn you up front that this newsletter has recommended some real doozies in the past, like that silly “forever battery,” and they’ve gotten involved in some stock promotion that I think taints their name a bit (though that was a couple years ago for Aussie Soles, which I don’t think is traded anymore, and they do distinguish between their “independent” research and their “paid advertisments”).

And like many publishers they also re-use their teasers for years — like many companies (notably the Motley Fool, but most of them do it), they tease “special reports” that come “free” with subscriptions, and on this latest offer of theirs that teases a silver miner the “special reports” include their WiMax and “Forever Battery” and geothermal pieces that first were touted years ago (I hope they’ve updated these, because my snooping told me that geothermal “special report” they teased back in early 2008 must have focused on Raser Technologies, a pick made by several newsletters that ended up being last year’s “Turkey of the Year” and now trades for pennies).

Still, I don’t think I’ve seen this silver miner ad before … and silver is hitting new highs (or close to it) even as I type, so I thought I’d try to answer reader questions and figure out which “junior miner” he’s talking about.

Fields lays out basically the same spiel that all other inflation/precious metals folks use, that the global financial system is in peril, and that governments are fighting to devalue their currency and create new money to bail out failing states and companies, which will lead inexorably to a return to individuals and sovereign treasuries covering “real money” like gold and silver and other “real” hard assets. And that we’ll probably return to the historical average gold/silver ratio — though lots of folks argue about what ratio we should look for. The ratio has been as high as almost 100 and as low as about 12 over the past 100 years, though it was set in the mid-teens in the 1800s as a matter of law, and most geologists seem to think the natural ratio in the earth’s crust is somewhere around 17 (17X more silver than gold) … though silver is consumed/destroyed and gold is typically not, and silver has industrial demand to a far greater degree than gold. I wouldn’t hold my breath waiting for a specific “average” ratio to hit, since the ratio has been wildly volatile over the years, but it is pretty high now at over 50. (And of course, it’s possible that if the ratio has to return to “normal” then it could do so by gold falling just as easily as silver rising.)

Silver doesn’t get the attention of gold, but it has certainly gone up faster — with many folks considering it the “poor man’s gold” since it’s a lot easier to come up with $25 for a silver coin than $1400 for a gold coin. Here’s what the tease says:

“With commodities hitting record highs on an almost daily basis, this company, is without a doubt, your best chance to profit from silver’s coming rise.

“You see the question is not if silver will go from $23 to $80… or if this company will surpass 150%, 233%, or even 450% gains.

“As you’ll see, it’s when.

“And I believe the answer is very soon. “

So, with $80 silver we’d obviously see some extremely healthy returns for any silver miner … but he’s picking out just one for us to focus on. How about some details to pique our appetite? (Or as I like to call ’em, “clues.”)

“Miles ahead of the competition – This company is on the cusp of becoming the most prolific producer in the North America [sic] ….

“Silver’s coming increase should be great news for any junior mining company. But we’re not talking about just another junior mining company….

“… what this company has done is extremely clever. They went back and acquired the rights to one of the most prolific proven silver producing mines in the world.

“Without much fanfare they gobbled up as much of it and the surrounding area as possible. Initial estimates are 100 million ounces of silver. With one of the lowest extraction costs in the world of just $1.91 an ounce (and that’s on the high side) there’s $21.09 left of profit per ounce at current silver prices.”

Of course, now that silver’s gone quickly over $25 that’s even more profit (though when you see these kinds of “extraction costs” or “cash costs” it’s always wise to be a little bit leery when calculating a miner’s profitability, those typically don’t take into account the huge exploration and development costs — that’s why most big gold miners probably have “real” costs of $800-1,000 instead of the $300-500 that many of them claim as “cash costs per ounce”).

But still, that sounds like a pretty low cost for extraction. Not bad. Some more clues?

“… they acquired this property when silver was trading around $11 an ounce.”

And one more tidbit …

“With 4 mines in total and projected and probably reserves surpassing 346 million that can be mined any time they choose. Smartly, they’re watching the price of silver increase on almost a daily basis.

“Their current share price reflects NOT mining any of their reserves. What do you suppose will happen the moment they do? Well, if you believe as I do that their stock will quickly multiply then NOW is the time to act.”

So hoo dat? Well, with 346 million ounces of “probably reserves” (we’ll assume that they’re fudging a bit to include reserves and resources), four mines, and an extraction cost of $1.91 we must be talking about …

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The decidedly non-junior (at least in my book) Hecla Mining (HL).

Hecla is the largest producer of silver in the US, and the oldest miner in this country. They produced a new record (for them) of almost 11 million ounces of silver last year, and have been projecting that this year will total something similar to that. They have a market cap of just under $2 billion, which is small compared to some of the major gold miners … but there are only a handful of major pure play silver miners, and Hecla is one of the biggest — about the same size as Coeur d’Alene (CDE), Silver Standard Resources (SSRI) or Silvercorp (SVM) and a bit smaller than Pan American Silver (PAAS).

Hecla is a low-cost miner, with two operating mines and two exploration districts — and they’ve been pulling in the cash lately, you can see the latest details in the highlights from their third quarter report (came out a couple weeks ago) — they do still claim the extraction costs of $1.91 per ounce on their website, but recent “cash costs” have been negative thanks to byproduct credits (gold and copper, typically, though I haven’t checked what their output is), and the 346 million ounces was claimed as their “reserves and resources” number in an old investor fact sheet, though they don’t seem to use that number in their current material.

Hecla has often been mentioned to me as the “cheapest” silver miner, though there’s almost always a good reason for that (usually a history of disappointment, or a perception that they won’t be growing production anytime soon, though I don’t know what has made Hecla lag in valuation compared to some of their silver peers). The perceived lower valuation hasn’t hurt the comparative performance, over the past one, two and five years HL has had at least average share price performance compared to the other big silver names I mentioned (and indeed, compared to the metal itself).

That said, most of these stocks trade, as you would expect, pretty close to in lockstep with one another — bit reserves increases or earnings blowouts or new discoveries obviously sometimes help relative performance, as does increasing attention, but if you’re buying just one of the big silver miners and don’t want to specifically bet that Hecla will outperform their competitors Coeur d’Alene or Silver Standard, for example, you could also always just buy a basket or buy the new Silver Miners ETF (this came out from GlobalX earlier in the year, ticker SIL — HL is in the top ten holdings, as are some of the big Latin American miners and the others I’ve mentioned above).

Actually, if you had bought the silver miners ETF when it was introduced you would have done a little better with that than with SSRI, PAAS, HL, SVM or CDE … and even slightly better than the metal itself (as represented by SLV). There have obviously been silver miners who outperformed that index ETF — Fresnillo (FLNLF on the pink sheets), the top holding in that fund, did better than the index, as did the third largest holding, Silver Wheaton (SLW), which isn’t really a miner — since someone has to be above average, but the average beaters weren’t Hecla or any of the other major miners whose names came immediately to mind … and it’s certainly easier to buy a basket and not worry too much about whether one of the companies screws up.

Hecla definitely has had some great performance in recent years, particularly if you bought it a year or more ago when they hadn’t taken complete control of their huge Alaska mine, and they were producing far less and seemed a bit overleveraged and risky (the shares have more than doubled since Outstanding Investments teased them in August of 2009 when they weren’t yet profitable, for example), but I don’t know much more about the company than that — I do know that many of my readers have owned the stock in the past, so if you’ve got an opinion on Hecla (or any other favorite silver miner, for that matter), feel free to share it with a comment below.


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