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Stockhouse Movers & Shakers: Eric Sprott beats the silver drum

Peter Kennedy Peter Kennedy, Stockhouse
0 Comments| December 1, 2011

Canadian money manager Eric Sprott has issued a call to action, telling silver miners to support the metal by holding up to 25% of their cash reserves in physical silver.

But judging by the early response from a number of Canadian producers, it isn’t one that the industry is rushing to embrace.

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Officials at both Pan American Silver Corp. (TSX: T.PAA, Stock Forum) and Fortuna Silver Mines Inc.  (TSX: T.FVI, Stock Forum) (NYSE: FSM, Stock Forum) refused to comment. Asked for his reaction, a spokesman for Aurcana Corp. (TSX: V.AUN, Stock Forum) would only say that it’s “an interesting idea.’’

In the November issue of Sprott Asset Management’s Markets at a Glance newsletter, the Sprott Inc. Chairman outlined the reasons why primary producers should a hold a portion of their cash reserves in the very metal they produce.

He points out that the total silver supply in 2011, including mine supply and secondary supply (scrap, recycling, etc.), will total 1.03 billion ounces [according to CPM Group].

Last year, 777.4 million ounces of silver were used up in industrial applications, photography, jewelry, and silverware [according to Silver Institute figures].

“If we assume, given a weaker global economy, that this number drops to a flat 700 million ounces in 2011, it implies a surplus of 300 million ounces of silver available for investment demand this year. At today’s silver price – we’re talking about roughly US$9 billion in value.

In Sprott’s view, this is where the miners can make an impact.

He argues that if the largest pure play silver producers simply adopted the practice of holding 25% of their 2011 cash reserves in physical silver, they would account for almost 10% of that US$9 billion. “If this practice were applied to the expected 2012 free cash flow of the same companies, the proportion of investable silver taken out of circulation could be potentially enormous,’’ he said.

“Nothing would please us more than to see these companies begin to hold a portion of their cash reserves in the very metal they produce,” Sprott added.

But one industry official said there are good reasons why primary producers are unlikely to heed the call.

Companies like Pan American Silver, which produce the majority of their silver in concentrates, need to pay smelting fees in order to produce saleable metal. In reality, it means they are actually receiving a discount to the spot price for their production.

So it wouldn’t make sense for companies who produce silver in concentrates to turn around and buy the metal at market prices just so that they can hold it in reserve, the industry official said.

Also, companies that produce the metal must take into consideration that fact that silver prices have been highly volatile in recent years. This year, for example, silver has traded in a range of between US$30 and US$50 an ounce. But it wasn’t so long ago, that prices were considerably lower than they are today.

In 2003, for example the average spot price was US$4.87 an ounce. By comparison, silver was trading at US$32.84 this week.

One industry official said there are practical considerations to think about, especially when prices have fluctuated so much in recent years.

“It wouldn’t make sense for a company with $10-$20 million in the bank to replace its cash reserves with physical silver,’’ he said, adding that no-one wants to store the metal when they know that prices could be going down.  “ They may need that cash to cover capital expenditures, such as mill expansions and repairs.”

Still, even though Sprott’s call to action is likely to be ignored, that doesn’t mean the idea isn’t being discussed within the industry. “It’s the topic of the day,’’ said Gary Lindsey, a spokesman for Aurcana, which has silver mines in Mexico and Texas.

He confided to Stockhouse that he had fielded calls from a number of newsletter writers who had read the Sprott report and wanted to know what the company thinks. However, Lindsey said Aurcana Chief Executive Officer Lenic Rodriguez was unavailable for comment.



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