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Invest In Silver Mining

220px-Silberbergwerk_Suggental_JosephistollenIt is time to invest in silver. This metal is greatly undervalued in the market at present. There are several forces at work that will easily lead to a doubling in the price of this precious metal. Silver is now on the cusp of a major market comeback that was last seen in 2011.

The first movement to explore is the general rise in commodities across the board. There are a number of causes for this both short term and long term. The short term causes include the unusually long and cold winter in North America and the trouble in Russia and Ukraine.

Then one can observe major strikes in South Africa. Next is the civil unrest with violence in a number of countries including, Venezuela, Syria, Egypt, Libya, Iraq and Thailand. The list seems to grow longer every month.

The next event that is putting pressure on the price of commodities is the policy of quantitative easing which is the combination of lower interest rates and a higher money supply. It increases the circulation of paper assets and in the long run is inflationary. In the end it will always lead to higher prices. As more and more nations enact these kind of monetary policies it devalues the worth of currency in general.

China, Japan, The European Community and most importantly the United States because of the role of the dollar as the world reserve currency are all engaged in this practice of devaluing the value of their currency for short term economic growth.

One also can look at the role of sovereign debt as more and more countries around the world take onlevels of debt at the government level that has now become unsustainable.

Consumer debt levels in many nations are at all time highs or near record levels in numerous countries which puts increasing pressure on the overall economic stability of the domestic and international markets.

Another area of concern is the solvency of major domestic and many international banks which contrary to popular belief are still in trouble despite the propaganda that the problems of 2008 and 2009 have been resolved.

One can easily observe in Europe the ongoing problem of overexposed, underfunded regional banks that in nation after nation finally collapse years after the international crisis of 2008 and 2009. The original crisis was instigated by the overheated real estate market in the United States.

The now vastly overheated Chinese real estate market both in the commercial and residential sectors will ruin many Chinese banks on a regional and national level. It will have grave consequences on many international banks as well. One only needs to take a look at the books in a number of banks in the United Kingdom to see how dangerous this game has become. Many of these banks are vastly over leveraged in the China’s real estate market as if that economy is totally immune to market forces.

The combination of these factors makes the investment in tangible assets all the more attractive to investors around the world. It becomes even more evident as more governments around the world are also investing in commodities.

The main determination for investors on an individual, corporate or government level is how strong the demand will be for the commodity in the short and long term. This is why more investors are taking another look at precious metals.

Whereas palladium, rhodium, platinum, and to a lesser extent gold can easily have price spikes based on events in the countries that are major producers of these metals silver is in a different category.

Silver Mine

Silver Mine

There are a number of assumptions about silver that have kept the market price lower then it should actually be at this point in history.

It was only in the end of September 2010 that silver finally breached the $22.00 USD (United States Dollar) level. This was the first time that this had happened since the Hunt Brothers the former Texas oil barons had attempted to corner the silver market in 1980. If you consider inflationary factors it was remarkable that it took 30 years to reach that milestone again.

Back then the price spiked to $50.00 USD but crashed soon enough when the United States government decided to get more involved in the market.

The coming steady rise in silver prices will be less dramatic and more driven by market forces this time.

The other advantage is that silver is supported by real industrial demand. It has more uses overall then any other metal.

Silver is used in electronics, computers, DVDs CDs and more importantly for future demand, the solar energy industry. The use of photovoltaic cells in solar panels contain amounts of silver. New technologies in the future may use different materials but the heavy government involvement at present in the form of subsidies and tax advantages guarantee a certain price support for silver.

Silver

Silver

In addition, it is important to note that its present low price which dipped below $20.00 USD again on March 26, 2014 (reaching a low of $19.62 USD during the day) makes it much more affordable than any precious metal. There are many more small time investors who have taken an interest in this metal because of the present low cost.

Nearly half the silver produced yearly is used in industry and its low price has reinforced that usage. A third of the production is taken up by jewelry and silverware. The remaining supply is bought by investors in the form of coins and bars. Over time the percentage taken by investors has been climbing.

Another change in recent times is the increasing investment being made by individual countries and institutions around the world. Nations are not just buying gold but increasingly silver as well in rather large amounts. China for example used to export silver now they are major importers of the metal.

India alone will buy 22% of the world silver production this year and 44% of investment silver this year as a government tax on gold (10%) is switching precious metal investors in that country from gold to silver. In 2013 Indians bought 4,800 tons of silver where total world mine production is about 24,000 tons.

Silver ETF (Exchange Traded Funds) holdings increased 6% in 2013 and are set for more increases this year. ETF’s in this case are commodity based funds traded on the stock market.

You might ask why is silver so low in price? Silver prices usually outperform gold on the upside and under performs to the downside. It is also important to note that the actual world price for silver is set by the trading of electronic futures contracts that are many times more numerous than real ounces of silver. The Comex futures pit where silver is actually traded ends up being a huge price manipulation that divorces physical supply from actual demand. As more and more investors like India start taking physical possession of the silver it will start a chain reaction in the market that will force a return to more traditional determinants of price.

This will be reinforced by stagnant supplies. Mine production of silver is difficult to increase because ¾ of the world’s supply comes as a by product from copper, zinc and lead mines.

Silver Mining

Silver Mining

When investing in silver as with gold you will need to determine what your financial goal is and whether it is a short or long term investment. Case in point, was the recent run up in gold and silver as a result of the crisis in Ukraine and Russia. Gold was approaching $1400.00 USD (now it is near $1300 USD) an ounce and silver had increased in price to $22.00 USD. If you were a short term investor the time to sell your holdings for silver would of been on February 24, 2014 as the crisis was unfolding. The price had gone from $19.25 on February 03, 2014 to it’s short term high in a matter of weeks. As the crisis and feeling of uncertainty passed so did the price respond.

To take advantage of the 20% gain in price you would of needed to move rather quickly so as much as I advise long term investors to buy silver coins or bars if you are a short term investor you might be better off with an investment in an ETF or mining stock. You could then liquidate your holdings in silver rather quickly to take advantage of news events.

It is something to keep in mind before the next international crisis arrives. This will be soon given the continuing instability in the world at this juncture in history. The present decline in American activism overseas as well as the European reluctance to commit to a solid course of action has become quite evident. The hesitancy to combat aggression abroad almost guarantees future incidents around the world in 2014 and beyond.

You might ask what mining companies are best? There are so many of them to choose from. When making a decision the most important factor will be besides good management, the cost of production. That is how much does the company need to spend to extract the silver?

Silver Mine

Silver Mine

The cost of production is between $18 USD to $20 USD on the average. This is the actual expense incurred in the production of silver in the industrialized countries as a result of more expensive labor. Outside the West, it can be somewhat lower. That is why many companies have holdings in a number of countries. It is also why companies decide which mines to work depending on the world price of silver in the market. The amount of ore and ease of extraction will also determine the break even point.

This situation does provide a floor for the price of silver as with other metals in the long run. If the price of silver goes below the cost of production for that mine or in that country production for any length of time. operations will soon slow down or cease. As the supply dwindles it makes the remaining stocks of silver more valuable which then raises prices. That in turn will bring more mines back on line thus increasing the supply of silver once more.

The top ten producing countries of silver in the world is as follows in order of importance: Mexico, Peru, China,Australia, Chile, Bolivia, The United States, Poland, Russia and Argentina.

Mexico is by far the most important country in the world for silver output and has been for the last 500 years. It provides a third of world production today with 128.6 million ounces. 66% of the product comes from just two companies Penoles and Grupo.

Peru produces 116.1 million ounces followed by China at 99.2 million ounces. Next in line is Australia at 59.9 million ounces. The country lays claim to the largest mining reserves of silver in the world. Chile and Bolivia produce 41 million ounces each.

For the investor in silver it is important to note that silver production will be declining in future years. This has been predicted by a number of institutions including the United States Geological Society. Therefore an investor would also want to invest with a company that will have the ability to keep producing silver.

The two factors of price of extraction and ownership of adequate property for mining leads this writer to recommend the Endeavor Silver Corporation. This company owns 3 different working silver mines in Mexico with 23 million ounces of reserves that has been verified by an outside source (Micon International Limited). The company also owns the rights to 6 additional mines which will keep the company in business in the long run.

Endeavor increased production for the 9th year in a row in 2013. The increase was over 50%.

Silver Mine

Silver Mine

The price of extraction for this silver in the older mines costs the company around $11.00 which is 40% to 50% below the present price of silver which is nearing the cost of production in many areas of the world.

The price of the stock of Endeavor Silver Corporation (NYSE: EXK) on March 26, 2014 was $4.23 USD. It had lost 33 cents in trading for the day. This registered as a decline of 7.24%. Of course it coincided with drop in silver prices below $20.00 for the first time in months.

The price of the stock has hovered around $5.00 USD a share over the last month during the crisis in Europe with Russia and the Ukraine over the issue of Crimea.

Over the last year the stock had reached a high of $6.00 USD and a low of $3.00 USD. During the 2011 to 2012 run ups in silver the stock stayed mostly above $10.00 USD a share.

The present capitalization of the company is $422.79 million USD for an average volume of 1,905,000 shares.

The company estimates it will produce between 6.5 million  to 6.9 million ounces in 2014. The production level for 2013 was 6.8 million ounces.

A downside for the company was the new 7.5% tax enacted by Mexico on mining which will cost the company an additional $3 million USD.

The new San Sebastian Mine which holds 11.4 million ounces of silver ore will be permitted by the Mexican government at the end of this year. The project viability will depend on the price of silver when mining operations are ready to commence. Endeavor Silver is very reluctant to take on debt to begin new projects. This has allowed the company to maintain a healthy balance sheet with zero long term obligations. This is another reason why I feel upbeat about the company. It has sound, conservative management in place. With $35 million USD cash on hand in the 4th quarter of 2013 the company will need the price of silver to be above $19.00 USD an ounce for project to be viable. Costs for newer mining operations to the company last year was $18.31 USD.

Silver Coin

Silver Coin

The company plans to allocate $43.9 million USD on capital spending this year down from $88.6 million USD in 2013. The 50% cut will free up nearly $45 million USD for a future project that could well be the San Sebastian Mine.

So if silver takes off this year not only will the company be able to sell the silver it produces for a higher price it will soon have more silver to sell. Growth and profits for the company will totally rely on world prices for silver. Otherwise production growth for 2015 will be postponed for a year or longer.

Consider this information before making an investment.

 

 

 

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