Despite a strong finish in 2018, silver continued to disappoint long suffering bulls of this forgotten sector last year, leading to a plunge in sentiment and speculators building up record short positions. At its worst by mid-November, gold’s little sister was down over 17% year-to-date with a 2.2x bullion comparable loss. Although silver had a brief flicker of excitement in early 2016 with a 50% move in six months to $20 per ounce, 96% of this huge gain was lost by the time silver struck its low at $13.86 per ounce on November 13th.
However, since that brief visit below $14 late last year, silver is becoming attractive to contrarians. Patient speculators, who have waited for signs of the capitulation move which began last summer to reverse, are beginning to scale into the sector. The grey metal has also become increasingly attractive to investors looking for undervalued asset classes and safe-haven investments.
This year, I expect the sentiment to be more supportive for the silver market. The Silver Institute has recently published some bullish insights on 2019 silver market trends, which were summed up in a Northern Miner article last week.
Moreover, after making a quarter-century low relative to the gold price late last year, silver began to outperform gold. And more importantly, as mentioned in this column last week, a few of the best in breed silver juniors have continued to climb while the precious metals complex consolidates its recent gains. Seeing speculation rise in these high-risk vehicles, combined with their recent divergence from the gold complex, is a bullish sign for the overall precious metals sector.
Although the silver price typically outperforms gold during precious metal bull markets, a properly timed entry into a basket of silver junior developers, explorers, and growth-oriented producers will provide much more leverage to the metal. In fact, when the mining complex made a significant bottom in early 2016, most silver juniors made over 3x moves inside of six months!
I have listed my favorite junior in each of the aforementioned sub-sectors below and all three possess high leverage to the silver price.
Growth-Oriented Silver Producer (GOP):
Alexco Resources (AXU, AXR.TO): This near-term silver producer controls a district scale sized land package of 233 sq km in the Yukon. The Keno Hills Silver District contains four deposits with an average grade of over 800 g/pt and less than 15% of the property has been explored. There is a fully functional 500tpd mill on site and the company currently has a rapidly expanding resource of over 83 million ounces of indicated silver.
Alexco remains on track to have the results of a Pre-Feasibility Study (PFS) published by the end of Q1 and will be making a production decision by the end of Q2 2019. If a positive production decision is made, the company will have six months of pre-production work to complete before becoming Canada’s only high-grade primary silver producer. While many of the company’s peers have been high-grading production during a depressed silver market, Alexco’s high-margin reserves have remained in the ground, awaiting higher silver prices.
Alexco also owns the cash-flow generating Alexco Environment Group (AEG). AEG is a profitable environmental consulting and remediation firm, which provides environmental consulting services and is a projects group with proven capacity for turnkey remediation projects execution. The company has $14M in cash with an undrawn $15M credit facility and 120M fully diluted shares. Here is the latest company presentation.
Bear Creek Mining (BCEKF, BCM.V): The company controls 100% of the Corani silver-lead-zinc project, located in the Puno region of southern Peru. The project is approximately 160 km southeast of Cusco and consists of twelve mineral concessions that form a contiguous block of ground covering approximately 5,700 hectares. Corani boasts current reserves which will support average annual production of 8M ounces of silver and 150M pounds combined lead and zinc over an 18-year mine life.
At $18.00/oz silver, $0.95/lb lead and $1.10/lb zinc, the project has an after-tax NPV at a 5% discount rate of $404 million and an IRR of 15.1%, with a payback period of 3.6 years. The NPV increases approximately US$112M for every $1 increase in the silver price (with proportional increases in lead and zinc).
As the company continues to advance the project, they are committed to maintaining the optionality of Corani as long as possible, while balancing permitting and social responsibilities. This includes, most recently, continued community programs, along with work on local access roads and a nearby electrical substation. Bear Creek is also conducting extensive ongoing engineering work in coordination with Ausenco engineering. Once the silver price has a solid $20 floor, I expect this junior to be a strong take-over target.
There is solid institutional ownership in the tightly held stock, which has a retail float of just 37% of 103M shares outstanding. The company boasts US$41M in cash and no debt. Here is the latest company presentation.
Early Stage Gold/Silver Explorer:
Minaurum Gold (MMRGF, MGG.V): This regional discovery generator controls five projects which are contained within three district scale sized land packages and located in three separate regions of Mexico. The company has assembled a top notch management team which has been responsible for multiple large, high-grade discoveries. Minaurum’s strategy is to acquire low-holding cost, high-reward projects and to warehouse them for the next bull market.
The company is in the process of drilling a high-grade silver discovery made in January of last year at its Alamos Project in Sonora, Mexico. Alamos contains a wide, high-grade epithermal vein system which has historically produced approximately 200M ounces of silver. There is the potential for a large, high-grade system with over 780 samples having been analyzed identifying several selected targets, ranging from 308 – 3,230 g/t silver. The project has never been systematically explored, and so far, historical and Minaurum mapping and sampling work has identified eight additional vein target zones.
Although there are nearly 325M fully diluted shares, the stock is very tightly held with only 15% of the 308M outstanding free trading. The company has no debt with C$10M in cash, which will fund two years of drilling. Here is the latest company presentation.
Full disclosure: I own shares of AXU, BCEKF & MMRGF, which were purchased in the open market and have also recommended all three of these companies to my subscribers. I do not receive any monetary compensation or stock options from any of the companies I invest in, or discuss in my Kitco weekly articles. Please do your own due diligence before purchasing shares in any of the companies mentioned in this article.
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The iShares Silver Trust (SLV) closed at $14.82 on Friday, up $0.17 (+1.16%). Year-to-date, SLV has declined -7.32%, versus a 4.35% rise in the benchmark S&P 500 index during the same period.
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