Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
Why Krugman, Roubini, Rogoff And Buffett Dislike Gold - 30th Sept 16
After the Debate, the Deluge? - 30th Sept 16
Has Dow Theory Lost its Relevance: Stock Market Ignored it and Rallied to New Highs - 30th Sept 16
Donald Trump Failing to Recover After 1st Debate Hillary Shimmy Loss - Betfair Betting Market - 30th Sept 16
BEA Revises Q2 2016 US GDP Growth Upward to 1.42% - 29th Sept 16
Could the OPEC deal set stage for the Next Stock Market Risk Rally? - 29th Sept 16
Why Trump Lost, Hillary Won the 1st U.S. Presidential Debate - 29th Sept 16
Is a Dollar Crash Imminent After the Senate Overrides Obama Veto on Saudi 9/11 Bill? - 29th Sept 16
2017: Gold and Silver's Year of "Public Recognition" - 29th Sept 16
Did Trump Win the 1st US Presidential Election Debate? - There's Something Happening Here... - 29th Sept 16
FED Goes from ZIRP to NIRP! - 29th Sept 16 - Chris_Vermeulen
Here’s Why You Should Be in Cash Right Now - 28th Sept 16
The Fed Put a 50% Tax on Your Retirement Plan - 28th Sept 16
Massive Chinese Debt And Why They Are On A Gold Buying Binge! - 28th Sept 16
Stocks Commodities and FX Markets Waiting Technically While Fundamental Data Neutral Poised - 28th Sept 16
This Commodity Has Perked Up its Investors' Portfolios - 27th Sept 16
Charting the Continuing Gold Market Correction - 27th Sept 16
Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - 27th Sept 16
Financial Markets and FX Setups 27th Sept - 27th Sept 16
Crude Oil, Forex and Stock Market Trend Forecasts - 27th Sept 16
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Silver Junior Mining Stocks

Commodities / Gold and Silver 2012 Dec 28, 2012 - 10:21 AM GMT

By: Zeal_LLC

Commodities

Silver mine production is expected to come in at nearly 800m ounces in 2012, an all-time record and the seventh consecutive year of growth (per the U.S. Geological Survey).  At 2012’s average silver price, this total represents a value of nearly $25b.  There’s a lot of money to be made mining this shiny-white metal!

With a massive capital carrot supported by structural fundamentals that are still great, there ought to be a ton of mining companies targeting silver in their exploration endeavors.  So in my latest silver-stock research project I took a close look at the companies on the ground floor of silver exploration, the juniors.


By its simplest definition, a silver junior is a non-producer that considers its primary business the exploration for and/or development of silver-centric projects.  Regardless of market capitalization and asset base, a silver junior doesn’t generate revenue.

While juniors don’t directly contribute to mine supply, their role in the greater supply chain is invaluable.  The successful ones are making discoveries and proving up deposits that will eventually feed the supply chain.  They’ll either develop their discoveries into mining operations on their own, or be acquired by the big boys.

These juniors that find success can also deliver legendary returns, which is what makes them so appealing to investors.  But since mineral exploration is inherently a risky business, the odds of success are greatly stacked against these companies.  Sadly, most juniors will fail.  And this is why it is important for investors to be prudent in their selection process.

In my search for these junior-level companies I pulled from the universe of silver stocks that list in the US and Canada.  And surprisingly I found there to be very few that actually qualified as silver juniors.  By my count, there are just under 100 juniors that consider silver their primary metal of focus.

When I stepped back to consider why there were so few companies going after silver riches, I realized that these results shouldn’t have surprised me considering the geological nature of this metal.  Silver is actually quite unique in its geology from an economic point of view, as it usually occurs as a subservient mineral.

More often than not, silver occurs in polymetallic deposits that hold high concentrations of base metals and/or gold.  And at the end of the day when the ore is processed and the metals are sold, these other metals end up delivering more revenue than silver.  The silver content tends to be a byproduct of primary lead/zinc, copper, or gold mines.

There are of course exceptions, but it is quite uncommon to find a polymetallic deposit where silver would deliver the most revenue.  And because of this, the vast majority of silver mine production comes to market as a byproduct.

To put this in perspective, it is estimated that over two-thirds of silver mined each year comes from non-primary silver mines!  And a couple good examples of this are the operations of major copper producer KGHM Polska Miedz and major gold producer Goldcorp.

KGHM’s three massive primary copper mines in Poland combine to produce byproduct silver in the neighborhood of 40m ounces.  Each of the Lubin, Polkowice-Sieroszowice, and Rudna mines produce more silver by volume than most of the world’s top-ten largest primary silver mines.  Yet this silver is subservient in value to their copper output.

The same goes for Goldcorp’s massive Penasquito mine in Mexico.  Penasquito is a primary gold producer by revenue, but its huge silver byproduct (~23m ounces per year) ranks it as the world’s third-largest silver mine.  These four mines alone account for a staggering 8% or so of the world’s mined silver supply.  And the list goes on of mines that produce hefty silver streams that are only byproducts to other higher-revenue metals.

So as a result of silver’s subservient geological nature, the odds don’t favor mining companies discovering deposits that are silver-centric.  And this somewhat explains why there are so few mining companies actually working primary silver deposits.

Another thing I discovered in my research is the lack of deliberateness of the companies that comprise this pool.  Provocatively most silver juniors didn’t actually start out with their sights set on being primary silver companies.

While the majority of junior exploration companies do start out with their sights set on a specific metal, they are ultimately at the mercy of what the rocks hold at depth.  A company may stake its claim in a greenstone belt known for its gold deposits, in search of a gold deposit of its own.  But when drilling underneath a gold anomaly at the surface, it may discover a thick deposit of high-grade copper.  This company would thus transform from a gold junior into a copper junior.

Overall miners certainly don’t mind finding a deposit comprised of minerals they weren’t targeting.  The fact that they found a deposit is usually a joyous occasion.  And since their ultimate goal is the almighty dollar, they tend to be mineral agnostic if whatever they find can generate investor interest and ultimately a profit.

There are countless examples of juniors shifting metal focus based on the results of their exploration work.  And on the silver front, more often than not those companies that do start out looking for silver are usually the ones switching to another metal.  They find primary gold or base-metals deposits, and run with them.

Of the nearly 100 silver juniors, of which only half actually have “Silver” in their names, very few started out as silver companies.  Most in fact started out as gold or base-metals companies that stumbled upon primary silver deposits.  And of those companies that did start out as silver companies, many did so as a result of a spin-off or structured start-up.  They already had their silver projects and didn’t have to find them.

A good example is mega-junior Tahoe Resources.  Tahoe’s Escobal project in Guatemala holds one of the world’s finest primary silver deposits.  This project is currently under development, and when it achieves commercial production in 2014 it will be one of the world’s largest and lowest-cost primary silver mines.

Tahoe is one of the rare juniors that started off as a silver company when it went public on the TSX in 2010 (it now has a listing on the NYSE as well), but it was a structured start-up courtesy of Goldcorp.  A subsidiary of Goldcorp actually discovered Escobal while looking for gold.  And it is only thanks to the fact that Goldcorp desired to stay gold-centric that it established Tahoe Resources, thus allowing silver-stock investors to take part in this beauty.

Perhaps the most surprising thing I discovered about silver juniors is their size.  Now I didn’t expect these companies to be huge.  With an ounce of silver generally worth about one-fiftieth that of gold, the value of a primary silver deposit is typically worth a lot less than a primary gold deposit (most silver deposits don’t hold 50x the resources by volume of an average gold deposit).

Because of this it is of course logical that on balance silver juniors are going to have smaller market capitalizations than gold juniors.  But after running the numbers, “junior” is an understatement in describing these stocks.  If I exclude Tahoe Resources, a huge top-side outlier (~$2.5b market cap), the average market cap of the junior silver stocks is only about $29m.

Taking it a step farther, if I exclude just the four largest by market cap (Tahoe, MAG Silver, Orko Silver, and Bear Creek Mining) the average drops to about $17m.  These stocks are tiny!  Check out the pie chart below to get a good visual read of just how small the silver juniors truly are.

The market caps of the nearly 100 silver juniors were updated through last week, and this breakdown is simply mind-blowing.  At the top are an elite group of $100m+ companies.  These juniors own large deposits in relatively geopolitically-safe regions.  And they collectively hold 1.7b ounces of silver resources.  But as you can see, this group is the smallest with only a 6.3% share of the total population.

Next are those silver juniors in the $50m to $100m range, and again this group towards the top is sparsely populated.  Interestingly it is well understood that stocks with market caps between $50m and $300m are labeled as micro-caps.  The fact that most of the largest silver juniors are micros puts their collectively small size into context.

At under $50m you get into the realm of the nano-caps, which is where the majority of the silver juniors reside.  Amazingly 86% of all silver juniors have markets caps of less than $50m!  And as you can see, only a small fraction reside in the top half of this range.

Incredibly the largest group of silver juniors sport market caps under $5m.  We’re talking penny-stock realm here!  While most of these companies may be sniffing a potential silver deposit, they don’t yet have a compliant resource base.  And not surprisingly, most have very limited working capital and thus meager work programs.  These juniors are the riskiest of risky!

And speaking of risky, one of the major takeaways for me is that this sector is not for the risk-averse.  Investors need to be keenly aware of what they are getting into if they decide to put their capital to work in this sector.  While the reward side of the risk/reward trade can reap fortunes if you pick the right stock, the risks are extreme.

The biggest risk of course is a company failing to find and/or develop an economically-feasible silver deposit, which is the most common outcome for most juniors.  But there are also non-company-specific risks that come with nano-caps.

One big high-level risk is where these stocks trade.  Interestingly only about 15% of silver juniors have primary listings in the US, with most of these being on the OTC Bulletin Board.  Sadly an overbearing regulatory environment (primarily Sarbanes-Oxley) turns most start-ups away from listing in the US.  And this is a big reason why the majority of silver juniors take their shots at tapping public venture capital on the TSX Venture Exchange.  Though not ideal, thankfully US investors can still own most TSX-V stocks via the Pink Sheets.

But whether TSX-V, OTC BB, or PNK, all of these exchanges/platforms come wrought with volatility and liquidity issues.  Many of these stocks simply lack exposure, and thus capital volume.  And as a result it doesn’t take much action to move them violently in either direction.  And unfortunately the downside action is amplified in a tough environment like we’re in today where junior resource stocks are highly out of favor.

The nice thing about juniors though is their fortunes can change in the blink of an eye.  All it takes is some upside momentum in the price of silver and renewed interest in resource stocks for investors to once again glom onto juniors.  And when this happens, the breakdown of this pie chart can look radically different.

If you can stomach the inherent risks of trading on the frontier junior exchanges/platforms and accept the company-specific risks that come with the micro- and nano-caps, then junior silver stocks may be just for you.  As daunting a picture as I have painted, there is enormous upside potential in this sector.  Even though a lot of these nearly 100 stocks are junk, there are some quality companies working on quality projects that could pan out nicely.  And if you pick the right ones at the right time, there are some legendary gains to be won.

At Zeal we recently completed an intense research project that poured over the universe of junior silver stocks.  And the product of this research is a hot-off-the-presses report that profiles our favorite dozen.  The stocks in this 23-page report range from small nano-cap speculative plays to some of the micro-cap elite.  And we believe that all have huge potential to thrive in silver’s ongoing secular bull.

We also publish acclaimed weekly and monthly newsletters that offer contrarian market analysis and trade recommendations.  And interestingly one of the stocks we just recommended in our weekly newsletter, a silver junior that was profiled in this report, was recently bought out for a whopping 72% premium.  Join the big silver companies that also think the juniors are cheap, and buy your report today!

The bottom line is silver’s secular-bull-driven demand has led to a huge increase in silver-mining output.  And the mining companies have been rolling in the dough selling their silver at near-record-high prices.  This silver renaissance has not only turned on investors to the producer companies, but the juniors that have a huge role in developing the next generation of mines.

But as a result of silver’s subservient geological nature, investors are finding a sparsely populated junior market.  With primary silver deposits few and far between, the population obviously isn’t as robust as one would hope.  And adding to the precariousness of silver juniors are depressed market conditions and generally smaller deposit values, which makes most of them nano-cap in size.  Thankfully even amongst this trifling group is an elite bunch that ought to thrive with their underlying metal.

By Scott Wright

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research as well as provides in-depth market analysis and commentary. Please consider joining us each month at … www.zealllc.com/subscribe.htm

Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the volume of feedback I may not have time to respond personally, but I will read all messages. Thanks!

Copyright 2000 - 2012 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife