first majestic silver

Special Situation Silver For Free

March 24, 2006

How would you like to own silver without paying for it? You say it sounds like a fairy tale? Well, allow me to tell you about it by beginning my story in the classic fairy-tale fashion.

Once upon a time, there was a whole lot of silver in the ground in a remote place called Prairie Creek, which sits among the Mackenzie Mountains in the Northwest Territories of Canada. The Hunt brothers bought the property and built extraction facilities with a present useful worth of $100 million. Then, Bunker Hunt and William Hunt tried to corner the world market in silver and wound up bankrupt in 1980. Their Prairie Creek property was purchased in 1994 by a mining company. The price of silver was very low in 1994, however, and it remained low for a number of years. The mining company was smart enough to let the silver sit there in the ground while the market price was so low. Over time, investors lost interest in following the company, and shares were tucked away in safe deposit boxes. Besides, anything connected with the name "Hunt Brothers" had a negative tone to it.

The name of the mining company is not very romantic. The word "silver" does not appear in its title. It goes under the name of Canadian Zinc Corporation (symbol CZN in Toronto; CZICF on the "pink sheets" in the US). Its shares trade today at slightly under a dollar a share (US). All currency figures in this report are in US dollars. To get the free silver, you have to pay around dollar for a share for the stock.

"Aha!" you exclaim. "I knew there was a catch to it."

Well, every fairy tale worth its salt-its silver?-has a catch to it.

"But," you say, "if I pay a dollar for the stock, isn't the silver already included in the price?"

It would be, if you were a believer in the efficient theory of the stock market. Under that theory, the present price of any stock reflects its worth. Furthermore, under that theory, stocks would hardly ever go up or down. Moreover, the theory is vacuous: if all shares are efficiently priced, then "efficiency" tells us nothing at all about any individual stock.

Surely if there were an Olympic event for the most inefficiently priced stock, CZN would, at the very least, win the silver medal.

"But," you say, "I don't believe that I can get something for nothing. Never have, never will."

Alright. Let's start by focusing on the zinc. You pay a dollar a share for it. If a dollar a share is less than the value of the zinc, then it's a mathematical certainty that whatever silver is thrown into the bargain is costless to you. It's like the 1992 Presidential campaign when it was feared that if Bill Clinton were elected he'd give many of the decisions to his wife Hillary. The Clintons countered with the terrific slogan: "Buy one of us, get one free."

Buy zinc, and get silver for free.

"Alright," you say. "Prove it to me. Give me the numbers."

Let's start with zinc by going to the Canadian Zinc Corporation's website. There, we find a "resource estimation" compiled by an independent assessor, MRDI Canada, a division of H.A. Simons Canada, Ltd. The geological resource has been classified into measured, indicated and inferred resources, based upon the level of confidence according to the Australasian Code for Reporting of Identified Mineral Resources and Ore Reserves.

The Company adds that the Prairie Creek mine ranks among the highest grades of zinc, lead, and silver in the world. But let's forget about the lead!

Here's a quick, conservative evaluation of what an investor gets by purchasing a share of CZN. High-grade zinc sells for $2330 per ton and the price is rising. Since we can only count 12% as zinc ore, we get an extracted price per ton of $280. CZN has approximately 11,000,000 tons of ore in the ground as per the above chart. Multiplying that figure by $280 we get slightly more than $3 billion. Now we divide by the number of fully diluted shares of CZN, which are slightly less than 85 million shares. Our final figure is slightly more than $34 per share.

You spend about $1.00 for a share of CZN and you get $34.00 worth of zinc in the ground. But maybe that doesn't interest you. Maybe you just don't like base metals. Like the lady a few years ago who bought a McDonald's (or was it a Wendy's?) and said, "Where's the beef?" you are asking, "Where's the silver?"

So, if it's just the free silver you're interested in, let's calculate how much you get if you buy a share of CZN. We first convert grams into ounces; there are 34.3 grams per ounce. Using the above chart, the average of 160 grams of silver per ton, works out to an average of 4 2/3 ounces of silver per ton. Multiply the last number by 11,000,000 tons in the ground, and we get 51,370,000 recoverable ounces.

To be sure, there are extraction costs, but a lot of the infrastructure is already in place and, in any event, as the price of silver goes up, the extraction costs per ounce go down. Now, let us take the recoverable ounces figure of 51,370,000 and multiply it by the current price of silver, which is $10.33. The product is US $530,652,100. Divide by the number of fully diluted shares (85,000,000) and the grand total is $6.24. That's the market price amount of .999 pure silver that you get for free , when you buy a share of CZN for around $1.00.

For good measure, Canadian Zinc's Management Analysis on their website states: "Canadian Zinc continues in a strong financial position. At September 30, 2005, the Company had cash and short term deposits of $11.5 million and is debt free." Most recently, on January 31, 2006, Canadian Zinc announced the successful completion of a secondary offering which brought in an additional $9.6 million.

What's the bottom line? Am I recommending that you buy CZN stock? Absolutely not. I don't know you and you don't know me. We are not in a fiduciary relationship. You should DYODD, which, by the way, is not the symbol of a South African gold stock. (For the purposes of full disclosure, even though you may well know the acronym, it stands for Do Your Own Due Diligence.) A simplistic question may be: "What is one's view regarding one's capacity to realize higher and higher valuations over time?"

Am I a long term investor who owns shares in CZN? As sure as Lake Huron is moist.


*Donald Dross is an associate of Japan Asia Investments; articles also appear under Sid Klein.

This letter has been offered into the public domain and may be freely copied or quoted.

DISCLAIMER: This market letter is intended to assist in the dissemination of information to private subscribers. The information contained herein represents Messrs. Dross's and Klein's best efforts in good faith to advance knowledge to SKC clientele, but there can be no implied guarantee as to its accuracy or completeness. The information is given as of the date appearing on this market letter, and Messrs. Dross and Klein assume no obligation to update the information or advise on further developments relating to the information provided herein. No solicitation to buy or sell securities is intended, and none should be inferred. Investments are inherently risky, but investment risk itself is a function of individual preferences. Thus any opinions, recommendations, or judgments expressed in this market letter are of necessity abstract and general. They must be modified, accepted, or rejected by individual subscriber/investors whose risk averseness cannot be known to either Mr. Dross or Mr. Klein.

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