first majestic silver

While waiting for the Silver Bonanza...

May 18, 2000

For a many years now, investors in silver and silver mining companies have been waiting for an explosion in the price of the metal that was to be triggered by the growing supply-demand deficit and the gradual elimination of silver inventories. Despite the fact that above ground stocks have shrunk from more than one billion ounces, in the early 1990's, to barely a few hundred millions ounces last year, the rise in silver prices has yet to materialize. With an annual physical deficit above 100 millions ounces, silver prices should already have started to move higher. The Warren Buffet rally of 1997-98 that carried prices to the $7.50 level could have been the beginning of the big Silver Bonanza announced by the late Jim Blanchard in the mid-1990's, but it abruptly ended yeilding the current trading range of $5-$5.50.

A few reasons have been given to explain this situation with the most important being speculation in the Comex futures by institutional short sellers and forward selling by base metals producers, for whom silver is only a by-product. It is hard to say what events will take place to stop what appears to be a contradiction. However, we can be sure that silver's unique characteristics, its growing demand in the fabrication of industrial and jewelry products, and investors interest for a metal that has for many years been used as money are factors that will eventually lead to the price adjustment that we have been expecting. Unfortunately, there is no way we can tell when this will happen. Silver prices are rather stable and they could remain in that tight trading range for years.

The are a few ways investors can participate in the silver market and these include physical bars, coins, COMEX futures and options, COMEX registered warehouse receipts, silver certificates and silver mining company shares. We don't want to discuss the merits of each of these investments. However, we suggest that silver mining company shares are the best vehicle at this point in time because they are the only investments that offer some upside potential in the current environment. When silver starts its bull market, it will then be time to consider the other types of investment vehicles. Of course, very large portfolios that can afford to be patient should diversify immediately, but smaller portfolios should concentrate on silver mining company shares.

This being said, not all silver mining shares are suitable investments or speculations. Most have come down in price by large percentages since the last high made during the Warren Buffet rally in the winter of 1998. Many are real bargains for the patient investor or speculator, but some have seen their financial situation deteriorate to a point that they are now too risky. Here is a list of the junior and mid-tier silver stocks we follow:

Mining Company
Names & Symbols
R1 - R2
R1 - R2
Apex Silver (SIL)
Pan American Silver (PAAS, PAA.T)
Coeur D'Alene (CDE) 
Hecla Mining (HL)
Silver Standard (SSRI, SSO.T)
Corner Bay Minerals (BAY.T)
Sunshine Mining (SSC)
First Silver Reserves (FSR.T)
Yamana Resources (YRI.T) Intrepid Minerals (IAU.V)
Bonanza Silver (BZS.V)

1)  Market cap($US):  Number of shares outstanding fully diluted times $US market price per share

2)  MOz.Ag:  Millions Ounces of silver (gold and base metals excluded)

3)  Oz.Ag/US$:  Ounces of silver per US$ of market capitalization

4)  R1:  Mineable reserves category - Silver only

5)  R2:  Geological resources category - Silver Only

The table above contains: the name and trading symbol of the company, the current market capitalization in millions of $US, the mineable silver reserves in millions of ounces, the total geological resource in millions of ounces. Please note that we have not included equivalence for gold and base metals. The purpose of the exercise is not to conclude on which is the best company but to show which ones offer the best silver exposure. The next column shows the number of mineable ounces for each US$ of market capitalization and the last column shows the number of geological resource ounces per dollar of market cap. There are certainly more mining companies that we could add to this list, but they are either too large and therefore offer less leverage or we simply don't follow them at this moment.

Before commenting on each of these companies it is interesting to compare their stock performance since the winter 1998 high in silver price:

Stock Winter 1998
Prices adjusted for splits. In US$ unless indicated

Corner Bay Minerals.

Corner Bay has been the best performer of the group for the last two years and for good reasons. This junior from Toronto has discovered a unique silver deposit near Alamos in Sonora State, Mexico. The deposit is unique because it is an open pit operation ameanable to heap leaching. So far a mineable reserve of 100 millions ounces of silver equivalent is identified. Preliminary metallurgical tests suggest that a recovery rate of 67% could be achieved on the average grade. On that basis, the deposit would have a net present value near $6-$7 per share and provide an internal rate of return above 50% with projected operating costs near $2.50 per ounce of silver. Initial production could be near 9-10 millions ounces of silver per year. More recently, the company announced the discovery of a new high grade silver core with one hole returning 52.5 meters of 719 g/t Ag equivalent (172 feet of 23 opt Ag-eq). This high grade is almost 10 times higher than the average grade of the deposit and appears to be the heart of the feeder system. More drilling is expected to test this new zone and new reserve calculations will be done later this summer. Corner Bay is still an early exploration play and has excellent potential. On the basis of more than 4 ounces of silver in the reserve category for each US$ of market capitalization, it is one of the most leveraged silver plays in the group. We will continue to buy the stock.

Apex Silver.

Apex is an impressive story based on the huge San Cristobal zinc, lead and silver deposit in Bolivia. SIL has been the second best performer since the 1998 silver high with a market loss of only 16%. Although already a mid-tier producer with the highest market capitalization in our group, SIL will definitively participate in the silver bonanza. Even if silver prices do not move, Apex will generate large cash flows when it starts commercial production in 2003. Production is expected to reach 24 million ounces of silver per year, but Apex will also produce as much as 560 millions pounds of zinc and 181 millions pounds of lead per year. As such, Apex will be a base metal producer with a silver by-product comprising only 25-30% of total revenus. You can still imagine that a bull market in silver will have a major effect on SIL revenus and profits. SIL has 1.5 ounces of mineable silver($7.50) per dollar of capitalization. It is moderately leveraged and is a conservative play due to its expected low costs of $1. 86 per ounce of silver and $0.28 per pound of zinc.

Intrepid Minerals.

Intrepid is a grass-roots exploration play and doesn't have any silver resources or reserves yet. It is therefore highly speculative. Its properties are in Central America, mostly in El Salvador. The Cerro Colorado target on the Aldea Zapote property in northwest El Salvador is the most interesting prospect and has already returned drill intercepts ranging from 95 grams silver per tonne to 449 grams silver per tonne over significant widths of up to 55 metres. Intrepid will need additional financing that will allow for a new drill program to start sometime after the rainy season is over in Central America. IAU is a typical speculative exploration silver play with the usual high risks and high rewards potential. We continue to hold Intrepid in our portfolio.

Pan American Silver

PanAm Silver is well known and recently been considered the blue chip of silver stocks. It has huge resources of almost one billion ounces of silver (7.3 ounces per dollar of market cap) and reserves of 372 millions ounces (2.7 ounces/$) in 8 different deposits. It also has base metal production at its Quiruvilca mine in Peru, where current silver production is near 3 millions ounces per year. This mine is currently breaking even but heading in the right direction. Costs have been trending down and with the recent acquisition of a second operation in Peru, Huaron, they should continue to do so. The Huaron acquisition will result in management synergies and reduced administration costs at the company's Quiruvilca mine in northern Peru, since both mines are similar-sized underground silver-zinc operations that produce concentrates from similar processing facilities. Production from Huaron could more than double Pan American's Peruvian silver production in 2001 from 3.5 million ounces to more than seven million ounces at a cash costs near $3.50 per ounce.

In Mexico, Pan American Silver recently announced a major increase in the mineral resource at its 100-per-cent-owned La Colorada project in Zacatecas state. The total resource for La Colorada is now 6.72 million tonnes grading 419 grams of silver per tonne (90 million ounces of contained silver), plus by-product gold, zinc and lead. An internal feasibility study is expected to be completed by the end of May. The study will be used in connection with the arrangement of a project loan to cover the capital costs to begin mining and milling operations. If financing is arranged in mid-2000, construction would start in the third quarter, resulting in production in the second half of 2001. Initial plans called for a production rate near 4 millions ounces per year, but with the new reserves, this is likely to increase substantially.

The sad story at PanAm is certainly the Russian saga that put a stop on all developments at Dukat. Dukat is the large former producing mine in Madagan with 256 millions ounces in reserves and 230 millions ounces in other resources. It was scheduled to come into commercial production in 2001 at a rate approaching 16 millions ounces per year. Last November, a sealed auction was held for the purchase of certain essential assets of the bankrupt former Dukat operating company. Pan American was surprisingly outbid by a Moscow-based company not previously interested in the Dukat operation. Since then, all mine developments have been suspended and lawsuits have been launched. The company is evaluating different alternatives that will allow it to resume work at Dukat. Although the company remains confident, the future is uncertain in Russia.

Among Pan American's very large resources, more than 250 millions ounces in four properties are considered as long term investments. They will need silver prices between $6 and $9 before they can contribute to the bottom line of the company. Despite the problems at Dukat, Pan Am Silver has to be considered an excellent silver play for the long term. The company has debt near US$10 millions and working capital of US$14 millions. After suggesting a sell last November, we recently started to accumulate again when the stock dropped below US$3.50 in April.

First Silver Reserve.

First Silver has been a favorite trader for many years as it has always reacted positively to swings in the price of silver. In the last Warren Buffet rally, FSR moved up almost 200% and we expect it will continue to do so in the years to come. FSR annual silver production is near 2.5 millions ounces and has always been profitable until this year. It is now breaking even due to slightly lower silver grades. It still continues to generate small cash flows, but things could change at First Silver. For the past 18 months, the company has been making progress on a 600 meters drift it is digging into the heart of the mountain where their San Martin mine is located. The drift is heading towards the junction of three mineralized silver veins. The area has been named "El Banco". So far, the drift has been centered on a new mineralized breccia which exhibits a length of 200 metres along the vein and has an average width of 2.6 metres and contains an average of 401 grams silver per tonne (12.9 ounces per ton). This is approximately 100 g/t higher than the current mill head grade. The potential to develop major tonnage of high grade silver is excellent. We continue to watch FSR and will be a buyer if silver prices start to move higher or if "El Banco" reveals a major discovery.

Silver Standard.

Silver Standard is another highly leveraged explorer that should explode with higher silver prices. SSRI has 3 major projects including Bowdens in Australia, Manantial in Argentina and Candelaria in Nevada, USA. Silver Standard has the highest leverage of all the stocks we follow with 8.8 ounces of silver behind each US$ of market capitalization. Unfortunately, it appears that SSRI will need higher silver prices to achieve substantial market gains. Bowdens and Manantial are excellent projects with internal rate of returns above 20% with silver at $6.00. Recent work may help improve these numbers and feasibility studies are continuing on these projects to determine at what silver prices they can be brought to production. Anticipated annual output could reach between 6 and 10 millions ounces if both properties make it to production.

Silver Standard is currently completing due diligence work on the Candelaria mine, an old producing property recently optioned from Kinross Gold. As much as 150 millions ounces of silver resources is available on that property, 94 millions ounces in the old open pits and 56 millions in crushed materials on heap leach pads. It appears that these metals may require a silver price in excess of $6 before they can be recovered. The company is completing additional metallurgical work in order to determine the viability of the project. Silver Standard will be a strong buy as soon as silver prices start improving or if feasibility studies, being completed now, conclude that the projects are viable at current silver prices.

Coeur D'Alene.

Coeur D'Alene is a well known silver and gold producer in the USA. With production of more than 10 millions ounces of silver and 150,000 ounces of gold it is considered to be a well established mid-tier producer. Unfortunately, the company has been loosing money for the past few years. Its flagship property, Rochester in Nevada, has averaged total costs above $4.50 per ounce over the last 4 years. But things appear to be improving now and costs should decline in 2000 thanks to a combination of higher production due to higher grades, leaching of run-of-mine material and a lower than anticipated strip ratio. Coeur's other operations are in the silver valley of Northern Idaho where it is producing more than 2.2 millions ounces of silver per year at a total cost of approximately $6 per ounce. Fortunately, the new acquisition from Asarco, the discovery of a new high grade ore, and improvements in the operations and expansion of the Galena mine offer the potential for an increase in production of up to 5 million s ounces per year as well as a significant decline in operating costs.

Coeur is also completing metallurgical studies on a low grade resource, the San Bartolome deposit in Bolivia. If studies are positive, this could become the source of significant cash flows in the coming years, and this is exactly what Coeur needs. Although CDE has more than $120 million in cash and short term investments, it also has more than $285 million in debt. With interest expenses exceeding $15 million per year and the current very low cash contribution from operations, shareholder's equity has been shrinking slowly but steadily. In a recent effort to reduce debt, the company announced last week that it has commenced a "Dutch Auction" tender offer to purchase a principal amount of up to $27,800,000 of its 6% Convertible Subordinated Debentures due in 2002. They are trying to buy back debt at a 30-35% discount. If successful, this will be a good use of their cash. The best thing that could happen to Coeur D'Alene is an increase in silver prices. We continue to watch the situation and intend to b uy the stock as soon as silver prices confirm that a new bull market has started.

Hecla Mines.

Hecla is a diversified producer of gold, silver and industrial minerals. Silver production comprises approximately 30% of Hecla's total revenus. Hecla's total silver production in the first quarter of 2000 was 2.2 million ounces, a 25% increase over the same period a year ago. Total production costs are near $4.50 per ounce. Silver is produced from two operations: the Lucky Friday in North Idaho and the Greens Creek silver/zinc/lead/gold mine near Juneau, Alaska. Like Coeur D'Alene, the current ratio of short term assets to short term liabilities is good but the long term debts are high. Hecla needs higher metal prices.

Yamana Resources.

Yamana Resources is in a unique situation. They have found exceptionally high grade silver on their 4,400-hectare Bacon property in Santa Cruz, Argentina. The deposit yields a potentially mineable direct shipping ore (DSO) resource of four million ounces of equivalent silver at a grade of 15,832 g/t (509.1 ounces per ton) eq Ag. This DSO resource, contained in 7,800 tonnes of rock in several pockets within a short section of a new structure, is of such high tenor and quality that it requires no on-site treatment in order to be profitably shipped to Noranda's Rouyn smelter in Quebec for processing. Excluding the DSO, the balance of the Bacon resource is about 4.7 million ounces equivalent silver contained in 111,300 tonnes averaging approximately 1,320 g/t (42.4 ounces per ton) eq Ag. Yamana anticipates considerably expanding this milling grade resource by a phased underground mining and exploration program. Doubling this resource would likely justify the capital expense of a small concentrating mill. As it stands, this resource is rather small, but because of the very high grade it will be extremely profitable and will generate very interesting cash flows for Yamana. The stock is probably already selling for anticipated cash flows, but we are following this company because the possibility of finding more high grade ore exists. If this is the case or if silver prices make a big move upwards, Yamana stock would rise significantly.

Sunshine Mining.

For many months we have suggested staying away from Sunshine because of its deteriorating financial situation. In recent press releases, the company announced that a meeting of the Noteholders possessing 8% Senior Exchangeable Notes of Sunshine Precious Metals Inc. (the Eurobonds) was convened and a motion was made and passed to extend the maturity of the Eurobonds a further thirty days from April 24 to May 24, 2000. Sunshine also announced that it was continuing negotiations with the Noteholders and holders of its other debt securities regarding a comprehensive restructuring of the company's balance sheet. Also, the company has been given notice by the New York Stock Exchange (the "NYSE") that it has fallen below continued listing standards. The company's goal in negotiations with its debt holders is the re-attainment of continued listing status with the NYSE. While the final terms have not yet been agreed upon, it is anticipated that a restructuring will transfer a very substantial equity ownership inter est in the company to the debt holders. If a restructuring is not successfully accomplished, the company may file for bankruptcy under the U. S. Bankruptcy Code.

This is a sad story and we hope that Sunshine will find a way to continue its operations. They own the Pirquitas deposit in Argentina which has more than 115 millions ounces of silver reserves. A recent study confirmed a very robust 27% return on investment with low cash costs of $1.30 per ounce. For now, it is better to continue watching the stock. The outcome of the current negotiations will determine if SSC can be bought and at what price.

Bonanza Silver.

Bonanza Silver is a newcomer in the sector. In late 1999, the company optioned the PAR claims located 30 miles north of Nevada's famed Carlin gold trend. Bonanza is planning a 2,500 metre reverse circulation (RC) drill program during late May and June of this year on the Cornucopia Caldera, northwest of Elko, Nevada. The target is "bonanza-type" epithermal silver mineralization (with a significant gold content). Recent exploration work confirmed that over 30 veins existing on the property are untested and are strong targets for the current drill program. If this RC drill program is successful, it will be followed immediately by diamond drilling to establish grade and to begin to define a resource. A discovery on these claims could propel the junior stock to much higher levels, but failure to do so would cause the shares to return to the $0.05-$0.10 trading range. For now we are following the story and will keep you informed on the progress of the drill program.

In conclusion, we continue to consider Corner Bay Minerals as the best silver play to own at the moment. Pan American Silver and Silver Standard are also near the top of our list. And if silver starts to move aggressively higher, we will watch all the stocks mentioned above. Most will move steadily higher.

Let's hope the Silver Bonanza will commence soon.

Claude Cormier.

Bruce Robbins.

Mr. Cormier is president of Ormetal Inc. and editor of The Ormetal Report newsletter. He can be reached for comments at   [email protected] Mr. Robbins is a consulting geologist and advisor to Ormetal Inc. He can be reached for comments at [email protected]. The informations herein are obtained from sources deemed reliable, but their accuracy cannot be guaranteed. The reader is well advised to do his due diligence on the companies mentioned above, or consult with his financial advisor before purchasing its securities. The authors of this article are not registered investment advisors.

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