Silver and Sterling Mining
Silver Stock Report
by Lou Passi & Jason Hommel, April 1, 2005
Here's a riddle that everyone will surely answer differently. What is it that you can't live without, yet is so scarce it may soon disappear altogether? The hopeless romantic might reply that it's "the love of a good woman". An environmentalist might complain that it's "fresh air in a smog-filled metropolis". And the political activist might simply shout "freedom". But, let's add another wrinkle to our riddle. What is it that is also sold short in amounts that far exceed its global supply? Impossible you say? Well, the correct answer to this riddle is SILVER.
Yes, silver is truly an indispensable commodity. It has a number of unique properties including strength, malleability and ductility, electrical and thermal conductivity, sensitivity to and high reflectance of light, and the ability to endure extreme temperatures. Because of silver's unique properties, it can't be substituted in most applications. A partial list of critical silver applications includes batteries, bearings, catalysts, electronics, electroplating, medical, photography, solar energy and water purification.
Due to silver's many invaluable uses, it has been consumed in industry in large amounts, about 7/10ths of an ounce of silver, per person, in the U.S., since 1945.
Thus, 60 years later, by today, silver is now also a scarce commodity. World demand for silver exceeds annual production and has every year since 1990 - a total of 15 straight years. Few primary silver mines are operating today due to current low silver prices, but prices are likely headed much higher and soon because above ground supplies are low, shrinking rapidly and approaching zero. The market has been living off silver inventories since 1990. Inventories are at historically low levels. From a peak of 2.2 billion ounces of silver in 1990, bullion inventories are now estimated at just 300 million ounces. Imagine how much lower supply might be in a year or two from now.
Most incredible of all is that due to excessive naked short selling and leasing, silver has the largest short position that's ever existed in anything! A naked short sale is the sale of something you don't own. Current naked short positions in silver (including over the counter, uncounted derivatives) total in the billions of ounces - that's with a "B" - and exceed real world supplies by billions of ounces too.
Regulations are supposed to preclude excessive short speculation, but regulators have apparently neglected to police the silver market. As a result, unbridled short selling has artificially depressed silver's price. Eventually, all short sellers will close their short positions by buying or delivering the physical silver they sold. And why? Because "He who sells what isn't his'n, buys it back, or goes to prison!" That means we're going to see a silver price explosion when short-covering buyers compete for too few ounces of available silver. And so, we might also see delivery defaults! In fact, the move towards defaults and rising prices has already begun, if you consider position limits as a breakdown on the freedom people should have to buy what they want. Today, silver is priced at about U.S. $7.50 an ounce, already up 70% in the past 24 months, but well below it's all-time high of near $50 in 1980.
If you want to capitalize on this silver price explosion, by all means start accumulating silver bullion bars and coins (if you can find them) at today's relatively low, low prices. More aggressive investors will desire to own shares in a variety of mining companies highly leveraged to the price of silver.
Sterling Mining (SRLM - Pink Sheets) is one such company. The share price March 31 was $3.60/share. With 15 million shares outstanding, the market cap is $54 million. With 15.8 million shares fully diluted, the market cap is $57 million.
Sterling now controls the legendary Sunshine Mine, the richest silver mine in American history with more than 360 million ounces of production over the past century. Mine reserves stand at 26 million ounces of silver, as well as an additional resource of 160 million ounces of silver, for a total of 186 million oz. of silver. The mine is leased for 15 years, and can be bought for an additional $5 million.
Sterling acquired the Sunshine Mine after the Sunshine mining company went bankrupt. In 1993, the famous Sunshine mining company had a market cap of $500 million, while they were $100 million in debt. The debt caught up with them as silver prices dropped in 1999-2002.
Today, lean Sterling Mining has a market cap of about $70 million, and is debt free. Thus, Sterling Mining may have an upside potential to increase their market cap by about 7 times to return to the former valuation.
Oddly, the Sunshine Mine was profitable when it closed in 2001. It was producing at a rate of over three million ounces of silver per year at an average grade of approximately 20 ounces per ton and a cash cost of just $4.49/ounce. The property includes offices, a 1,100-ton-per-day mill, more than 100 miles of underground workings, and 2,300 acres of mineral rights.
In 2003-04 Sterling completed a surface geophysical program on the property to explore for the potential upward continuation of silver-bearing structures. The program identified five target areas, and in September 2004 an initial surface drill program was conducted. Sterling is following a methodical approach preparing the mine for a return to long-term sustainable production.
Sterling Mining's share price has suffered recently, down to just below $4/share from a high of about $14/share, perhaps partly due to rumors on the internet about mine flooding. Olav Svela, Vice President, has firmly stated:
"There is no water problem at the Sunshine mine. We are currently finishing up our Phase II development plan for the mine and hope to be in production within a couple of years, if not sooner."
Many silver stocks, in general, have also been hit by two problems in the last year. First, silver prices stalled in April 2004, when silver hit a high price of $8.40, and then crashed back to $5.50, thus discouraging many silver stock investors. Second, many private placement shares have come free trading, and that puts downward pressure on share prices as initial investors with large blocks of shares cash out to lock in gains. Sterling Mining gained from a low of about $.25/share in early 2003 prior to the acquisition of the Sunshine mine.
Sterling is now the 7th largest primary silver company in the world with 231 million ounces of silver resources or 19 ounces of silver per share. Silver accounts for 91 percent of the company's total resources, making it a high-leveraged silver stock.
Other Company Projects: (many leased, not all 100% owned)
Coeur D'Alene Mining District - In addition to the Sunshine Mine, Sterling controls more than 15,000 acres of mineral rights in the Silver Valley. This is one of the richest silver districts on earth, yet there's been relatively little surface exploration conducted by modern techniques. Recent discoveries indicate that significant silver mineralization is just waiting to be found.
Mexico Projects. In 2003 and 2004 Sterling acquired a number of properties in Zacatecas State, Mexico, with rapid production and exploration potential for 100+ million ounces of near-surface silver resources.
Baroness Tailing Project - an advanced stage project located in the Zacatecas Mining District, Mexico. Production is expected to begin in 2005. It is estimated that the project contains 5 million metric tons of finely ground tailings that average 3.0 ounces per ton silver and 0.02 ounces per ton gold, which is a resource of 15 million ounces of silver and 100,000 ounces of gold. Processing costs are expected to be $3.50 per ton or less.
Milagros Property - Sterling Mining holds an option on the Tesorito and Tabasquena claims near the prolific Milagros property in Zacatecas State, Mexico. The claims comprise two shallow shafts (about 65 feet and 280 feet deep, respectively) approximately half a mile apart, sunk onto a major silver-bearing epithermal vein structure. The reported thickness of the vein averages about 10 feet, widening to nearly 20 feet. The structure is believed to be open along strike on both ends, as well as at depth. Earlier reports have estimated that between the two shafts lies an estimated one million tons of mineralization, which, based on past smelter returns, has historically produced ore at 17 ounces per ton silver, implying a 17 million oz. silver resource.
San Acacio - The San Acacio Silver Project, located four miles from the City of Zacatecas, Mexico, comprises the old San Acacio Mine within the famous Veta Grande Mining District that has produced 180 million ounces of silver. The San Acacio claims cover roughly four miles of the Veta Grande quartz-carbonate vein system. Historical reports indicate a drill-inferred resource of 14.4 million ounces of silver. Previous operators have used this drill data to estimate an additional 3.1 million tons at a grade of 5 ounces per ton silver, yielding another 15.5 million ounces. Sterling management anticipates that surface drilling will be conducted on the property in early 2005.
JE Project - 700 acres of property located in the 'Persian Gulf of Silver', a NW Montana region of several low-grade 100+ million ounce deposits. Stratabound silver/copper mineralization was defined in this area by eight diamond drill holes adjacent to the NNW-trending Snake Creek Fault. Sterling aims to conduct an initial exploration program in 2005 to test the zone of mineralization between the discovery hole and the Snake Creek Fault, where grades are expected to increase. Management believes this property has the potential for 50+ million ounces of silver resources.
Montana Silver-Copper Sulfide Belt - covers a 1,600 square mile area in Sanders County, northwest Montana. In this area three world-class silver/copper deposits have recently been identified: The Troy, Rock Creek and Montanore deposits. These three deposits contain roughly 350 million tons averaging 0.75 copper and 1.75 ounces per ton silver. In 2003-04, Sterling Mining acquired a number of properties in this area.
Other silver companies in Montana are Mines Management (MGN - Amex) and O.T. Mining (OTMN - pink sheets). Montana's Governor has recently stated his strong support of mining interests in the state.
Sterling is as close to a pure leveraged play on silver as you will find among mid-tier mining companies. The company's share price should also benefit from a solid "producer bonus" as production begins in Mexico this year and from additional silver discoveries. Furthermore, the company's silver ounces in the ground are also among the cheapest you can buy, if you buy stock at current prices, which is priced at about $.29/oz. in the ground.
March 31, 2005
Disclaimers: All potential investors are encouraged to do their own research and due diligence, and/or contact Sterling Mining to verify all important information. For more information or to subscribe to Sterling's mailing list, please visit the company's web site at http://sterlingmining.com. You can also call Olav Svela, Vice President Cavalcanti Hume Funfer Inc. Investor Relations, at 1-416-868-1079. He'll be glad to hear from you.
Lou Passi is a private investor and retired pharmaceutical executive living in Chicago. Mr. Passi was not paid by Sterling Mining for producing this article, nor does he work for the company. He does own shares in Sterling Mining. Lou Passi can be contacted via e-mail at firstname.lastname@example.org.
Jason Hommel sponsored the writing of this essay by offering to give a 100 oz. silver bar to whomever could write the best essay on silver and Sterling Mining. Mr. Hommel edited the essay and added a few bits of information that were researched and highlighted by other essay contestants. He owns shares in Sterling Mining and was not paid by the company to write this article.
This essay was first sent out via email on March 11th. I, Jason Hommel, have purchased all of my stock in Sterling Mining on the open market between about $3.70 and $4.20. Sterling Mining is now my third largest stock holding, and I own over 100,000 shares.
Jason Hommel writes a weekly silver stock report that covers the market caps of about 80 silver stocks. See silverstockreport.com