Silver Stock Report
by Jason Hommel, Dec 29,2003
The stock of Sterling Mining (SRLM--pink sheets) has been a big winner in 2003, moving up from a base of about 50 cents a share in the summer, to hitting a high of $10 share by November. That's up by a factor of 20! A twenty-bagger! In about 6 months! Today, at $7.25/share, they have just under 10 million shares, with a market cap of about $75 million.
So, why did the shares move up so much? Is it too late to buy? Is the moved played out? Are the shares tired? Has a top come in? Is the momentum lost? Will the shares now trade in a range? Those are the questions that befuddle the technical investors. I don't concern myself with such things, and this article will not address any of those questions. I look only at value, the fundamentals. I ask, "What do you get?" and "What are you paying?"
The fundamental story is that Sterling Mining acquired the rights to the Sunshine mine, and continues to acquire more silver properties in the Cour d'Alene silver valley, in Idaho, U.S.A.
The Sunshine Mining company went bankrupt due to their debt burden, and perpetually low silver prices. This is what creates the opportunity for silver investors today. Sterling Mining bought the property because they were willing to offer cash, while other major mining companies wanted to spend too much time doing their due diligence.
In the real world of real and limited assets, it's "first come, first served". That's the rule whether applied to buying silver bullion, or buying land rights, or participation in private placement opportunities. Whoever shows up with the cash first gets to buy it.
Now, when Sterling Mining leased the Sunshine property, I didn't know the Sunshine mine from a hole in the ground. I was fortunate enough to own a little stock of Sterling back at 61 cents/share. My initial decision to buy Sterling Mining stock was based on seeing a banner ad at David Morgan's web site, silver-investor.com, and by reading about management's philosophy of acquiring silver properties at low prices while silver is still cheap. I, myself, due to my ignorance, wondered whether it was too late to buy more after the stock had moved to 83 cents after they announcement of the acquisition of the Sunshine mine. And, I kicked myself for not buying any at 50 cents/share. In the end, I had to force myself to ignore my jealousy of other people's good fortune (those who bought before me), and I had to buy the stock on the merits of the situation at the time. And so, I bought more at 90 cents, and more at $1.10. Again, I bought at $2.40, and again I bought at $3.60. The more I learn about the Sunshine Mine, the more I keep buying. It was difficult to buy into a rapidly rising market, and each decision was a new decision. But obviously, those were the right decisions. I bought, knowing little more than the "silver resource" totals listed for the Sunshine, which are 185 million oz. of silver. I divided the current market cap by those silver ounces, to get a "cost per oz. in the ground." I could hardly believe the math and good opportunity, but I realized it was a good value. But the more I learn, the more I realize the great value of Sterling Mining.
The Sunshine Mine produced 360 million ounces of silver over 100 years of fairly continuous production.
In 1993, the Sunshine Mining Company, with 200 million shares, and $100 million in debt, and with the price of silver ranging between $3.70 and $5.30/oz., had a market cap of $500 million dollars!
In contrast, Sterling Mining now owns a 15-year operating lease on the Sunshine mine with option to buy it outright by paying $5 million more, which they can choose to exercise at any time, no rush. And Sterling Mining has no debt. At $6.55/share, with just under 10 million shares fully diluted as of December, 2003, Sterling Mining has a market cap of about $75 million. I believe they will have no trouble raising the $5 million (with little dilution) to exercise the option to buy the mine.
So, does significant upside potential remain? Is $75 million less than $500 million? You bet!
But look at the other advantages of Sterling Mining: Very low overhead. Better land position. Sterling continues to acquire property in the silver valley.
And the silver bullion market is in a much better position, with a higher price, with 13 years of deficits, a smaller silver supply, and investors are waking up to the silver story now with the availability of information on the internet. Investors are also waking up to the monetary fraud of the overvalued paper dollar, as gold continues its third year of a bull market.
Sterling Mining also owns ten square miles of land around the Sunshine mine. Of those 10 sq. miles, only 1/4 mile was ever properly explored by Sunshine. Sterling mining has begun a surface exploration program around the mine using modern exploration techniques to rectify the situation.
This brings me to the Cour d'Alene Silver Valley. This valley produced 1.1 Billion ounces of silver historically. There were basically three big mines, Hecla, Cour d'Alene, and the Sunshine. In December, 2003, Hecla has a market cap of about $850 million and Cour d'Alene has a market cap in excess of one Billion dollars! The Sunshine mine is a lot like the other two mines, in that it has been in continuous operation for about 100 years, and they never really needed to do any significant exploring, they just followed the silver into the earth. Therefore, all three of these mines have traded at a significant premium to the stated "resources and reserves," because they all have a strong history of proving up and adding to their reserves as they mine.
So, I was wrong to buy Sterling Mining only for the "reserves and resources" of the Sunshine, because like Hecla and Cour d'Alene Mining, there is likely to exist much more silver in the Sunshine mine than the published resource figures show. The Silver Valley is unique in that the silver is not all close to the surface, but goes deep.
The Sunshine mine was producing silver at a profit as recently as 2000, with cash costs around $4.00-$4.50/oz. So, unlike a lot of silver explorers, Sterling Mining has an existing mine, with existing infrastructure. Other companies often have capital costs in excess of $100 million dollars to get a mine going.
Right now, Sterling Mining is listed on the pink sheets. (SRLM) They don't have a listing on the major exchanges, and they don't have a bulletin board listing either. Why not? Those cost money. Right now, management is still focused on spending their money on land acquisitions and consolidating their position within the silver valley. There is a silver rush going on! And I think management is pursuing the right strategy. I see no reason to rush for an Amex listing and become a fully reporting company at this time. The assets of this company are not in the financial balance sheet, but rather, in the ounces of silver in the ground that they are rapidly buying. They are in the process of acquiring land all around the Sunshine, and making their property contiguous, buying properties that are adjacent, or next door. I think it matters very little whether they had $1 million or $1.1 million cash in the till in the last quarter. (Ray Demotte, president, says they have about $1.1 million cash now, in December, 2003.)
Nevertheless, Sterling Mining is committed to moving up to another exchange by next year, and also they will be slowly increasing their marketing efforts. However, their priority will continue to be to acquire cheap silver prospects, resources and reserves.
The company has not even yet spent money on booths at the gold shows. Personally, I think spending money on marketing is well worth it. The more they tell investors their story, the more money they will receive when they issue shares, and the better deal they will get for existing shareholders. As a shareholder, this is my motivation for writing about the company.
Sterling Mining has other good silver properties in addition to the Sunshine Mine. All total, they have perhaps up to 500 million oz. of silver "exploration potential" that they might have within all their various properties in the silver valley.
So, how cheap is the "silver in the ground" that you are buying when you buy Sterling Mining stock? At just under 10 million shares, at $7.25/share, with a market cap of $75 million divided by up to 500 million, that's 15 cents/oz. of silver in the ground. I like to calculate things in terms of silver to silver, so I divide the market cap by the silver price, and I get a market cap denominated in silver, which is $75 million / $5.76/oz. = 13 mil oz. of silver market cap. Then, I divide the oz. in the ground, or 185 million or 500 million (exploration potential) oz., by the 13 million oz. market cap. This gives a range of 14.2 to 38 oz. of silver in the ground that you get when you spend the equivalent of one oz. of silver (or each $5.76 that you spend) on Sterling Mining stock at $7.25/share.
Ray Demotte, president of Sterling Mining, looks at it in a similar way. He says that with the 185 million oz. of silver in the Sunshine, and with just under 10 million shares, that's 19 oz. of silver per share. So, to keep that figure constant or rising, he figures that with every share he issues to raise capital for expenses, he'd better buy up to (or explore and find) 19 more oz. of silver in the ground, or more, to keep growing the silver resources for his shareholders. That's the kind of management perspective I love. He is keeping dilution to a minimum, while growing the company by acquiring silver assets.
Ray Demotte says that a lot of his existing shareholders are continuing to buy stock. They tell him that they are "tired of holding paper money." I believe we are witnessing the beginning of monetary demand for silver, as investors pour money into silver stocks first.
Monetary demand for gold and silver will cause silver prices to explode beyond belief.
Just look at the amount of dollars out there that could buy gold. $20 trillion in bonds plus $9 trillion in M3 = $29 Trillion. A mere 1% of that is $290 Billion, which, at $400/oz., is a massive demand of 22,549 tonnes of gold. Yet annual gold demand is a mere 4000 tonnes, which exceeds the 2600 tonne mine supply. Do you understand what those figures mean? That means that far, far less than 1% of dollars, in either bonds or M3 can buy gold, because there simply is not nearly that much gold available. And how much silver is available for monetary demand? Nothing, because we have deficits. But there is 62 million oz. of silver registered for delivery at the COMEX, which, at $6/oz, is worth $372 million dollars. So, if about 1/10th of 1% of 1% of paper money tries to buy that silver, it will be gone.
Therefore, long before 1% of U.S. paper dollars tries to buy gold, such buying power will force the price of gold to head up well over $1000/oz., and silver up over $50/oz. !!!
Some people think they can capitalize on that inevitable gain by buying paper futures contracts. But I believe paper futures contracts will default, since they promise to deliver more silver than I think exists in deliverable form. Therefore, I believe the best ways to profit from the inevitable trend is to buy physical silver bullion, and buy silver stocks which have plenty of silver in the ground for what you are paying, such as Sterling Mining.
I publish a free weekly silver stock report on 90 silver stocks. To receive an email notice of when and where it is published, please sign up at silverstockreport.com
I own shares of SRLM.PK.
I have not been paid by the company to write this article.
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