Weekly Reports | Nov 23 2021
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Silver investors should be so lucky as the grey metal emerges from the coat tails of its big sister
By Tim Boreham, Editor, The New Criterion
In the past, silver has been akin to younger brothers and sisters seeking to hang out with their older sibling – gold, that is and much to the yellow metal’s annoyance.
As time goes by, the little kids develop their own confidence and forge their own career and persona.
In the past we’ve compared gold and silver with Kylie and Dannii, but in reality ‘little’ Dannii has long emerged from the coat-tails of the Singing Budgie.
The same thing is happening with the ‘real’ gold and silver.
For the last century metals have traded in sync with each other, as measured by the gold-silver ratio, or GSR.
On average gold has been worth 45 times more than silver.
In 2011 when silver hit a record US$46 an ounce, the GSR fell to around 30 times.
With gold currently trading at US$1845 an ounce and silver at US$24.80 an ounce, the GSR has blown out to 74 times and Kylie again is overshadowing Dannii (or Venus is eclipsing the more successful Serena, as measured by grand slam titles).
For those who believe that valuations will always revert to the average over time, either silver is undervalued – or gold is overvalued.
The investment thesis with both metals is they are hedges against rampant inflation and general financial or geopolitical tumult.
Given the inflation concerns both here and in the US, gold and silver should be on a roll. Indeed, they’ve rallied in the past month or so but have still fallen 12% and 14% from their recent peaks in early August 2020 and early February 2021.
One reason is that higher interest rates – usually part and parcel of inflation – are a negative influence, because they improve returns on other investments relative to the non-incoming producing metals.
But bear in mind that in nominal terms – that is, allowing for inflation – interest rates remain in negative territory.
The gold price has also been hit by the outflows from gold-backed exchange funds into cryptocurrencies, which are either the store of value of the future or a disaster waiting to happen.
For those still lured by gold and its long history as a store of value, silver actually might be a better option. There’s certainly an argument for having a smattering of Kylie and Dannii in one’s portfolio.
Silver’s proponents argue that the demand profile around the grey-ish metal is superior because it is used in more industrial applications than gold.
Silver is used in electronics and in healthcare and food preparation (because of its antibacterial properties).
It’s also part of the renewables revolution as a solar panel component, but we could swear that every mineral is a ‘battery metal’ these days.
About half of silver is consumed, while another 20% is used in jewellery and special occasion tableware.
“Silver wears two hats,” says Ainslie Bullion director Paul Engeman. “It’s got the monetary metal hat and the industrial metal hat. So if commodities boom on an inflation led reflation trade, then silver will enjoy that ride.
“The fact it's coinciding with inflation means the inflation hedging monetary side is going well for silver as well; it gets that double whammy.”
He notes that more silver is consumed rather than hanging around in a vault, while supply is finite. China accounts for 22% of silver exports, but has imposed export bans in the same way it has constrained supply of magnesium, phosphate and rare earths.
Only about one-quarter of silver supply comes from primary production; the rest is a by-product of lead, zinc, copper and gold mining. If Chinese demand for these other metals declines as expected, silver output will also be affected.
Outside of China, silver production is dominated by Mexico, Peru, Russia and Bolivia – all of which are not exactly Top of the Wazir when it comes to stable mining jurisdictions.
As a much smaller market, silver trading is more volatile and more prone to manipulation, as evidenced by the Hunt Brothers – all three of them – who tried unsuccessfully to corner the market in the late 1970s.
In Engeman’s words: “silver is both a smaller market and it’s got more masters than gold has.”
As with gold, there are several ways for investors to gain a silver exposure, ranging from owning the physical metal, exchange traded funds, digital tokens (more recently) and the listed producers.
Ainslie Bullion reports strong demand for its silver ingots and coins, usually as an adjunct to gold investment.
As far as ASX exposures go, there are no pure-play silver producers but there’s a raft of early to mid stage players eyeing golden – er, silvery – opportunities.
The biggest producer by far is South32 ((S32)) and its Cannington lead-silver mine in northwest Queensland, which accounts for 6% of global output. But the mine is a small part of the BHP offshoot that covers multiple commodities in multiple countries.
Having listed in July last year Manuka Resources ((MKR)) says it is on track to start mining its acquired Wonawinta project, in NSW’s Cobar basin, by late 2022.
The project is rated at 38m tonnes with 51m ounces on contained silver, at an average grade of 41.3 grams per tonne.
Manuka is already producing gold from its nearby groovily-monikered Mt Boppy, generating revenue of $22.8m in the June quarter.
The company claims Wonawinta would be Australia’s “largest pure-play silver producer”.
The self-explanatory Silver Mines ((SVL)) is in the final stages of obtaining mining approvals process for its Bowdens project near Mudgee in NSW.
With a resource of 163m ounces including reserves of 66m ounces, the deposit is – in the company’s words – “the largest undeveloped silver deposit in Australia and one of the largest globally”.
Production plans assume a 16.5 year mine life, with life of mine output of 66m ounces of silver, 130,000 tonnes of zinc and 95,000 tonnes of lead.
Investigator Resources ((IVR)) is advancing to pre-feasibility stage with its Paris silver project, which is not on the rive gauche of the Seine but in south Australia’s Eyre Peninsula.
Given the guerre de paroles between Messieurs Morrison and Macron, that’s just as well.
The local Paris has 18.8m tonnes with 53.1m ounces of contained silver and 50,000 tonnes of contained lead, with the silver assaying a handy 88 grams per tonne.
For those seeking more oh la la than the Paris option, Boab Minerals ((BML)) is moving to definitive feasibility study stage at its 75% owned Sorby Hills lead-silver project, in WA’s Kimberley region.
At last report the deposit was scoped at 49.9m tonnes with 54m ounces of contained silver.
Silver explorers include BBX Minerals ((BBX)) in Brazil, Argent Minerals ((ARD)) and its Kempfield project in NSW and Thomson Resources ((TMZ)) with four silver projects in Queensland and NSW (two of them acquired from Silver Mines).
Indeed! The golden road to prosperity is lined with … silver.
Tim Boreham edits The New Criterion
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