Gold/Silver Ratio Changes Course on Rising Physical Silver Demand

The gold:silver ratio may have found resistance at 1:59, suggesting silver prices could outperform gold in coming months. The last time we saw a similar technical pattern developing was in June 2010, before the ratio moved from 1:70 to 1:32 in April 2011. During that time, silver prices jumped 180% compared to gold’s more modest 58% increase. Now the gold:silver ratio appears to be reversing in silver’s favor, well supported by strong demand that continues to vastly outpace that of gold.

Although the World Gold Council thinks global gold investment demand in 2011 rose 33% yr/yr, the Silver Institute says investment demand for silver probably increased 66%. Those projections are further backed by evidence of increasing physical demand, which pushed silver coin sales across the world to record levels. The U.S. Mint, for instance, sold 15% more American Eagle silver bullion coins in 2011. That may not seem like much, but 2010 was also a record year for silver coin sales. By comparison, gold American Eagle coin sales were actually down about 18% in 2011 (in terms of total ounces, not number of coins). As we reported back in July, Australia’s Perth Mint’s silver coin sales from January to June alone were 66% higher than all of 2010, and in September, the Mint said sales were still at “unprecedented levels.” Australian gold coin sales, however, were not nearly as high.

Update on Silvercorp Metals Fraud Allegations

Although some of our readers and clients have grown concerned about yesterday’s considerable drop in the value of Silvercorp Metals’ (SVM) common shares, we maintain our view that the company is a legitimate and efficient silver mining operation in full compliance with the regulations of the countries in which it is publicly listed.

The major decline was partially due to: (1) abnormally high short postions (over 20 million shares); (2) unusual options activity (400% above average yesterday); and (3) overall diminishing investor confidence in the company following the release of an anonymous letter distributed two weeks ago. We believe the allegations in said letter to be purely bogus and unfounded as no clear evidence was presented to support such claims. Silvercorp’s management has also refuted charges that it was inconsistent in its regularly audited financial filings with China’s State Administration of Industry and Commerce (“SAIC”) and the Securities and Exchange Commission (SEC), and has provided proof of its cash holdings and silver resource estimates by a qualified third-party expert. Moreover, the company has been fully cooperative with recently initiated investigations by the Ontario Securities Commission (“OSC”) and the British Columbia Securities Commission (“BSCS”).

Yesterday morning, however, the company was hit with fresh allegations of fraud by a “little” blogger who is facing defamation lawsuits by two U.S.-listed Chinese manufacturers that he also falsely accused of fraud earlier this year. The blogger claims he counted (for a very short period of time) Silvercorp’s daily truck deliveries to mills and somehow came to the conclusion that production activity was about a third less than purported, amongst other unreasonable allegations.

It is not surprising that these false reports have come after Silvercorp reported record silver production at higher profit margins than ever. To some, this seems just too good to be true. Nonetheless, there is simply no evidence to support any of the bloggers’ allegations.

Therefore, not only do we continue to hold our core position in SVM, we took the opportunity today to significantly add to it. At such low prices, we are of the opinion that Silvercorp has quickly become the most undervalued major mining company in the world and is now more attractive than ever–especially considering the company’s share buy-back program. Once OSC and BCSC have wrapped up their investigations, we expect the price of shares to begin to move in the direction of our $15 price target.

var addthis_config = {“data_track_clickback”:true};

Palladium Still a Better Bet Than Platinum

Palladium continues to defy underlying market fundamentals, suggesting it remains sorely undervalued relative to platinum. At less than half the cost of platinum, palladium’s absurdly low price is putting more pressure than ever on total global supply. Although nearly as much platinum is mined annually as palladium (only a 7.5% differential, according to USGS data), palladium is in its fifth consecutive year of supply deficit, which widened 500% last year alone, and platinum is expected to enter a seventh consecutive year of surplus.

The recurring supply deficits are partially attributable to substantial declines in annual sales of Russia’s state stockpiles, which have long been used to help meet total global demand (and/or suppress market prices). GFMS data suggests that such sales dropped 27% last year, lending some credence to Russian mining giant, Norilsk Nickel’s claims that the government stockpiles have been nearly depleted. Russia’s state palladium sales will continue through 2012, according to a finance minister, but it’s highly doubtful the total will exceed last year’s and even more unlikely there will be any sales at all in subsequent years.

Russia’s diminishing state stockpiles aren’t only to blame. Norilsk, which contributes about 40% of all the world’s palladium mine supply, reported a 5% decline in 1H 2011 production to 1.425 M oz. This indicates a possibility that output will be lower for the full year and beyond, as the company has no apparent plans to dramatically increase production in the near future.

Fortunately, other major palladium-producing countries will pick up the slack. South Africa, which also mines roughly 40% of the world’s total palladium, is mostly on track to increase total output despite a series of labor disputes and safety stoppages. The third and fourth largest producers, the U.S. (Stillwater Mining Company) and Canada (North American Palladium), have both reported higher output year-to-date.

So, supply should be stable this year; however, it’s physical demand that’s the real concern. Since both palladium and platinum are used interchangeably in many industrial applications (particularly in the automotive sector), global physical palladium demand is now growing more than twice as fast–and even faster in the world’s largest automobile markets. Chinese palladium demand, for instance, increased nearly 46% last year alone, compared to an 8% drop in platinum demand. The country’s burgeoning automotive sector may have slowed somewhat in the first half, but recently published figures for June and July show a significant turnaround following the Chinese government’s launch of a “Cash for Clunkers” type of program. Auto manufacturing in China is up about 2.5% so far and it’s quite likely the country’s palladium imports will surpass last year’s total.

Indian auto sales surged 30% in 2010, albeit at a slightly slower pace, and production (yr/yr) has grown by double digit percentages every month this year. Similarly, auto sales in Brazil climbed 10% during the first half to a record high. Production seems to be keeping pace and could continue as China’s JAC motors, Japan’s Suzuki and S. Korea’s Hyundai are all planning to launch new manufacturing operations in Brazil. These trends suggest it’s likely palladium imports to both India and Brazil will be higher by year’s end.

The U.S.’ auto industry may have been severely impacted by the Japanese earthquake in March, but palladium imports were still up during the first half with a noticeable 60% yr/yr increase in June, according to preliminary U.S. Dept. of Commerce statistics.

As long as palladium prices remain far cheaper than platinum, we could continue to see deeper palladium supply deficits and growing platinum surpluses (at least in the short term). Because demand for palladium will continue outpacing supply, there’s little doubt that prices will at least reach parity with platinum in the years ahead.

Silver Mining Output Falls Amid Surging Physical Demand

Investment demand for the most undervalued precious metal continues to surge worldwide, but so far in 2011, silver production has not risen nearly as fast. In its annual Silver Survey, GFMS forecasts global silver production at 790 M oz. (+7.4%), but it’s highly doubtful the actual figure will greatly exceed 760 M oz. (+3%) because many of the world’s top silver producing countries have already reported quite noticeable declines in production during the first half–a trend that is likely to continue.

After a surprising 7.3% drop in output last year, Peru, now only the world’s second largest silver producer, continues producing less. Even though official 2011 projections were optimistic, so far the numbers just aren’t stacking up:

Month	Change (2010-11)
January	-1.1%
February	-3.3%
March	-6.1%
April	-19.18%
May	-2.66%

Consistent with the past 4 years, #5 Chile will likely report lower figures again in 2011. Nearly all Chile’s silver is mined as a by-product of copper producers, none of which is expected to ramp up production until 2012 according to Chile’s National Copper Commission (Cochilco).

The 6th largest silver producer, Bolivia, suffered a major
blow when miners went on strike earlier this year at two of world’s largest primary silver mines, San Cristobal and Coeur D’Alene’s (CDE) San Bartolome. You may recall that a major strike in 2010 contributed to the country’s 9.4% slump in total output.

Production in the U.S., the world’s 7th largest producer, is perhaps falling hardest, according to the USGS’ preliminary 2011 figures:

Month	Change (2010-11)
January	-17%
February	-7%
March	-14%
April	-10%

The 10th biggest producer, Argentina, may also produce less as many of its top silver mines continue to struggle. For one, Pan American Silver (PAAS) estimated that 2011 output at its Manantial Espejo mine would be 3% lower and Q1 figures showed a 12% decline. Secondly, Coeur d’Alene’s Martha mine produced half as much in Q1 2011 than it did in the same quarter last year. Lastly, Silver Standard’s (SSRI) Pirquitas mine produced substantially less silver in Q1 2011 than the previous 2 quarters.

#3 China will likely mine more silver, however, analysts should not count its projected increase in production towards total global mine supply due to its 3405 ton export quota. Silver investment demand in China is booming, as in India where silver imports climbed 222% in May 2011 over 2010 and 200% in Q2.

Demand is also growing rather briskly in the West where record silver coin sales have become the norm. The US Mint, for instance, reported that sales of its 1 oz. silver American Eagle coins are thus far 19% higher than last year. To keep up with growing demand, the San Francisco Mint had to begin minting these coins for the first time in nearly a decade.

Although yet to report any 2011 figures, we assume that demand is still high in Canada where the Royal Canadian Mint recently reported record Silver Maple Leaf coin sales which jumped 74% over 2009. Australia’s Perth Mint says its silver 1-oz. coin sales are at record highs as well. Sales from July 2010 to July 2011 are up 66% from total FY 2010 sales.

In Europe, the UK’s Royal Mint announced that 1H 2011 silver coin sales doubled and the Austrian Mint said that demand is so high that it plans to increase silver coin production by 36%.

Should these trends persist, government mints could further delay delivery and raise premiums for coins. Once investors truly realize how severe the circumstances have become, it’s only a matter of time before market prices catch up with what investors are actually paying to purchase the physical metal.

Silver Miners Become Most Profitable, Undervalued Companies

As precious metals prices continue to outpace inflation, mining company profit margins have soared. Like most other companies, silver and gold miners have become the most profitable they’ve been in years. In fact, several are ranked among the world’s most profitable publicly traded companies.

The majority of the world’s most profitable companies mine silver and/or gold, as either a primary resource or by-product. Two primary silver companies top the list, edging out all of the technology, pharmaceutical and financial giants:

Rank	Company	Industry	Operating Margin
1.	Silver Wheaton (SLW)	Silver	73%
2.	Silvercorp Metals (SVM)	Silver	62%
3.	Changyou.com (CYOU)	Tech	62%
4.	China Yida Holding (CNYD)	Tech	60%
5.	Fresnillo PLC (FNLPF)	Silver	59%
6.	Visa Inc. (V)	Finance	58%
7.	Giant Interactive Group (GA)	Tech	57%
8.	Bullion Monarch Mining (BULM)	Gold	56%
9.	Mastercard Incorporated (MA)	Finance	51%
10.	Baidu, Inc. (BIDU)	Tech	51%
11.	Royal Gold, Inc. (RGLD)	Gold	51%
12.	Southern Copper (SCCO)	Copper/Silver	50%
13.	Nevsun Resources (NSU)	Gold	50%
14.	Freeport-McMoran Copper & Gold (FCX)	Copper/Gold/Silver	49%
15.	Questcor Pharmaceuticals (QCOR)	Pharmaceuticals	47%
16.	Majestic Silver (AG; FR.TO)	Silver	45%
17.	Lorillard, Inc. (LO)	Tobacco	45%
18.	Barrick Gold (ABX)	Gold	44%
19.	Newmont Mining Corporation (NEM)	Gold	44%
20.	IMPACT Silver Corp. (IPT.V)	Silver	43%
21.	Alamos Gold Inc. (AGI.TO)	Gold	43%
22.	China Biotics (CHBT)	Tech	43%
23.	Newcrest Mining (NCM.AX)	Gold	42%
24.	Philip Morris International Inc (PM)	Tobacco	42%
25.	AstraZeneca PLC (AZN)	Pharmaceuticals	42%

Since silver is up 100% since July 2010, having vastly outperformed gold, it should come as no surprise to see so many of the world’s few pure silver companies in the rankings. If silver prices continue to outperform, we can expect to see even higher margins moving forward.

Unprofitable over a year ago, Silvercorp Metals’ (SVM) operating margin jumped to a staggering 62% thanks to negative cash costs from silver production. Over the same period of time, SVM has significantly increased its net income by 500% and its total estimated silver resource by 3100%. Yet its market value is only up about 40%, leading us to believe that the company has become sorely undervalued — much like other junior silver miners.

As such, 5 of our top 10 undervalued junior mining companies are primary silver producers, including Revett Minerals (RVM), which may not be nearly as profitable as Silvercorp, but is just as undervalued. With immediate plans to increase silver production by more than 25% at half the cash costs of the previous year and longer term plans of moving its massive 229 M oz. resource at Rock Creek to production, Revett has extraordinary potential to one day become one of the most profitable companies in the world.

Top 10 Advanced Precious Metals Exploration Companies 2011

In spite of the major correction in precious metals equities that has transpired over the past few months, most exploration companies we follow are still far too overvalued. This is especially true for companies that have made and defined significant discoveries since 2008.

The surge in investment capital from speculators has allowed such explorers to move their big discoveries through the development stage at lightning speeds. With production plans in place, these explorers seem increasingly attractive to mining companies looking to expand through the acquisition of advanced precious metals projects. Unfortunately, there are few good deals out there.

For example, Vancouver-based junior gold producer, Aurizon Mines’ (AZK) CEO, David Hall blamed high valuations earlier this spring for his company’s inability to acquire any undervalued gold projects specifically on track to produce, within the next 3 years, at least 100,000 oz. annually. The chairman of the world’s second largest gold producer, Barrick Gold (ABX) agreed that precious metals exploration company valuations have become so high that acquisitions have been hard to justify to boards and shareholders.

Our Top 10 Advanced Precious Metals Exploration Companies not only boast control of large, prolific, near-production projects in mining-friendly regions, they’re also well financed and free from long-term debt — and of course undervalued compared to their peers. Now that these companies appear to be extremely oversold, it may be a good time to look into our top picks.

RBY shares, like most equities, bottomed last summer, providing investors great
returns by the end of 2010

You may recall that last year, late June through early August provided an excellent opportunity to invest. This year appears to be no different, suggesting that a positive reversal could be imminent and, as usual, the most undervalued companies will provide us the best returns.

See Full List of Top 10 Advanced Explorers

The Most Undervalued Gold Royalty Company Shows Signs of a Reversal

After Royal Gold acquired International Royalty Corporation last year, it left the market with just one undervalued gold royalty company from which to choose–Bullion Monarch Mining Inc. (BULM). Presently valued under $ 50 M, the company boasts:

- growing income streams from royalty payments, including a 1% net smelter royalty (“NSR”) from the world’s largest gold miner, Newmont Mining (totaling $ 4-5 M annually from output at the Leeville Mine in Nevada ).

- a 100% interest in Dourave, an undervalued Brazilian precious metals exploration company that will release a new resource estimate later this year.

- a 100% interest in property in Utah’s mineralized Oquirrh mountains, between Kennecott Utah Copper’s Bingham Canyon Mine and Barrick Gold’s Mercur Gold Mine.

- an 80% interest in EnShale, a petroleum exploration company that holds the estimated resource equivalent of 667 M barrels of oil; Enshale has an “edge” over big oil companies because it mines oil shales, which could be more efficient than pumping.

- cash reserves and no debt.

CONTINUE >>