Before giving our view on the best silver miner in the world a little background information is necessary. First, the reader should ask why invest in the mining industry at all? The answer to us is covered in our third rule of silver investing below.
This third rule of Silver Investing can be found in the global-investor book of Investing Rules.
This rule is one that many silver investors know quite well and the joys of watching your mining stock outperform the increase in bullion prices by a factor of two or three to one is exciting. However, leverage works in both directions and when the price of the precious metals fall back the mining shares fall back hard. This is normal market behavior and should be anticipated by the savvy metals investor.
Again, mining shares analysis is difficult and in the speculative area nearly impossible. Because of this fact, it is important to do your own homework carefully. Also you can subscribe to a service that provides insights into this area. We do our best to diversify and to give clear signals to area we think have merit. However, we are only human and have made errors in the past. It is the nature of investing that you cannot be 100% accurate, although for the first two years our report did have nothing but winners. Those days are over and in today’s market is it more important that ever to be careful and use proper money management.
If you do not wish to put in the time and effort required to succeed in this area of investing, we suggest you consider a gold mutual fund. Even with professional management not all companies are winners, but with proper diversification total results mirror the general gold equity market. Unfortunately, there is not a silver mutual fund at this time. This is a question we are asked quite often.
The Ten Rules of Silver Investing was available to paid subscribers only but we have decided to make it available for free to anyone that joins our free email list …
Requirements of a well run mining company
The best Silver Miner in the world needs to not only anticipate the future but also contain as many costs as possible. This can be done to varying degrees but fixed costs are great expenditures and variable costs are becoming more “variable” by the minute. The costs of power, water, and labor seem to be increasing without end.
The infrastructure needs to be examined for roads, power, water, and environmental concerns. The political climate is a prime factor in determining the merit of a project, especially in today’s global environment.
Naturally the geology is of prime importance. An accurate geological model needs to be developed which includes data from drill holes, test pit sampling, quality and grade analysis, and what additional drilling may be required. Enough data needs to be verified for a Canadian company to be National Instrument 43-101 compliant.
A preliminary financial analysis includes the anticipated cost of capital and what is expected for the prices of the minerals going forward. Guess wrong here and your whole project can be in jeopardy.
So by now you know most of the risks and would like our opinion of the best Silver Miner in the World. It is simply Berkshire Hathaway yes Mr. Warren Buffet may prove to be the best silver miner of all time!
Why would we consider Berkshire to be the best in the world?
1. No environmental impact statement was required for this mine.
2. No 43-101 statement was necessary
3. All geological data becomes unnecessary
4. Low overhead—very few employees
5. Political problems reduced substantially
6. Fix costs known—price of silver at time of purchase
7. Variable costs (known?) –storage costs
Why is Berkshire the best miner? Profit, yes profit, even adjusted for inflation Berkshire has a profit in silver, this is not the case for almost the entire silver mining industry. Some will argue this is not a miner at all, and of course that point is obvious, what is not so obvious is how smart it is to let others mine silver at a loss, and then pick up the end fungible product at a cost lower than theirs.
Ted Butler did a nice article on the Buffett purchase of silver. What is so fascinating is that Buffett mined silver right off the exchange at a cost below what most miners are able to do. In fact as of last year not one primary silver miner showed a profit for the entire year. A few quarters of profit yes but on an annual basis no! This will change for fiscal year 2005 in our view and one of these companies has been in our speculative list for some time now. Please bear in mind we are speaking of total costs, not cash costs which miners are so fond of speaking about which neglect the actual costs associated with the mining of ore.
However, the point to be made is that a synthetic mining company is exactly what the marketplace needs at this time. The synthetic miner simply takes silver below the true (total cost)1 of production and stores in away. This would entail, a silver purchase program dealing with real silver obtained under strict requirements that should yield positive returns to investors.
At this time the preliminary work has been accomplished to begin such a synthetic mining company. The initial circumstances require that institutional investors only be allowed to participate, however once established another may be available to the general investing public. However to implement this plan silver would need to be near the current price in inflation adjusted terms. If silver shoots up from here, then the proposal simply would not be as effective. In other words, Buffett is a lock whether someone else can duplicate this remains to be determined. A free market approach to the proposed Silver ETF may be something the market needs currently.
In fact the proposed Silver ETF has some very interesting points we find for example:
The Official Sector
Unlike gold, there are no official statistics published by the International Monetary Fund, Bank of International Settlements, or national banks on silver holdings by national governments. The main reason for this is that silver is generally not recognized as a reserve asset. Consequently, there are very limited silver stocks held by governments. According to GFMS Limited in World Silver Survey 2005, at the end of 2004, government held silver bullion stocks total 164 Moz. Silver holdings held by the central banks and governments equal only a 10-week supply whereas for gold it is estimated that governments hold approximately the equivalent of 10 to 12 years of supply. Recently, countries like Russia, China and India have reduced their holdings of silver.
What is also interesting is what the proposed Silver ETF has to say about the U.S. dollar.
Between 2002 and 2004 the price of silver increased due to a number of factors. Among such factors are the decline in the U.S. dollar against other currencies, the poor performance of U.S. and other major equities markets, a surge in investment demand in commodities as an asset class generally, strength in fabrication demand, and the low level of forward selling by mining companies.
Sound bullish to you? It certainly does to us.
The key fact that very few outside of the precious metals community even consider is what Ibbitson Associates 2 stated in their conclusion on portfolio diversification with gold, silver, and platinum.
Quoting: Of the seven asset classes, the precious metals asset class is the only one with a negative average correlation to the other asset classes. Excluding cash, precious metals is the only asset class with a positive correlation coefficient with inflation. Precious metals provide a substantial hedge against inflation and provided a positive returns when they were needed most. End quote.
Further on in the conclusion section this report states investors can potentially improve the reward-to-risk ratio in conservative, moderate, and aggressive asset allocations by including precious metals with allocations of 7.1%, 12.5%, and 15.7% respectively.
Since many financial planners basically use a “cookie-cutter” approach to preparing retirement plans this Ibbitson study definitely will upset any astute in that industry that continue to learn. What would a CFP say to a client that had paid for proper diversification only to find our later that no exposure to the precious metals was given? Especially if this client knew that the precious metals is the only asset with a negative average correlation to the other asset classes.
We have suggested that during the second leg of this major bull market that more institutions will move into the sector and many private investors will begin to move into the precious metals as well. Now Certified Financial Planners have a tool and knowledge to move into real physical metal it may have an impact.
Coming back to Berkshire Hathaway, a special report about Buffett and Silver was written several years ago and is free to our paid subscribers, but one of the most profound aspects of his purchase is that it amounted to less than two percent of Berkshire’s holdings at the time. If Buffett were to bring Berkshire’s holdings to the conservative seven percent as outlined by Ibbitson Associates it would require more than twice the amount of silver presently on the Comex at this time.
Certainly there is much more to the silver story than supply and demand, in fact one of the most important points is proper portfolio diversification.
The Silver Investor
The Official site for the Serious Metals Investor
October 20, 2005
1 Total Costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense, on-site general and administrative costs, royalties and mine production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit. This cost varies as grade, labor, and energy, transportation, and other third party costs increase.
2 Ibbotson Associates 225 North Michigan Avenue Suite 700, Chicago, Il 60601 Professor Roger G. Ibbotson, the company founder and Chairman, pioneered collecting the requisite data used in asset allocation and in quantifying the benefits of diversification. The firm continues to provide solutions to investment and finance problems for a diverse set of market. Ibbotson /Associates fills a growing need in the finance industry as a single-source provider of investment knowledge, expertise, and technology.
David Morgan has a BS in Engineering and a Masters in Business (finance and international business). David has been a private economist and precious metals analyst for over twenty years. He adheres to the Austrian School of Economics, although his degree is not from the Mises Institute.
Mr. Morgan is a contributor to FreeMarketNews.com and has written numerous articles, some of which may be viewed at Gold-Eagle Mr. Morgan also writes Silver-Investor.com Newsletter. His e-mail newsletter is issued on a monthly basis and includes economic news, overall financial health of the global economy, currency problems ahead. Mr. Morgan pours over nearly every metals, economic, and financial newsletter and business publication and digests it to save his readers valuable time and money! Reviews current trends, long term fundamentals, and specific information required for any investor, especially the serious silver or precious metal investor.
