 My
5 cents-worth
Bob Moriarty
Archives
Dec 6, 2006
It's pretty
obvious to an American who can count that with a copper price
of $3.15 and a zinc price of $2.03 that our humble cent is doomed.
It costs over two cents to make a pre-1983 copper cent and over
a cent to make a post-1983 zinc cent. In its finite wisdom, the
Congress of the United States has actually come up with a formula
to determine if you should average a bill up or down to the nearest
five cents. Say bye-bye to the cent.
I think that
of all the metals-related web sites, we are the only site who
actually aim to make their readers money. And I take a lot of
pride in the fact that our readers have consistently been given
good
investment advice
for years. If you read the site
on a regular basis, you have made money in your investments if
you are willing to listen.
So I have a
guaranteed 35% return investment only for the benefit of my readers.
And the Chinese. Because they can add and subtract and are already
aware of this investment. The investment is a measure of how
close our economy and the financial system of the world is to
total chaos.
I just got
back from a couple of days at the San Francisco Gold Show. (By
the way, I will be holding an hour long workshop at the Cambridge
House Investment
Conf. in Vancouver in January, if you are interested.) Everyone
in the mining business is wildly optimistic about mining. But
most of the speakers and those attending the show fail to realize
how close we are to total chaos. With $370 trillion dollars in
derivatives, four US carrier groups off Iran and an $8 million
dollar an hour tar baby in Iraq, "Houston, we have a problem."
Wanna make
35% on an investment? Go to your US bank and buy a bag of nickels.
Each nickel weighs 5 grams. 1.25 grams is nickel ($15.15 per
pound) and 3.75 grams is copper ($3.16 per pound.) It costs the
US government $.067 per nickel to make them just for the metals.
I don't have figures for the Canadian five cent piece but it
has to be pretty close to the same.
So while your
attention is being focused by the media on the humble cent, the
nickel is going to go the way of the dodo bird. Since the price
of all commodities is set today by Chinese demand and their foreign
exchange surplus is now over $1 trillion, you can count on them
dumping US denominated investments (Bonds and Treasury Bills)
and loading up on real assets. Like pennies and nickels. All
it would take is a mention on David Letterman and you will have
seen your last nickel until they start making them of paper.
The world,
your world and mine, is going to start changing at a faster and
faster pace. If Bush and the Gang of Fools in Washington have
their way we will start a nuclear war with Iran which we clearly
will lose in the first 48 hours. That will destroy both Israel
and the US, which seems fair, we are only considering attacking
non-nuclear Iran because they don't have nukes. There is no one
who can fix things, our financial system is way beyond fixing,
with the US government some $80 trillion in debt. But you can
protect yourself and your family.
I've been traveling
most of the last month and I want to share with you some of my
adventures. One of the most interesting was my two-day visit
to one of the oldest silver mining districts in Mexico. Mexico
is, of course, the largest silver producer in the world with
silver production of about 94 million ounces a year. One mine,
the Fresnillo Silver mine produces 32 million ounces all by itself.
Cortez conquered
the Aztecs in 1521. Soon after the Spanish discovered silver
at Taxco, near Acapulco, in 1524. The 2nd silver district in
Mexico was called the Royal Mines of Zacualpan, discovered and
put into production in 1527, located only 25km from Taxco. By
the 18th Century, Mexican silver mines were producing 9 million
ounces of silver a year. Mexico has produced a third of the silver
in the entire world.
Regular readers
will remember I am a big fan of the bootstrap model of mining
where a company begins to produce minerals at a profit and uses
the funds to further explore. The only alternatives are either
to dilute existing shareholders on a constant basis, which is
the favored business model, or to finance internally. I favor
internal financing even if it is not favored in the industry.
 The President and CEO of Impact
Silver, Fred
Davidson, scored the most incredible coup two years ago in Mexico.
He did a deal for the entire Zacualpan district encompassing
a total of 125 square kilometers for about $1.84 million dollars
US and 300,000 shares of IPT. It would be easy to get lost in
the details and to fail to see the real story. He negotiated
the deal in June of 2004 with silver under $6 an ounce.
Fred's guys
(who happen to be the best and most professional group I have
seen at any mine in Mexico) have discovered almost 200 surface
workings. In other words, mines, and it's clear there are twice
as many around. This is a district, an entire district with 400
mines which have been on and off in production for 478 years
and they have barely scratched the surface.
Every silver
lining has its cloud. I've been to Fresnillo and seen it and
seen Mag Silver's property next to the Fresnillo Silver mine.
It's in a relatively flat area with lots of room and good roads.
The only limit I could see at Zacualpan was the geography. It's
up and down and the roads are tiny. There could well
be billions of ounces of silver in the hundreds of silver veins
they already know about but moving around is physically hard
to do.
Impact is not
going to try to maximize silver production. That's very important
to mention. Fred Davidson is a bean counter in every good sense
of the word. He understands finance and money and profit, that's
his background.
Impact is going
to maximize
profit
at Zacualpan. That's the bad news and the good news. Fred is
going to maximize profit but someone is going to be mining silver
and lead and zinc there two hundred years from now. Hopefully
at a profit. And Fred Davidson is going to use that cash flow
to expand Impact into other Mexican silver districts which do
have greater production potential.
Impact spent
between June of 2004 and January of 2006 conducting exploration.
The district had never been properly mapped and explored on a
district scale. One of the giant dangers to a project of this
size is that you can go broke before you fully understand the
potential. Fred and his mostly Mexican crew, understand that
the first goal is profit and the second is a good plan for profitable
management of the hundreds of millions of ounces of silver we
can see are there.
There are no
good historical records but a reasonable estimate would be production
of a million ounces of silver a year for the last 478 years except
for the frequent civil wars and disturbances. Bear in mind that
the Spanish didn't value zinc and if they came across a high
grade zinc vein, they left it. With 1% zinc now being worth $40
a ton, Impact is in the enviable position of being able to focus
on the highest value ore which at present is going to be the
high-grade and previously-ignored zinc.
I have been
to a dozen or more Mexican silver/lead/zinc properties. In my
view, Mexico is a far more favorable place to mine than either
the US or Canada. The tree huggers and bureaucrats have taken
over mining in the US like a cancer and as mining minded Canada
is today, not many years ago, that wasn't true. The giant Mexican
family fortunes were financed on Mexican silver/lead/zinc mines
and the Mexican miners are among the best in the world if managed
properly. Fred is letting Mexican born and trained geologists
and mining engineers run the show and they are brilliant. I believe
Mexican mines should trade at a premium in Vancouver and Toronto
even if they don't today. And while some in the industry are
talking $5 copper, there is a far greater shortage of zinc than
copper and I believe zinc will sell at a higher price than copper.
It may not be as sexy as copper but it's going to be a whole
lot more profitable.
Impact used
the period between signing the deal in 2004, and closing in January
of 2006, wisely. Once Fred had the reins in his hands, he started
mining in a serious way. His deal gave him a slightly dated mill
capable of production of 500 tons per day. (getting your hands
on a 500 TPD mill for under $2 million is considered stealing
in some places) Upon assuming control of the district and mill,
Fred began producing about 180 tons a day. It costs him about
$50 a ton to mine and mill and his cost of production of silver
is about $4.25 an ounce. With $6 silver as in 2004, the mill
was barely profitable. With $13 silver and $2 a pound zinc, it's
a license to steal.
Impact produces
just under 400,000 ounces of silver today and about 1 million
silver ounce equivalent. Their goal is to ramp production up
to 500 tons a day and be producing in the area of 2 million to
2.5 million ounces of silver equivalent. By optimizing the mill
and increasing the grade after careful exploration, Davidson
believes they can produce in the nature of 5 million ounces of
silver equivalent. It won't be the biggest silver producer by
far but it will rank as one of the most profitable.
In San Francisco
at the latest gold show, one of the leading analysts in the industry
took me aside and told me that the biggest problems with the
small silver/lead/zinc producers in Mexico was the lack of 43-101
resources. My response is that while that is perfectly valid,
it's also perfectly meaningless. The Spanish mined 9 million
ounces a year with primitive methods and equipment for centuries
without any resources. They simply mined until they ran out of
ore and then found another vein and mined it. All at a profit.
That's a lot more valid a business model than drilling until
a project looks like a giant Swiss cheese, losing money and diluting
your shares all along the way.
Fred has already
begun his expansion program. In July of 2006 he
announced
the purchase of the Veta Grande silver project in Zacatecas.
For just about $2 million US and 500,000 shares, he gets a bunch
of silver projects and a 200 TPD mill. His real goal in Zacatecas
is to control the mill and to do deals with the owners of the
prime silver/lead/zinc areas. He's in the drivers seat because
the locals bring their ore to him for processing and he gets
to see who has the highest grade ore and gets paid for processing
it. In a land where mills are rare, it's better to control the
mill than the mine.
I have to mention
another company if only because the two companies are intertwined.
Fred Davidson started a drilling company he called Energold Drilling
so he could control access to drills when mining. The company
has been profitable for the last 6 years. How many people can
say that in mining? They have set a new record this year for
meters drilled and gross profit with 25 drills working. Davidson
plans to expand to 30 drills over the next year or so.
If you want
to be in the mining business, it's nice to have your own pet
drilling company. I can't tell you how many tales of woe I have
heard in the last year about ability to get your hands on a drill.
I was at projects in the Yukon with the shortest of seasons where
they had drills, but the drills didn't happen to come with crews.
They were forced to operate on a single shift a day, which gets
very expensive.
The drilling
company throws off cash with $2.4 million in gross profit in
2006. But EGD with only 22.2 million shares owns 6.6 million
shares of IPT. So about three shares of EGD is the same as one
share of IPT. EGD has a total market cap of $29.5 million Canadian
but their IPT shares are worth $10.5 million Canadian all by
themselves. EGD also has $15.3 million in working capital. So
if you like the Impact story, you can either invest directly
via IPT directly or through EGD indirectly.
Impact contacted
me at the San Francisco show and wanted to advertise on 321gold.
I had to turn them down because we are simply running out of
space. And we are not willing to totally garbage up the site
visually.
Impact Silver Corp
IPT-V $1.60 Canadian (December 5, 2006)
ISVLF-OTCBB
38 million shares
Impact Silver website |
Energold Drilling Corp
EGD-V $1.33 Canadian (December 5, 2006)
EGDFF-OTCBB
22.2 million shares
Energold website |
Bob Moriarty
President: 321gold
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