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Blowing Off the Froth

By David Bond      Printer Friendly Version
Nov 26 2008 3:52PM

Wallace, Idaho – While the rest of this pathetic planet reeled toward recession or worse, businesses, banks and ponzi schemes closing everywhere, we in Wallace blew the froth off the first-released kegs of Dirty Blonde Ale courtesy of the Wallace Brewing Company. A night later, we turned out in record force at a sensibly priced dinner of prawns and steak at the Wallace Elks Lodge whereupon we overbid for trinkets we did not need, donated by merchants who could not sell them, with all proceeds going to a Children's Fund the needy kids are certainly going to need this Christmas. It's how you do things here.

We have taken our hits, certainly. Sterling Mining was the first casualty of the economic downturn; they ran out of money about 6 months ahead of time at the Sunshine Mine. But Sterling's fault appears not to be with its mining infrastructure so much as its imbecilic board of directors' chairman, who would not return a call to the President of the United States if his first-born were hostage, much less from reporters or editors of credible mining publications. Then US Silver kicked a few of its Galena Mine crew to the curb, the premise being that if you cannot make an 8-foot round in this part of the world you'd better tramp off to a stupider part.

Things might even get worse. BHP broke its deal with Rio Tinto, which was in the process of selling the Greens Creek mine to Hecla, which owns the Lucky Friday Mine hereabouts.  Teck's Fordham coal deal may unravel; their COO, Peter Kukielski, has just resigned. Apex Silver has bailed on its flagship San Cristobal property in Bolivia, selling out to Sumitomo. Coeur d'Alene Mines is in the process of getting kicked off the Big Board on account of its share price is under $1; like 60 cents under a buck, not that they deserve it, of course. (CDE is still in Bolivia, a one-trick pony that doesn't deserve the name Coeur d'Alene – unless you're referring to the city, not the mining district.) Some of the world's darling miners are staring down the barrel of bankruptcy.

The great unveiling truth in all this chaos is that metal mining is a lot more expensive than any promoter ever told you. Extraction costs at primary silver mines anywhere in the world are north of $15 an ounce, rising and the metal trades at $10 on a good day. Silver production from base metal mines – source of 70 percent of the world's total newly mined silver – is falling like a drunk over cracks in the sidewalks, and those mines, hobbled by the recent “correction” in copper, PGM, lead and zinc prices, aren't going to be giving you cheap silver anytime soon. Cheap gold, a 30 percent byproduct of base metal mining, isn't getting any cheaper, either. In fact it's gone away.

Projects that looked good as recent as six months ago now stink. Nobody thought about fuel prices, tire costs, labour issues and political ramifications. Apex and CDE looked like geniuses last year with their charge into Bolivia. Now they look like the idiots they truly are. There will no bail-out for shareholders in mining companies.

They only refuges in this market are an asset play or an earnings play. There are legitimate mining companies trading close to, or even below, a 1:1 price/earnings ratio. In other words, the cost of a single share is equal to or less than a single year's payback in dividends or earnings. The other way is to evaluate their properties, divide them over their current market cap, and decide accordingly. Be wary of, but also be aware of, companies that have reported to the SEC that they are running out of cash They might be value-rich.

So why are we partying in Wallace? Because unlike Canadians we think long-term. We have fresh running water in Placer Creek, and firewood and wild game in the hills above us, and fish in the rivers. And we sit on the world's biggest pile of silver beneath our feet. In other words, in Wallace, we sleep soundly on our sound money.

David Bond



Editor of The Silver Valley Mining Journal