Investment in silver ETFs would return quickly

Tag : silver bullion
Amid the hammering of listed resources stocks over the past twomonths, and the more recent heavy sell off of commodities, silverexchange traded funds (ETFs), represented mainly by the US-listediShares Silver Trust, stand out as one of the most resistantcommodity-linked securities. An investment in the iShares SilverTrust, which currently holds USD 3.4bn in silver bullion, is aneasily accessible proxy investment in silver bullion.
Where an investment in silver ETFs would have returned 33% over thepast 12 months, a weighted investment in 43 listed silver stocks isnow returning a highly dramatic negative -33% over the same period.Gold ETFs, represented mainly by the US-listed SPRD Gold Trust,have also performed well, with a return of 28%, ranking just behindsilver ETFs.
Listed gold stocks, however, have far outperformed listed silverstocks, returning a composite 5% over the past 12 months. Thedisparities in the returns from listed stocks may at least bepartially explained by the declines in spot prices: at USD 919 anounce, gold bullion is currently 11% off its highs, while at USD17.23 an ounce, silver bullion has fallen by 19%.
Both gold and silver bullion are favoured by certain specialistinvestors as high beta investments during times of crisis ortrouble. The two metals traded at record highs during March thisyear, when Wall Street's Bear Stearns crisis peaked. While bothgold and silver are ranked as precious metals, along with theplatinum family, gold has a demonstrable monetary role, somethingarguably absent from the rest of the precious metals peer group.
Primary silver producers are far less easy to find than primarygold producers. The silver sub-sector is led by Fresnillo, PanAmerican Silver, Polymetal, Hochschild, Coeur d'Alene and Hecla,and the fast-rising Silver Wheaton. Most of the world's silver isproduced as byproduct, typically by the larger mining names.
Thus, while Fresnillo, the biggest primary silver digger, produced34m ounces of silver in 2007, BHP Billiton chimed in with 48mounces, and KGHM Polska Miedź with 39m ounces. BHP Billiton'sCannington mine in Australia ranks as the world's largest andlowest cost single mine producer of silver; it also handily ranksas the world's largest and lowest cost single mine producer oflead.
Silver production is also important for a number of gold producers,not least Goldcorp, and not least at its Peñasquito mine inMexico. While this ranks as a zinc-gold-silver-lead deposit, itsingly ranks as the largest silver deposit in the world.
Not unlike KGHM Polska Miedź, which presents itself mainly as acopper miner, or similarly copper major Freeport McMoRan, whichproduces more than a million ounces of gold a year, when Goldcorprefers to Peñasquito, it prefers to throw the shine on gold.Goldcorp states that when the mine is fully operational, it isexpected to produce an annual 400,000 ounces of gold, 31m ounces ofsilver, 97,000 tonnes of lead, and 189,000 tonnes of zinc.
As in a good number of other examples, silver is seen as secondary,or less, when a number of metals stream out of a single miningoperation; thus, in May 2008, Goldcorp announced thatPeñasquito had poured its first gold from the newlycompleted oxide circuit. The mine is also important for SilverWheaton, which on 24 July 2007 completed a deal to buy 25% of thesilver produced from Peñasquito, for the life of mine, inreturn for an upfront cash payment of USD 485m.
Today, Silver Wheaton's payment may seem a little rich, given thediscount that investors increasingly place on silver producers, andsilver projects. The game was very different prior to the launch ofthe iShares Silver Trust in early 2006, when investors were happyto price listed silver stocks at premiums even to listed goldstocks. Since then, there have been increasingly signs ofcannibalization, with the silver ETF increasingly priced and tradedat a premium to silver producers and projects.
Take Aquiline, which holds the Navidad silver deposit, sitting inArgentina, which ranks as relatively friendly terrain, in mostsenses of the world. Navidad is rated the sixth largest silverdeposit in the world, with 453m silver ounces (measured &indicated), plus 3bn pounds of lead, to boot. Even adding inAquiline's Calcatreu and Pico Machay gold projects, investorsaccord the listed stock a market value of USD 370m. The stock priceis at half its peak.
Amid the souring atmosphere, consolidation opportunities may arise,and accelerate as explorer and development companies across theglobal resources sector are increasingly shunned by both credit andequity markets. Earlier this week, Pan American Silver CEO GeoffBurns was quoted as saying that "There's certainly a window that isopening that in my view was not open before".
Referring to the recent decline of valuations among silverexploration companies, Burns, quoted by Reuters, said he hopes totake advantage of tight credit conditions by seeking outcash-strapped development-stage projects to augment Pan AmericanSilver's roster of Latin American silver mines.