Silver Wheaton’s ‘train wreck : bought deal is getting snubbed

Nicky Loh/BloombergSilver Wheaton acquires silver and gold “streams” from mining companies to help them finance their projects. That has been a very active business during the mining downturn, and Silver Wheaton has kept bankers busy.

The stock traded below the offer price all day Tuesday, and sources said a very large portion remains unsold. One source described the entire deal as a “train wreck.”

The bought deal, which was announced Monday night, was priced at US$20.55 a share by lead underwriter Scotiabank. The pricing was very aggressive, as it represented a 3% discount to Silver Wheaton’s closing price that day. Typically, the discount on bought deals is larger, as a reflection of the risks taken on by the underwriters, one of which is that the stock price drops. On this deal, the underwriters are also charging agents’ fees of 3.75%. – or $0.77 a share.

Amid weaker precious metal prices Tuesday, Silver Wheaton shares did fall, by 5.5%, and closed at US$20.02. On heavy volume – trading in New York and Toronto at 11.4 million shares was about 1.5 times normal – the shares hit an intraday  low of US$19.83.

Silver Wheaton is a very liquid stock, so if investors want to build a large position, they can buy it on the open market and bypass the bought deal. Deal insiders are hopeful that metal prices will rise on Wednesday and they will be able to sell more of the offering.

Investment banks lined up to be part of this bought deal, because Vancouver-based Silver Wheaton has been one of their top mining clients in recent years. Indeed there are four lines of underwriters (all with varying degrees of liability), with BMO, CIBC and RBC on the second line, BofA Merrill Lynch and TD on the third line, and Scotiabank signed on for a 25% share.

Silver Wheaton acquires silver and gold “streams” from mining companies to help them finance their projects. That has been a very active business during the mining downturn, and Silver Wheaton has kept bankers busy.

A source said there has been no serious talk so far about trying to cut the price on the offering, or reduce the size. Scotiabank does not typically lead mining offerings this big.

This is the third time in recent months where banks had trouble selling a very large mining stock offering. It shows that investor appetite for these stocks is not endless amid rough market conditions.

In late 2013, Barrick Gold Corp. did a US$3 billion bought deal, which was priced at a 5.4% discount to the market price. And in the middle of last year, Franco-Nevada Corp.’s US$500 million share offering proved to be a tough sell.

The Franco-Nevada bought deal has similarities to the current Silver Wheaton deal. Both firms are in the mining-royalty business, and in both cases, the discount to the market price was very small. It was less than 2% in the Franco transaction.

Silver Wheaton plans to use cash from the bought deal to fund its acquisition of a gold stream from Vale SA’s Salobo mine in Brazil. It is the second gold stream that Silver Wheaton is buying from this mine.

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Silver Wheaton Corporation BUY Target Price $29

Metals and Mining — Precious Metals and Minerals
SLW : TSX : C$21.51
SLW : NYSE
BUY 
Target: C$29.00

COMPANY DESCRIPTION:
Silver Wheaton is uniquely positioned as the purest silver
producer. The company’s asset base consists of silver purchase
agreements with the San Dimas and Penasquito mines in Mexico,
Pascua-Lama project in Chile/Argentina, Zinkgruvan mine in
Sweden, Yauliyacu mine in Peru, Stratoni mine in Greece. Most
recent streaming deals with Hudbay minerals (silver and gold
streams at 777 and Constancia) and Vale (gold streams at
Salobo and Sudbury mines).
All amounts in C$ unless otherwise noted.

STRONG MOMENTUM INTO Q4
Investment recommendation
Silver Wheaton remains the preferred vehicle for exposure to silver
given the strong growth profile, margins, liquidity and diversification.
Further accretive streaming transactions are possible over the next 12
months, although new equity should be expected for larger transactions.
SLW is currently trading at 1.20x its forward-curve-derived NAV,
modestly above the silver producer group, but below SLW’s royalty
peers. Our NAV continues to assume a 25% permitting/development risk
discount for Pascua and Rosemont. We maintain our BUY rating.
Investment highlights
 SLW reported Q3/14 adjusted EPS of $0.20, in line with our
estimate and consensus. While attributable AgEq production was
below expectations (8.4 vs. 9.2Moz), a 1.3Moz inventory drawdown
resulted in sales beating our estimate (8.7 vs. 8.4Mozs).
 SLW wrote-down Mineral Park $37.1m following Mercator Minerals
Chapter 11 filing, and Campo Morado $31.1m given questionable
viability of the satellite resource base (metallurgy and low prices).
We have removed Mineral Park from our valuation and reduced our
Campo Morado’s valuation by 70%. Overall, these two small streams
are non-core and have limited impact on SLW’s overall profile.
SLW’s key streams remain well insulated to lower prices.
 SLW made a final $135m payment to Hudbay Minerals (HBM-T,
BUY, covered by Gary Lampard) relating to the Constancia gold
stream. While the payment was expected, SLW paid through the
issuance of 6.1m shares (dilution of 1.9%) rather than cash. The
preference for equity is understandable with the net debt to EBITDA
at 1.66x, which may not be high relative to SLW’s producing peers,
and is easily manageable, but remains high for a royalty company.
Both Franco-Nevada and Royal Gold have net cash positions.
Valuation
We have revised our target price to $29.00 from $30.00. Our target
remains predicated on a 1.55x multiple to our fwd. curve derived
5%/operating NAVPS estimate of C$20.02 (previously C$20.76) less net
debt and other corporate adjustments.

Pan American Silver Corp.

 

PAA : TSX : C$15.75
PAAS : NASDAQ
HOLD 
Target: C$18.75

COMPANY DESCRIPTION:
Pan American Silver’s key operating mines include
Huaron, Morococha and Quiruvilca in Peru, Dolores, La
Colorada and Alamo Dorado in Mexico and Manantial
Espejo in Argentina. The company maintains ownership
of the Navidad Project located in Chubut Province,
Argentina, to which we ascribe no value.
All amounts in C$ unless otherwise noted.

Metals and Mining — Precious Metals and Minerals
PEA HIGHLIGHTS STRONG
ECONOMICS FOR DOLORES
EXPANSION
Investment recommendation
We reiterate our HOLD rating on shares of Pan American Silver
following results for Dolores’ PEA contemplating the addition of a
milling and pulp agglomeration circuit to the process flow sheets and the
development of an underground mine. While the company reports a
strong IRR for the project, a construction decision has been deferred for
9-12 months to proceed with additional studies and continue the
delineation of underground mineralization.
Investment highlights
 Robust economics, with initial capex estimate of $105 million,
returning an IRR of 33% at $1,300/oz gold and $22/oz silver. We
estimate the development of this project to begin mid-2015, with the
pulp agglomeration plant operational mid-17 and the underground
mine at full operation (1,500 tpd) in H1/18E. We estimate that the
development of the pulp agglomeration circuit and underground
mine is approximately 5% accretive to our company NAV.
 Annual silver production is expected to increase by 38% in the first
10 years, due largely to a 21% increase in throughput and better
recoveries (~7% for both gold and silver). While an underground
resource has not been provided, we estimate 5.25 Mtonnes (based
on 1,500 tpd for 9.5 years of operations) containing approximately
11 Moz silver and 0.3 Moz gold.
Valuation
We have revised our target to C$18.75 from C$17.75 based on 1.05x our
5%/operational NAVPS estimate of C$13.85 (previously C$13.09) plus
net debt and other corporate adjustments. Our 2014 EPS estimate has
been revised to $0.28 from $0.15 following the incorporation of Q1/14
results and revised 2014 cash cost estimates.

Canaccord Precious Metals Update

JUNIOR PRODUCER Q4/13 SCORECARD: RECALIBRATING OUR PRICE
DECK TO THE FORWARD CURVE
 For the junior precious metal producers, we have calibrated our forecasts to our updated forward curve price deck, consistent with the deck used for the senior producers.

 Our revised price deck is summarized below. Since our last update in October 2013, the long-term forward gold price has declined 3%, from $1,439/oz to $1,391/oz. Curve pricing for major by-products copper and silver have also declined, approximately 4% and 9%, respectivel.
 On the other hand, we have seen a year-to-date recovery in junior gold equity prices as highlighted by an 18% increase in the GDXJ (surprisingly outperforming the gold price which is up only 4%). We believe this reflects renewed investor interest in the space, capital inflows into the gold sector and likely increased levels of investor risk tolerance. While we have maintained the upper end of the range of target multiples for junior producers at 1.1x, we have increased the lower end of the range from 0.4x to 0.5x, reflecting increasing levels of investor risk tolerance for equities with operational/financial challenges.
 We remain positive on bullion longer term, but see the potential for significant volatility in the gold price over the next 12 months. While we see greater upside to gold equities relative to bullion, we continue to recommend investors stay defensive and choose quality over leverage. We favour companies with quality assets, strong balance sheets and relatively lower risk profiles –
i.e., producers that could generate and grow free cash flow even in the current depressed gold price environment.
 Rating changes in this report include Argonaut Gold (BUY from Hold), Endeavour Mining (BUY from Speculative Buy), Fortuna Silver (BUY from Speculative Buy), and Sandstorm Gold (BUY from Speculative Buy).

Target prices have been revised lower for most stocks under coverage with the exception of higher target prices for NGD, AR, AUQ, DGC and PAA. Canaccord Genuity Canadian Focus List Picks include B2Gold, Primero Mining and Fortuna Silver Mines.
 Our Q4/13 estimates have been updated to reflect actual metal prices during the quarter and pre-released operating results. In general, we are expecting a sequential and y/y decline in earnings (due to lower gold and silver prices). Our Q4/13 EPS estimates are notably below consensus for NGD, AUQ, EDV and PAA.

 The Gold Investor’s Handbook “ by Jack A. Bass, B.A. LL.B.

( available from Amazon)

1oz 1984 Krugerrand Transferred from en.wikipedia (Photo credit: Wikipedia)

1oz 1984 Krugerrand Transferred from en.wikipedia (Photo credit: Wikipedia)

Why Invest in Gold and Gold Stocks – and Why Now ?

Historically, gold has been a proven method of preserving value when a national currency was losing value. If your investments are valued in a depreciating currency, allocating a portion to gold assets is similar to a financial insurance policy. In the past year, the climb in the price of gold above $1600 per ounce is due to many factors, one being that the dollar is steadily losing value.

• The dollar is weak and getting weaker due to national economic policies  like quantitative easing , which don’t appear to have an end.

Silver Wheaton Corporation Update Target $30

SLW : TSX : C$21.59
SLW : NYSE
BUY 
Target: C$30.00

COMPANY DESCRIPTION:
Silver Wheaton is uniquely positioned as the purest silver
producer. The company’s asset base consists of silver
purchase agreements with the San Dimas and
Penasquito mines in Mexico, Pascua-Lama project in
Chile/Argentina, Zinkgruvan mine in Sweden, Yauliyacu
mine in Peru, Stratoni mine in Greece. Most recent
streaming deals with Hudbay minerals (silver and gold
streams at 777 and Constancia) and Vale (gold streams
at Salobo and Sudbury mines).
All amounts in C$ unless otherwise noted

Metals and Mining — Precious Metals and Minerals
MINERAL PARK FINDS A BUYER;
KENO HILL NOT EXPECTED UNTIL 2015; MAINTAIN BUY RATING AND C$30.00 TARGET

Investment recommendation

We maintain our BUY rating on Silver Wheaton. We believe the
perceived increased risk with respect to Pascua construction and
Rosemont permitting has been largely discounted in the company’s
shares. SLW boasts a robust growth profile and continues to generate
strong free cash flow at spot gold and silver prices.
Investment highlights
 We updated our model to reinstate the stream from Mercator’s
Mineral Park mine in Arizona following the proposed merger with
Intergeo MMC, which is expected to inject cash to sustain
operations. Based on Mercator’s previous mine plan, not assuming
any changes are made following the merger, we value the Mineral
Park stream at US$108 million or 1.4% of NAV.
 We also updated our model to incorporate the new PEA for Alexco’s
Keno Hill project in the Yukon. Production re-start is now expected
approximately one year later in Q1/15. Our valuation for Keno Hill
has declined from US$116 million to US$50 million. Given the
significant financing risk surrounding the re-start, we continue to
discount the stream by 50%. Alexco is in violation of the completion
agreement based on achieving throughput of 400tpd by YE14. We
assume SLW will extend the deadline given the option value.
 Overall, our 2014 production forecast of 39.4mozs remains largely
unchanged. Our 2013 EPS and CFPS estimates remain materially
unchanged at $1.06 and $1.50, respectively.
Valuation
We are maintaining our target price of C$30.00, which is predicated on
a 1.30x multiple to our forward curve derived operating NAV estimate of
C$25.29 (previously C$25.44) plus net debt and other assets.

Pan American Silver Corp. : Adjusting for Lower Gold and Silver Pricing

Pan American Silver Corporation (Photo credit: Wikipedia)

PAAS : NASDAQ : US$12.33
PAA : TSX
HOLD 
Target: US$13.00

COMPANY DESCRIPTION:
Pan American Silver‘s key operating mines include Huaron, Morococha and Quiruvilca in Peru, Dolores, La Colorada and Alamo Dorado in Mexico and Manantial Espejo in Argentina. The company maintains ownership of the Navidad Project located in Chubut Province, Argentina; to which we ascribe no value.
All amounts in US$ unless otherwise noted.

We are lowering our recommendation on Pan American Silver to HOLD from Buy, and our 12-month target price to US$13.00 from US$19.50
following our revised commodity price forecasts and sector outlook. Over the next 12 months, we expect challenging capital market conditions to persist and only a modest improvement in gold and silver prices.
While Pan American Silver has one of the strongest balance sheets in the sector (US$245 million in cash/ US$738 million in working capital as
of March 31, 2013), we estimate that free cash flow would be limited (representing an FCF yield of 5% in 2014E and beyond) under our revised gold and silver price forecasts.

Organic growth within the portfolio is limited (mill/pulp agglomeration circuit at Dolores and possible expansion at La Colorada – both pending completion of economic studies), and we expect that without a material improvement in the silver price and the situation in Argentina, Navidad will likely not be built.
The stock trades at 1.71x P/NAV (5% Spot gold/silver) vs. the precious metals producer group arithmetic average of 1.16x. While some characteristics should warrant a higher multiple in current market conditions (strong balance sheet and relatively low development risk),we view the stock as fairly valued in light of limited growth potential. As such, we are downgrading Pan American Silver to HOLD from Buy based primarily on limited implied return.
Valuation
Our 5%/NAVPS estimate has declined by 48% to US$10.68/share due to a reduction in our gold/silver price forecasts ($1,350 Au/$23 Ag from
$1,750 Au/$32.50 Ag). Our 12-month target price has been lowered to US$13.00 (from US$19.50) based on 1.2x (previously 0.9x) our 5%/peak
NAVPS estimate.
Forecasts
Our 2014E EPS and CFPS have been revised to -US$0.02 and US$1.01, respectively, from US$1.05 and US$2.18 based on our lower as assumed gold gold/silver price forecasts.

NOTE: Most gold and Silver Stocks are covered on http://www.ampgoldportfolio.com

Related articles

• SILVER MINING COSTS EXPOSED: Cash Cost Fallacy (srsroccoreport.com)
• Silver Wheaton Corp. (SLW), Pan American Silver Corp. (PAAS) & Hecla Mining Company (HL): Is There Some Silver Lining in Silver Companies? (insidermonkey.com)

Silver Eruption ?

American Platinum Eagle bullion coin (Photo credit: Wikipedia)

The coming silver price eruption

2012-DEC-02

There was a degree of predictability about the knockdown in gold and silver at the US futures market (Comex) last Wednesday. The reason is that the Commercials (together the producers, processers, fabricators, bullion banks and swap dealers) have large short positions, so they have a vested interest in lower prices. This is particularly noticeable in silver, which is shown below.

The chart is of Commercials’ shorts and longs as of Tuesday November 27. The Commercial shorts (the red line) now stand at 99,317 contracts, or 496,585,000 ounces, about two thirds of 2011’s worldwide mine production, and is the highest level of exposure since 2009. Because the longs have ticked up (the blue line), the net figure is not yet at record levels, but is only 9,212 contracts away from it.

The justification for looking at the gross short commercial position is that the shorts are mostly the bullion banks, and producers hedging future costs (whose business is channelled through the bullion banks). The

long commercials are more genuine, being manufacturers satisfying physical demand and locking in current prices to secure their margins. Swap dealers, again mostly the bullion banks, have positions both ways. The gross short position is therefore a better indicator of the futures market position of the “liquidity providers” than the net balance.

In a properly functioning market, net public demand is always long, so liquidity providers, such as market makers, or in this case the bullion banks on their own account, are always short between them in a bull market. The skill required is to make trading profits in excess of losses on the underlying position. The proviso always is that you never become so short that in an emergency you cannot cover your position. The bullion banks in the silver market are ignoring this overriding principal.

They now have a problem. Instead of having record short positions against an over-bought market, there is only moderate managed fund interest. This interest is shown in the next chart.

While money managers (mostly hedge funds) have nearly doubled their longs and slashed their shorts since July, their longs are still only a little more than average: this hardly represents the overbought conditions suitable for a major bear raid.

On this evidence, the bullion banks which are short in the silver market are potentially in serious trouble, unless somewhere there is a pot of physical silver they can dip into. There isn’t, if we assume that iShares Silver Trust’s 315 million ounces is unavailable. There is no other identifiable source of silver, other perhaps than some producer supply, and there is anecdotal evidence that on every dip, cash silver migrates from

West to East, confirmed by silver being constantly in backwardation.

The odds now favour a substantial bear squeeze. And as the managed funds which lost money on their shorts in June-July sniff sweet revenge, this could rapidly escalate. At the moment, every dollar move upwards in the silver price costs the shorts nearly half a billion dollars. And there is no way it can be covered, because the cash silver simply does not exist.

When the shorts finally run for cover, the effect on the silver price is going to be spectacular.

The Gold Investor’s Handbook – click here for  investment profits and much more detail on the in’s and outs of investing in gold

Related articles

• Part I: The Road To Bullion Default (etfdailynews.com)
• Why Silver Prices Are On Schedule To Push Above $50 An Ounce In 2013 (etfdailynews.com)

Eric Sprott Sees Gold At New High Before Year-end ( Bloomberg)

English: Crystaline Gold (Photo credit: Wikipedia)

July 13

Gold will climb to a record by year-end as the global economy slows from the weight of too much debt, says Eric Sprott, the founder and chairman of Canadian fund manager Sprott Inc.
“I just can’t imagine the demand for gold is going down,” he said in a July 9 interview at Bloomberg’s Toronto office. “I don’t personally see a solution to the problem that we’re in, the financial leveraging issue that we all have where everybody wants to shed debt and there’s no buyers.”

Sprott’s company manages funds investing mainly in gold, silver, and precious-metals equities. He expects bullion will rise as investors seek the safest assets while governments spend to stimulate their economies, increasing chances that inflation will accelerate.

Gold, which had advanced for 11 successive years, is little changed so far in 2012. It’s 19 percent lower than the record $1,923.70 an ounce traded on Sept. 6 in New York after investors favored buying the dollar amid Europe’s escalating debt crisis.

The metal “should go to new highs before year end, that would be my guess,” said Sprott, 67. “Gold has blown away every financial market in the world since 2000, let’s not forget that.”

Rallying to a record would mean gold climbing at least 24 percent on the Comex in New York, where bullion for August delivery fell 1.2 percent to $1,557.70 an ounce at 9:44 a.m. Gold futures gained 2.4 percent in 2012 through June, the smallest first-half increase since 2007.

Sprott declined to make a specific price prediction. Future highs are “indefinable” because they will depend on decisions by policy makers, he said.

Sprott has previously made predictions that were accurate, or largely so. He said in May 2011 that gold might rise to $2,000 that year. In March 2008 he said banking stocks would collapse. Bear Stearns Cos. was sold to JPMorgan Chase & Co. later that month and Lehman Brothers Holdings Inc. filed for bankruptcy in September.

Governments including the U.S. don’t have the resources to meet their obligations, Sprott said.

“We have a fundamental problem in the sovereign and banking system in the world,” Sprott said. “Probably nobody has any conception of how bad it is.”

Central banks can either print money, which would help lenders, or “deal with the Minsky moment,” he said. The term was named after the late U.S. economist Hyman Minsky, whose Financial Instability Hypothesis argues that capitalist economies first trigger waves of credit expansion and asset inflation and then credit contraction and asset deflation.

“Minsky said that if you expand your economy by increasing debt, there comes a point where the productive engine can’t deal with the debt,” Sprott said. “I’ve thought that there will be many, many Minsky moments for many banks and countries.”

Sprott is a qualified accountant who started his investment career as an analyst at Merrill Lynch & Co. He founded his current company before selling Sprott Securities, now Cormark Securities Inc., to its employees in 2002. He owns 55 percent of Sprott Inc. according to data compiled by Bloomberg.

His company, which also offers wealth-management and consulting services, had C$9.7 billion ($9.5 billion) under management as of March 31, mostly through its Sprott Asset Management unit.

Sprott Inc. rose 0.2 percent to C$4.85 in Toronto yesterday, valuing it at C$822.8 million. The company has declined 52 percent since its May 2008 initial public offering.

Sprott has lauded gold and gold stocks since at least 2001. The company began offering its own products for investors who want to own bullion in March 2009. Sprott Inc.’s Sprott Hedge Fund has returned about 391 percent since its inception in 2000, according to data compiled by Bloomberg.

Gold equities, which have lagged behind gains in the metal, will probably “do well” when gold prices rise, Sprott said. The stocks “can’t get a sustained recovery until gold has a sustained recovery,” he said.

The NYSE Arca Gold BUGS Index, which comprises 16 gold mining companies, has fallen 27 percent in the past 12 months, compared with a 0.3 percent decline in gold in New York. Toronto-based Barrick Gold Corp. and Vancouver-based Goldcorp Inc., the world’s two most valuable miners of the metal, have dropped 23 percent and 35 percent respectively in the period.

To be sure, gold-mine production is increasing, which will be negative for prices, said Pawel Rajszel, a Toronto-based investment analyst at Veritas Investment Research.

“Supply is growing faster than demand can keep up with, and as a result you are going to see prices slowly but gradually fall,” Rajszel said. “Obviously there’s a bunch of short-term fluctuations that can happen, but I think over the long term you will see gold prices fall.”

The metal averaged $1,613 in the second quarter. It will average $1,721 in the third quarter and $1,802 in the fourth, according to the average of 23 analysts’ estimates compiled by Bloomberg.

The debt crisis “should be incredible for gold,” said Sprott. He said the world may eventually return to the gold standard.

“Ultimately, if there’s a currency crisis, which one could argue we are in the throes of it right now, how do sovereigns and banks back things up? What do you back it up with?” he said. “I can imagine that the most logical thing is gold.”

John Embry of Sprott Asset Management – Interview re: The Gold Standard and central banks

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

The Hera Research Newsletter is pleased to present the following insightful interview with John Embry, chief investment strategist of Sprott Asset Management LP, where he plays an instrumental role in the corporate and investment policy of the firm.  Mr. Embry, who is a world renowned expert on the gold market and on gold and precious metals mining shares, currently focuses on the Sprott Gold and Precious Minerals Fund.  Mr. Embry has researched the gold sector since 1963 and has more than thirty years of industry experience as a portfolio management specialist. 

HRN: (Is) the basic problem is too much debt and leverage? 

John Embry: The over the counter (OTC) derivatives situation is so surreal I can’t begin to express it.  Correctly calculated, the notional value of all OTC derivatives is in excess of one quadrillion dollars globally.  The vast majority are related to interest rates. Central banks have to keep creating liquidity to prevent these instruments from collapsing. 

HRN: What can the Federal Reserve and other central banks do?

 John Embry: They’re lost either way. They’re running a massive lab experiment with monetary policy and don’t have a clue what the outcome is going to be. 

HRN: Do you think the U.S. economy can grow its way out of debt? 

John Embry: When I was a kid back in the 1950’s, most women didn’t work. Americans maintained their standard of living by putting a second person to work.  When that was expended they made up the difference by going into debt and, eventually, they used their homes as cash machines.  Now student loans total more than $1 trillion. I just don’t see where the consumer demand is going to come from going forward.  You can’t get blood out of a stone. 

HRN: What do you think the outcome is going be? 

John Embry: I believe that before this is over we’ll have a new currency system, probably backed by gold. 

HRN: Do you support the gold standard?

HRN: But the gold standard doesn’t prevent financial panics.

 John Embry: There are always going to be financial panics, but, under the gold standard they tend to be short term.  If we had had a gold standard, there would have been a number of cleansing periods where excess debt was eliminated.  The Federal Reserve allowed the build up of debt that led to the stock market bubble and crash of 1929 and to the Great Depression, which was followed by World War II.  It took about a decade to build up the debt and more than a decade to deal with the fallout.  It’s taken more than 40 years to build up the debt we have today and I don’t know how long it’s going to take to correct it.

 HRN: What does this mean for the average person? 

John Embry: I think living standards of most people in the world, particularly in the West are going to decline precipitously.  The Federal Reserve recently reported that the net worth of the median American family has fallen nearly 40% since 2007 after adjusting for inflation.  Before this all plays out, I think the percentages are going to be far larger.

HRN: Do you foresee any wider impact on society? 

John Embry: When I was growing up in the United States after World War II, I didn’t realize how remarkably fortunate we were as a society to have such a strong middle class.  Seldom in history has there been a middle class to equal what transpired in the U.S. and Canada from the 1950s to the 1980s.  We basically took it for granted because that’s all we ever knew.  The middle class in the United States is disappearing.  What happens is that you have massive poverty and a small wealthy class.  It’s one of the worst things that can happen to a society and it can lead to civil unrest.  If there’s no reason to buy into the system, people will act up. 

HRN: Do you view gold and silver as commodities? 

John Embry: I view gold and silver as monetary metals.  The mainstream news media conflates gold and silver with industrial commodities, but they’re really a competitor to the currency system.  Gold is the antithesis of paper money. 

HRN: I’ve read that central banks are buying gold. 

John Embry: Confidence in currencies is misplaced.  There is a strong flow of gold from West to East.  The Chinese, Indians, Russians and Vietnamese know perfectly well what’s going on with the US dollar and the Euro.  They are buying physical gold and the West has been stupid enough to sell it to them. 

HRN: What’s your view on China? 

John Embry: I’m not optimistic on China in the short run.  The People’s Bank of China (PBoC) recently cut bank reserve requirements by 150 basis points to stimulate 1.2 trillion yuan ($190 billion) of new lending because they don’t want growth to fall from around 8% to 7%.  As I see it, they’ve dined out on Western profligacy for 20 years and have become the most unbalanced economy in the world.  An inordinate amount of China’s economic activity is generated by exports and by all manner of capital spending on manufacturing, real estate, infrastructure and more.  The slowdown in the world economy has revealed massive overcapacity in many sectors. 

HRN: Can China develop a consumer-driven economy? 

John Embry: The idea that China’s economy can morph into a consumer-driven economy is preposterous.  The very same consumers are employed in sectors like manufacturing where there is massive overcapacity.  If the world slides into another global recession, which is not beyond the realm of possibility, I don’t see how China stays out of it and if they don’t then there’s no engine of growth left in the world. 

HRN: So, even with a rising middle class, China remains dependent on exports? 

John Embry: The fact is that China has become the world’s manufacturer but the ability of their two largest customers, Europe and the United States, to consume is being constrained.  China is not going to be able to keep selling more year over year.  The HSBC manufacturing index has fallen to recessionary levels. 

HRN: It has been predicted that China will become the world’s largest economy.  Do you think that’s true? 

John Embry: I think China will probably dominate the 21st century.  The U.S. dominated the 20th century but it went through some very tough times in the first half of the century. 

HRN: With a slowdown in China, what’s your view on commodities like copper or crude oil? 

John Embry: In the short term, I’m worried about commodities.  In a deep global recession, I expect there will be extreme monetary debasement, which will hold up the nominal prices of commodities more than supply and demand factors would suggest. 

HRN: Do you foresee a bear market in commodities? 

John Embry: We are in a short-term bear market that will be arrested by monetary debasement. 

John Embry: The only things I’m comfortable holding are precious metals and, because they are so cheap now, precious metals mining shares. 

HRN: Where do you think the price of gold will end up? 

John Embry: I’m more concerned with how many ounces I own than with how many U.S. dollars I can get for them at any given point in time.  Gold and paper money are going in opposite directions

 John Embry: One of the greatest periods of wealth creation was when we had a gold standard in the second half of the 19th century.  It’s hard to believe that it’s going to be 41 years since there has been gold backing for any of the major currencies in the world.  That is what has allowed the massive build up of debt that we have today.  If there had been a gold standard, we wouldn’t be in the position we are in.  Western governments don’t want the gold standard because it restricts their ability to dole out favors.

Alexco Resources Corp. Silver Spec Target $8.50

English: Silver :: Locality: Lucky Queen mine, Keno Hill, Mayo Mining District, Yukon Territory, Canada (Locality at mindat.org) :: An old-time, classic, nearly pure specimen of fine silver wires from an uncommon Canadian locality in the Yukon, the Lucky Queen Mine. Ex Richard Hauck Collection. 5.1 x 4.2 x 3.8 cm Deutsch: Silber :: Fundort: Lucky Queen mine, Keno Hill, Distrikt Mayo Mining, Yukon , Kanada (Fundort bei mindat.org) (Photo credit: Wikipedia)

Note : I learned of Alexco just this week – doing the research for my new book AMP Gold and Precious Metals Portfolio.

I have a good list of senior miners .If you have favorite juniors that may be unknown please email the names and a brief description – to jackabass@gmail.com

July 1

Alexco Resource Corp. 

 AXR : TSX : C$4.29 | Speculative Buy , Target C$8.50

 Flame & Moth and Bermingham deposits: 19.9 million ounces of silver;

Investment recommendation

SPECULATIVE BUY recommendation on the shares of Alexco Resources with a target price of C$8.50

Investment highlights 

Alexco reported initial resource estimates for the Flame & Moth and Bermingham deposits.

 The Flame & Moth deposit is host to a global resource of 1.1 million tonnes grading 405 g/t Ag, 0.35 g/t Au, and 7.53% combined Pb/Zn, containing 14.9 million ounces of silver. 

Bermingham is host to 359,000 tonnes grading 435 g/t Ag and 3.8% combined Pb/Zn, containing 5.0 million ounces of silver. 

The initial resource for Bermingham is lower than what was  expected; however, we view the initial resource at Flame & Moth positively. The Flame & Moth deposit is particularly significant for the future development of the Keno Hill district as it hosts significantly wider zones of mineralization compared with the Bellekeno, Lucky Queen, Onek, and Bermingham deposits.

Its development is expected to allow for Alexco to significantly increase the throughput and production from the Keno Hill district over the next three years.

Valuation

Value the Flame & Moth and Bermingham deposits based on an in situ valuation. After adjusting our model, our peak silver NAVPS (5%, US$35/oz

Ag) estimate has decreased to C$8.51, down from C$8.79. We  value the shares of Alexco based on a 1.0x multiple to our peak silver price NAVPS

estimate (5%, US$35/oz Ag).