-- Posted 18 August, 2006 | |

The Wallace Street Journal

By David Bond, Editor
The Silver Valley Mining Journal

Wallace, Idaho – With all the feeding frenzy going on amongst the mining majors, to wit: Inco, Falconbridge, Barrick, Xstrata, Cominco, we were reminded of an earlier such time, at the peak of the silver boom in 1980 when silver miners and oil companies went at it with similar frenzy.

We published a poem in the late, great Wallace Miner back then, which proved to irritate Hecla’s then-CEO Bill Griffith to the point that it caused him to throw a pencil at the wall in his office, we were told, breaking it in two.

Bill was a fun guy to annoy, as the late E. Viet Howard, then operations chief for Sunshine Mining Co. soon also discovered. Back then, Hecla held a one-third interest in the Sunshine Mine “Unit Area.” That meant they shared the profits and, more annoyingly, the profits on a 33-66 basis with Sunshine and Silver Dollar. Howard would accumulate all the bad news about the Unit Area he could dig up for an entire week, then dispatch it via courier to Griffith’s office at about 3:30 p.m. every Friday. “I don’t want to wreck his day,” Howard quipped. “I want to wreck his weekend.”

The needling reach fever pitch early in 1980, when Howard persuaded Sunshine to “white-hat” Hecla’s acquisitions of, first Day Mines, and then Ranchers Exploration. Hecla, which was emerging from near-bankruptcy after the failed joint-venture with El Paso Natural Gas to build the Casa Grande copper mine, ultimately prevailed in the merger battles but paid a pretty good premium for peeing off Howard and Sunshine. El Paso, which ended up with a passel of HL stock in Casa Grande’s aftermath, sold its HL shares to Rosario Resources. Sunshine, meanwhile, started cuddling up to the oil companies – in fact, former SSC CEO G. Michael Boswell now works for oilman T. Boone Pickens. And here is where the story begins:

The Big Fish

Big fish ate a little fish
Then turned up in the gut
Of an even bigger fish
And dare you ask, So what?

’Cuz Amax ate Rosario
Who’d bid up Hecla Mining
Who bit on Day while Sunshine munched
Now Standard Oil’s a-dining

On Amax, who, remember
Owns Hecla’s largest block
Of eminently purchasable
Common public stock.

If Big Oil ends up with our mines
They’ll show us folks no mercy.
If you think Kellogg’s hard to razz
Just try to call New Jersey.

I’ll know that it’s all over
And the time for prayer long past
When Sunshine trucks sport Chevrons,
And Hecla’s passing gas.

Which being 26-year-old history, is best viewed with entertainment in mind. But with the huge group-grope going on in the gold mining sector, we can expect similar mischief in the silver sector. After all, as Andrew Bary reported in his article “Silver’s Golden Moment,” in the 7th August issue of Barron’s, you could mop up the entire silver mining industry with what even by mining standards is chump change.

“There are a half-dozen sizable silver producers: Apex Silver, Coeur d’Alene Mines, Hecla Mining, Pan American Silver, Silver Standard Resources and Silver Wheaton . . . the six combined have a market capitalization of $8 billion. That’s only 5% of the market value of the gold-mining sector and a tiny fraction of the $1.4 trillion global-mining industry.” (Emphasis added.)

That $1.4 trillion, in turn, is indeed chump change to the oil industry. Exxon alone is worth $401.7 billion; behind Exxon is Total S.A. at $331.6 billion; BP at $228.4 billion; and PetroChina at $207.9 billion. Tote those four gas-passers up and you’ve got the global mining industry covered.

This helps put our little silver corner in perspective. The year’s top primary silver producer, for the moment at least, is Coeur d’Alene Mines. But they rank only 9th in terms of actual mining company silver output at 13.7 million ounces, far behind BHP Billiton’s 53.8 million ounces, Industrias Penoles (47.4 million) KGHM Polska Miedz (40 million ounces), Kazakhmys (20.5 million), Polymetal (18.9 million), Grupo Mexico, (18.5 million), Cia. De Minas Buenaventura (15.3 million) and Rio Tinto (14.9 million ounces). Next come Swiss gold-miner Xstrata at 13.3 million ounces and Canadian nickel miner Falconbridge at 12.5 million ounces, the latter tied with primary Canadian silver producer Pan American Silver.

So we silver bugs are merely a fly-speck in the grander scheme of things, which, argues Barron’s’ Andrew Bary, makes silver stocks (and physical silver ownership) such an attractive, albeit volatile, opportunity. Add the risks that must be appended to Coeur d’Alene Mines and Apex, both of which are betting their futures on Bolivia’s Bolshevik political future, and the game even gets tighter.

As Dr. Frank Lucas noted in Zurich a couple of months back, it wouldn’t take much to mop up the whole lot of them, or to corner that tiny wedge of “investor” or “speculative” silver that is available to the market. With more than 70% of silver coming as by-product from the big gold, copper, and zinc mines worldwide, wild swings in the silver price don’t necessarily translate into production quantity changes.

We have, by all accounts, a forthcoming squeeze in the physical silver market. Comex stocks are at an historic low. Worldwide silver consumption rose by a huge 11% just last year, interesting in light of a drop in demand from silver’s biggest customer, photography. Warren Buffet’s silver stockpile of some 100 million ounces just sort of disappeared into the markets over the last couple of years. Barclay’s silver ETF came out of the chute like Seattle Slew, tying up 15% percent of the entire annual world mining output of silver.

We are headed for interesting times. A massive short squeeze is in the inevitable future, and it will make the late 1970s and 1980 look like a zit. The Fed and the Plunge Protection Team are out of gas, and the dollar has no friends. If you’re not sitting on silver, you’re on a foundation of sand. Remember, as David Morgan sagely pointed out earlier this year, the dollar’s worth less than half of what it was in 1980, which puts silver in the $6 range. While you’re on your way to the silver store, or to get some Hecla or Silver Wheaton, stop off at the gunsmith’s too. For there reside the other three precious metals: lead, brass and Winchester blue.