China's Secret Silver Solution A Special Report

November 18, 2004

In this report we analyze the impact of newly industrialized China on the world's silver markets. Pressure from China's compressed industrial revolution - along with that from worried citizens turning to silver as a store of wealth - could soon trigger explosive price hikes in the silver market. Could the solution to the looming precious metals' crisis lie in China's own back yard? The first of several reports featuring China and silver.

DAVID MORGAN, PUBLISHER AND EDITOR,
THE SILVER INVESTOR

INTRODUCTION

INITIAL OBSERVATION: China is wrapping its heretofore-inefficient mines in private market incentives because it must produce at elevated rates to feed the beast - its powerfully compressed industrial revolution. Disciplined and ongoing privatization policies have already elevated China from 5th to 4th among all silver producing nations; additionally the jump in production is significant, boosting China's production by almost 2 million ounces from 2002 to 2003. According to certain, top-secret information that has just come to my attention, certain of China's younger and better producing mines - the ones that contributed the most to China's elevated silver production - are seen to be surrounded by other hugely promising silver strikes. If so, these would constitute what would certainly be among the most compelling investment opportunity I've ever had the privilege to point out to my readers.

I have been criticized by some readers for not providing enough investment ideas. Lacking a broad universe of producers and a wide array of properties, I am often reluctant to offer up "new ideas" - worried they may not meet my standards, or those of serious precious metals investors. Today, probably for the first time since I've been writing about the evolving silver boom of the 2000s, I can suggest a new investment idea to readers with tremendous excitement and full confidence: China.

China Is Privatizing

INITIAL OBSERVATION: The highly classified results of strikes around the mine I am scheduled to visit - results that were obviously not supposed to leak into the public domain - are apparently showing similar chemical makeup and geological patterns. If this is indeed the case, then estimates of the expanded site hold potential as good as any North or South American mine. How much could be pulled out of such a mine? Potentially, hundreds of millions of ounces?

China! Soon we will leave Beijing and travel north to where many of China's richest and largest silver discoveries are contained within wider regions that may partake of a similar geology - and where additional exploration by local Chinese companies may have confirmed the presence of continuous ore bodies. If geological patterns are to be believed, I am told we may bear initial witness to one or more of the very largest silver/lead/zinc systems in the world.

Privatization Makes Silver More Popular

INITIAL OBSERVATION: Silver is used in a variety of high-tech applications, making it the precious metal that has to be replenished every year. With its silver supply running so low that it threatens to derail the great success that is the nation's industrial revolution, China's leaders are sparing no expense to investigate every aspect of their nation's white-metal resources. They have launched a top-to-bottom scouring of an entire nation for every available silver lode - large or small - a critical initiative that has already unearthed significant investment opportunities for China investors.

China's rural economy is being powerfully transformed by a compressed industrial revolution lasting a decade instead of the 70-100 years that the same process took England and America. Everything about China - from infrastructure to housing to education and entertainment - is changing, modernizing and privatizing with breakneck speed. Revitalized, privatized, commercial markets are the stars of the show, but communist officials remain in the director's chair. And the West's various Treasury officials - especially anyone associated with the U.S. Treasury - are giving China all the moral support they can. After all, the Chinese government and affiliated institutions are critical purchasers-of-last-resort at U.S. Treasury auctions now that the Japanese are tapped out and the Europeans have turned sullen. Much is gained, and by many, should China prosper.

Demographic Danger, Leaders' Balancing Act

INITIAL OBSERVATION: China, Inc.'s leaders, those of its new business class are said to be action-oriented, prone to dynamic optimism and quick thinking. They are not hard men; but certainly they must be courageous, willing to do the tough work of building back up the magnificent stocks of white metal that flat-lined at the end of 2004, according to the Silver Institute

Will it all prove too much for China to handle? Bottlenecks and silver shortages - signs of things to come? China's silver usage is up, and has been every year, currently hovering around 40 million ounces, though there are estimates it could easily rise to 100 million ounces. Even then China would not be utilizing as much silver per capita as many Western nations. Just now, the Silver Institute's 2004 World Survey reveals that China's silver demand has finally surpassed production, putting China formally in deficit. Since China's main fabrication use for silver is electrical components/ electronics (with brazing alloys running second) chances are that so long as the country remains a leading industrial producer, its silver usage will grow along with its silver deficit.

Monetary Use of Silver Adds to Demand, Deficit

INITIAL OBSERVATION: Dear reader , you have traveled this far with me - now sit with me here with me and watch the flickering picture on the big, white screen. Look, a long-delayed reaction is taking place. Prices are rising, first by pennies, then faster and faster. What prices! What numbers! Oh, the humanity! See them poke up their heads, the poor prairie dogs. They are trying to calculate their losses. That one, hitting his head on the wall. His brother told him to buy gold, butt he just laughed and called it a "barbarous metal." Over there/ He sold massive amounts of silver bullion two years ago because it was so "old fashioned" to hold quantities of physical metal. And that one, watch him - he's a jumper! Who are these others, the animated ones trying not to break out in smiles, hiding their bright faces like children at a wake - hushing each other and then starting to break out into smiles all over again. Sure, they are the investors who understood the cyclical nature of the marketplace and placed their investments accordingly. Not to many, I'm afraid, but they have had their reward. Let's see what the final numbers are. Silver has peaked at $100 from its start under $4. Gold has peaked at $2,000 from a start of somewhere around $250. These numbers work out to results that are similar to those turned in at the end of the great commodities bull-run of the 1970s.

Please focus on the stresses affecting the silver market. There's production demand, certainly. But there is another demand altogether straining Chinese - and world - silver supplies. It has to do with silver's intrinsic value as a money metal; its ability to retain value during periods of high inflation as well as high growth and high inflation and low growth. It seems the 2000s are struggling with the same low growth/ high inflation scenario (some call it "stagflation") as the 1970s. Toward the end of that decade, silver peaked at $50 and gold at $800. Contrast that to today's prices, where silver is around $7.50 and gold still fairly close to $400.

Sustaining Silver - Buy or Develop?

INITIAL OBSERVATION: Silver-mania ... Pass it on! Silver-mania is breaking out all over China. Even China's private sector is getting into the act. Soon China's mining companies will soon have a wonderful new 500-acre silver industrial zone - a precious-metal's habitat from which to gravely discuss the inevitable changes in the silver market or merrily celebrate the private-market victories that certainly should at the very least be noted with a toast. The industrial zone is being built by private funds and will, according to project officials, "enhance the competitiveness and status of the Chinese silver industry in the international market." According to a report by the Silver Institute, Shanghai was chosen as a silver center because of its strength as a center of business and finance - " the development will be supported by an existing infrastructure including telecommunications, roads, communications, gas and electricity." Sounds like a cool pad!

My statement at the beginning of this report that China is "open for business" is generated by close observation of actual recent events. China is becoming increasingly pro-market and business-friendly, at least as of this writing. Recently, several major, North American silver mining companies - Minco Mining & Metals Corporation (Minco) and Silver Standard Resources Inc.- announced a strategic alliance to jointly pursue silver opportunities in China. Under terms of the strategic alliance, Silver Standard will invest C$2,000,000 in Minco Silver to acquire a 20% interest in the new venture. Silver Standard will have preferential purchase rights to participate in future financing of Minco Silver in order to increase its interest up to 30% in Minco Silver. As part of the strategic alliance, Minco Silver will be the exclusive entity for both Minco and Silver Standard to pursue silver projects in China. The gates are open. Foreign silver investment has finally come to China.

The Mystery Unfolds …

INITIAL OBSERVATION: Far away and high up in a conference room, China's planners scrutinize secret geological maps suggesting mineralization of such vastness that it makes no sense to fund outside exploration - only to dig and dig and dig. Will China's silver output surpass 150 million ounces? Will the Chinese nation celebrate what well may be its manifest destiny - hosting the richest store of white metal the world has ever seen? What did they know - the leadership - and when did they know it? And why didn't they tell us! Wait a minute, they have - well, I have, anyway.

When it comes to silver, China's leaders seem to have opted to exploit what China may possess internally rather than acquire outside mines, mining entities and infrastructure. The question I must ask and then hope to answer at least partially during my travels in China (knowing such an answer may not ever be fully forthcoming) is how did those in charge of silver production and extraction in China reach their conclusions? Someone, somewhere, knows - or believes - China's silver regions are fertile enough - once privatized anyway - to provide for China's manufacturing and monetary needs well into 21st century. This is an astounding conclusion!

First In, Best In …

INITIAL OBSERVATION: A new productivity boom is coming your way, brought to you by China's emerging generations of market-educated, University-trained factory managers. They expect to drive their factories past quota and their mines past closing. They are comfortable with each other and gracious with others. Like China itself, China's younger generation is open for business.!

As you can see, I find China's silver-mining privatization profoundly stimulating and gratifying. I am excited about going over to visit China's most promising silver regions and mines. As an analyst, I welcome the opportunity to observe those with an "inside track," but I am trying to embark on this trip without any preconceived notions. Distrust is always a factor - especially among the mid-level communist cadres - and so is fear of changing political and social realities. Yet even now, the torch is being passed from China's old mining operators - those lodged collectively within the bosom of the state - to an emergent class of savvy mining entrepreneurs, private, wealthy individuals and their families who have begun to use clout - their Guan-Xi - to participate in some of China's most profitable and lucrative silver mining sites.

Conclusion and Review

1) Vast silver fields are waiting to be explored and developed in China: Top Chinese officials apparently have reason to believe - or have been led to believe - that there exist world-class silver reserves within the country that demand to be explored or placed into production.

2) Fields are placed where prospectors have never even made a thorough investigation: Silver has already been mined in China for some 3,000 years, mostly in the eastern regions. The areas most available that promise additional major discoveries lie in and around the northern and northwestern sections of China and Inner Mongolia.

China is correct to maintain in-country production of silver: New exploration techniques combined with advanced production technology might just allow China to make a silver mother lode discovery that might just match or perhaps exceed anything found in other silver-rich regions such as Mexico or Peru. At the same time, new uses for the "white metal" continue to develop and further tax supplies.

In my next report, we will discuss the feasibility of finding such "super sized" ore bodies and track the movements of well-known prospectors who might be exploring now. We will also launch a fairly rigorous assessment of what regions and mines are likely candidates right now to help China fill its rapidly increasing silver deficit.

All together now ….

Question: What is China's Secret Silver Solution?

Answer: Vast bodies of silver-rich ore available for exploration and production right now, right in China's back yard …

I think you've got it!

David Morgan
Stone Investment Group
www.silver-investor.com

18 November 2004

David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html

Silver has the highest electrical conductivity and heat of all metals.