An Open Letter to All Silver Producers

March 12, 2000

This is an urgent message to all management and shareholders of any mining company that produces silver, either as a principal product or as a by-product from mining gold, copper, lead or zinc. I believe this message will spell the difference between great wealth or abject failure for many companies and investors. It is intended to eliminate any excuse later, that no clear warning was ever issued.

Hundreds of mining companies throughout the world, particularly in Australia, have collectively shorted well over a billion ounces of silver. At five dollars the ounce, this is probably the single worst bet in the history of finance. It is a bet that is guaranteed to bankrupt many of these companies in the coming great silver price spike, rendering hard earned investments worthless. The companies that heed the message, and get and stay short free, will enjoy bounty beyond belief. For the coming silver spike will exceed the many fold price increase in palladium (from $120 in 1996 to $800 recently), for one simple reason. While both metals share a deficit consumption profile, silver alone has the distinction of being the most heavily shorted item in history, period. This gargantuan short position ensures, all by itself, a run to $50 or $100 per silver ounce. I don't care that this labels me extreme. The situation is extreme. (Where did you think the price was headed for the most manipulated market in the world, when the manipulation ended - $7/oz?). My common sense tells me that $10 to $20 silver won't fix the dual problem - a structural physical deficit and a staggering naked short position. Anyone who tries to fight this coming historic surge will be cast aside.

As big as the silver short bet is, it is dumber than dumb. Hedging silver at $5 - what for? We're at inflation adjusted, all-time price lows for silver. All-time means thousands of years. Think of it. The biggest short bet the world has ever seen, at a price the lowest the world has seen. How could there ever be a more idiotic trade? This has to be the record for the most stupid risk/reward ratio. What could possibly justify being short a five dollar item with a 50 or 100 dollar upside potential risk? We have seen the effect on gold miners who were heavily short in the 20-25% price jump in September - two (Ashanti and Cambior) effectively went bankrupt. On a 25% up move. What do you think will happen when silver jumps 1000%?

Miners who are short any amount of silver, will be mauled in the price spike. But miners who are short more than one year's production, appear to stand little chance of avoiding insolvency. And all for a trade that makes no economic sense. Mine management will be quick to respond that they are only hedging, exactly what Ashanti and Cambior said before their financial demise. This isn't hedging, not at all time price lows. This is a certain death sentence. Let me illustrate the point with a couple of real life examples. In each case, silver is not considered to be the main product.

Boliden Limited ( is a Canadian miner that produces primarily zinc and copper, with by-product gold and silver. As of 12/31/99, it has sold 30 million ounces of silver in an options strategy at a maximum price of $5.67 oz. (Undoubtedly of the buy put/sell call alligator variety, entered into during the dealer-inspired 2nd Quarter 99 selling orgy). Boliden has not hedged its other metals. It produces a little less than eight and a half million ounces of silver a year. It has incurred operating losses of around $60 million annually, in each of the past two years. It has roughly $65 million in net current assets and a big $1.2 billion in long term debt. Being short 3.5 years of silver production, Boliden is exposed badly to a silver price spike. At $15 per ounce, its short position would be $300 million under water. At $50 per ounce, the liability would approach $1.4 billion. Even if by some miracle, Boliden wasn't bankrupt at either point, its suffering shareholders would reap zero benefit from what should be a price bonanza. Boliden is hedging against any profit. It's disgraceful.

Barrick Gold doesn't list silver production and hedging on its web page, so I got that information verbally from their Investor Relations Department. Barrick produces roughly four million ounces of silver a year and is forward sold on a little over 14 million ounces at $5.07 oz. (also 3.5 years production). While I have written extensively on Barrick's gold hedge, its silver hedge is just as dangerous, in spite of the tiny amount of money involved in doing the trade. Barrick has the use of $70 million for agreeing to be short 14 million ounces of silver. At $15 per ounce, Barrick's negative mark to market would be $150 million. At $50 oz, almost $650 million. At $100 oz, $1.3 billion. Now think about that. At $5 oz, how much could one make on a short position? Forget whether there would be margin calls and positions called in - think of how Barrick shareholders would be screwed in a silver price spike. There would be zero silver profits over $5.07 on three and a half years of production, no matter how high silver went. That, I submit, is lunacy and corporate negligence of the highest order. Of course, Barrick will claim it can defer the short. Big deal, who knows what silver will be at then? The record shows that Barrick missed a wonderful opportunity last summer by not listening to my clear warnings to cover their short gold position at 20 year lows. Let's see if they miss again, by staying short silver at the lowest real price in history. Barrick shareholders, beware - being short silver is not in your best interest. Management should concentrate on developing and producing, not timing the market.

It should be noted that many miners with short gold positions can't cover because they lack the funds to buy back their gold shorts. But silver shorts can be covered, if companies act quickly, because silver is so cheap. It doesn't take a lot of money to buy back silver shorts. But once silver prices spike, the money needed will be great. While I haven't put it to paper and pencil, once silver spikes, I don't think the Australian banking system has the capacity to fund the silver short position of that country's miners. There is no legitimate reason for a miner not to cover silver shortsimmediately. In fact, if miners (particularly the by-product producers) accumulated silver at current prices, in anticipation of the price increase, those companies would be richly rewarded. (OPEC in crude oil and the Russians in palladium should be the model). The temporary postponement of silver revenues would be minor, at current prices.

There are hundreds of mining companies short stupid amounts of silver. This is preposterous. Shareholders must take matters into their own hands. You own these companies. You can not permit good, productive companies to be destroyed by a stupid financial transaction. You must insist of management;

1. Cover all silver short positions immediately

2. No new shorts on any price increases

3. Accumulate silver at current prices

Do not assume someone else will contact these companies - do it yourself. Document your contacts and follow-up. Don't fall for any corporate song and dance. If you are not sure if your company is short silver - ask. You may make the difference in a company's survival. Make sure that no officer or director can ever claim that they didn't know. Make sure they know. Just do it.

Most silver is produced as a byproduct of copper, gold, lead and zinc refining.