Emerging Silver Producers

September 6, 2005

No matter how you look at it, by now most everyone with any sense of the market is likely established in the belief that commodities are in a secular bull market and we are now entering the second phase of it known as "the wall of worry" phase. This is the phase institutions enter the market. Of course they are already in the market, and we mean to say that institutions enter the sector that is in a bull market. By that I don't mean the likes of Sprott Asset Management or US Global Investors because they are among the few institutions heavily involved in the sector, but the "mainstream" mutual funds, the pension funds, the colleges, the Wall Street investment banks, the darlings of CNBC and Bloomberg TV.

Up until now Fund Families like Legg Mason and Vanguard have been content with one or two "Gold" or "Natural Resource" Funds in the total mix, which were grossly outnumbered and outsized in quantity, capital and air time by their numerous other funds - the Large Caps, the Core Funds, the Diversified Funds, the Growth Funds, the Aggressive Funds and so on. I guess it makes sense. The commodities sector, aside from oil, simply could not accommodate more institutions because there weren't enough quality companies that would clear the minimum investment requirements of most mutual funds. To that end I would venture to guess that at least half the companies listed on Amex in the last two years came from natural resource sector.

And here's another hunch. Whatever the number of "International" Funds was, meaning US Funds that invest abroad, it has to double and triple in the coming years. The bulk of world economic growth is more than likely to happen abroad and I don't believe foreign companies will continue to seek listing on US exchanges with the same vigor as they have in the past.

Jim Puplava has just created a Gold Index that makes an emphasis on quality juniors including silver juniors. With that in mind we decided to look at some of the emerging silver producers that may qualify to be added to shopping lists of institutions entering the sector or otherwise materially impact their own standing by becoming a producer.

Apex Silver (NYSE: SIL)
Market Cap on 7/25/05: $662.82 MM

It has to be the first company we look at because it's clearly the largest company with the largest mine coming on stream. Igor Levental of Investor Relations assured us that all work is proceeding as planed and if anything is slightly ahead of schedule. "There are a lot of things taking place on the ground, like the infrastructure project road construction we just finished" said Igor, noting that this work has to be done, even though it does not draw much excitement from investors.

Apex, as you recall, is developing its 100% owned San Cristobal project in Bolivia. It's a silver/zinc/lead property with vast resources. The plan is to produce 22.3 million ounces of silver a year (plus a whole lot of zinc and lead) scheduled to begin in second half of 2007. While it is 2 years away, Apex is expected to become world's largest primary silver producer and add substantial supply to the market. It will also be among the cheapest silver producers with cash cost projected at around US$1.31. In addition Apex has an extensive portfolio of silver properties for which it does not get any credit at this time. More recently the company has started to be more active with its other projects.

Genco Resources (TSX-V: GGC)
Market Cap on 5/25/05: C$19.63 MM

Genco Resources is perhaps one of the least known companies on the list, yet it is probably one of the more deserving of your attention. We personally critiqued Genco for what we believe is "insufficient marketing and promotion" which stands in contrast to many of its peers. The management asserted that it has been a company policy to "under-promise and over-deliver". Still the company is taking steps to address the situation and among other things launching a new web site next month (August, 2005).

So what should you know about Genco? For starters, Genco is a silver producer (with some gold credits) and is profitable at that! In the first half of 2005 the company earned about 5 cents/share net of all expenses. That is a rare feat among not only silver but even a vast number of gold companies.

Yet the good news is just beginning to flow and there is a lot more coming. To date Genco has been processing some 140 tpd (tons per day) of ore and is working to increase that to 220 tpd by the end of this year, a 63% growth. It gets better: in 2006 the company expects to go through 340 tpd and thus ramp up production to 2,000,000 of silver equivalent from 460,000 ounces in 2004. In the first half of 2005 the company already produced as much silver as it did in the entire last year.

The bulk of this growth is attributed to higher grades of both gold and silver at its new San Rafael vein. The management is rather optimistic about the prospects of this vein and has reasons to believe there are more parallel ore-shoots like it nearby. To confirm this prognosis Genco retained another drill rig that is already on the property and should start poking holes any day now. That is in addition to ongoing drilling at its main La Guitarra Mine. The company's plan is to maintain at least two years worth of reserves at the prevailing production rate at the time. That said, Genco's master plan is to eventually upgrade the mill to 1000 tons per day if in fact enough ore is found to support such scale of production.

The beauty of it is that all this growth is being financed from operating cashflow. The company IS MAKING MONEY TODAY and putting it back in the ground to fund the expansion. Genco has about C$2 million in the bank and has no plans for additional market financing at this time. The insiders own about half of outstanding shares and there are no cheap warrants or options hanging over the stock. In fact the management is very wary of stock dilution. For instance, a number projects the company looked at for acquisitions has been turned down because they did not offer as much value as there already is in the stock and therefore would mean dilution to existing shareholders. At the present time the company is considering five more prospects.

Endeavour Silver (TSX-V: EDR)
Market Cap on 7/25/05: C$33.04 MM

Endeavour Silver has been among the most aggressive silver juniors. EDR owns 51% of Santa Cruz mine in Mexico and is the operator. It has an option to acquire the remaining 49% for US$4 million by 2008. The company is projecting silver production to triple to 1.3 million ounces in 2005. EDR is also embarking on aggressive exploration program to expand silver resources from 10 million oz to 20 million by the end of 2005.

Endeavour is active in acquiring silver assets in the area and recently bought 9 properties from Penoles. Interestingly, in addition to 3% NSR, the deal provides that ore mined from these properties is to be sent to Penoles for smelting. Some of these properties have historic silver production and could have significant potential. EDR is planning still more acquisitions in the near future and has one the best marketing teams working for the company.

First Majestic (TSX-V: FR)
Market Cap on 7/25/05: C$43.99 MM

First Majestic is another junior silver producer that has been very active in Mexico. Even though it's a relatively young company they control a producing mine in Mexico and have excellent prospects to build on their initial success. The company is likely to fall short of its target production of 1 million ounces of silver for 2005 mainly due to equipment problems. First Majestic cancelled proposed C$15 million financing earlier this year due to falling stock price amid a broad sell-off in silver stocks, despite holding up remarkably well compared to its peers.

Still, FR has been busy in the field as much of the work, like restoring access to lower areas of the mine, needed to be done mining could be possible. The company now expects to produce 0.5 million ounces of silver this year and up that to 2 million ounces in 2006. At last reporting First Majestic showed 80,000,000 million ounces of silver in the inferred resources category. A twenty five thousand meters drilling campaign is under way to upgrade the quality of those resources. At the same time the company is expanding the mill capacity at the La Parrilla Mine to 400 thousand tons per day. The company believes that the drill program at its Chalchihuites group of properties, that is host to 4 former producing mines and only 40 miles away from La Parrilla, will yield sufficient results to eventually expand the mill capacity to 1000 tons per day.

In addition the company is looking at other prospects with a view to acquiring new properties. Expect the company to do another financing before the year end. The size of it is likely to be determined by the stock price at the time and could be anywhere from C$5-15 million.

Macmin Silver (ASX: MMN)
Market Cap on 7/25/05: AUD$36.01 MM

Macmin is the only primary silver company in Australia. It has 55 million ounces of silver equivalent (some gold credits) in resources and a significant gold kicker through it's ownership of 30% stake in New Guinea Gold which in turn is planning to be producing 40,000 ounces of gold starting 2006. The company is well on its way to becoming a silver producer from its Twin Hills Project in Texas, Queensland. Mine construction is under way and should be entering final stages. Production is scheduled to commence late in 2005 at an annual rate of 2.5 million ounces of silver (equivalent). It can be increased to full mine capacity of 3.5 million oz/year if needed.

Processing of thirty ton silver ore sample is under way for trial silver powder production for marketing purposes. Macmin will employ open pit heap leach processing but unlike other silver producers may be able to market its silver powder directly to end users. This is possible due to its metal recovery process called "electrowinning". Tests are being conducted to assess the suitability of Macmin's product for various end user applications ranging from electronics to medical and construction fields. If successful, this may result in higher realized sale price per ounce of silver and add to the bottom line. Of course, the company can always go the traditional route and sell its silver to refiners.

Sterling Mining (Pink Sheets: SRLM)
Market Cap on 7/25/05: $49.50 MM

Sterling Mining is now producing silver from its Baroness Talings Project. The company originally forecasted 30,000 ounces/month of silver based on conservative grades of 2.4 oz per ton (compared to historical data of 3.0 opt). In our last update we provided for these and other factors by further reducing the 360,000 ounce annual production forecast to 200,000. Now that the first set of VATS has been successfully completed the company intends to proceed with its plan to build the second facility. Since production just commenced in Q2 2005, Sterling intends to update projections once it gains additional operating experience at the facility.

Sterling conducted initial tests with material from its San Acacio project and came back with some interesting results. After processing "fines" from the San Acacio dumps and backfill, it has confirmed metallurgical tests that this material is amenable to the leaching process used at Baroness. The company appears to be excited about these findings and believes that there is a real potential to significantly expand production rate in 2006. Sterling already obtained approval from the authorities for a 667 ton per day third facility at the Baroness intended specifically to process San Acacio material. According to Sterling rehabilitation is under way to allow access to lower underground workings. Prior drilling of over 600 meters resulted in an inferred resource of 14.2 million ounces of silver. The Spanish mined 32 million ounces from the San Acacio over hundreds of years, with a cutoff grade of 30 ounces of silver per ton so the company is very optimistic about processing material from San Acacio in the near future.

At the Sunshine the company completed its Phase II Mine Plan, with the final Phase III Mine Plan to be completed in November 2005. Key rehabilitation efforts are ongoing with particular emphasis being placed on the Silver Summit tunnel and hoist. This hoist is necessary for a secondary escape way, i.e. so that the project is not dependent on solely the Jewell shaft (which is currently in operation). In addition to ongoing maintenance and rehabilitation work, the company has contracted an ex-Sunshine geologist to do computer modeling and work on planning the exploration program.

The company retained two high level financial executives including a former treasurer of Coeur D'Alene Mines, so progress towards a higher listing should be forthcoming. Of course, until the company moves up to a higher exchange fund buyers are likely to remain on sidelines, but make no mistake, they are watching this one closely.

Silvercorp Metals (TSX-V: SVM)
Market Cap on 7/25/05: C$115.27 MM

Silvercorp Metals (Formerly SKN Resources) is an emerging silver producer in China. SVM is advancing its Ying Project to formal production. In the mean time, it has been shipping hand sorted ore from the 3 shafts being sunk as part of mine construction directly to smelter. That was possible due to phenomenally high grades of silver (up to and over 100 ounces per ton) as well as lead (up to 55%) and zinc. Silvercorp reports measured and indicated resources but that is because the grades are so high that there is no need for further drilling and researching. Reportedly, silver grades are even higher at depth which makes the area similar to the Silver Valley in Idaho. Interestingly, the company is cashflow positive on an operating basis even before commencement of formal production, but it needs financing for capital expenses and to develop its other properties.

We attended the company's presentation at the IIC NY Show and were very impressed. The Silvecorp has been on the fast track with developing its Ying Project and stock price is steadily rising. Silvercorp recently closed a financing that was well oversubscribed. So much so that the company increased the financing from initial C$4.0 MM to C$6.4 MM. The company has been getting a lot of press lately, largely due to efforts of ever so dedicated Cathy Fong, its VP of Corporate Development. We believe this company has all the ingredients needed to build on its success and there is plenty of upside potential left in the stock.

Sean Rakhimov

Editor, http://SilverStrategies.com
Email: Sean@SilverStrategies.com

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the author and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. The author, entities in which he has an interest, family and associates may from time to time have positions in the securities or commodities discussed. No part of this publication can be reproduced without the written consent of the author. © Copyright 2005 by Sean Rakhimov.

US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.

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