Last week, I started telling you about my trip deep into a Mexican silver mine. Today, I’d like to finish my story.
But first, have you been watching gold and silver move? Holy moly!
Gold prices soared almost $18 last Thursday as China’s central bank chief said the country was eyeing “lots of instruments†as alternatives to U.S. dollar reserves. Although the yellow metal has since pulled back, the excitement in the gold market is palpable.
Silver? It’s outperformed gold over the last few months! I think fundamental forces are lining up to send silver charging to $13.50 … $15.00 … and beyond. To me, any pullback is an absolute gift to anyone who hasn’t gotten in on this raging bull market.
Now, let me tell you more about what I found in Mexico …
A Sizzling Silver Miner
South of the Border
There is an excitement in Mexican resources that is hard to put into words. I saw it in the eyes of the hard-working miners going down into the mine I visited.
Let me tell you, my trip was fun, but I wouldn’t want to do that every day. At times, the clouds of dust would envelop us so thickly that our miners’ helmets were dim bulbs in the surrounding murk. That’s when I could really sense the tons of rock over my head.
But the miners do it happily. They’re very good at what they do, and in a country where too many people still live on $5 a day, their jobs are considered very good ones.
After I got out of the mine, I toured the mill where all the rock is crushed up so the silver can be extracted. I saw the furnace where liquid silver is poured into ingots — a process that should crank up to full production in the very near future. And I actually got to hold one of these 55-pound silver chunks in my arms. It was heavier than my four-year-old son, though not nearly as wiggly. 
I spent the whole day investigating the company’s operations, but as sundown approached, it was time to go. We jumped in the trucks and went back to the plane, which was parked in a pasture. After chasing the horses out of the way, we took off.
On the way in, we flew over the foothills of the Sierra Madre. On the way out, we headed in the opposite direction, over the big Sierra Madre. Many peaks were bald fists of rock, but most of the range is a verdant carpet of green hiding an enormous mineral wealth beneath.
At least sixty minerals claim Mexico as their type locality, meaning that they were first found there. In addition to silver and gold, Mexico’s treasure trove of mineable metals includes copper, iron, molybdenum, lead, zinc, manganese, arsenic, and tellurium.
Every now and then, we’d fly over a mountaintop that had a short landing strip hacked out on it. “Why would anyone put a landing strip up there?†I asked one of my guides.
“See all that green stuff growing around it?†he replied. “That’s marijuana.†It just goes to show how desperate some citizens are for opportunities. This is one reason why many Mexican state governments are so accommodating to the new wave of mining business. The new jobs give hope to their people.
We finally touched down on an asphalt airstrip by the Mexican coast near sundown. We’d won our race with the sun. And I came away with a treasure trove of information on one of the great miners in my Red-Hot Canadian Small-Caps portfolio. Of course …
There are Many More
Attractive Mexican Miners
Waiting to Be Discovered
I just can’t understand why so many Wall Streeters are rushing to stick a fork in the precious metals boom, and ignoring an abundance of great companies in the process.
Maybe the big money boys like selling the same stocks over and over again because it’s too much work to get out there and find the up-and-comers. But while they’re busy trotting out the same old fish, I’m finding the sleeping giants of metal.
For example, as I was leaving for my trip, I got a call from an official at another Mexican silver mine. He suggested that as long as I was “in the neighborhood,†I really should stop by and see what they were discovering on their property near Durango.
And when I got back to the office, there was a message blinking on my phone from yet another miner bringing a potentially oh-so-rich silver/gold project online south of the border.
These are potentially huge projects … and yet the companies remain relatively unknown. Some of their stocks are already doing well, so I can only imagine what will happen when the rest of the world catches on. Just look at the chart to see what another Canadian/Mexican miner — already in my Red-Hot Canadian Small-Caps portfolio — has done recently!
This stock is taking off partly because it’s moving to the Toronto Stock Exchange (TSX) from the TSX-Venture, the Canadian index for smaller, more speculative stocks. A couple of other stocks in my portfolio have already made this same move … and it proves a boon to their stock price every time.
But there are other forces driving stocks like this higher … the same forces driving the price of silver higher. Just four of them:
- The World Jewelry Confederation, an industry trade group, expects China, India, and Russia to stand at the center of a double-digit rise in silver consumption in the coming years.
- According to research consultancy CPM, there were around 2.2 billion ounces of silver held in above-ground stockpiles in 1990. Today, there are probably only about 300 million ounces. That’s a 50-year low!
- Industrial demand for silver is hot and getting hotter. Silver is the best metallic conductor of electricity, and uses for it are growing. For example, newly developed silver-zinc batteries can run notebook computers for hours longer than lithium-ion batteries.
- The silver exchange-traded fund, SLV, is a roaring success. It already has 104,735,443 ounces of silver — that’s way, way up from the 21 million ounces it started with back in April. And it’s going to get bigger. The SLV filed papers to issue another 16,822,727 shares in its silver trust, representing, at 10 ounces per share, another 168 million ounces of silver. That will effectively increase the size of the trust by more than 150%. This new demand on the silver market is huge.
There are other factors as well … all pointing the way higher for silver. Remember, silver mine production rose by 3.4% (to 642 million ounces) in 2005, and should rise a similar amount this year. But demand is growing at about 3.8% per year — outpacing supply.
Now, will production from all these new mines in Mexico depress the price of silver? That could happen, but history shows us that about a third of new mine projects suffer serious delays. Moreover, I believe these new mines will be lucky just to keep up with demand. If anything, these sleeping giants of metal are just starting to awaken … and enormous profits will be waiting when they do.
If small-cap stocks aren’t your thing, that’s okay. There are some great diversified precious metals funds that should also do very well in the months ahead. For example, Frank Holmes and his crew over at U.S. Global Investors are doing great work. His World Precious Minerals Fund (UNWPX) is an excellent choice. It gets five stars from Morningstar, and beats its peers in terms of returns and costs.
But if you can see the potential in small-caps, it’s not too late. You can sign up now for my Red-Hot Canadian Small-Caps.
Yours for trading profits,
Sean
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