Source: The Gold Report
Resource nationalism is becoming a growing problem for many mining companies. In this exclusive interview with The Gold Report, Sean Rakhimov, editor of SilverStrategies.com, shares his insights for safely investing in silver mining companies in a volatile world.
The Gold Report: You have written that the pace of global resource nationalism is gaining momentum, affecting the supplies and prices of many commodities. You believe resource nationalism in all of its current forms is likely to affect silver more than other metals, particularly investable silver. Would you explain why?
Sean Rakhimov: The effect of resource nationalism on the physical supply market has not been significant yet, but I do think it's going to affect future supply. Large-scale projects are already affected.
Combined, these projects represent about a billion and a half ounces that were expected to be coming on-line at this time. Yet sales are nowhere on the horizon and it's largely due to the actions of the governments where these projects are located.
TGR: Can we go back to your original thesis of how resource nationalism is going to affect investable silver?
SR: Venezuela has been on that path of resource nationalism for the longest time. Ecuador is on that list as well as other countries. I think any new money coming into the sector will likely be diverted away from those countries. Look at Bolivia, for example. It has a number of operating mines, but it turned around and nationalized the exploration projects.
TGR: Why did Bolivia nationalize South American Silver's silver project instead of a project that it could take over that doesn't need developing?
SR: I don't have the definitive answer. Most likely it was a political decision to appease a certain constituency. In addition, the decision had a pragmatic element in that if you nationalize an operating mine, the implications in the international trade circles are further reaching and more negative. It could lead to some trade sanctions by other countries and so on.
TGR: In an article entitled "Shrinking Silver Space" on SilverStrategies.com, you argue that silver investors are largely limited to Mexico, Canada, the U.S., Europe and to a lesser extent Australia. To the casual investor that seems like a fair number of choices. Isn't that enough?
SR: It may be enough, but I think the underlying theme here is that perhaps it is advisable to avoid the jurisdictions we mentioned earlier. Their actions demonstrate that your money is at a greater risk if you're investing in those jurisdictions
The key thing is that some monster projects located in risky jurisdictions are not coming on-line and future silver supplies are going to be affected. Silver supply growth may not be there a few years from now. Right now the supply is growing about 3% a year, but I don't see a lot of big projects coming on-line.
Lack of silver supply growth is going to be significant because the demand is increasing at a healthy pace. I liken this event in some respects to what's going to hit the uranium market at the end of this year when Russia stops its megatons to megawatts program, which would probably take away a good portion of the current uranium supply worldwide. Another event with similar implications is the mining labor unrest in South Africa. That affects the platinum and gold markets, but the major impact is squarely on the platinum market. These are major events for the sectors.
TGR: Do you think the resource nationalism is going to result in a significant rise in silver prices?
SR: Over time, yes. We're not going to get a billion and a half ounces of silver from the aforementioned projects in countries with unfriendly mining jurisdictions. That's one and one half years of annual worldwide supply.
TGR: Do you think that we're ever going to get to what Eric Sprott is saying, that eventually silver will return to its historic 15:1 silver-to-gold price ratio?
SR: I think it's in the cards at some time toward the end of the cycle, probably by the end of this decade.
I don't have a more specific time frame. That's mainly because this cycle is different from a number of previous ones from recent history; this one is a worldwide crisis and we're talking about systemic problems with the global currencies. The four dominant currencies in the world—the U.S. dollar, euro, British pound and Japanese yen—are shaky. We're talking about 80% or so of the currency market. This cycle has been going on for a long time. If this were an ordinary cycle, I think things would have been played out by now. We're about 10 years into it.
TGR: Is this the beginning of a seismic shift?
SR: Yes, this cycle is larger and more severe by an order of magnitude, and because of that it may take longer. There's a lot more at stake and a lot more powerful forces are involved. These forces will be much more active in trying to affect the outcome or timeline of events and they have already.
TGR: Do you think some of the midtier and larger silver producers will use some of their burgeoning cash flow to pick up some underpriced assets?
SR: Absolutely. Usually the mergers and acquisitions in the sector happen in waves, often at the top or bottom of the market. We had an intermediate term top when gold hit $1,800/oz in spring 2011 and silver hit $49/oz.
When the cycle is topping, large companies are usually flush with cash and they're looking to grow the company because that's the expectation from the market and investors—to demonstrate future growth. Companies have two ways to spend it: dividends and growth—buy somebody, increase production. Larger companies' balance sheets are in much better shape than exploration companies or junior companies. In addition, their valuations are higher, trading at several times better valuations than juniors. So these firms go for value and buy companies that are trading very cheaply.
TGR: What are some companies that are trading very cheaply? Are there some potential takeover targets that you think might be enticing?
SR: Merger and acquisition activity dovetails with what I have been saying about resource nationalism. A lot of capital has been flowing into Mexico and other "safe" jurisdictions.
TGR: You once told us that you never sell silver bullion, but is now a good time to buy it? Or would you wait?
SR: It's always a good time to buy silver. I don't do much timing as a trading strategy. I think you should be buying silver when you have excess cash.
TGR: Is silver any closer to being purchased as a reserve currency by the world's central banks, as you once speculated it would be?
SR: I think silver will be purchased at a point where gold is priced out of range for small central banks. The central banks are well aware of the gold/silver ratio, which is around 50:1 now and should be going down. The trend is in that direction and, as I mentioned earlier, I expect it to hit 15:1. I'm not sure how exactly it will play out. As discussed earlier, this is a much larger cycle than the last several, and a lot more is at stake here. And there will be a currency crisis. We're beginning to see governments around the world buying gold to add to their currency reserves and gold is still within central banks' price range. But if gold goes to, say, $5,000/oz, as is routinely forecasted by many these days, are we going to see governments continue buying it as they do today? I don't know. Maybe they'll buy silver, maybe they'll buy palladium. But at some point I expect countries to buy silver because, in addition to being a precious metal, it is also a strategic metal like the rare earths or uranium. Silver is an important industrial commodity and countries that don't have any will have to either source it elsewhere including the open market or export manufacturing to some place where silver is available.
TGR: Thanks for your time.
Sean Rakhimov launched his website, SilverStrategies.com, in 2004. His writing has appeared on such Internet portals as Le Metropole Cafe, 24hGold, 321gold, Kitco, GoldSeek, Gold Seiten and The Gold Report. He previously designed financial systems for the investment banking business, learning about options trading, securities lending, payments processing, clearing and settlement, fixed income securities and margin transactions. Rakhimov is constantly looking for value opportunities in new and established stock stories.
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