Some of the biggest silver producing companies on the planet see a unique opportunity forming quickly.
The junior silver miners and explorers are cheap and perhaps very undervalued by some measures. I'm not going to speculate here on specific names...on the other hand, maybe I will.
When I see Silvercorp (SVMFF.PK), which trades on the Toronto exchange under the symbol SVT.TO, down around its 52-week low, I wonder if some of the top feeders in the silver "food chain" like Pan American Silver (PAAS) can't see this as well.
Silvercorp is a super-high-grade Chinese silver producer, which the folks at Casey Research seem to think is "the victim of a drive-by 'market perform' forecast" by a disoriented analyst.
Here's a company that posts a wonderful record profit (US$108.4 million in FY08 vs. $39.8 million in FY07) and has reported discovering more super-high-grade silver and gold mineralization.
It is on track to deliver all the growth that the company has promised for this year including triple the production at one one its mines and the market brings it down by over 50%. What gives?
Yeah I know, "where there's smoke there is fire", but the only smoke an objective analyst would see might come from what he's smoking. This is a great buying opportunity of a quality silver producer.
The same thing is going on in Latin and South America, and one of the big silver firms knows it quite well.
Pan American Silver hopes to take advantage of tight credit conditions by seeking out cash-strapped development-stage projects to augment its roster of Latin American silver mines, the company's chief executive said on Friday.
"There's certainly a window that is opening that in my view was not open before," Pan Am CEO Geoff Burns said of the recent decline of valuations among exploration companies.
"Probably in the last four months, we've really noticed junior companies that have projects, all of a sudden they can't get financing," he said in an interview.
Now, rather than scouring the market for affordable targets willing to do a deal, Burns' phone has been ringing with cash-strapped juniors looking for a larger partner.
"Before it would be us approaching somebody else... now it's coming back the other way," he said, adding that he expects the company will be able to announce a deal before the end of the year.
Burns said one or two acquisitions are key to Pan Am continuing to expand its production past 2011. Pan Am's silver output is seen rising by around 60 percent by 2011 from last year's levels. Take a look at the chart below of the share price.
PAAS is looking like it wants to go "on sale" again, and remember it is selling for only 13 times forward (12 months) earnings.
These are people who know how to "cash in" on the silver boom and the opportunities to buy or joint-venture with smaller companies.
They're not the only ones either. Hecla Mining (HL) will have an earnings conference call on Tuesday, August 5th, and it wouldn't surprise this silver bull to hear about their plans to "buy low" into the low-priced silver junior market.
Remember, Hecla is by some calculations the lowest-cost silver producer on planet earth and they have the Greens Creek Mine all to themselves now.
They are growing in Latin America as well and have a 100% interest in the San Sebastian unit in the state of Durango, Mexico
So who might be tempted to gobble-up Silvercorp? How about Jinshan Gold (JINFF.PK) as a possible suitor? Or how about another Asian producer? The possibilities are definitely there.
Meanwhile, Pan American's Burns said he also expects silver prices to go back above $20 an ounce before the end of the year, due to strong industrial demand from Asia and the emergence of silver as an alternative to gold as a hedge against U.S. dollar weakness.
I calculated that if silver traded at a fair ratio to the price of gold (say 30-to-1), silver would rise to $33 an ounce when gold goes back to $1,000. Is that possible? In the silver market, all things are possible, including buying sprees and cornered markets.
Disclosure: Author holds long positions in SVMFF.PK, PAAS, JINFF.PK and HL