Doug Hadfield's  Instablog

By Doug Hadfield, Resource Intelligence TV

With the global economy slowly finding its footing again and gold bugs profiting nevertheless from ongoing uncertainty in the markets, we sought carefully for just the right analyst for our latest segment of resourceINTELLIGENCE TV, Interview with an Expert. (Click HERE to go directly to the video interview with Mr. Melek)

Melek told us that copper remains BMO Research’s preferred commodity today.

The reason for this, Melek told us, is that China is coming “back to trend”, which is fundamental to long term global economic growth.

It turns out that unlike other sectors such as gold, rare earths and coal, China doesn’t produce much copper relative to its consumption, Melek said. “That means they’re a big net importer of copper. They can’t distort the market like they have with other metals.”

BMO also sees fairly robust demand going forward not only from China but increasingly from India and other developing countries in the long term as they develop infrastructure and capacity.

“We’re going to continue to see increases in urbanization and also steady growth in the developed world,” he said.

Then there are the supply side issues with copper that also contribute to tight fundamentals. Melek says that there are only a limited number of new copper projects in the pipeline. Add to that issues with labour negotiations at major producers around the world and “that means that the surplus for 2010 may be smaller than the consensus is thinking.”

In the big picture, Melek sees Chinese and developing world demand for copper as the main driver, but perhaps surprisingly he also sees short term growth from the US as an important factor driving the fundamentals.

It turns out that although the US employment is still suffering deeply post the “great recession”, it will still see demand for copper grow, which hasn’t happened for some time.

“If you recall we had a massive decline in housing in the US, destruction of the auto sector and now both are in recovery mode… I acknowledge that the levels from which we’re coming are low, but growth is growth and it will contribute to positive growth which we haven’t seen for a while.

“For this year and into 2011 we’re going to see the emergence of the  US and the rest of the developed world as a driver for commodity demand and as industrial production and restocking takes place. Over the next couple quarters it will be the developed world that will be the driver of commodity markets.”

Driving this, says the senior BMO commodities analyst, are the massive stimulus packages erected by the US and other western governments.

“[BMO] is nowhere near as negative in their outlook for the US as a lot of other observers are. The short term looks fairly robust and in no small way because of the stimulus that is yet to be spent. Only 20 to 25 percent has been spent. There are  hundreds and hundreds of billions of dollars yet to hit the real economy — that hasn’t happened yet and it’s about to.”

BMO expects a deficit scenario in copper’s fundamentals by 2011, which will add further upward pressure to the price, which is anticipated to average $3.30 through 2011. Unfortunately, that doesn’t mean that there will be no unraveling of the sector before then. The risk of a near term correction is real for copper and other higher risk metals.

“They’ve gone up quite a bit and are up there relative to the cost curve,” Melek said. “Imports of copper and others into China could slow down. [China has] been importing at a record pace and at this point relative to current demand and supply numbers it looks like they could have temporarily imported too much.”

He pointed out that in an environment where equities are correcting with an attendant reduction in risk taking, commodities could suffer.

Nevertheless, long term demand growth and higher prices are the outlook, according to BMO. This, Melek said, is positive for the economy in general, and will lead to spin off effects in the broader economy, in sectors such as telecommunications services and retail.

Resource Intelligence TV: Better due diligence for resource investors, stock brokers and analysts. A web-based resource investor relations program. Interviews with some of the best and brightest minds in the mining and exploration investment sectors.

Disclosure: No Positions

By Doug Hadfield, resourceINTELLIGENCE TV

Eric Fier is a compulsive list maker. Each meeting he chairs is carefully orchestrated with an agenda listing who is attending, what will be discussed, when and by whom. Each detail is carefully scrutinized – breaks, meals, introductions and handouts. Even time slots for comments and questions are judiciously peppered throughout.

“I think the team in Mexico really likes me,” Fier quipped to me at the company’s kick-off meeting to launch construction of its Santa Elena Silver-Gold Mine in northern Mexico. “And they like me even better when I leave.”

Click here to watch Eric being interviewed by resourceINTELLIGENCE TV’s Doug Hadfield.

Eric is the Chief Operating Officer for SilverCrest Mines (TSX.V: SVL). His bailiwick is no less than the construction of the company’s new Santa Elena mine in northern Mexico. The completed mine will process 2,500 tonnes per day over a mine life of eight years producing 35,000 to 45,000 ounces of gold and 600,000 to 1 million ounces of silver per year . The construction and mining schedules have been planned with extraordinary detail and regard for timing and cost optimization. Eric believes in the “best bang for the buck” approach.

In 2008, when I first visited the mine site at Santa Elena, I discovered a company that had in two years acquired, explored, defined and made a production decision on a 100+ year-old previous producer. Consider that about one in 10,000 exploration projects actually becomes a mine (Source: The Ontario Mineral Industry Cluster OMICC.com). In that respect, not only is it amazing that SilverCrest has progressed so quickly, but also that they have progressed to this stage at all.

Mine building requires a collection of traits that few possess. The most important are the dogged tenacity and foresight necessary to whittle down to just one a list of tens of thousands of projects. That one project must have the merits required by a particular juncture in time. This means more than foresight; it’s a kind of clairvoyance, a present understanding of future market fundamentals.

Thus, another essential trait of the mine builder is good timing. Eric’s detailed schedules are the backbone of his sense of timing and foresight. Like so many railway ties that hold railway tracks together, each bulleted point in a schedule ensures the plan progresses on schedule and within budget. I saw this first hand during a site visit to Hermosillo (where the company’s Mexico offices are located) and Banamichi (where the mine is being constructed).

Banamichi is one of those little towns in Mexico that seem to exist out of time with few of the trappings of modernity. On route to the mine, our cavalcade of pickups aroused warm smiles and welcoming waves from local townspeople. SilverCrest has brought with it a steady flow of business to the tranquil town, a strong working relationship and the promise of something else: an industry that Banamichi can call its own.

Mining is one of the oldest modern professions in Mexico. The very purpose of the Conquistadors’ 16th century voyage to Mexico was – apart from acquiring new lands and converting natives to Christianity – to seek rich new sources of gold and silver. Once the Conquistadors had subdued the Aztecs, they fervently mined what they could: Within two years, mines in Mexico had doubled the global supply of silver.

Today mining in Mexico is less a task of making new discoveries than it is determining which past producing mines has enough gold and silver in its veins, tailings and mine workings to economically revisit with 20th century processing plants like the Merrill Crowe and the carbon-in-leach (CIL). Santa Elena has proved to be such a past producer.

For over 100 years, the land that comprises Santa Elena has been held by a family of cattle ranchers and prospectors. SilverCrest purchased the land for $4 million in scheduled payments which has now been paid and 100% ownership passed to SilverCrest.

If the company mines its existing reserves and resources, it will recover more than 400,000 ounces of gold and over 15 million ounces of silver. Although the mine is not huge, the economics are excellent. At $1,000/ounce gold and $20 silver the Pre-tax Cash Flow is $193 million. At $900/oz gold and $17 silver the Pre-tax Cash Flow is $156.9 million. The mine’s start-up capital costs are as cheap as chips – $20 million.

One geologist from Hermosillo told me that one of the more lucrative professions in Mexico is prospecting and staking unstaked deposits.

“Eets very good business in May-hi-co,” he explained, “to travel the country and find and – how do you say it in English, to stack the claims?”

I wracked my brain for a few seconds. “You mean stake the claims?” I asked.

“Si, it’s a very good business here in May-hi-co.”

SilverCrest Mines exists on the other end of the staking equation. With an alumni of geos, metallurgists and prospectors that hails largely from the El Dorado Gold class of 1997, SilverCrest acquired and fast tracked Santa Elena between 2006 and 2009. Along the way, the management team “wowed” Macquarie Bank, Sandstorm Resources and Sonoran Resources, acquiring pre-construction and construction capital in favourable agreements and negligible dilution of 45 million shares outstanding.

The list of SVL employees from Banamichi (6 km from the mine) and capital city Hermosillo grows as the project nears its first pour of dore – the silver and gold blend bars the company will produce and send under armed guard to a refinery. Presently, the company employs a total of 5 at its offices in Hermosillo and another 40 at the mine in Banamichi. That includes contract employees involved in excavation and construction. SilverCrest anticipates about 100 construction hires after Christmas when work is in full swing.

As the team grows, so do Eric’s lists. His penchant for total commitment to schedules and plans has won him the respect of those involved in the mine. Although he has a background as a mine engineer, metallurgist and geologist many also laud his abilities as a public speaker. Eric is both unabashed and articulate before his audience.

Others, such as SVL’s Operations Manager and Chief Metallurgist Salvador Aguayo Salinas PhD told me that it was Eric’s commitment to the local community and the environment that inspired him most to join the project. Salvador left a career at the University of Sonora to head up the company’s operations in Mexico.

Cecile Munoz, who is the VP of Sonoran Resources – the company SilverCrest contracted to build the mine at Santa Elena – attributed Eric’s professionalism to the enthusiasm of the other key players on the project. “Mines build communities,” she told me. “Some mines have had a negative impact on the communities they are near. In this case, you have a dedicated, professional and responsible management team. That creates so many opportunities for a community like this one. It’s jobs, but it’s also more than jobs. This mine will bring opportunities to improve infrastructure here. Tourism. Even small things like laundry services will be required, so it’s not just direct employment we’re talking about.”

“It’s an incredibly complex process,” SVL’s VP of Finance told me of the process of mine building. “We may joke a little about Eric’s schedules, but they’re really what make the project tick as well as it does.”

The rapport among the team players – both Sonoran Resources and SVL – is palpable. President of Sonoran Resources, Jesse Muñoz told me that he and his colleagues have built over forty mines. This is a project he regards as one of the best.

“It’s really special to work with a team like this,” Muñoz said. “I’ve known Eric and Scott (Drever, President and CEO of SVL) for a long time and I know their level of commitment.”

Muñoz told me that Sonoran Resources is fortunate in that his expertise is a commodity in high demand. He’s a Merrill-Crowe specialist – Merrill-Crowe plants are used for processing gold and silver ore. With precious metals prices commanding historic highs, Muñoz told me, “We are blessed in that we can choose who we work with. We chose SilverCrest because the Santa Elena project has a lot going for it. It’s straightforward metallurgically, located right beside a town, well supported by the community, has high metal grades and excellent infrastructure. It’s the kind of project that mine builders covet because there’s so little risk involved.”

At the end of the kick-off meeting in Banamichi, which was attended by thirty key players involved in the construction of the mine, Eric outlined the schedule for the day. What followed was an exhausting programme of speakers, a mine visit and a barbecue to celebrate the kick-off. With that celebration, I realized, SilverCrest has proved that only by superior leadership and planning can an undertaking of this kind be successful. It brings to mind something T. Boone Pickens wrote in his book, The First Billion is the Hardest: “A fool with a plan can outsmart a genius without a plan any day.”

Disclosure: No Positions