Junior Mining Companies: The Treasure of the Sierra Madre

Includes: EWW, EXK, SLV
by: Trey Wasser

It has been estimated that about one third of the silver currently in circulation was produced in Mexico. Mexico has been the world’s largest silver producer for most of the past five centuries, perhaps longer. Silver mining in Mexico started in earnest with the conquest of the Aztecs by the Spanish Conquistadors in 1521. Columbus established a Spanish beachhead in the Caribbean on his second voyage to the New World. From there, Queen Isabella sent a law-school-dropout-turned-explorer named Hernando Cortez in search of gold and tin. The year was 1519. What Cortez found when he landed on the Mexican coast at Vera Cruz was a much more sophisticated society than Columbus found in 1492. Montezuma ruled an Aztec Empire that was already mining metals and drinking hot chocolate from golden goblets.

Prior to the Spanish exploitation, Mexico’s rich mining history dated back as far as 950AD. The Totec and Mayan civilizations had huge mining operations. They were master craftsmen and are credited with being some of the first metallurgists; melting their gold, silver and copper and creating masterpieces that defined the term “precious metal”.

In a few short years Cortez had worked his way inland and defeated Montezuma. The once proud Aztecs were reduced to being miners and laborers filling the galleons with Mexican riches headed for Spain. Under Spanish rule, Mexico produced hundreds of million ounces of gold and silver for over 300 years. In 1810, during the War of Independence from Spain, the mining industry was literally shut down. Political unrest in Mexico lasted over 100 years and included a Civil War in the 1850’s. Continued meddling by the Europeans and US support of the dictator Porfirio Díaz Mory led to the Mexican Revolution in 1910. Even though the Mexican Constitution was established in 1917, it would be another 20 years before civil unrest in Mexico would subside and post-revolutionary industrialization could truly begin.

The vast mineral riches of Mexico extend from Sonora to Oaxaca, principally in the Sierra Madre Mountains. Early mining was very easy. Gold and especially silver/copper were simply found on the surface and dug until the ore was depleted or digging got too difficult. They then moved in either direction and began digging again. Industrialized mining through much of the mid 1900’s was not much different. Cutoff grades for pit mining were typically 15gpt gold and 300gpt silver. Most of the mines were privately held by the richest families who had vast land holdings and mined the “easy pickings”. While Mexican silver production has regained its earlier prominence, they were literally just scratching the surface of the underlying ore.

Tales of riches soon began to attract the miners and prospectors longing for the gold rush days in America. They did not have to go very far. The Sierra Madre in Northern Mexico were underexplored compared to the traditional mining regions of Taxco, Pachuca and Zacatecas, closer to Mexico City. These tales were depicted in B. Tavern’s 1935 novel, “The Treasure of the Sierra Madre”. Captivated by the timeless story of gold, greed and betrayal, John Huston immortalized the story with his 1948 film by the same name. Starring Humphrey Bogart, the movie was one of the first films ever to be shot on location and is a timeless classic to this day.

Industrias Penoles (established in 1887) was one of a few companies strong enough to survive the chaos and revolt in Mexico. In the 1960’s, new law mandated that all mining companies must be majority owned by Mexican Nationals. Penoles became a diversified company and dominated mining in Mexico. Backed by a public offering on the Mexican Bolsa in 1968 and $500MM in loans from US banks, Penoles launched an eight year exploration program. By 1977, they had increased reserves ten-fold and re-established Mexico as the world’s largest silver producer.

The next big change in the Mexican mining industry came in the early 1990’s. In 1992, mining laws were changed to allow foreign ownership of Mexican mines. In 1994 the North American Free Trade Agreement [NAFTA] was implemented and the Peso was devalued. Low metal prices and a devalued peso caused many mines to be shut down. Many, already enriched families, “threw in the towel” and moved on to other businesses.

But, a new boom was just beginning as private investors, geologists and Canadian miners quietly began to accumulate these established mining concessions in Mexico.

Today, mining in Mexico may be more exciting than ever. Many of the old mines, closed in the 1990’s, are being re-opened by junior mining companies. For the most part they are fully permitted. Many have existing reserves and working (or upgradable) infrastructure. This has allowed many juniors to move from IPO or “shell company” and into production without doing years of drilling to determine feasibility. This “boot strap” mining method is proving to be very viable in Mexico. Several companies have chosen to use their capital to re-open existing mines and quickly generate cash flow for developmental drilling to expand reserves. The old saying is “the best place to find gold is at a gold mine”. This is proving to be true in Mexico where modern engineering, geological modeling and drilling techniques have never been implemented.

The list of “boot strap” producing juniors is long and getting longer. These names include Endeavour Silver (NYSE:EXK), Impact Silver [IPT:CDV], Great Panther [GPR:CDV], ECU Silver [ECU:CDV], Excellon Resources [EXN:CDV] and First Majestic [FR:CDV]. In addition there are a host of companies that will bring mines back into production in 2007. These names include Columbia Metals [COL:CDV], Morgain Minerals [MGM:CDV] and EXMIN Resources (EXM:CDV).

Bob Moriarty of 321 Gold has written many pieces on the Mexican Mining Industry. His work is excellent and I love to read his stories of touring mines around the world. Bob has traveled the Sierra Madre extensively and is a big fan of the “boot strap” mining method. He is very bullish on Mexico and especially fond of Impact and Great Panther. Steven Saville, of TSI, is bullish on First Majestic. I am a subscriber of TSI. Steven Saville is, in my opinion, the most savvy market analyst on the Street.

My personal favorite is EXMIN Resources. After publishing my report “Other People’s Money”, I received a call from CEO Karl Boltz. Karl wanted to correct my spelling errors and update me on his rapidly evolving Company. His enthusiasm for EXMIN and Mexico is intoxicating, to say the least. EXMIN is now up to 17 projects in 12 Districts in the Sierra Madres. He wanted to clarify that Dr. Gibson, EXMIN’s VP of Exploration, consulted for Hochschild on properties being sold by Grupo Mexico, not for Penoles themselves. Apparently Hochschild looked at dozens of projects in Mexico before deciding to JV with EXM at Moris. Boltz also disclosed that their largest institutional shareholder is US Global Advisors [GROW].

He clarified that the April warrants were from the private stock conversion and were re-priced when they did their first offering. The warrants are mostly held by management and insiders and will be re-priced to $.75, in April, for 3 more years.

He gave me some insight into the Penoles drilling program at Maguarichic. He indicated that 2006 drilling results, released last week, was strictly part of an orientation program. These locations were high on the ridges and meant to define targets lower in the valley and locate road access. This drilling was not expected to yield the type of bonanza results that he is looking for from the 2007 drilling program.

Boltz really impresses me. He is building his Company the right way. There are many junior companies that trade only in the pink sheets and get their first actual listing on the Frankfurt Exchange. Caveat emptor, "Let the Buyer Beware", of any company that can’t even muster a TSE Venture listing. Boltz wants to quickly move EXMIN from the Venture to the Toronto Exchange and pave the way for an Amex listing. He knows how a stock traded in the Pink Sheets/Frankfurt Exchange can be manipulated and he does not want that for his shareholders. I applaud that restraint.

Karl is very clear about one thing, they are explorers, not miners. They want to find the ore and partner with the experienced producers to do the mining. At this point, they are well partnered with Hochschild and Penoles. With 15 additional projects, I expect Boltz will continue to attract experienced mid-tier and senior partners.

The author is long EXM and has no positions in any other stocks mentioned in this report.