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China's Silver Bull Market

Two Chinese Silver Stocks to Take Advantage of Booming Domestic Demand

Written by Luke Burgess
Posted July 30, 2010

july_2010_china_flag.pngA Chinese silver bull market is about to make history.

And with the world's largest population, increasing silver demand for investment and manufacturing could help drive prices worldwide — and spur significant gains for companies with silver assets in China.

The Chinese have used silver as a monetary unit for over a thousand years. But it was until only recently that China's silver sector was opened to investment.

And now, thanks to de-regulations of the silver market, China has become one of the premier silver mining countries in the world — with booming global investment interest.

The New Premier Silver Mining Country

Under the Mao Zedong administration, the Chinese government imposed strict controls over the silver market beginning in 1949. This made the private purchase of silver bullion illegal.

And it prohibited international companies from any ownership or rights to develop mineral projects in the country. This meant China's silver resources could not be fully explored or evaluated with modern techniques.

But after Mao's death in 1976, the Chinese moved away from a state-controlled economy.

And over the next three decades, China loosened the reins on the silver market and deregulated its mining sector, piece-by-piece.

5 Global Reasons to
Invest in Silver Now

  • Investment demand for silver has skyrocketed 522% since 2007.
  • World governments are hoarding silver; official sales have plummeted 83% in the past three years.
  • Above-ground silver supplies dropped 86% last year.
  • Industrial demand for silver has increased over the past decade, despite a 236% increase in prices.
  • Silver outperforms gold during bull markets.

Today, the country has streamlined the permitting and approval process and allowed silver companies to advance projects faster than many other countries in the world.

As a result, foreign investment has transformed the Chinese silver industry in the past ten years, turning it into the third-largest silver producer in the world today.

Since the de-regulation of the market, rapid economic growth boosted demand for silver — needed in everything from investment bullion and jewelry to electronics, photography, and silverware.

Rising personal income levels and a higher standard of living for billions of Chinese is expected to continue increasing silver industrial demand in the country over the next several years.

And now, thanks to a decade of wealth accumulation by Chinese citizens, there are also billions of potentially new silver investors that will further lift silver demand.

This is especially significant when you consider the average savings rate in China is 30%-40%.

China has the world's biggest potential for silver consumption.

Li Xiaoni, Vice President of China's Chamber of Commerce

The combination of growth in domestic consumption and manufacturing for export may continue to result in double-digit growth in Chinese silver demand.

And for silver companies working in the country, a healthy domestic market means premium prices.

Additionally, the geologic setting for silver deposits in China is particularly favorable, with the majority of known silver deposits poorly explored and exploited leaving the potential for significant new discoveries or expansion of current deposits.

A handful of public companies are working in the country today. Many have already made significant discoveries and advancements. Here are two Canadian companies that have done quite well over the past 12 months with significant silver assets in China:

Silvercorp Metals (NYSE: SVM)
july_2010_svm_chart.png

Share Price: $6.32
Market Cap: $1.04 billion
Website: www.silvercorpmetals.com

 

july_2010_svm.png
Ying Mine from above

Since commencing production in 2006, Silvercorp Metals has become the #1 primary silver producer in China and the 13th largest primary silver production firm in the world.

The company has enjoyed high profitability and large returns due to the exceptionally high-grade nature of its Ying deposit and the incredibly low-cost jurisdiction in which it operates.

Silvercorp has the lowest production costs among its industry peers. Most recently, the company's cash cost for production was an average $5.64 per ounce.

As a result, Silvercorp also has the highest gross profit margin compared to its competitors.

Since 2007, the company has increased silver production by 142%. And over the next three years, Silvercorp expects to continue boosting output by 84% from 4.6 million ounces in 2010 to 8.5 million ounces in 2014.

Meanwhile, Sivercorp continues to grow its resource base through continuous exploration of existing projects acquiring new development projects in multiple jurisdictions.

In total, the company has silver reserves and resources including:

  • proven and probable reserves of 122 million ounces

  • measured and indicated resources of 262 million ounces

  • indicated resources of 265 million ounces

Silvercorp is well-financed and has strong operations and large resources, not to mention no long-term debt.

Minco Silver (TSX: MSV)
july_2010_msv_chart.png

Share Price: $3.05
Market Cap: $124 million
Website: www.mincosilver.ca

 

july_2010_msv.png
Mine Development Plan for the Fuwan Silver Deposit

Minco Silver is an exploration and development firm focused on the Fuwan silver deposit, located in southeastern China.

This deposit is situated along the under-explored Fuwan silver belt, believed to host up to a total of 400 million ounces of silver.

Minco's Fuwan silver deposit currently contains resource estimates of:

  • 55 million ounces of silver reserves

  • 101 million ounces of silver resources in the indicated and inferred category

The Fuwan deposit is also fortunate to be located near well-developed infrastructure including immediate access to modern road, electric, water, railroad facilities, and a variety of services such as skilled and unskilled labor. This allows Minco to advance the Fuwan project at lower capital costs compared to similar sized projects.

In September 2009, a Bankable Feasibility Study suggested a silver mine at Fuwan could produce 5.5 million ounces per year for 9.2 years.

The study estimated a 91% silver recovery rate from the ore and cast cost per payable ounce of silver of $5.65.

The construction of the Fuwan mine is expected to begin during the fourth quarter of this year. This mine will make Minco Silver a major player among silver producers in China.

To sum things up...

De-regulation of China's silver industry has created a primer mining environment, and rapid economic growth is driving domestic silver investment and manufacturing demand.

Shares of companies with silver projects in China may have considerable leverage over their global industry peers as a healthy domestic market will command premium prices.

Good Investing,

luke_signature.gif

Luke Burgess
Editor, Wealth Daily
Investment Director, Hard Money Millionaire and Underground Profits

P.S. To learn more about China's rapidly developing precious metal industry, check out my recent Wealth Daily article called China's Gold Bull Market.

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