Is silver poised to outshine gold once again? We all remember 2011, when silver spiked in May and gold spiked in September.
In percentage terms, silver out-spiked gold, with the ‘moon’ metal rising some 84% from February to May, while the ‘sun’ metal rose only 28% from July to September.
Well some insiders, at least, seem to be preparing themselves for a repeat, as one gold company recently changed teams to play for silver now.
Canadian miner Wildcat Silver Corp (TSX-V:WS) is a silver mine in need of a purse of cash. A fellow Canadian miner Riva Gold (TSX-V:RIV) is a purse of cash in need of a mine. Sounds like a match made in mining heaven, doesn’t it? So Wildcat proposed to Riva, and Riva happily accepted.
On March 4th both companies announced entering into letters of intent with each other, where Wildcat will buy “all of the outstanding common shares of Riva in consideration for 4.7 common shares of Riva for one common share of Wildcat,” reports Canada Newswire (CNW). “This represents a price of C$0.17 per Riva common share, which is based on the volume weighted average price of the Wildcat common shares for the 20 trading days ending March 1, 2013.”
Why the attraction? “Riva has a cash balance of approximately C$8.1 million and currently does not hold any mineral properties,” CNW points out.
Wildcat, for its part, already has a stake in a potentially lucrative property: an 80% interest in the Hermosa silver project located in Santa Cruz, Arizona.
Although this represents a move in a different direction for Riva, you have to admit she has found a beaux with quite the potential for success. The Hermosa project, explains CNW, “has a preliminary economic assessment which estimates average annual production of over 15 million ounces of silver for the first five years and a 16 year mine life.”
If production targets are met, the property could be generating $435 million each year at the current silver price of $29. And there is more where that comes from, as CNW informs:
“Hermosa’s measured and indicated mineral resource consists of 194 million tonnes averaging 37.7 grams per tonne silver for a total of 236 million ounces of silver and an inferred mineral resource of 80 million tonnes averaging 30.9 grams per tonne silver for a total of 79 million ounces of silver as announced in the August 9, 2012 press release.”
That’s some $6.8 billion worth of measured and indicated silver plus another $2.3 billion worth of inferred, for a grand total of over $9 billion of buried treasure. And Riva is gloating over her prospects, as its CEO and chairman Richard Warke expressed:
“We are pleased to be able to bring this transaction to our shareholders.” “Riva has been assessing strategic alternatives for the last year and we believe this represents the best opportunity for the Company’s investors to participate in the significant potential of the Hermosa project, one of the largest undeveloped silver deposits in the USA.” – CNW quotes.
On the Wildcat side of the wedding isle, the acquiring shareholders will be pleased with the over $9 million that Riva is bringing to the union, comprised of the $8.1 million in cash plus an additional $1 million in secured term-loan—money which can be put to good use extracting the property’s wealth.
What strikes me as very interesting is that Riva Gold, as its name suggests, was formed to acquire gold. And yet it is now being acquired by silver. Both sides know their industries well, which might be telling us they expect silver to outperform gold. After all, there are plenty of gold producers that Riva could have written checks to.
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Analysts generally agree on a reasonable price ratio between gold and silver of 1:40; that is, where the price of 1 gold ounce equals the price of 40 silver ounces. But at the height of the silver spike at the beginning of May 2011, the ratio reached an impressive 1:32.65, with gold trading at roughly $1600 while silver reached the $49 area.
Source: BigCharts.com
Notice how silver (represented by SLV in black plots) plays catch-up with gold (represented by GLD in gold plots) whenever it falls too far behind? In most cases, silver’s thrusts (blue lines) are steeper and longer than gold’s (gold lines).
What is the ratio between the two metals today? About 1 gold to 54.5 silver. Silver is terribly undervalued compared to gold, and investment dollars are like water that always rushes to the lowest level of the ground. If the ratio between the two metals returns to just the average consensus ratio of 1:40—say with gold at the current $1580—silver would have to reach $39.50 an ounce just to return to the generally accepted ratio, never mind any momentum spikes potentially pushing silver well above 1:40 as had occurred in May of 2011.
A jump in silver from the current $29 to the more balanced $39.50 represents an increase of some 36.2% for the moon metal. And that’s without gold budging an inch. If gold were itself to rise, say, back to its all-time high of $1925 reached back in 2011, that commonly accepted ratio of 1:40 would lift silver to at least $48 for an increase of more than 65% over today’s price. And that would be close to the spike of 2011 all over again.
If industry insiders are an indication, the boards and shareholders of at least two mining companies tend to agree with silver’s shinier potential over gold’s.
Joseph Cafariello
