Thursday, January 26, 2012

Silver Miners Hoard Silver

It is not just silver investors, banks, institutions and collectors that buy silver and hoard it, silver miners hoard silver also.

Many successful mid-tier silver miners have recently been hoarding silver because they believe the price is too deflated. A good example is Endeavour Silver (NYSE: EXK). In the fourth quarter, Endeavour decided to bet on higher future silver prices by holding onto millions of dollars worth of silver and gold. Their report says, and I quote,

"...As a result, the Company sold only 400,000 oz silver and 4,000 oz gold in Q4, 2011 and metal inventories rose to 812,000 silver oz and 3,000 gold oz in bullion and another 168,000 oz silver and 2,400 oz gold recoverable from concentrate..."

A huge jump in inventory for Endeavour, up from 270,536 silver ounces and 2,420 gold ounces at the end of the third quarter resulting in the company now sitting on over 40 million dollars worth of precious mental.

Endeavour Silver holds on to inventory but others, like First majestic Silver do it by buying silver futures.

The chart above shows silver's average selling price from 2006 through 2011, as well as GFMS's target price in 2012. It's notable that the average annual increase in silver over this period is 24%, and that GFMS's 2012 price target is in line with this trend (Chart from StockCharts.com).

Silver is as good as, if not better, than cash and this is a smart strategy for mining companies anxious to get the best price for their silver. Instead of selling for a low price these and many other, companies are holding out for a better future price. A smart strategy! Especially when you consider Thomson Reuters GFMS prediction that the 2012 average silver price to be $45, as investment demand continues to support the silver price absorbing any market surplus.

As in any company, a silver miner's best interest is for the shareholders and that means getting the best return for the capital. Provided the mid term operating expenses can be covered, a lot of cash on the balance sheet is not really needed. Particularly when you consider the fact that increased paper money is eroding the value of cash. It makes more sense to retain ones capital and profits in precious metals instead.

Not that they could not sell right now and make a profit. The baseline profit can be achieved with 15 dollars an ounce. But why settle for 28 or 30 dollars an ounce when you can sit tight and maybe earn 40 or 45 dollars an ounce.

It is easy to see why silver miners are sitting on their hands when it comes to selling silver and is another good reason why it is a smart strategy to buy silver now.

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