CDE: A Great Play on the Silver Market
"When one door closes, another opens. But we often look so regretfully upon the closed door that we don't see the one that has opened for us." ~ Helen Keller 1880-1968, American Blind/Deaf Author, Lecturer, Amorist
|World Silver Supply and Demand
(in millions of ounces)
|Net Government Sales||33.5||97.2||60.3||63.0||60.3||88.4||60.2||67.5||78.2||42.3|
|Old Silver Scrap||193.9||181.6||180.7||182.7||187.5||184.0||183.7||186.0||188.0||181.6|
|Implied Net Disinvestment||48.2||44.8||87.2||--||10.8||--||--||--||--||--|
|Coins & Medals||27.8||29.1||32.1||30.5||31.6||35.7||42.4||40.0||39.8||37.8|
|Implied Net Investment||--||--||--||11.2||--||10.5||44.0||77.6||70.8||25.8|
|SOURCE: World Silver Survey 2008
A look at the above table reveals that there is a rather huge shortfall in Silver production; mines only produced 670.6 million ounces in 2007 while demand came in at 894.5 million ounces. The balance was supplied from above the ground supplies via direct government sales and from the recycling of old silver scrap. Producers reduced their hedging positions by a whopping 30% and this was done in the face of higher silver prices; a total of 25 million ounces of hedged positions were closed. Even more interesting was the fact that scrap volumes fell by 3% despite higher prices to 181.6 million ounces. Given the huge price increase in Silver bullion from a low of roughly 4 dollars to a high of 20.80 one would have thought that mine production and scrap production would have sky rocketed but that does not seem to be the case; in 1998 mines produced 542.2 million ounces and in 2007 670.6 million ounces were produced for an increase of only 23% in roughly 10 years. At the same time Silver demand has increased by 8.49%; even if the demand remained constant mined production would still not be enough but to make matters worse demand continues to increase while supplies increase at a mediocre pace. One has to conclude that one of the reasons mined production has not increased significantly is due to the fact it takes a very long time to open up a new mine and that not as much money is being deployed into Silver exploration as should be given the huge shortfall. Thus the Silver market is in a unique situation which provides for an incredible long term opportunity. There are many plays in the Silver sector but we feel that CDE is one of the best plays in this sector and we will list several reasons to substantiate our claim.
Without even looking at this chart a person who sits down and thinks about the situation can spot a rather huge anomaly that is going on in the precious metals sector right now. The opposite of this just took place in the oil sector. CDE is on the extreme end of this anomaly; all one has to do is ask this question in order to arrive at the correct answer. What was the price of silver bullion in August 2005 and what is the price of Silver bullion today? Now do the same thing for CDE and immediately one spots the anomaly. Silver bullion is trading roughly 100% higher than it was back in August of 2005; at its peak this year it was up over 170%. CDE peaked around April of 2006 at around 6.60 and in the last 3 years has not managed to even come close to re testing this zone. Incredibly it put in a new 3 year low when Silver has just come of from putting in a series of multi decade new highs.
Let's look at some fundamentals which all appear to be strongly favour CDE.
It has two of the biggest Silver mines in the world right now and claims to be the world's largest silver producer and get this none of its Silver production is hedged. It thus stands to benefit tremendously as its profits will rise with each up tick in the price of silver and consequently its profits will decline with each down tick. A feasibility study on its Palmarejo property in Mexico has boosted its Silver reserves by an incredible 29%; this mine is scheduled to come online around the first half of 2009. It was considering the sale of its Nevada gold and silver mines but because they are producing so much cash management decided it was in their best interests to hold onto them. CDE does not only produce Silver it also produces a decent amount of Gold.
Currently its silver reserves stand at 216 million ounces and its gold reserves come in at 1.5 million ounces. These figures probably do not take into consideration the 29% boost in their silver reserves. It currently has a market cap of 999 million. Its silver reserves alone are worth roughly 3 billion dollars at current prices and if we add the Gold reserves in the figure soars significantly higher (roughly 1.3 billion more); based only on its Silver reserves we find that the company is currently selling at huge discount.
In 2007 it produced 11.7 million ounces of Silver and it's anticipated that its 2008 production will come in at roughly 13 million ounces; an increase of 11.1% but its 2009 production is expected to increase to 24 million ounces a whopping 100% increase over its 2007 production. The increased production will come from the San Bartolome mine in Boliva now believed to be the largest pure silver mine in the world and from the Palmarejo mine in Mexico which will also add to its gold production. For the record its Gold production is also not hedged. Just these factors alone make CDE a compelling investment.
So far we have not looked at the technical picture; we have simply focused on an anomaly and on fundamentals. From a mass psychology perspective individuals are shunning this stock and many of the precious metals stocks for most stocks in these sectors have not performed as well as the metals have; thus based on the principles of mass psychology one should continue accumulating this chap and various other plays in the precious metals sector that are being treated in a similar manner.
CDE appears to be putting in a nice bottoming formation in the 3 year chart (the above chart) and it has put in a double bottom formation in the one year chart (displayed below); it has also flashed 3 back to back positive divergence signals and it's trading at a new 4 year low when its reserves have increased significantly and bullion has finished coming of a series of new multi decade highs.
All charts provided courtesy of www.prophetfinance.com
Right now CDE needs to trade past the 2.90-3.00 ranges for 12-15 days in a row; it will most likely fail to do so in its first 1-3 attempts. Once it breaks through this obstacle it should be able to trade all the way to the 3.90-4.20 ranges before pulling back. After this its next major obstacle is 4.80-5.10 ranges; it has not been able to hold above this zone for a sustained period of time in the last 3 years and thus it's obvious that this zone is going to offer a very strong level of resistance. It will need to break past these ranges on strong volume and trade above them for at least 21 days in a row; once this is achieved it should be in a position to test and then take out its old 3 year high.
As of late the markets have had a tendency to overshoot both their upside and downside targets. However when a market overshoots to the downside when the fundamentals, technical and the mass psychology outlook are all bullish it will in 9 out of 10 times mount an even stronger counter rally than it would have had it not experienced this situation to begin with. We cannot tell you when CDE will start to rally but we can tell you this from an investment point of view it makes for a very good long term buy. The greatest investors have never tried to time the exact bottom they have always looked to acquire stocks when they have been smashed to pieces for apparently no long term reasons.
"Many do with opportunities as children do at the seashore; they fill their little hands with sand, and then let the grains fall through, one by one, till all are gone." ~ Thomas Jones