Silver looks a screaming buy as leading Australian developer moves closer to production
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SPECIAL REPORT: The gold-silver ratio – that is, the number of ounces of silver it takes to buy one ounce of gold – has long been considered by precious metals investors as a useful guide to future price movements.
And the signal it would appear to be giving off now is that silver is a screaming buy.
Any widening in the ratio above the long-term average of 63 is generally taken as a cue to buy silver as it begins to look cheap in relative terms against gold. The opposite applies if there is a narrowing in the ratio.
With gold at around US$1480 an ounce and silver at US$12.10 an ounce on March 19, the ratio reached a record of 123. It has since pulled back to about 113.
Anthony McClure, managing director of ASX-listed Silver Mines Limited (ASX: SVL), which owns the Bowdens Silver Project in New South Wales, struggles to put his finger on why the ratio has widened so significantly over the past month, but he believes it won’t last.
“It’s bizarre, there is no physical metal available,” he tells Stockhead. “You can’t go into the Perth Mint or any other mint and buy silver. In that environment, you’d expect the price to rise.
“There was some talk that silver got smashed because the electronics trade has been smashed (by the effects of COVID -19), but I don’t think that’s really going to be a big factor.
“At some point, the ratio has got to turn and we’ll see the relative valuation disparity tighten.”
Regardless, many – including McClure – agree that the longer term outlook for both gold and silver is overwhelmingly positive based on them being renowned stores of value.
“When the world comes out of this malaise, with all those trillions of dollars that have been pumped into the system, there is no other option than for it to lead to a higher interest rate environment,” he says.
“Where’s the best place to be in those circumstances? It’s precious metals.”
Silver Mines’ Bowdens project, near Mudgee in central NSW, contains a JORC resource of 275 million ounces of silver equivalent, making it one of the largest undeveloped silver deposits in the world.
In June 2018, the company completed a definitive feasibility study (DFS) on an open cut mine development at Bowdens producing an average of 3.4 million ounces of silver, 6900 tonnes of zinc and 5100 tonnes of lead a year for an initial 16 years.
The primary focus since then has been on rigorously preparing an Environmental Impact Statement for the project, which is now almost ready for submission.
In parallel to navigating through the final stages of the approvals process, Silver Mines is continuing with work to optimise the results of the DFS and improve the project’s profitability.
To this end, McClure says he is confident operating expenditure estimates for the project can be brought down to below US$10 per ounce of silver.
He also points out that the weaker Australian dollar – the DFS was done using a US dollar exchange rate of $0.75 – should have a positive impact on project economics.
Silver Mines registered 70-75% local support for Bowdens in a social impact survey completed prior to the NSW Independent Planning Commission blocking the only other significant mining proposal in the region, South Korean company KEPCO’s $290 million Bylong coal project, in September last year.
McClure expects that local support will have risen in the wake of the KEPCO decision and that the NSW government will also be looking at Bowdens as a project that could help reinvigorate a post-coronavirus state economy.