Back in the 1970s, silver mining did not seem like a great business. Silver just fetched $5/oz, so it was hardly worth the effort. But nobody back then foresaw the emergence of China and India. They are now two of the largest silver consuming countries in the world; demand today is rising at 9% per year. Silver also experienced an explosion of demand from the electronics industry. Today, powered by a combination of industrial demand and the appetite for silver jewellery, the silver price has stormed upwards, hitting $45/oz in 2011 and sitting today at about $23.
Despite the recent dip in sympathy with gold, forecasters remain bullish for silver. Silver is looking cheap at the moment. What’s more, demand is outweighing supply. Annual silver demand of 1.06 billion ounces today is expected to grow to 1.18 billion ounces in 2015. Silver supply on the other hand is 950 million ounces per annum today, rising to 1.05 billion ounces by 2015. Extra supply needs to be found from somewhere.
So why not revisit those mothballed mines of the 1980s and bring them back to production to take advantage of today’s high prices? That is exactly what Black Mountain Resources (BMZ) has done, and it reckons it can make high returns from its projects in the United States. Executive Chairman Pete Landau, a serial natural resources entrepreneur runs the show; his other ventures have included Range Resources (RRL) and Continental Coal (COOL).
Black Mountain has a distinct advantage
Crucial to Black Mountain’s ambitions is the USA’s patented title rule which allows mines to be re-opened after years of neglect without having to go through a new application process. While Landau concedes that there may be other potentially profitable silver mines in the world, he pointed out that the silver price only broke $20 in 2010. Because of this, it appears other silver mines aren’t being reopened. But above all, most countries have a ‘use it or lose it’ approach, meaning that any owner who had left a mine idle for 30 years would have lost the title to it.
So if there is going to be a rush to open old mines, Black Mountain does at least have a lead on its rivals. With that in mind, it has spent $4m on prospecting in return for a 70% interest in three high-grade mines, namely the New Departure Silver Project, the Conjecture Silver Project and the Tabor Gold and Silver Project, located in Idaho and Montana, north-western USA.
Most advanced of these is the New Departure project in Montana, a mine that produced silver for a hundred years from the 1880s. Geological reports completed in 1998 identified six separate undeveloped ore blocks estimated to contain 2.5 million ounces of silver at an estimated average grade of 620 grams per ton. With these located only 90ft below the existing workings, they should be easy to reach and Black Mountain is hoping to be producing silver ore by the end of this month and making first sales of concentrate by the end of July.
By using contractors to do the mining and sending the ore to a local mill, Black Mountain is keeping its own investment and operating costs to a minimum. It expects to be able to produce one million ounces for four years from 2013 at a total in cost of $8-$10/oz, with every chance of prolonging the mine life by proving up further resources.
Black Mountain is just one example of the innovative approaches now being used in the precious metals mining business. Mine reclamation, ore streaming deals, and innovative new production technology are all the rage.
BMZ working three mines all with known resources
The Conjecture mine also has a long history of production and has similar geological characteristics to the prolific silver mining region of Coeur d’Alene, 50km to the south. The project has been leased for 45 years from Chester Mining Company, and has considerable infrastructure already in place including a 2,000ft vertical shaft sunk back in 1956. Again historic studies give a good indication of the potential, in this case identifying an 8.5 million-ounce resource with a silver grade of 310 grams per ton in July 2012.
Black Mountain has also signed an exclusive option for a long term lease of the Lakeview Mill, located less than 2km from Conjecture and, for an initial ten-year mining life, the cost of production is estimated at $10-$12/oz. Production is scheduled to start in the third quarter of this year.
Black Mountain is looking to re-enter the third mine, Tabor, and repair existing workings before mid-year so this is a silver play with known resources and every chance of early production. It’s worth pointing out that, despite its high grades, Black Mountain is valued at just $0.90 for each ounce of silver. This is compared to the sector average of $4.4/oz, which is why Landau argues that the shares are undervalued.
There are of course risks here. The silver bulls could be wrong, and junior miners are notorious for failing to meet promises. All the same, Black Mountain is one to keep an eye on.