silver exposure: bullion or shares

Most silver bulls on this forum have been advocating owning mining shares rather
than physical silver. Out of interest, I have done a ‘serviette’ comparison of investing
in MMN or silver bullion (either physical or certificates). For this purpose I have
made the following assumptions.

Silver Price
Once the short side manipulation runs out of dumpable silver the price rally will be
pretty spectacular, perhaps exceeding 50 USD per ozt. There are, however, three
factors which I believe will return the silver price to a trading range of 7 to 10 USD
per ozt within a few years. The first two will be a sudden reduction in silver jewelry
consumption and an increase in silver scrap supply. These two factors will bring the
price back to ~20 USD within six months. The third factor of increased mine supply
will take a few years. It may be noted that many mining companies have mining
operations that are ready to start for want of higher silver prices. From 6 months to
two years after a price spike, I believe that the silver price will average about 15 USD
per ozt.

MMN
Assume that MMN begins its mining operation at the start of the price spike. Prior to
this, funding the project would have entailed large hedging obligations. Within two
years MMN has produced 7 mozt, for which it has received an average price of 15
USD per ozt. Costs for MMN during this time have amounted to 6 USD per ozt,
leaving it with a profit of about 63 M USD. Allowing generous writedowns (~10 M
AUD), MMN would be left with a profit of about 80 M AUD after tax, or the
equivalent of about 0.3 AUD per share.(current share price = 0.11AUD per share)

Bullion
You sell your physical or certified holding for a higher price - +40 USD if you are
fortunate.

Conclusion
The leverage of share ownership over bullion may not be as great as some on this
forum have suggested. MMN does have speculative appeal other that its silver
interests.(I believe that the assumptions I have made for MMN re silver are very
generous.)

Billy

Disclaimer: This is an opinion piece only. Do your own research