May 15, 2013 | By Tekoa Da Silva
I had the chance to connect recently with John Smith, President and CEO of Silver Standard Resources (see disclosure). It was an interesting conversation, as John has been in the resource industry for 30 years, with nearly 20 of those spent developing mines at BHP Billiton.
During the interview, John indicated that as the world’s major mining companies are slashing capital expenditure and exploration budgets, mining costs are slowly turning around. He also spoke to the stabilizing political environment in Argentina for miners, as well as commenting on the “paper to physical” dynamic he sees in both precious metals and energy.
When asked if this is a good time to be developing new mines, John explained that, “If you look at the majors; the BHP Billiton’s, the Rio Tinto’s, and the Xstrata’s, you can see there’s a lot of companies pulling back now on building mines. [That] does a couple of things. First…for the market and suppliers [of] major processing equipment and mobile fleets…you tend to see the delivery schedules getting much shorter…and [there isn't] so much heat in the prices, [because] there’s not [as] much competition for that equipment.
“[Secondly], it’s also a time that people want to acquire…As these [periods of] compression in silver and gold prices…provide the unique opportunity to buy, and sometimes it’s better to buy and build, because of the ‘speed to market‘ of cash flow…So it really is a good time…in terms of being counter cyclical to the industry.”
John also pointed to the increased trading interest of mining properties, in that, “What [companies] deem as ‘non-core’ [properties are] coming into the market, and their ‘non-core’ is ‘core’ for some other people. So again, it’s an opportune time [in] the marketplace.”
With regard to the business environment in Argentina, John indicated that, “We’re seeing less ‘changes’ now. There was a period of time where there [were lots of] changes around import and export restrictions, and we still live in that environment…[but] we’ve not seen too many other structural impacts recently, so [there's] been a point of somewhat stability there.”
He further added that, “For miners, our investment horizon is seven years, [and while] we’re looking at the day to day, we’re also focus[ing] on seven years out…because as we make investments (and in mining they are large investments), they’ve got a long life…[so] stability and clarity is absolutely important.”
When asked his thoughts on physical silver, John commented that, “The delinkage between the physical and the paper [market] is quite strong…You look at oil and gas and it’s something like 100 times paper to physical…[and] you get that in the precious metals as well. So there is a disconnect. The marginal price of silver is being determined by the investment demand now…[However], risk and reward is not appropriately placed, [so] we’re going to see a return to silver and gold no doubt.”
Wrapping up with thoughts on the long-term fundamentals of silver, John concluded by saying, ”[There's] the investment potential in silver, but [it's] also a commodity that’s consumed. In the times that the economy is running [strong], there’s a high amount of silver secured for building computer electronics, medical equipment, and renewable energy…[So] I think we’ll see a return to silver in the not too distant future…[as] it is a great metal long term.”
Disclosure: Silver Standard has been kind enough to help keep the lights on here at Bull Market Thinking. However, this interview is not a recommendation to buy, sell or otherwise take action on the stock. Your editor instead recommends that we “comb through” John’s comments, carefully looking for educational bricks which serve the highest value.
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Tekoa Da Silva
Bull Market Thinking