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Global MiningResearch
This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s)under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 57 to 59
April 3, 2011
A New Paradigm for Silver
Demand Is Expected to Outstrip Production Growth
BMO Research analysis indicates silver demand & supply fundamentalsshould remain positive to the end of 2012E. Moreover, the prospects of further quantitative easing combined with ongoing sovereign debtconcerns could result in investment demand for silver exceeding BMOResearch’s supply projections through 2014E.1: BMO expects silver production to grow 55% through 2015E, with64% of new production forecast to come from early stage projects,underscoring the downside risk associated with this projection.2: Assuming realistic growth projections, industrial demand for silveris forecast to grow 22% through 2015E; investment demand is keyto making up the balance.3: Preferred silver stocks are: senior producer PAAS; SLW for its low-risk and growing royalty stream; intermediate producers FR andSSRI; and junior explorers THO and BCM.
FRES.LSE Market Perform
Price: £15.64 Target Price: £15.50
SLW.NYSE Outperform
Price: US$43.36 Target Price: $52.00
↑
HOC.LSE Outperform
Price: £6.49 Target Price: £7.75
CDE.NYSE Outperform
Price: US$34.78 Target Price: $40.00
↑
PAAS.NASDAQ Outperform
Price: US$37.13 Target Price: $51.00
HL.NYSE Outperform
Price: US$9.08 Target Price: $11.00
SSRI.NASDAQ Outperform
Price: US$31.38 Target Price: $40.00
↑
SVM.TSX Outperform
Price: C$14.11 Target Price: C$16.00
↑
FR.TSX Outperform
↑
Price: C$20.61 Target Price: C$25.00
↑
EDR.TSX Underperform
Price: C$9.50 Target Price: C$6.50
BCM.TSXV Outperform (S)
Price: C$10.15 Target Price: C$13.00
↑
FVI.TSX Outperform
Price: C$5.30 Target Price: C$6.50
↑
OK.TSX Market Perform(S)
Price: C$2.53 Target Price: C$2.50
MSV.TSX Outperform (S)
Price: C$5.75 Target Price: C$7.50
MAG.TSX Outperform (S)
Price: C$11.57 Target Price: N/A
THO.TSX Outperform (S)
Price: C$19.60 Target Price: C$24.00
↑
(S) in rating denotes Speculative, Prices as of March 31, 2011
Andrew Kaip,
416-359-7224
andrew.kaip@bmo.com
David Haughton,
416-359-4052
david.haughton@bmo.com
John Hayes,
416-359-6189
johnp.hayes@bmo.com
Fig 1: BMO Research Silver Supply and Demand Projections to 2015E
Forecast
DeficitSurplus
2005A2006A2007A2008A2009A2010A20112012201320142015
-400-2000200400600800
S i l v e r S u p p l y / D e m a n d B a l a n c e ( M o z )
High CaseBMO CaseLow Case
Source: BMO Capital Markets
Fig 2: BMO Universe Silver Equities Relative Value
0.51.01.52.02.5101001,00010,000100,000Share Price to NPV per Share
M a r k e t C a p i t a l i z a t i o n ( U S $ M )
MSVCDEOK
FR PAAS
EDR HLFRESCheapExpensiveMAG
Spot Prices: US$37.65/oz Ag and US$1,433/oz Au10% Nominal Discount Rate
F a i r V a l ue - S i l ve r
BCMHOCSLW
SVM
THO
FVISSRI
Source: BMO Capital Markets
Global Mining Research
Silver Miners
April 3, 2011
Page
2 of 59
1. A Paradigm Shift
The long-term relationshipbetween gold and silver hasbroken down due toconstrained physical supplyand strong demand.
BMO Research has reviewed a number of supply and demand scenarios forsilver through 2015E. The analysis suggests that the projected rise in minesupply should largely be consumed by rising industrial demand through tothe end of 2012E.The prospects of further quantitative easing combined with sovereign debtconcerns, competitive ‘fiat’ currency devaluation in western economies, andthe return of inflation could result in investment demand exceeding BMOResearch’s projections and extending the supply deficit through 2014E.This shift in the supply/demand dynamic lies in contrast to the broaderinvestment perception for silver, which is rooted in the 1990’s when themetal was in abundance, driven by the demise of the photographic industryand Chinese selling.The paradigm shift for silver suggests that the traditional benchmarks forsilver, such as the long-term historical ratio with gold, are no longer valid.Accordingly, the markets are searching for a new set of criteria againstwhich to benchmark the price of silver, with a bias to the upside.
The gold to silver ratio hasdeclined to below 40 to 1, alevel reminiscent of high silver prices last seen in the early1980’s.
Fig 3: Silver Versus Gold Ratio
J a n - 7 0 F e b - 7 2 M a r - 7 4 A p r - 7 6 M a y - 7 8 J u n - 8 0 J u l - 8 2 A u g - 8 4 S e p - 8 6 O c t - 8 8 N o v - 9 0 D e c - 9 2 J a n - 9 5 F e b - 9 7 M a r - 9 9 A p r - 0 1 M a y - 0 3 J u n - 0 5 J u l - 0 7 A u g - 0 9
102030405060708090100110
G o l d t o S i l v e r R a t i o
Gold to Silver RatioAverage
Long-term Average
Source: BMO Capital Markets
BMO Research’s analysishighlights the potential for growing industrial andinvestment demand for silver toexceed supply through 2012E.Investment demand aboveBMO Research forecasts couldextend the projected supplydeficit to 2014E.
Fig 4: BMO Base Case Demand and Supply Forecast, 2005 to 2015E (Moz)
Forecast
DeficitSurplus
2005A2006A2007A2008A2009A2010A20112012201320142015
-400-2000200400600800
S i l v e r S u p p l y / D e m a n d B a l a n c e ( M o z )
High CaseBMO CaseLow Case
Source: BMO Capital Markets
Global Mining Research
Silver Miners
April 3, 2011
Page
3 of 59
Assuming robust global growthand a stronger rebound in theU.S. economy, BMO Researchexpects demand to exceedsupply through 2012E.
Fig 5: BMO Base Case Demand versus Supply Forecasts, 2005 to 2015E (Moz)
Forecast
2005A2006A2007A2008A2009A2010E2011E2012E2013E2014E2015E
0500100015002000
F o r e c a s t S i l v e r P r o d u c t i o n G r o w t h ( M o z )
High Case SupplyBMO Case SupplyLow Case SupplyBMO Case Silver Demand
Source: BMO Capital Markets
Including the prospects of further quantitative easing andhigher inflation, BMO Researchexpects demand to outstripsupply through 2014E.
Fig 6: BMO High Case Demand versus Supply Forecast, 2005 to 2015E (Moz)
Forecast
2005A2006A2007A2008A2009A2010E2011E2012E2013E2014E2015E
0500100015002000
F o r e c a s t S i l v e r P r o d u c t i o n G r o w t h ( M o z )
High Case SupplyBMO Case SupplyLow Case SupplyHigh Case Silver Demand
Source: BMO Capital Markets
BMO Research views thedownside risk for the price of silver as low, as it is predicatedon a reversal of current globalmacro-economic conditions.
Fig 7: BMO Low Case Demand versus Supply Forecast, 2005 to 2015E (Moz)
Forecast
2005A2006A2007A2008A2009A2010E2011E2012E2013E2014E2015E
0500100015002000
F o r e c a s t S i l v e r P r o d u c t i o n G r o w t h ( M o z )
High Case SupplyBMO Case SupplyLow Case SupplyLow Case Silver Demand
Source: BMO Capital Markets
Sections
« prev | next »- FRESNILLO As at: 31-Mar-11 FRES CASH FLOW ANALYSIS - US$M
- COEUR D'ALENE As at: 31-Mar-11 CDE CASH FLOW ANALYSIS - US$M
- HOCHSCHILD MINING As at:31-Mar-11 HOC CASH FLOW ANALYSIS - US$M
- SILVER STANDARD As at: 31-Mar-11 SSRI CASH FLOW ANALYSIS - US$M
- HECLA MINING As at: 31-Mar-11 HL CASH FLOW ANALYSIS - US$M
- SILVERCORP As at: 31-Mar-11 SVM CASH FLOW ANALYSIS - US$M
- FIRST MAJESTIC As at: 31-Mar-11 FR CASH FLOW ANALYSIS - US$M
- ENDEAVOUR SILVER As at: 31-Mar-11 EDR CASH FLOW ANALYSIS - US$M
- MINCO SILVER As at: 31-Mar-11 MSV CASH FLOW ANALYSIS - US$M
- ORKO SILVER As at: 31-Mar-11 OK CASH FLOW ANALYSIS - US$M
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