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May
31 2006
By:
Tom Szabo
SILVERAXIS.com
At
www.SILVERAXIS.com,
I will soon be providing investors with
analysis tools for the handful of companies
(less than 100 at last count) that have
a claim to being a major player in exploration,
mine development or production of silver.
And although this project is still some
months away from completion, the impending
arrival of a new silver exploration play,
Arian Silver Corporation (AG-AIM), is a
great opportunity to start sharing my approach.
While much of my "silver stock"
analysis will rely on comparing and contrasting
companies within and across various categories,
each company will eventually get its own
narrative in a format similar to what follows
below. These narratives are not meant as
buy or sell recommendations but rather to
provide a quick introduction and to focus
attention on the key opportunities and challenges
facing each company.
ARIAN
SILVER CORPORATION (AG-AIM) - JUST IN THE
NICK OF TIME?
Analyst
Disclosure Statement
I
hold no position in Arian Silver Corporation,
its affiliates or any other company mentioned
by name herein. I have not been compensated
in any manner for writing this analysis.
Any changes in this disclosure will be made
on my website.
General
I
suppose Arian Silver Corporation (AG-AIM)
can be viewed as a late arrival to a resource
game already teeming with companies destined
for greatness and those of dubious merit.
But when viewed as a "pure silver company",
Arian joins a much smaller field. In fact,
Arian appears to be the only pure silver
play trading on the London Stock Exchange
(AIM), which is quickly becoming the center
of global mining finance.
Before
we go further, I should point out that the
word "Arian" is actually Welsh
for silver and has absolutely nothing
to do with the term "Aryan" used
by some white supremacists. Why Welsh? I’ll
get to that later.
But
first, let’s define a little better what
Arian is. Actually, I like to think of companies
like Arian as "primary silver stocks"
instead of "pure silver plays".
Primary
Silver Stock: More than 50% of current
mine production, profits or reserve and
resource base is attributable to silver.
For explorers without resource figures,
more than 50% of exploration expenditures
targeted specifically at projects where
silver was either the primary mineral mined
historically or, when no previous mining
has taken place, preliminary geological
assessments indicate that silver is the
primary mineral present.
Semantics
aside, the main reason to buy a specialist
like a primary silver stock is because you
expect it to trounce other resource stocks
during a bull market in precious metals
and natural resources.
One
more point about primary silver stocks and
I’ll move on. There are those within this
high risk, high leverage group that are
relatively safe – the emerging and mid-tier
producers with multiple feasible projects,
high visibility and market acceptance such
as Silver Standard, Silver Wheaton and Pan
American Silver – and those where you are
essentially testing your skills against
the collective wisdom of the resource investment
community by placing an informed (hopefully)
wager on an exploration or development play.
Arian would be considered one such wager.
Bottom
Line
You
should consider investing in Arian if you
think that it showed up just in the nick
of time. That is, you believe that the easy,
no-brainer property deals are pretty much
a thing of the past yet you suspect the
time may be ripe for a company with a well-defined
strategy and ready access to capital and
deal flow. You are convinced such a company
can, in the current environment, acquire
and develop highly prospective, advanced
stage silver projects in Mexico or elsewhere.
The
Opportunities
• Unusual
to have a junior with this level of exposure
to the collective expertise of company management
and insiders, including the Endeavour mining
franchise, in the areas of exploration,
mine finance, deal making, project development,
company building, geology and prospecting.
• Growing
portfolio of Mexico-based "brown-field"
projects. Brown-field refers to areas where
previous mining activity of some sort has
taken place and some or all infrastructure
still remains in place.
• Buyers
of Arian stock would likely tell you that
their investment in the company is a bet
on people, places and plans instead of existing
projects, although several Arian properties
appear to have significant potential. These
factors are discussed in further detail
below.
The
Risks (As Usual)
• The
current market capitalization in respect
of the existing projects appears to be on
the high end of the range.
• Management
may not be able to bring its plans to fruition
because it may lose focus or become distracted.
The industry players backing Arian could
lose faith.
• Existing
projects may not host economic mineral deposits.
• Questionable
availability of advanced silver projects
at a reasonable price in an environment
of intense competition including more than
25 Canadian juniors and small producers,
several majors and numerous private companies
and individual prospectors focused on acquiring
and developing gold-silver projects in Mexico.
• Legal,
environmental and other local factors arising
from operating in Mexico, including uncertainties
inherent in holding mineral concessions
without related surface rights.
• The
tenuous prospects for making significant
new discoveries in time to reap the rewards
of exploration success during the "sweet
spot" of the resource boom when the
highest valuations are typically enjoyed
by late-stage mine developers and emerging
producers.
Facts,
Figures and Highlights
• Arian
is a British Virgin Islands corporation
trading on the London AIM market through
a recently completed merger with British
Columbia registered Hard Assets Inc. Hard
Assets was a shell company previously trading
on the AIM and was majority owned by mining
industry insiders.
• Arian
intends to list on the TSX Venture Exchange
as soon as possible.
• 86,315,869
shares outstanding and 95,903,802 shares
on a fully diluted basis, after adjustment
for the merger with Hard Assets Inc.
• The
substantial majority of shares are held
by management, insiders and institutions.
• Recent
price on May 30, 2006 of 0.28 GBP ($0.53
USD or $0.58 CAD per share).
• Market
capitalization of approx. $46 million USD
($50 million CAD). On a fully diluted basis,
market cap is approx. $51 million USD ($56
million CAD).
Putting
It All Together
Let
me save us all some precious time and outline
only those factors you should probably constantly
keep in mind. The below points are important,
but of course not the only important things
to consider. Please use common sense and
your own comfort level as a guide when investing.
Properties
Arian’s
website
and its recent press release dated May 25,
2006 contain essentially all the available
facts about Arian’s current projects. I
won’t rehash these details but I encourage
you to spend 5 minutes looking them over.
There are only a few items I would like
to highlight.
First,
Arian holds several mineral concessions
in the Zacatecas state of Mexico, at least
two of which, Calicanto and San Celso, have
the potential to be placed in production
within 5 years if exploration reveals ore
deposits meeting the company’s criteria.
Arian is basically interested in developing
multiple 50 million plus ounce silver deposits
totaling at least 150 to 200 million ounces
within proximity to a single processing
facility. The deposits must be exploitable
by decline vs. shaft, which would allow
the exclusive use of rubber tired LHD (load-haul-dump)
equipment for all phases of ore transport.
In addition, stockworks and disseminated
mineralization would be exploited up to
aggressive cutoff grades. The idea is to
bulk mine, not high grade like the old timers.
Such
a plan, according to the company, should
result in a mine life of at least 10 years
and cash production costs under $4.50 per
ounce of silver. These are clear and easy
to understand goals and should Arian succeed
in achieving them, shareholders would be
handsomely rewarded. The question is whether
the current portfolio of projects is going
to cut it, and if not, how and at what cost
can Arian acquire the properties which will
allow it to achieve its aggressive goals.
Second,
Arian’s geographical focus is currently
on Mexico, which I hope is where it remains.
Although there have been recent labor problems
and the upcoming elections are likely to
put a less business-friendly administration
in place compared to that of Vicente Fox,
Mexico is still probably one of the best
countries for foreign-owned mining operations,
especially when it comes to silver. Meanwhile,
Zacatecas state is a prolific silver producer
as attested to by the 1 billion ounces of
historical mine output and the current status
of the gigantic Fresnillo mine of Industrias
Penoles, which is the largest primary silver
mine in the world second only in total silver
production to BHP’s polymetallic Cannington
mine in Australia.
Last
but not least, investors with exposure to
exploration or mining in Mexico would be
wise to understand that country’s mining
laws. This overview
is probably a good place to start. Basically,
the historic mining districts are located
on privately owned land and mineral concessions
do not automatically confer any surface
or water rights. In most cases, surface
access is typically obtained through negotiation
with the landowner or if that is unsuccessful,
the Mexican government will usually issue
temporary occupancy orders. There are exceptions
of course. Disputes at best will put a project
in temporary limbo and at worst derail it.
Since Arian will likely reach a point with
one or more of its properties where it will
need to deal with surface, water and other
rights, investors who pay attention to such
matters will have a better handle on company
prospects than will others.
People
The
founder and CEO of Arian is a Welsh geologist
and all-around mining man named Jim Williams
who has a keen interest in silver and has
spent the better part of the past four years
looking for it in the historic Zacatecas
mining districts of Mexico. I told you that
I’d eventually get to why the company is
named after the Welsh word for silver!
Before
founding Arian, Jim helped other companies
find and acquire historic mines (and in
fact, entire mining districts) as well as
old tailings dumps with high silver grades,
primarily in Zacatecas state. For the past
year and a half, he has concentrated his
efforts on assembling the current portfolio
of Zacatecas silver projects for Arian.
Jim is a straight-shooting, no-nonsense
kind of guy who exudes a volatile combination
of intelligence, discipline, passion and
a wild side that often makes him the center
of attention. Not necessarily bad qualities
for heading up a primary silver company.
Jim
has several prominent directors joining
him, including Tony Williams (no relation),
the London mining financier most recently
involved with European Minerals, and David
Cohen, President and CEO of Northern Orion
Resources. Arian's AIM
Application Announcement also shows
the company to have several additional savvy
backers including Haywood Securities, Endeavour
Financial and Apex Silver, among others.
The observant investor might even spot the
Endeavour and Northern Orion connection:
Endeavour has been a key player in the success
of Wheaton River Minerals, Silver Wheaton,
Bema Gold, Northern Orion and Urasia Energy
to name a few.
Being
backed by a source of serious money, contacts
and expertise such as Endeavour and Arian’s
other sponsors is one thing, but possibly
becoming the go-to silver play of a well-connected
outfit with lots of deal flow is something
quite different. Endeavour seems to have
done a pretty good job of avoiding overlap
in the geographic or mineral focus of its
favored resource companies, so one might
conclude with some degree of certainty that
whatever Mexican (and possibly other) silver
projects that Endeavour comes across that
aren’t suitable for Silver Wheaton – whose
main interest seems to be mines that produce
silver as a by-product -- will be paraded
in front of Arian.
There
are also risks that come with having powerful
backers, not the least of which is that
you perform or you’re fired. Here, I think
all parties understand what they are getting
into and have in all likelihood put policies
and procedures in place to make sure that
Arian management will stay focused, committed
and undistracted and at all costs avoids
embarrassing the company’s sponsors. Each
potential Arian investor will need to assess
whether or not management is up to the task.
Value
Proposal
Arian
gave up a larger-than-normal part of the
company (43%) to gain the sponsorship of
the Endeavour group, resulting in a current
market capitalization on the high end of
what otherwise might be reasonable. But
they now have access to a very powerful
finance group that has raised hundreds of
millions of dollars for many of their clients.
For example, Endeavour just raised $700
million for Urasia Energy (since November
2005). And they clearly have access to strong
deal flow. Remember, when looking at a company
with no producing assets or cash flow, success
most of the time evolves around the people
who have a track record and are capable
of making things happen. Put bluntly, Arian’s
valuation is the price of admission for
playing with a smart crowd who thinks big.
It’s
a Wrap
I
plan to update this silver stock narrative
and the forthcoming others on a periodic
basis on my website. If you would like to
discuss this or any other silver stock,
or for that matter any topic involving silver,
please drop me a line at tom@silveraxis.com.
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