There is something eternal, beautiful and innate to the human psyche when it comes to gold and silver. It’s been a store of wealth forever and with the massive manipulation of the monetary system by central bankers, you have to wonder when that bill is coming due.  No doubt gold and silver will hold some value but like everyone else, I have no precise idea of what that is.  As I sit staring at the 10 oz .999 silver bar paperweight in front of me, I was thinking about how much it has declined in value.  In fact I started to order another one as it is quite gorgeous and quite cheap now.   I was even thinking about ordering a gold one but I thought better about spending $14,000 on a paperweight.  10 ounces of pure gold would cost roughly about that at $1400 per ounce.  That’s just too much money to trust lying around on my desk.  Besides, I think gold could go lower.  Somewhere in my head I have a vision of gold cracking $1000 and silver bouncing around at $15-18 per ounce.  Who knows if it will ever get there?  I certainly don’t.

But then I noticed some large insider buys in a couple of companies that mine the metals.  As I looked into it the drop of the miners’ stocks has been more precipitous than even the underlying precious metals.  Perhaps they are already reflecting these prices floating around in my head.  There is no way to know but based on the 10K’s I read they can both make money even at those draconian price points.  And they have pretty darn good financials.

Allied Nevada Gold Corp., a gold and silver producer, focuses on the mining, development, and exploration of properties in Nevada .  The company’s principal products include unrefined gold and silver bars. It operates the Hycroft Mine, an open pit gold and silver heap leach operation located to the west of Winnemucca, Nevada. The company also has six properties, which include Maverick Springs, Mountain View, Hasbrouck, Three Hills, Wildcat, and Pony Creek/Elliot Dome. In addition, the company has approximately 90 other exploration properties. Allied Nevada Gold Corp. was incorporated in 2006 and is headquartered in Reno, Nevada.

Allied Nevada Gold
Allied Nevada Gold

ANV recently completed a secondary offering in which it sold $150 million worth of stock at $10.75 per share.  ANV Allied Nevada CEO Buchan bought $2.2 million dollars worth at an average price of $10.75 on 5-17-13.  That increased his holdings by 9%.  The stock closed at $7.70 today so that was not a lot of fun for those bag holders.  The Company expects the net proceeds of this offering will be approximately $141,700,000after deducting underwriting commissions and estimated expenses of the offering payable by us. They intend to use the net proceeds of this offering to fund capital expenditures for our Hycroft Mine expansion project and for general corporate purposes. to the prospectus their adjusted cash cost of gold sold was $638 ounce.  ANV expects to sell approximately 225,000 to 250,000 ounces of gold and 1.5 million to 1.8 million ounces of silver.

The number of shares outstanding after this deal will be 103,887,966.  At todays price of $7.75 it puts the Company’s market cap at $895.13 million.  As of March 31, the Company had total liabilities of $689 million.  That puts its enterprise value at $976 million.  As of December 31, 2012, ANV had reported a proven and probable mineral reserve at the Hycroft Mine of 11.9 million ounces of gold and 509.6 million ounces of silver. In 2012, the Hycroft Mine produced 136,930 ounces of gold and 794,097 ounces of silver.  Just doing the back of the napkin math with $1400 gold and $20 silver around $16.6 billion in gold and $15.8 million in silver. Based on their costs of $628 per ounce gold, that makes the value of the gold worth more than $9 billion.  That’s more than nine times what the stock is trading for.

Hecla Mining HL is the other name we have seen some buying in. Hecla Mining Company, together with its subsidiaries, discovers, acquires, develops, produces, and markets precious and base metals worldwide. he company owns 100% interests in the Greens Creek unit located on Admiralty Island, near Juneau, Alaska; and the Lucky Friday unit located in northern Idaho. Hecla Mining Company was founded in 1891 and is based in Coeur d’Alene, Idaho. This is a more complicated situation. The CEO Phillips Baker purchased 150,000 shares at $3.19 on 5-14-13.  HL has had some issues for some time due to its problems with the Lucky Friday silver mine in Idaho which has been shut down since 2010.  When other mining stocks rallied or held their own, HL did not participate.  It appears though that the Lucky Friday problems are behind it now.   It offers unrefined gold and silver bullion bars to precious metals traders; and lead, zinc, and bulk concentrates to custom smelters.

Hecla Mining
Hecla Mining

At December 31, 2012, the book value of HL’s property, plant, equipment and mineral interests, net of accumulated depreciation, was approximately $996.7 million .  Their market cap and enterprise value as of March 31, 2013 are listed are $963 million and $758 million respectively.  On April 16, 2008, Hecla completed the acquisition of all of the equity of two Rio Tinto subsidiaries holding a 70.3% interest in the Greens Creek mine for approximately $758.5 million.  Mostly a silver mine, Green Creek has 94 million proved ounces of silver reserve or at today’s prices about $1.9 billion dollars with silver at $20 ounce.  Considering the cost of getting it out of the ground and the fact that silver is higher in price today than in 2008, it looks like a reasonable price but nothing like the discount seen in Allied Nevada’s stock.

HL might be more about returning the  Lucky Friday mine to full production during 2013 than the price of silver dropping to three-year lows.  Limited production recommenced at Lucky Friday in the first quarter of 2013 after the temporary suspension of operations in December 2011. Full production levels by are expected to return by approximately mid-2013. Lucky Silver is estimated to have 54.4 million ounces of proved silver reserves.

The financial terms of settlement of the Coeur d’Alene Basin environmental litigation and other claims may materially impact their cash resources and our access to additional financing.  The bulk of this payment, approximately $55.5 million by August 2014,  appears to be coming from in the money exercise of warrants.  If the warrants are not exercised the Company could use a lot of its cash up making good on the obligation.

These are two large mining companies that we own.  We purchased ANV today and will probably buy more.  We initiated a position in HL a few days ago and added to it today.  There is a certain herd-like feeling about the sell-off in gold and silver.  I’ve been around long enough to know margin liquidation when I see it.  I expect both metals to rally soon although longer term, who knows, except that I can say with certainty that gold and silver will capture eyeballs long after Google and Apple are forgotten.  It might just be time for the miners to glisten.

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