Jim Williams could hardly have timed it better. After spending the last six years developing silver projects in Mexico, production from his company’s flagship San Jose mine finally got underway in September. Just weeks later a near-two year rally in the price of silver saw the precious metal reach a 30-year high of $30.75 an ounce on New York’s Comex exchange.For Williams and Arian Silver Corp. (LON:AGQ) , the potential for 200m ounces in the ground is something to get excited about.
From modest beginnings, Williams’ eye for a project and no shortage of luck, has created a company with a handful of exploration projects and the all- important production base in Mexico’s Zacatecas State. At San Jose, the company’s contract mining and milling operations are scheduled to process 500 tones of ore per day to produce a silver-rich powdery concentrate worth $6,500 per ton based on a silver price of $18. So far Williams and his team have concentrated their efforts on the resources of just 10% of their San Jose Vein. That has landed them with a JORC-compliant resource of around 43 million ounces of silver, 120 million lbs of lead and 250 million lbs of zinc. Unsurprisingly, Williams is keen to forge ahead with further drilling elsewhere on the vein – indeed that work is underway.
But while Williams’ commitment to getting the project into production has finally reaped rewards, the company has not had an easy time during the recession. Between the autumn of 2008 and late winter 2010 its share price failed to break 5p. Anticipation over work at San Jose got things moving over the summer but it wasn’t until production began in September before the shares enjoyed a substantial re-rating – they are currently trading just off a high of 40.75p. The surge in interest in recent months matches the charts of other, larger Mexico-based silver specialists, Fresnillo (LON:FRES) , which is the world’s largest primary silver producer, and Hochschild Mining Plc (LON:HOC) . Among its smaller cap peers, Irish miner Minco(LON:MIO) is also active in Mexico, while silver projects also form part of the portfolios of Ovoca Gold (LON:OVG) in Russia and Oxus Gold (LON:OXS) in Uzbekistan. In an interview with Stockopedia, Jim Williams explained why he remains bullish on the prospects for silver and outlined his plans for Arian in the future.
Jim, your experience in mining exploration goes back a number of years, so what led you to begin exploring for silver in Mexico?
I’m a geologist by profession and I have been heavily involved with Mexico for the best part of six or seven years now. In 2005 myself and a colleague co-founded Arian as a private company, raised some money with family and friends and went on to list on AIM in May 2006, and later co-listed on Toronto Venture in July 2006. Up until 2008/2009 we had had a very good run but we suffered in the recession and now we are back on track, we’re in production and it is all very exciting.
I’ve been involved with silver since it was $5.5/$6 an ounce and I always believed that it was unsustainable at that level going forwards. Silver has always been regarded as the poor cousin of gold but we’ve all seen silver now come up through $6, $7, $8 up to $10, $13 and here we are today with silver knocking on $30. I went to Mexico about six or seven years ago as a director of a US company. Just afterwards I started doing my own thing, I put my own portfolio together with my own money.
Is Mexico an easy place to carry out exploration?
Absolutely. I have travelled all over the world, mostly in my younger days in Africa, I’ve been to various European countries, the US and Canada. Mexico does have its problems in certain places but so does London, it’s just one of those things. We are in one of the safer parts of Mexico, in Zacatecas State, and I’d rather be in Mexico than be in Angola, the Congo or Zimbabwe by a long way. It’s a thriving country. I think the only thing holding Mexico back right now is that it is linked to the US dollar and the weakening US dollar, overall, is partly the reason for high metal prices.
What are your views on the market price of silver and are you bullish about where it is going?
If you asked me this six months ago I would have thought: ‘Hit $30? What nonsense’. Now, when it is just knocking $30, within the last month you’ve had the likes of JP Morgan and some of the major banks being caught short in silver, which is actually what the Hunt brothers did in the early 1980s when silver went up to $50 an ounce and then came crashing back down. Today, silver is far more sustainable in terms of where it is going and has got far more uses in supply generally, particularly in construction. I think that given weakening currencies, particularly the overall weakness of the dollar, investors, even American investors, want a safer haven and are buying silver exchange traded funds (ETFs). Statistically, right now, if every person who has an ETF calls in that ETF for the physical bullion there isn’t enough silver in circulation to provide demand for that source alone, never mind every other use of silver.
Construction is probably knocking on 50% of silver usage at the moment. China is growing and developing cities inland, westbound of Beijing, and they want high rise buildings with reflective glass, which is all silver chloride coated. Who doesn’t have a mobile phone today? While it is all minute quantities of silver circuitry, it’s in volume. Nanotechnology, medicine, anti- fungal creams, anti-burn creams, anti-viral medicines – silver is in all of this now. Another use, which is quite new, is in solar powered panels to make them more efficient. Likewise, the best hi-fi’s in the world have got silver wires connected to the speaker systems – it’s very, very expensive but if you want the best sound reproduction forget copper, silver’s the best known conductor of electricity.
Another reason silver is growing is demand is that countries like China want to hoard up, like they do with copper and other metals, to make sure they have enough supply for the future independently of the rest of the world. They are not the only country looking at this, there are many countries who want to stockpile inventories. So it is going to be used more as a bullion currency backup, like gold has been doing all the time. I think now with silver, which is 50-55 times cheaper by ratio than gold, from a perception point of view you get more bang for your buck.
So these are just a handful of new uses and reasons why silver has gone up in price but ultimately it’s a lack of trust, I think, in the US dollar, and also the Euro. Going back 12 months everyone was happy trading currencies but now it’s so volatile and there’s no obvious light at the end of the tunnel. So it’s inevitable that silver, gold, base metals and any company sourcing production is going to be doing well.
Your San Jose mine is your flagship project among a number of assets in Mexico. You have just started production there so how challenging has it been to get the project this far?
In a nutshell it has been very challenging. We picked the project up in 2006 when we raised some money post listing. It was quite a cheap acquisition, it was only $1.5m, based on a mortgage scheme, which we have paid off now. So exploration and drilling was the key thing. We have got 63 sq km of contiguous ground and we’ve got a massive vein system called the San Jose Vein, which runs more or less east to west. On that vein was the old San Jose mine, which closed down in 2001 because at that time 2001 silver was, at best, $4.5 an ounce, so having no mill on site the whole operation was marginal at best. The operators threw the towel in, the project reverted back to the vendor, the vendor approached us in 2006, we did a 90 day due diligence and decided to proceed. And we haven’t looked back. We have done about 18,000 metres of drilling on that project specifically in addition to all the surface work and everything else involved in exploration. We did a scoping study during the middle of 2009 when the markets were flat and now we’re in production.
We have now got contract mining and contract milling on site. Up until three months ago we were delayed with the miller but eventually we signed the deal in September. On that day – 22 September – we had our highest ever volume of 10.5m trades in London and at the same time roughly 9.5m trades in Canada, so 21m trade in one day, which for us was unprecedented. That was our highest ever day in volume and in the last six months, unless I’m mistaken, our volume in London has never been less that 1m shares traded. Up until six months ago Canada was the main market for us, from a volume point of view, but all of a sudden things changed around. London became the main market for us from a volume perspective, and ever since then it has never altered.
What will all this production mean for the near term profitability of the company?
Our philosophy was that we would use about 65% – 70% of the net revenue and put it back into the ground to prove up the rest of the resources. Ultimately for any company right now there’s value in the ground. Whether it’s silver out of the ground or in the ground a company investor can own a pro rata percentage of it. We’ve got 45m ounces of silver right now, plus lead and zinc, or 60m ounces of silver equivalent, having only defined in quite a lot of detail no more than 10% of the known strike length of this one vein system within our concession. Mathematically, you can say there could be 10 times as much in the ground over the rest of the strike length but I’m being quite conservative and assuming only 50% recovery. That gives you more than 200m ounces of silver, plus lead and zinc.
I think that 12 months ago if you had 20m ounces of silver in your portfolio you would have all the big boys on your back. I think the way the market is going right now, I’d be very surprised if no-one is looking at us and thinking about some sort of consolidation exercise. Let’s look at this in a simple way; if I was a high net worth individual with deep pockets and I wanted to get into silver, with having some technical knowledge I’d be looking around not at companies who were fully valued but the companies which are undervalued which are, essentially, turnkey operations. You’ve got mining production just started within the last few weeks, our first ore has gone to the mill after being stockpiled for a few weeks to build up the quantity, we’ve got two drill machines turning right now doing resources. So we’re in production and we’re expanding the resources. We already have a big chunk of resources that are JORC compliant, so I think this is a fantastic opportunity.
Have you seen any evidence of the bigger players coming in and taking a closer look at some of the smaller, more innovative exploration companies?
There has been a lot in the press in the last month or so about mid cap companies coming in, maybe bigger companies as well, looking at taking a percentage of smaller companies. For example, Sprott Asset Management, the big fund in Toronto, is a big supporter of silver. Sprott now, on a fully diluted basis, own around 17% to 18% of us. Sprott’s modus operandi, fearing the dollar is going to crash at some point in the near/medium future, is to buy bullion in the ground which has a value. So although it has not been mined yet, it can be mined easily at the right price. Gold companies, go back 10 years ago when gold was at $350 an ounce, a lot of the companies today wouldn’t have worked at that point in time. Our operation at San Jose wouldn’t work at $6 silver. We’re not at $6 silver, we have done our financial calculations on $18 silver and now we’re nearly $12 more than that. It doesn’t take a rocket scientist to realise what another $12 bucks on the spot price is going to do to us.
What we do at San Jose is produce a concentrate and we sell the concentrate to an off-taker. The off-taker will smelt it and then the smelter will have to refine it or maybe sell it on to another off-taker to refine it, and that gives you your silver bullion proper. Concentrate, as the name implies, is a high value powdery substance. That’s what we do, we make a concentrate and we sell it. So a lot of the infrastructure, which arguably can be quite complex in taking the thing all the way through to a bullion bar, we avoid, for the time being anyway. I’m a big believer in not going too fast too soon, don’t get too big too soon otherwise you will fall over, do things systematically and build it up in the right time. Right now the market obviously loves our story, naturally with the share price and the volume; even though people are selling at north of 30p people are buying in at north of 30p, so they want a springboard to the future.
With San Jose production underway, what is going on at your other projects in Mexico?
We’ve got half a dozen projects at least. We’ve got the Calicanto project, which is strategically located right next door to Capstone Mining (TSX: CS). When I say it is strategically located, we are contiguous with much of their boundary on the one side. That’s the first project I ever put into the portfolio. For me, it is a novelty because I went in initially with my own money and Calicanto was the very first project I did a deal on. It’s quite small, it’s only about 80 hectares, whereas San Jose is 6,300 hectares, but unlike San Jose which is quite straightforward geologically and is a vein system as long as the eye can see, Calicanto is far more structurally complex. We’ve got, so far, four known vein systems all criss-crossing each other. It is going to take a very good structural geologist to unravel what’s gone on in the past. We have done 3,500 metres of drilling there and we have to do more drilling to define a compliant resource just because of those complexities. Until you understand the complexities in detail it’s pointless trying to guess what might be going on.
But nevertheless you are quietly confident about the upside in that project?
Absolutely. This is a fantastic property, it’s high grade, we’ve had consistent grades in excess of over 1,000 grams per ton of silver, which in the industry is called Bonanza Grade. At the same time we’ve had more than 10 grams of gold as well within the same intercept. Well 10 grams of gold multiplied by the ratio of say 55:1 is another half a kilo plus, when you look at the equivalent. I’m not saying that’s consistent throughout the concession but it’s certainly fairly common in certain parts on one of the veins in that Calicanto structure.
Tepal is another property we’ve actually optioned off to Geologix Explorations (TSX: GIX). We did a deal in January this year and Geologix is knocking on a dollar in price, it’s now 90 cents, and we did the deal at 22 cents. So we have made a lot of money on our stock in Geologix and we’ve got cash payments coming in, with another US$1.55m coming in before the middle of February next year. Right now we’ve got $10m in our kitty, so we are cashed up, we’ve got more money coming in and we’ve got a good story and now we’re in production. So I feel good about it.
Why would you say private investors should take a closer look at the company now?
We haven’t run our full length of legs yet. First of all Edison put independent research out for us saying that assuming we, for example, prove up the resources along that San Jose strike extension with further drilling, which we’ve already started, they foresee, at a silver price of $27 silver, our potential price is 195p per share. XCAP, for example, on our mining operation with the exploration upside at $25 silver were saying our share price should be 56p. These are not target prices, these are prices as of now, not accounting for any upside exploration success, which I’d be very, very surprised if we don’t have.
Thank you very much for your time.
Thank you for talking to Stockopedia.
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