Sprott's call for silver miners to re-invest in silver a ploy to force physical supply shortages

Speaking to Mineweb the week after posting a letter on King World News calling on silver producers to act to ensure that the physical market, rather than the paper one, determine the price of the metal, Sprott said that he wished producers of the metal would "finally realise what the paper boys did to them in 2008 - they nearly bankrupted them all and yet they haven't got involved in these lawsuits which I find troubling."

Asked whether or not he has received any feedback from the producers on his suggestion that they "reinvest 25% of their 2011 earnings back into physical silver," Sprott said that there had been a groundswell of interest - more than he had ever seen before - but that still more needs to be done.
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By investing in the physical market, Sprott believes, producers would be able to show that there is indeed an imbalance in the physical silver market.

"It's a pretty fine line right now whether they can meet all the demand on a day-to-day basis, if by putting 25% of their cash into silver - it might have the effect of decreasing the supply by around 10 percentage points... I believe 10 percentage points would be enough to make a difference."
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Over the shorter term, he says there is clear evidence of strong demand for the metal, "demand for silver is versus the demand for gold in the investment arena and when I see people like Gold Money sell as many dollars of silver, as gold. When I see the US Mint sell as many dollars of silver as gold which by the way implies in both instances, 50 times more physical than gold. And when we did the IPO for Gold Trust we made $440 million. When we did the IPO for the Silver Trust we made $550 million...Well how can the price be 50:1 when the money is going in 1:1?"

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Just as many individuals and institutions prefer to own silver instead of cash, some silver miners are choosing to hold onto their silver.

A few successful mid-tier silver miners, such as Endeavour Silver (NYSE: EXK), have recently been hoarding silver because they believe the price is too deflated. Even before yesterday's statement from the Fed to keep interest rates low through 2014, the discounted price of silver was fairly evident.

Instead of selling at low prices, these companies are deciding to hold on for a better future price. This is a smart move.

Think about it - if you owned nearly a million ounces of silver and buyers would offer only $28 per ounce, would you sell?

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DCFusor said:

To be able to do that they need to have enough other cash flow to keep the mines operating - once they get over that hump, they can go to town...but not before. Which is why nearly bankrupting them was so important in some quarters.

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The bottom line is that we don't need $50 silver to make money with silver miners. Many of the best-of-breed silver miners are baseline profitable at $15 silver or even lower in some cases.

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AGXIIK said:

I checked their website and found some good data.

Their 2011 annual production was 3.7 Million oz of silver and 21,800 oz of gold at about a 45 to 1 production ratio. This was an 11% increase over the prior year.

But the interesting element of this was Cooke and the board's decision to withhold silver. The firm withheld over 25% of its silver and gold production, holding nearly 1,000,000 ounces of silver of the sale market. About 7,000 ounces of gold were also withheld.

This caused the firm to show a 39% yaer over year sales loss. That takes alot of courage to crater revenues to counter the 2011 manipulated volatility of silver and gold prices when shareholders want income, net profit and dividends.
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McEwen Mining, the product of the January fusion of US Gold and Minera Andes, said on Thursday its San Jose mine in Argentina produced 1.45-million ounces of silver and 20 934 oz of gold in the fourth quarter.

The TSX- and NYSE-listed firm also said it held around one-third of its $78.8-million treasury in bullion, betting that prices will rise.

CEO Rob McEwen followed a similar practice when he headed up Canada’s Goldcorp, and repeatedly forecast that gold prices would hit $5 000/oz by the middle of the decade, and silver $200/oz.

Last year, Canadian fund manager Eric Sprott called on silver producers to hold some of their treasuries in the metal itself.
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