Some Mining Investors are Already Witnessing Hyperinflation Over the last decade, investors seeking protection from inflation have been accumulating gold and silver mining shares. Gold and silver have appreciated by more than 300 percent from their lows, so it would be logical to assume that mining shares have performed even better given their inherent leverage in earnings potential. Ironically, some of these investments have already suffered from their own hyperinflation in the form of share dilution. Just as governments have mismanaged their budgets and printed too much money; some mining companies have done the same to the detriment of their shareholders.

Coeur d' Alene (CDE), an American silver miner, is one such company. It has diluted its shares so much that on May 27, 2009 it had a reverse 10 for 1 stock split. This article will use post split adjusted figures. Governments often do the same thing with their failed fiat currencies. In the wake of Germany's Weimar Republic hyperinflation, a new Rentenmark was created that was equal to 1,000,000,000,000 of the old German Marks. While not as bad, CDE's shares outstanding have risen from 2.4 million in 1999 to over 80 million in 2009 - a factor of more than 33.



The majority of miners do issue shares in order to raise capital that is invested in projects with double digit returns; however this hasn't proven to be the case for CDE. $1000 invested in CDE in 1999 would now be worth only $440, while an investment in silver would have grown to $3300, and PAAS would have grown to $4220. Clearly not all precious metals investments are the same, and not all mining companies track the price of gold or silver over the long run.



Despite the all time highs seen in gold and a large increase in the price of silver, CDE was unprofitable in 2009 and the share price continued its long term trend downwards. Management's compensation was able to hit a new high though.

	2005	2006	2007	2008	2009
Executive Compensation	2,325,837	3,254,007	5,677,971	5,064,010	5,997,589
Dennis Wheeler, CEO of CDE	1,459,901	1,897,946	2,560,960	2,245,362	2,527,319

It is possible to be right about a major bull market, but still lose money if the wrong investments are chosen. Investors should be careful to only invest in mining companies that restrain themselves from over-dilution. Furthermore, if mining companies such as CDE lose half their value in a 10 year bull market due to share dilution, there is a significant risk that they won't survive a bear market in precious metals.

With the price of gold hovering near 67 times the price of silver, a logical deduction must be that silver is much more abundant, and easy to acquire than gold. To the contrary, evidence proves otherwise. In fact there is very little silver to be found anywhere.

Known Above Ground Silver Holdings
Form	Ounces
Silver ETF SLV	295,313,780
US Eagles Minted	240,418,077
COMEX Warehouses	114,102,049
Estimated Private Bullion (non eagles or maples)	120,000,000
Central Fund of Canada	75,209,103
LBMA Estimated stocks	75,000,000
Canadian Maples Minted	21,303,000
Silver ETF ZKB - SWISS	7,397,885
BMG Bullion Fund	5,033,609
Total	953,777,503

There is nearly twice as much gold as there is silver in the form of investment grade above ground bullion and coins, and that ignores that fact that 52 percent of the worlds gold is kept in jewelry. While there is an 953 million ounces of above ground silver, there is an estimated 1,803 million ounces of above ground gold in bullion form.



It is important to note a few structural differences in the holdings of gold and silver as well. Approximately half of the above ground gold bullion is held by governments. There are no known silver reserves held by governments. While governments have historically sold their gold to finance their budgets and keep the gold price contained there is no similar readily available entity that could sell silver bullion. Precious metals investors often hold onto their precious metals for time periods measured in years, decades, and lifetimes. Most private investors will not sell their bullion for a 10 percent or possibly even a 100 percent gain. Therefore, even if there are nearly 1 billion ounces of silver in existence, the question remains on how much of that is actually for sale at anywhere near today’s prices.



The implied dollar value of all the silver bullion is tiny compared to gold, or other assets. In fact, measured in dollar value, silver is 1/127th of gold. Many investment funds have more than $16.88 billion however gold is more readily available to purchase in larger dollar amounts. Silver may be one of the most neglected and unloved assets of this century. Perhaps, the reason why silver is so cheap, is ironically because it is too rare to be invested in by asset managers. Or is it?

One way to value something is by its replacement cost. Appraisers and insurers often use the cost to replace an investment as a baseline of value. In analyzing the silver market, one way to value silver is by measuring the real cost of producing an ounce of silver. This value does not include any premium from investment demand or industrial demand, but it provides a pricing floor because companies don't stay in business for long by losing money.

With the price of silver near its highs this decade and far from its bottom of $3, it would be easy to assume that miners are highly profitable. Considering first quarter earnings from the top four pure silver miners (PAAS,CDE,HL,SVM, Excluding SLW because it doesn't mine, and SSRI because its arguably an explorer), just how much are they earning from these high silver prices?

Company	Earnings	Silver Produced	Breakeven Silver Price
PAAS	$19.1 million	5.5 million ounces	$3.47 below spot
CDE	-$8 million	1.3 million ounces	$6.15 above spot
HL	$18.4 million	2.5 million ounces	$7.36 below spot
SVM	$9.8 million	1.08 million ounces	$9.07 below spot
Total	$39.3 million	10.38 million ounces	$4.33 below spot

The average realized sales price of the silver sold was around $16.90. Averaging the earnings and production from all four companies, the breakeven spot price of silver was $12.57. However, it should also be noted that the majority of these earnings did not actually come from silver production, but the byproduct sales of base metals. Silvercorp (SVM) recorded a negative silver cash cost of $4.61 per ounce, and Helca (HL) recorded a negative silver cash cost of $3.03 per ounce. Without sales of other metals, many of the worlds silver mines would be still unprofitable at these prices.

Miners often provide financial figures that sound too good to be true. For example, Pan American Silver's cash cost per ounce of silver net of byproduct credits was only $4.35. While this sounds fantastic, it doesn't include many other fixed and variable business costs such as infrastructure, maintenance and exploration that is vital to replace consumed resources over time.

While these mining companies have excellent potential and leverage to the silver price, their financial statements also provide a window into just how profitable they will be at lower silver prices. A 30 percent decline would render the industry unprofitable, and if prices fell further mining production would be delayed or canceled. In addition, if energy and water prices spike, or if wages rise, a similar outcome could occur. Despite rising %500 percent in the last 10 years, the price of silver is scraping its own floor.

Dust off your pom poms, the Dow has just crossed the 10,000 level to the upside. Most people aren't partying like its march 1999 though – when the Dow first crossed that level. It has crossed the same level more than 30 times over the last 11 years, and the same exuberance has worn thin.

Perhaps investors are less exuberant because the Dow today buys so much less than it did in 1999. Today's Dow 10,000 is worth less than 7,500 when factoring in the governments CPI index. Compared to the price of oil in 1999, the Dow has fallen to around 2,650, and compared to gold its worth only 2300. The Dow to Gold ratio has fallen from 37 to 8.

Not only has the Dow remained flat since 1999, it has lost anywhere between 25 and 80 percent of its value, depending on the comparison involved. The concept of compounding has remained the same, but now in reverse. Losses in both nominal and real terms compound to create larger losses.

While equities have not provided returns or protection from inflation over the last 11 years, commodities and other real assets managed to gain in value and have acted as a pillar of financial stability. Gold and silver have performed exceptionally well, and proven that it is possible to generate positive inflation adjusted returns in precious metals. In other words, gold and silver not only acted as a store of value, but also provided returns beyond that which can be discounted by a rise is prices or monetary supply. Make no mistake, over the long run precious metals are not expected to rise at a faster rate than inflation. However, buying precious metals at the right time and price can yield outstanding returns just as the Dow did from 1980 to 1999.

Where are we in this investment cycle? Gold and silver were considered too risky at 270 and 3. When they are considered no risk buys, then you can look for similarities to 1999 - and we are far from such sentiment.