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The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, November 18, 2009

Q: What is your favorite silver investment right now? – A.H.
A: My answer to that question used to be Silver Wheaton, the $5 billion silver "streamer." Silver Wheaton doesn't run mines. The company buys a silver "stream" (usually a byproduct from a gold or base-metals mine) before the mine begins production.
That means Silver Wheaton sidesteps a ton of risk. Mining is a tough business, and only the best make money consistently. Silver Wheaton gets its silver whether the mine makes money or not.
But Silver Wheaton pays for that security. The company locks itself into long-term contracts, like the one it just signed with giant miner Barrick Gold. It will pay around $625 million for 52 million ounces of silver production over the next eight years or so. That works out to around $12 per ounce of silver that's still in the ground.
Silver prices were at $10 per ounce earlier this year. I don't think silver prices will fall back that far, but who knows what the future holds.
That's why my new favorite silver company is Silvercorp Metals, a billion-dollar Chinese silver miner. Silvercorp just announced huge second-quarter results. It increased production by 35% to 1.2 million ounces. But what's really astonishing is its cost per ounce... It has none.
Silvercorp's ore is so rich in lead and zinc, it can mine silver for FREE.
The company receives an extra $6.33 for every ounce of silver it produces. Its "effective" silver price was more than $17 per ounce produced last quarter. Today, its effective silver price should be up around $23 per ounce (silver's spot price is $17 + $6 extra).
Its margins are huge, second only to Silver Wheaton. And Silvercorp can still make plenty of money on its production if the silver price falls below $10 per ounce.
My S&A Resource Report readers are up more than 100% on Silvercorp since June, and it's over my "buy up to" price. But I've found two other ways to invest in China's booming precious-metals industry. Both are small gold miners that produce gold with the help of the Chinese government... the only way to make money mining in China. To learn more, click here.
Q&A Update: After last week's essay – We'll Never See $50 Oil Again – I got more than a few notes calling me a moron.
I wrote that oil companies were replacing their oil reserves with natural gas. Apparently, some readers "looked it up" and decided I was full of it.
This response, from D.B., at least managed to stay civil...
While I won't dispute the assertion of the title of this article, I think Badiali's comments about ExxonMobil (and possibly the other majors) are ill-informed...
In 2005, CEO Rex Tillerson announced the 12th year in a row of greater than 100% reserves replacement. That year XOM also reported 22.4 billion bbl of oil and gas reserves. In 2007, Tillerson announced that 10 year reserve replacement ratio was 112% with PROVED reserves of 22.7 billion bbls.
Badiali needs to understand his business much better than he does in order to avoid erroneous assertions like this. – D.B.
I have the utmost respect for Rex Tillerson, who runs the best oil company in the world. However, like the CEOs of many major oil companies, he occasionally spouts pure crap. You, D.B., stepped right in the middle of it.
The reserves Tillerson told you about aren't oil.
Reserves are reported in barrels of oil equivalent (BOE). So he's including natural gas and gas liquids in his calculations. Actual oil reserves are down. Take a look...
BOE Reserves*
22.4 billion
22.7 billion
22.5 billion
23.0 billion
Oil Reserves**
10.5 billion
10.9 billion
10.3 billion
10.1 billion
* ExxonMobil's 2008 Annual Report
**Data from Bloomberg
Yes, Exxon added more "BOEs" than it produced each year... But it added a lot more natural gas than oil.
Worse yet, oil companies calculate BOEs as 6,000 cubic feet of natural gas to one barrel of oil. By that ratio, if oil sells for $78 per barrel, natural gas should trade for $13 per thousand cubic feet. It's actually trading for about a third of that price.
Oil companies are producing oil and replacing it with gas. Gas is cheaper to find than oil, and cheap finding costs please Wall Street. Unfortunately, replacing oil reserves with natural gas will erode shareholder value in the long run. So when you're buying energy stocks, focus on oil-rich reserves.
Good investing,

In The Daily Crux
Market Notes
Big Tech rallies... Microsoft, IBM, and Hewlett-Packard make fresh highs.
Ford hits fresh high... America's last big independent carmaker spikes 26% in November.
Coal gains 5% in two weeks... coal miners Yanzhou and Peabody at new highs.
Earnings today... BJ's Wholesale, Gymboree, Limited Brands, PetSmart.
Market Watch
Symbol Price
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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