David Morgan | Expect All-Time High Silver Prices within 3-5 Years

David Morgan is a precious metals aficionado armed with degrees in finance and engineering.  He covers the mining and metals markets and is know for his particular interest in the silver market.  He is the founder of The Morgan Report and co-author of “The Silver Manifesto”.  In this interview, David shares his thoughts on where silver is heading and his approach to investing in silver stocks right now.

0:05 Introduction

1:16 Where is the price of silver headed?

2:46 Can silver’s price stay below the average AISC for an extended period of time?

3:47 The primary demand driver of the coming silver bull market

5:29 How David is approach silver stocks now

7:09 Discussing Royalty Companies

11:33 David’s thoughts on investing in late-stage silver development companies now

12:14 Discussing silver jurisdictions

15:43 How small of a silver miner would David invest in?

BEGIN TRANSCRIPT:

Bill: Welcome back, ladies and gentlemen, and thank you for tuning in to another “Mining Stock Education” episode. I’m Bill Powers, your host, and today I’m joined with David Morgan, who’s the founder of “The Morgan Report” and the author of “The Silver Manifesto.” Now, if you’re at all interested in the precious metals arena, and this sector, you already know David very well. David, it’s your first time on this podcast so thank you for joining me.

David: Well, it’s great to be with you, Bill. Thanks for asking.

Bill: Well, you are the silver guru, so the first question has to be, where is silver headed? And I’m going to have a follow up question to that being, is $10 an ounce silver possible in 2019?

David: Well, silver’s headed higher but that doesn’t mean it’s not going to lower first. Is it possible to hit $10 in 2019? The answer to, is it possible? Yes. Is it likely? No. Is it probable? No. I really, really doubt it. I mean, the problem with silver is that it can baffle the best of us. It just is that kind of a metal. I mean, if you look back in the 2011 run up, you looked for a year, I mean, that… Silver basically, held a really strong base around $30. I was thinking, “Perhaps it could hold it.” It didn’t. It tested the $26 level like three times and on the fourth time through, I gave out a warning to all our paid people, “Get ready. You better hedge. We’re going through 26, look out.” Basically, from that point till now, it’s been down, sideways, down, sideways, down. It hit the bottom at the end of 2015. We’re still higher than that so I think the lows in.

Bill: We did see under $14 an ounce silver about a month ago, which kind of surprised me. Would you say that the primary driver of the silver price right now is institutional demand rather than investor demand?

David: Yeah. I think the institutional demand or what I’ll all call industrial demand doesn’t really vary that much. It does somewhat, but it’s investment demand that makes the big price swing, so exactly correct.

Bill: Do you think that a commodity like silver, which is also money as you often point out, could it stay below the average all in sustaining cost for extended period of time in a way that we see uranium doing, where uranium might be trading at $28 a pound but on average, it costs about $60 a pound, all in sustaining costs. Could we see something like that happen in silver? I know you’re bullish. But is that possible?

David: Absolutely. The reason being is that primary silver miners only produce about 25% of the market share. Which means 70% roughly, 75%, comes from base metal producers, lead, zinc, copper and gold. As long as those miners, lead, zinc, copper and gold, are mining their product at a profit, silver is only an add on to them. They don’t really care what the cost is as long as their primary market is favorable. You would see a decrease in supply but you could also see a price that is not liked by silver bulls.

Bill: The primary driver then of the coming bull market would be… Do you think we’d have to see in, a monetary collapse or something dramatic happen within the financial system to see a dramatic rise in silver? I know you’ve often talked also about the speculation of silver being used in the electrical vehicle revolution. As you look at the future rising silver price, is it primarily though some financial catastrophe head that would cause you to see that rising silver price?

David: Well, Bill, that’s an excellent question. I’m gonna answer in kind of two parts. One, yes. Primarily, especially go back, you know, from when I started on the internet 20 something years ago. I mean, it’s going to take some type of financial conundrum. Some kind of, “Crisis, scare reset.” You can put in whatever word you want. I’m not trying to cause anyone any fear at all. These things have happened again and again through monetary history but it’s going to take that, “crisis” to move it substantially higher. Having said that, there have been some interviews where I’ve pointed out that it could have a double factor. Meaning, that during a financial panic, run to gold, silver tags along or whatever is moving it from an investment perspective, also tightens up the industrial side supply enough where they become speculators out of necessity. Which means that you’ve got to run to gold, spills over into silver, silver physical’s coming off the market like crazy like it did in 2011.

All of a sudden, Apple Computer, Mitsubishi, Samsung, LT, all decide that their warehouses aren’t holding very much silver whatsoever at all. Now, they’re competing with investors to warehouse some because if they don’t have it, they’re out of business.

Bill: When you approach silver investments, because you not only invest in the precious metals, the physical precious metals, but you also focus on resource stocks, how are you approaching silver resource stock investments right now?

David: Basically, we’ve, you know, kind of flattened out. We’ve put it in the silver market and we’ve gone in as kind of the resource de jour, you know, lithium, moly, a long time ago. Moly’s actually up this year, one of the few metal that’s up. Cobalt, we have a great, you know, if you want to be an owner of one of the best cobalt plays available, you know, we’ve reported on it. We were first on zinc. Our zinc company had great silver credits. That stock doubled. We sold it at a double. It’s since then fallen off substantially. We’re not afraid to take a profit. We’re not afraid to rotate. We’re not afraid to look at, you know, what’s the best going on the resource sector currently. Our uranium pick kind of made a round trip. It fell off like a lot of the uranium stocks but it actually started to move up rather well. If you got in during that time frame, it’s done quite well. It’s also got a great vanadium resource that comes along with that project. We’re pretty happy about that. Obviously, as you said, not just silver and we just look for what’s, you know, the best play. But overall, consistency does pay off, meaning that, since we favor the royalty and streaming company so much, and these companies are basically financing houses with extremely low overhead, which means high profit margins, and they still do well, even in kind of the worst of times. Some of those top tier, cash rich, unhedged, streaming/mining/royalty companies, still are doing pretty well for our investors.

Bill: Yeah. I was flipping through “The Silver Manifesto” this morning in preparation for our interview, and I read the chapter that you wrote on royalty and streaming companies. It was pretty convincing that you really like this model and it made a lot of sense. I believe you even said to look at them as a bank, essentially.

David: Yeah. A bank that’s built with metals backing it. Yeah, you know, I mean, a lot of people don’t know what we do, or understand or are sophisticated enough or care or whatever. But, you know, we care, you know. We care about you, we care about your profitability and how well you do in these markets. And, you know, it’s been been rather dire straits for many this last five, six years, and we’re included in that group. But if you look at that group as a whole, we’re still, you know, surviving. Many have left, many have moved into pot and that type of thing. Whereas, you know, I’ve always written kind of an institutional quality letter for the retail market. We have hedge fund managers that, you know, follow us and that type of thing. But nonetheless, you know, no regrets in what we’re doing. We also think that now’s the time. We think that, you know, this market is pretty well washed out and we’re looking forward to much better times of the next. Not only next year, which I think will be a good year, but not a great year, but over the next three to five years, I think it’s gonna be substantially higher than probably 2011 believe it or not.

Bill: Within the next few years is your expectation?

David: Yes. It is.

Bill: Wow. A couple more questions on royalty companies. Do you look at the ones… There’s been a lot of royalty companies and also like a hybrid I would refer to, company between a prospect generator and a royalty company. Are you looking at any of those sub-500 million market cap or even sub 100 million market cap royalty companies?

David: Somewhat. As you may or may not know and you probably don’t know Bill, I started one. I started Lemuria Royalties, and we’re looking at that sweet spot where, you know, Franco-Nevada or Royal Gold or Wheaton Precious Metals wouldn’t want anything to do with such and such a company because it was so small, it wouldn’t really fit their portfolio. But it would for a niche market like ours. We actually went in and started that company, or I started with a very solid team. We found a good streamer that we got and put into the portfolio a lot of cash. Since that time, it’s been merged and the cash that was in that merger has been moved into a gold-backed bond at about 11% which is pretty good price. You got all the upside to the gold price and is backed by gold and you’re earning at 11%. Our investors are happy. They’d rather see a public event where you get the multiples that you get in a gold company, and that hasn’t happened yet. But in this market, you know, we’ve done fairly well. Adding one thing on to that, I’m not trying to degrade anyone, but what I will say is we were one of a few that had the same idea that there’s a niche market in a royalty streaming space for micro cap-type of situations, you know, company’s a million dollars, $2 million, $5 million, that kind of thing.

Several of them made deals that were absolutely something I would walk away from because they didn’t generate a real rate of return for their investors. We look at, me as the head, at a minimum of 50% IRR, internal rate of return. Unless that was going to be the minimum, I would not do the deal. Some of these deals were made just to do deals in my view, but nonetheless, that’s… I’ve probably over answered the question. Thanks for asking.

Bill: I was speaking to a mining engineer actually just four days ago. He told me… I asked him specifically about what deals are out there in streaming and royalty right now. He said there are not many 15% IRR opportunities out there right now.

David: Yeah. That’s right. I mean, we did one and it actually turned out better than that. But we’re just basically on a hold mode right now. The new company has a little different model than a streaming or a royalty. I don’t have time to go into it, but it’s basically a refinery. There’s some credits given on the refinery side where you could buy gold, silver or whatever you’re going to refine at a discount and I’ll just leave it at that. If you’re interested, you could send me an email. Just go to our website and just go to [email protected], and my staff will forward it on to me.

Bill: David, a couple more questions about investing in silver miners right now. Late stage development plays that have a big silver deposit. Are they at all of interest to you as potential optionality plays since you see a rising silver price?

David: Absolutely, but I have to look at the real time more or less. I’d have to do some technical work and see if it’s, and fundamental work, see if it’s overvalued, undervalued or fair valued and how much upside it has. I’ll do a sensitivity analysis like it’s outlined in the book. We’ll take a look and if it looks like it’s fair or undervalued, and not many people know about it, sure I take a shot at it. I would put it on “The Morgan Report” more or less as a trade rather than a long term holding depending on the dynamics I just outlined.

Bill: In silver jurisdictions, Mexico is potentially changing some upcoming laws. What are you liking in terms of silver jurisdictions and what cautionary advice might you give listeners?

David: Well, we’ve already cautioned our members about the Mexican situation. I’m not overly over reactive to it. I said early on, I think we should hedge a bit, we did and the hedge worked out because the silver price dropped so much. Nothing to do with the election really. But I do think there’s some concern now more about the election. I think it’s going to be a tax increase. I think it’s something that’s not going to be a huge big deal. Yeah, it will knock off some of those Mexican silver miners for a while but, you know, silver is going from the current price in the 14s up into the 25s, 30s to beyond. That’s going to be a small situation in the bigger scheme of things. So, you know, taking it in stride, watching it closely. Usually governments deal with simple and easy. It’s easy to increase a tax rate. It’s hard to confiscate, nationalize a mine, that type of thing. I mean, I know those noises are out there. I know there’s, you know, people kind of pushing that meme.

I don’t buy into that whatsoever at all. I think it’s more likely to just do a tax increase.

Bill: Do you think a silver mine like the Escobal mine in Guatemala, owned by Tahoe Resources… Of course, Tahoe is being acquired now, but that mine. Do you think… Do you have any opinion or expectation with that mine?

David: A little bit. I mean, we did a writeup at “The Morgan Report” and I don’t have in front of me, because I don’t wanna misstate for people that pay me. But we went through it. I mean, sometimes, you know, if you really dig deep, a lot has to do with goodwill when you move into the country. I mean, if you do it right, and most Canadian miners do but not all, anyou build a great rapport with the people that you’re mining, you know, in their jurisdiction and you build it right, in other words, build it a right with the people and the community, and what are they going to give besides jobs and that type of thing, then you have a lot less political backfall or backlash on that side of the thing. And, you know, I don’t want to go too deep, but yeah, we addressed it. We think that Pan American is going to make it work. Ross is a legend in his own time, as he should be. He’s certainly addressed all kinds of problems throughout the mining industry, throughout the globe really.

Russia’s one. I mean, I don’t wanna belabor it, but, I mean, even Ross made a mistake in Russia, but he admitted it and moved on and, you know, cut his losses and just moved forward. Hopefully I answered that question. I do want to stress the point that there’s a lot to be said about the spade work and I don’t mean that so much as… I mean that as a metaphor, you know, going in and really getting to know the location, the people, what they want, what they need, what’s the most important to them, and that type of thing, and, the politicians as well obviously. And, if you can get that accomplished, and kind of set it up, where everyone pretty much knows what’s going on in the future, why, who’s getting…you know, how many of the town’s people will be hired, and on and on. If you go in there with a bit of a different attitude or perceive that you’re the big, you know, nasty mining company and you’re dah-dah-dah, you know, you can’t have problems. Now, just because you set the table correctly, doesn’t necessarily mean that everything’s going to go smooth. It certainly pays big dividends if you at least start in that way.

Bill: Rick Rule says that small mines have all the same potential problems as big mines, yet they don’t possess the potential cash flow upside that the big mines have. With that being said, do you ever invest in smaller producing junior silver companies?

David: Generally no. I mean, we have a rule, pretty much, rule thumb, we want 20 million ounces of silver, not silver equivalent as a minimum before we even talk to anybody. Have I broken that rule? Yes, I have. In fact, we did a write up on a company that we discussed off air that we don’t own anymore. We did. We owned it through a drilling company, because they had a big position in it, as you probably know who I’m talking about. That’s the exception, not the rule. But if we do make the exception, we explain it fully. Again, we just rewrote it, not owning any at this time, but that doesn’t mean some of our earlier subscribers, because we we have a lot of, you know, loyal people that have been with us, you know, 10 years, 15 years. I mean, we have some people that have been with us from the inception of “The Morgan Report.” Not many, but some. They might still own it, so we wanted to give them the, you know, the latest, the greatest, an update on that company.

Bill: David, before you go, is there anything you’d like to make listeners aware of?

David: Yeah. I’m breaking out into the energy space. I’ll be writing a higher end report for income cash flow and large capital gains. If you’re interested you can go to the new website URL called comingenergyboom.com. That’s comingenergyboom.com. All one word.

Bill: Your websites are also themorganreport.com and silver-investor.com. Is that right?

David: That is correct. Thank you

Bill: David. Thank you for joining me today. I appreciate it.