ECU Silver Mining Inc. (TSE:ECU)

[basserdan]

'GATA' Bill Murphy on ECU Silver....

Le Metropole Members,

I have served commentary on ECU Silver at The Dos Passos Table.

If I might say so myself, very few in the investment world have called the precious metals rise over the past decade like me and the rest of the GATA camp, especially over the past three months. Over those months, it was clear that silver had gone into "play" and was going to make a big move to the upside. This analysis was supported by the technical condition of the market, which was in the process of completing huge bases, conducive to supporting much higher prices. The weekly and monthly silver charts made that plain as day....

Extremely disturbed, I called Michel in an effort to get to the bottom of the problem. It was time to figure out what to do. Enough is enough. The choices were to switch into those silver stocks on the move, switch to another misunderstood dog that had not moved, move into more physical silver, or stay with ECU. Michel suggested he fly up from Mexico to Dallas and go over the ECU picture over lunch, which he did last week. This is a review of what we covered:


Bill Murphy on ECU Silver

October 16, 2010

If I might say so myself, very few in the investment world have called the precious metals rise over the past decade like me and the rest of the GATA camp, especially over the past three months. Over those months, it was clear that silver had gone into "play" and was going to make a big move to the upside. This analysis was supported by the technical condition of the market, which was in the process of completing huge bases, conducive to supporting much higher prices. The weekly and monthly silver charts made that plain as day.

Unfortunately, my method of taking advantage of my silver analysis has been a bummer and disappointed a number of Café members who knew what I was up to and followed my lead. Veteran Café members know I am talking about the share price of ECU Silver, in which I made a huge bet and own more than a million shares.

Some history in brief. I visited ECU’s main Velardena mine back in 1999 and met Michel Roy, the main force behind ECU. The stock was at 20 cents or so. After a bit of a rally, it collapsed, going to ½ cent and actually didn’t trade for 6 months. Michel then became CEO, after a stint at running the geology aspects of the company, which he is so good at.

Michel began to hit one target after another and the stock ran to $3.65 Cdn. at one point. From thereon in it has been all downhill. Well at least for the stock price. Back then ECU had proved up 200 million silver equivalent ounces, with more big hits right around the corner.

My colleague, Adrian Douglas, who is as smart as they get, wrote the following report on the way up:


ECU Silver Mining - An Extraordinary Junior Mining Company

By Adrian Douglas
October 11, 2006

http://www.lemetropolecafe.com/Pfv1.cfm?pfvID=5671&SearchParam=ECU%20Silver

******


Fast forward to today and ECU now has 420 million silver equivalent ounces to account for their efforts. Yet, the stock has collapsed to 71 cents, even while other silver stocks have risen 400% over the past 18 months. ECU can’t seem to get out of its own way.

It was bad enough a year ago when ECU was failing to begin to move with the other silver stocks, but the last couple of months have been beyond comprehension the way I saw it. At worst case, I expected ECU to soar when silver took out $20 per ounce. But no, NOTHING.

Extremely disturbed, I called Michel in an effort to get to the bottom of the problem. It was time to figure out what to do. Enough is enough. The choices were to switch into those silver stocks on the move, switch to another misunderstood dog that had not moved, move into more physical silver, or stay with ECU. Michel suggested he fly up from Mexico to Dallas and go over the ECU picture over lunch, which he did last week. This is a review of what we covered:

Basically the question is: "How can a stock be the darling of the market by going from pennies to $3.65 in three years, from 2003 to 2006, to a steady decline and now a dismal performance compared to other companies in the same industry?" What is different now?

From 2003 to 2006, ECU was an exploration company growing its resources with tremendous success in a good market. Every drilling programs yielded good to excellent results on a weekly basis. ECU was a company for individual shareholders with most of the publicity surrounding the company being done by word of mouth and enthusiastic shareholders … especially by MIDAS.

In 2007, a collective decision based on market perception and the perceived need to involve "big players" was taken to shift from an exploration oriented company to a production based company. Although ECU had been producing irregularly since 1998, it was decided to focus on significantly increasing the production to reach a positive cash flow situation. They went through a series of technical problems, first with the sulfides because most of the value was in the gold/pyrite concentrates and then with the oxides as it took longer than planned to develop the mines as they had to create an entirely new infrastructure. They finished that evolution only recently when the sales finally started to pay for the operations and they got a buyer for their gold/pyrite concentrates.

Because of all the delays and a poor market at the beginning, the stock drifted from its heights even though they managed to clean up some pending legal issues, acquired the properties, found new zones etc. Now that the market is going up again, all, like myself, are asking why the big players aren’t moving on ECU? And why isn’t it going up by itself?

Michel explained to me the technical big players are looking at a lot of projects at the same time and some are discarding ECU because they think you cannot have a large production from thin veins. Michel said not so. The answer is that there certainly were a lot of extremely large mines with thin veins in South Africa. Yes, it would be difficult to have a mine in Canada or the US with 1,000 miners but not in Mexico due to cheap labor costs. Another angle is that a very large portion of ECU’s resources is in the category called inferred. Most players consider the inferred resources as having a low probability of becoming real. However, in ECU’s case as demonstrated a number of times, they normally get more in reality than expected by the resources numbers. To be more specific, ECU is generally only being credited for between 5% and 20% of their inferred number when the number is more likely to be 100%.

I asked Michel to elaborate…

"This has to do with the fact that whenever we have drifted into or mined areas that were classified as inferred resources, we always encountered more tonnes and/or better grades than the resources were suggesting. (see recent press releases of ECU dated May 17, August 25, August 31, September 16 and October 7) This has to do with the extraordinary continuity of the veins in the local mineralized systems, within the limiting dimensions of the geological systems, we ALWAYS find the main veins. The reason we have not be including a lot of those resources in a higher category (indicated resources) is that we have never been able to predict the grade with enough statistical accuracy even though we have been able to predict a minimum grade."

As for the funds, the analysis look at ECU’s balance sheet and immediately come to the conclusion that the company will be doing a financing tomorrow and investors are better to wait and participate in it. Some even start shorting the stock immediately after meeting with Michel, or President Steve Altmann, even if ECU insists it will not do any public financing. They do not realize that the Company has been living like that since 1999 and has made incredible progress over all those years with normally near to nothing in the bank account. For ECU, it is a way of living and it is probably the main reason they have one of the lowest operating cost per tonne for this type of operation.

I pressed Michel on ECU’s costs. He began to get into costs per tonne, which did nothing for me and my amateur mining analyst mind. I asked him if he could come back with costs per ounce, which he did today:

"Calculating the cost per oz is a more interesting number for the analyst but it is a very complex procedure if you want to do it correctly. Also there is two basic ways of doing it, the first which is used by most majors is to give a credit for the revenues from other metals that the one considered and the remaining cost is divided by production. For example a gold mine with 100% recoveries, .1 oz/t gold, 1 oz/t silver and $60/t cost will give you $400/oz gold as cash cost using silver at $20/oz. If you have credits from base metals, it would further reduce the cash costs. I think it is a totally wrong approach to calculating cost/oz but agree it is easier if you have a metal representing most of your revenues. My preferred way is to convert all (In our case we could give credits for base metals and convert gold in silver or vice-versa) the revenues in the metal you want to give your cash cost. For that you have to consider NSRs for all the metals, not the recoveries, and convert accordingly.

Using the converted numbers, from the database used by Micon but modified to remove the bulk mining in all veins including San Diego, we get new resources of 24Mt 2.42 g/t Au, 175 g/t Ag, 1.84% Pb and 2.22% Zn. Using recoveries obtained in metallurgical tests and current contracts (NSRs of 75% for gold, 62% for silver, 60% for lead and 40% zinc which can be improved, I am 100% certain), we would get between $5.25 and $6.29 total cost per oz for silver-eq. and $339 and $406 total cost per oz of gold-eq. If we were to use the credit method, we would be negative in both cases. Also that was calculated using prices of $1,087 for gold, $16.82 for silver, $0.90 for lead and $0.87 for zinc.

Using the converted numbers, from the database used by Micon but modified to remove the bulk mining in all veins excluding San Diego, we get new resources of 16.4Mt 3.48 g/t Au, 195 g/t Ag, 1.61% Pb and 1.97% Zn. Using recoveries obtained in metallurgical tests and current contracts (NSRs of 76% for gold, 64% for silver, 62% for lead and 41% zinc which can be improved, I am 100% certain), we would get between $4.32 and $5.19 total cost per oz for silver-eq. and $279 and $335 total cost per oz of gold-eq. If we were to use the credit method, we would be negative in both cases. Also that was calculated using prices of $1,087 for gold, $16.82 for silver, $0.90 for lead and $0.87 for zinc."

My head is spinning, but that seems pretty good to me, outstanding actually.

As for the day to day moves in the stock, ECU has one large seller and several entities playing the stock for pennies, fully expecting that seller to fill their orders should they get caught short. A good example was last Wednesday. The day started with a left over 100,000 shares block for sale at $0.73 and the bids piled up to take it out, opening the way to go to much higher levels. Minutes before the opening, the one entity that always blocks the stock from going up, whenever he can, filled all the bids to push the stock down and continued to put pressure on the stock all day. Result, closed one penny down on the TSE but up everywhere else. It is a simple question of mathematics. ECU needs to keep the bids coming until the pressure is sufficient for the day to day players to either cover the short positions or start playing the stock upwards … in other words, blow the vulnerable shorts out of the water.

ECU has several strategies to do so: restart the exploration program by drilling the massive sulfides at depth since confirming any significant extension would bring the majors back at the table within hours; increase the revenues, net profits and production on a quarter by quarter basis; develop contacts with strategic partners, financial or technical; reevaluate the resources base to improve the quantity and quality of our resources.

Once again I asked Michel if he would elaborate…

"One fact that nobody denies is that the deepest intercepts in the Santa Juana veins system yielded extremely high assays over very good widths in massive sulfides. These generated more interest than most of the other achievements of the Company. The Company has now the financial and technical means to go back and drill the extensions of these intercepts as well as search for new ones nearby and intends to do so in the very short term. This will in no way slow the current production which the Company plans to increase at a steady rhythm and will generate a lot of interest in the mining circles as a confirmation of continuity would certainly justify the development needed to reach it for mining."

After speaking with Michel over lunch, it is my take that ECU will resolve the issues bothering analysts in the months ahead and the stock will do what it did in 2006 and then some. Once the analysts appreciate ECU really does have 420 million equivalent silver ounces and VERY likely to firm up 1 billion ounces in the years down the road, they are likely to pour into this very undervalued stock. There is no reason not to think ECU will eventually have one of the largest silver mines in Mexico, which will certainly grab the attention of the majors over the next year.

Once the psychology changes, the share price is very likely to make a pretty fast run to $5, digest those gains, and then move on up from there. If silver does what I think it is going to do in the months ahead, the price of ECU should soar. With that in mind, I am standing pat and waiting for ECU to perform like I thought it would years ago.

NOTE: to be clear, this is not investment advice, but personal commentary on a company that I have invested in for more than a decade and which many Café members are shareholders.

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