Silver is an unusual metal in the sense that it is produced mostly as a by-product of gold, copper and lead-zinc mining. So for those bullish on the silver price, investment opportunities have been limited to bullion or a handful of primary, mostly U.S.-based silver producers.

But with silver finally settling into a higher trading range of US$5-US$8 per ounce, a new generation of Canadian silver miners are listing on the Toronto Venture Exchange to take advantage of renewed investor interest in the precious metal.

Most of these emerging producers are acquiring small, privately owned mines in Mexico and Peru that have seen little or no investment in exploration or development since the early 1980s, when daily spot prices topped US$40 per oz. before collapsing into the US$4-US$5 per oz. range for much of the 1990s.

Their business plans are simple, in theory: spend a few million dollars upgrading the mines for production and then use the cash flow from operations to fund exploration and acquisitions in the surrounding district. The successful among them will avoid the crippling cost of mine-building by acquiring turnkey operations, and provide growth through exploration in areas overlooked in the past.

“The previous operators never drilled a single exploration hole,” says Brad Cooke, president of Vancouver-based Endeavour Silver Corp. , of the Santa Cruz mining operation the company acquired last year in the historical Guanacevi silver district of Mexico. “From their point of view, profits belonged to the shareholders, so they never had any working capital to do anything.”

Endeavour, which is on track to produce one million ounces this year from Santa Cruz, is aiming to be the fifth-largest primary silver producer in the world by the year 2007, when it plans to boost production to 3.6 million ounces. The ambitious plan hinges on finding more ore in the high-grade silver vein that runs through the property and outpacing its growing list of competitors.

Why the rush? Because silver is among the quirkiest of metals and the most vulnerable to spikes and crashes. While it has traditionally followed the gold price, recent movements suggest a stronger correlation with supply/demand fundamentals, more like the way a base metal would behave.

To add to the confusion, the world has been consuming more silver than it has been producing for the past 16 years. What has bridged the gap — and kept prices from escalating — is a drawdown of existing stocks, the millions of ounces of above-ground silver held by banks, Comex (the New York-based commodity exchange) and private investors such as Warren Buffett, who purchased about 130 million ounces of the precious metal in 1997.

Nobody really has a handle on how much of this stockpile is left, especially in China and Russia. But analysts believe it may have dwindled to a few hundred million ounces, considerably less than the more than two billion ounces thought to be stored above-ground in the early 1990s and barely enough to cover the difference between fabrication demand (837 million ounces in 2004) and supply from mine production (634 million ounces) over the next few years.

So, in the short term — until new primary silver mines can be constructed and other metal mine start-ups start contributing to byproduct production — silver equities may offer a better return than their counterparts in gold, say analyst Michael Curran and his associate Ryan Dolan of RBC Capital Markets in a recent report on silver.

“We see opportunity for renewed strength in silver prices as aboveground stockpiles, which have been eroded significantly over the past decade, struggle to keep pace with excess global demand,” the report says. “Medium to longer term, we look for new mine supply to narrow this demand gap, potentially providing a cap to commodity upside.”

The appeal of silver equities when silver prices are rising is that they are highly correlated with spot prices and their share price movements often exceed the spot price change, providing equity investors with strong leverage.

Taking advantage of the current rally may just be a matter of timing. The established primary producers, including Idaho-based Coeur d’Alene Mines Corp. and Hecla Mining Co., and Pan American Silver Mines Corp. and Silver Wheaton Corp. of Vancouver, are obvious choices but may be overpriced for the simple reason there are too many investors chasing too little product.

@page_break@For clients willing to take on more risk, there are a growing number of potentially undervalued silver stories. Here are a few, all based in Vancouver:

> Western Silver Corp. owns the Peñasquito property in central Mexico, which contains one of the world’s largest undeveloped silver deposits with resources estimated to be 240 million ounces of silver, plus gold, lead and zinc credits. The company expects to complete a feasibility study on the property later this year in preparation for production of 3.5 million ounces per year in 2007, at a cash cost of US$4.82 per oz., with costs falling in later years as production grows.

> Fortuna Silver Mines Inc. recently purchased the Caylloma silver mine in southern Peru. The mine produced two million ounces of silver in 2002 but was placed on care and maintenance in 2003 as a result of low silver prices. The property contains 21 million ounces of reserves and resources in several high-grade silver veins, as well as polymetallic veins rich in zinc. Fortuna is aggressively exploring one of these polymetallic veins and plans to be in production within a year, at an annual rate of two million ounces (plus base metal credits), at a cash cost of US$4 per oz.

> First Majestic Resource Corp. owns the La Parrilla mine near Durango, Mexico, where production, which began in late 2004, is expected to hit one million ounces in the first year, at a cash cost of US$3 per oz. The company also owns the Dios Padre Silver Mine in Mexico, where shallow reserves stand at 57 million ounces, and has acquired 5,000 hectares with estimated resources of 20 million ounces.

> First Silver Reserve Inc. has been mining much longer than its contemporaries in Latin America, but the company is coming back into the limelight because of the increase in the silver price and a resource base of 42 million ounces at its San Martin mine in Mexico. The company is currently trying to expand reserves at the mine to double or triple production from the current rate of 2.1 million ounces per year at a cash cost during the latest reporting period of US$5.85 per oz.

> One of the few opportunities outside Latin America is Silvercorp Metals Inc. , with a 77.5% interest in the Ying project in China. Resources at Ying stand at 43 million ounces of silver, plus significant lead and zinc credits. A US$5-million exploration and development program is currently underway on the property to increase silver resources while preparing for production. The project so far has been self-financing because tunnelling has yielded US$1 million worth of silver/lead and silver/zinc ores that could be shipped direct to the smelter without further concentration.

Opportunities to play the silver market are growing, but silver production will climb fairly rapidly once established deposits start or increase production. Unless gold goes through the roof and carries silver with it, as some analysts predict, increased production could put a damper on the silver price in the longer term and make some of these mines uneconomical again. IE