Metals of all types have been taking a hit as the broad markets are tossed-about over global growth concerns primarily stemming from the euro zone and, more recently, China. China, as the second largest economy in the world, plays a key role in influencing speculation about future demand for both precious and industrial metals as one of the largest consumers of many metals and the largest consumer of copper. China buys more than a third or the world’s copper output each year. Copper is particularly susceptible to pressures from China because the red metal has a vast amount of industrial uses and is also critical in the country’s initiative to develop its power infrastructure. China also ranks as the second largest consumer of silver in the world (behind the United States) as gold’s cousin has countless applications not only in jewelry, but also in most electronics as well as other industries, such as solar panels.
While many investors are fretting over growth rates in China, others are recognizing that the country’s GDP grew by 7.6 percent in the latest quarter as released in a statement last Friday. The growth rate may not be double digits, as China had steadily been reporting, but the growth rate is still staggering compared to other economies across the globe. Despite the deceleration, experts in the industry are calling for demand to be outstripping supply in China. Rio Tinto Group’s (NYSE:RIO) head of copper recently said in a Bloomberg article that “China’s copper demand will probably grow more than 8 percent annually in the next five years.” Echoing the sentiment, “Chinese copper purchases probably will recover in the second half as stockpiles run down, helping generate another deficit of copper cathodes,” said Charlie Sartain, head of Xstrata Plc’s (OTCQX:XSRAY) copper division.
Instead of focusing on naysayers that are painting a bleak metal market picture, savvy investors are looking at the opportunity to find companies with depressed prices that offer large upside potential as the reality of metal demands start to overshadow the commentary of pundits.
The pillar of silver producing countries is Mexico. The country has produced more than one third of the silver in the world over the last five centuries with 152.8 million ounces added to the total in 2011; nearly 50 percent more than the next closest country, Peru (109.8 million ounces). As far as gold production, Mexico rang-in at number 10 in the world in 2011 with 82 metric tons produced, a rise of 15 percent from 2010.
Regarding copper, Chile and China regularly sit perched atop the world’s biggest producers, it is notable that Mexico hosts the Cananea district in Sonora Mexico, the location of one of largest open pit copper mines in the world containing some of the largest copper reserves on the planet.
The Cananea district is host to multiple mines, most notably the mines of Buenavista del Cobre, S.A. de C.V., which is owned by Southern Copper Corporation. (NYSE:SCCO) and Grupo Mexico, S.A.B. de C.V. The reserves at the Cananea Mine are so prolific that Buenavista has allotted $3.7 billion to expand operations to bolster its production capacity from 180,000 tons of copper annually to 450,000 tons.
Southern Copper Corp. also sees growth in the metal industry. In their latest quarterly statement, the company said, “In China, several sources point to a growth in demand of approximately seven to eight percent for this year. In the U.S. and Europe, inventories are extremely tight, and we see them increasing to more normal levels over the next 12 months, particularly in the U.S.” Again, this sentiment from people in the industry seems contrary to what the bears want people to see, especially coming internally from miners as they are typically conservative in their estimates. Compiling the expansion plans at Cananea with the 17 other projects (10 in operation, 7 exploration) in Mexico, Southern Copper has established itself as a dominate player ready to meet the anticipated increases in demand.
Timmins Gold Corp. (NYSE:TGD) (TSX:TMM) is another mining and development company looking to capitalize on the metal reserves in Mexican soil. The Canadian based miner has a portfolio of nine projects in Mexico with its main focus in the northern part of the country, particularly the Sonora area where it has its producing San Francisco mine. An open pit heap leach operation, San Francisco has a forecast production at a rate in excess of 100,000 ounces of gold per year, according to its latest NI 43-101 report.
Last week, Timmins reported record gold production of 23,203 gold ounces (a rise of 7.8% from Q1 2012) and 14,453 ounces of silver for its Q2 2012 fiscal quarter ended June 30. During the quarter, a total of 39,028 ounces of gold were placed on the heap leach pads, compared to 31,150 ounces of gold during the previous quarter (Q1 2012), a 25.3% increase. Moreover, gold production should increase in the third and fourth quarters as a result of implementation of a new, larger capacity tertiary crusher. During calibration, the crusher sent a larger-than-normal amount of gold to the heap leach pads, which will be extracted during Q3.
The company said that the number of gold ounces placed on the pads is scheduled to increase during the rest of the year as the mine continues its expansion and maintains its production target of 100,000 ounces of gold for the year.
Shares of Timmins are only about 20 cents above 52-week lows; giving the company room for appreciation as gold and silver production increases in 2012 at the San Francisco mine.
For those investors looking for a junior heading towards production, Victory Resources Corp. (TSX-Venture:VR) (OTCQB:VRCFF) offers a value proposition at only 30 cents per share based solely on its Reforma Property in northern Mexico. Reforma may be the company’s flagship project, but it also has the Au/Wen Property, which hosts quartz vein gold deposits, in British Columbia, Canada. Initially focused on its Mexican holdings, Victory’s subsidiary, VicRes Mining Mexico SA De CV, has a purchase agreement to earn 70% interest of the Reforma property comprising of 6,987 hectare of mineral concessions, covering the regional mineralized trend, bordering the Tyler/Bahuerachi Copper deposit and Santo Tomas Copper deposit.
The Bahuerachi property, which was bought by Jinchuan Group China in 2008 for $216 million, lies to the north of Reforma and contains a mineral resource of some 525 million measured and indicated tonnes grading 0.40% copper with values of molybdenum, gold, silver, and zinc in its Main Zone. To the south lies the Santo Tomas porphyry mineral deposit which reportedly contains a mineral resource of some 600 million tonnes grading 0.363 % copper (plus gold and silver credits) in the North Zone and some 350 million tonnes grading 0.309 % copper (plus gold and silver credits) in the South zone.
Commercial production at Reforma lasted 13 years (1968 to 1980) and produced 2,000,000 tonnes of complex ore with historical average grades of 91.62 g/t silver, 1.90% lead, 7.44% zinc and 0.63% copper. To create a better understanding of the prolific nature, the silver alone that was mined would be valued at about $175 million at current prices. Victory has recently completed its own two-stage drill program on tailings ponds at Reforma. Investors will have a close eye out for the results from the bulk samples to further validate the potential of the property.
Recently, Victory increased its position in the area via the acquisition of the El Boleo property from Minera Copper Canyon S.A de C.V. The acquisition bolsters Victory’s holdings to 20,460 hectares of contiguous property sandwiched between the resource-heavy properties to the north and south. Recent soil and rock chip sampling defined coincident geochemical anomalies of copper, silver and zinc covering an area 1000 meters long and 600 meters wide.
The company has also entered into a $5 million financing commitment for further exploration efforts and engineering work to bring the past-producing Reforma underground mine to feasibility. This is a company definitely going places and one that should be high on mining investors radars as commodity prices rebound from their recent funk.
China is already making strategic moves, such as lowering interest rates, to facilitate a soft landing for their contracting economy. The country has a history of vatic maneuvers to remain as a world powerhouse even when their GDP is not growing as fast as everyone would like it to and 2012 will not be any different. While some may be running from metals, other investors are recognizing the upside benefits of building positions at depressed prices and that intra-industry investments can be diversified through miners at different stages of development and production to maximize potential and minimize risk. Proper due diligence is, as always, encouraged.
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