Mining Their Own Business While Agreeing That Silver Is Undervalued, Most Precious Metals Experts Aren’T Ready To Make Any Sweeping Predictions

After decades in the mining business, Mo Kaufman can count on one thing: the fickle nature of metal prices.

“I never try to forecast the future of metals prices,” says Kaufman, a Spokane geologist. “I learned a long time ago that it’s impossible.”

The events of 1998 bear out his premise.

Mining companies watched the price of silver shoot past $7 an ounce in February, following billionaire Warren Buffett’s announcement that he’d quietly acquired 20 percent of the world’s known silver reserves.

The rally raised tremendous expectations in Idaho’s Silver Valley.

It coincided with Hecla Mining Co.’s $16 million expansion project to bring a new silver-rich deposit into production at the Lucky Friday Mine in Mullan, Idaho.

Miners in the Sunshine Mine also saw their wages rise under a pay increase that kicks in when silver prices reach certain levels. Prices have only been high enough twice in the past decade to trigger the increase.

But silver’s rally was short-lived. Prices heralded in annual meetings this spring eroded by the time third quarter earnings were reported.

Analysts still say silver has a bright future. The New York-based CPM Group predicts silver prices could double within one to three years.

A price hike, however, is tied to economic recovery in Russia and Asia, analysts say.

Silver prices are averaging $5.67 an ounce this year - about 16 percent higher than last year - but still short of expectations.

“We had hoped the earlier price rise was the beginning of an upward trend that we feel is a long time coming,” said Vicki Veltkamp, spokeswoman for the Hecla Mining Co. in Coeur d’Alene.

A $1 increase in silver prices, for instance, would mean a $7 million gain in Hecla’s pre-tax earnings.

Sunshine Mining, meanwhile, recently wrote down nearly the entire book value of the Sunshine Mine near Kellogg. Officials said they doubted they could recover $50 million in mine investments at current prices.

“It’s torture for them,” said Joe Rosta, an analyst with the CPM Group. “Mining companies see (worldwide) silver inventories dropping and demand for the metal at extremely high levels.”

Yet prices aren’t responding, he said.

Demand for silver has outstripped annual production from mines for nearly a decade. That’s why Buffett’s investment firm, Berkshire Hathaway Inc., saw silver as a good opportunity. Analysts predicted that the drawdown in inventories would lead to higher prices.

Several factors have stalled a price hike, said John Lutley, senior adviser to the Silver Institute in Washington, D.C.

Russia and other former Soviet republics began exporting silver this year to raise cash, increasing the market supply.

Compounding problems, demand is down in Asian countries - large importers of silver for jewelry and electronics manufacturing.

“The expectation we had for silver has probably been deferred,” Lutley said. “We’re dependent on the situation in the Far East, how quickly those economies recover.”

The CPM Group anticipates volatile silver prices for the next year, with the potential for prices to double within three years, Rosta said.

Doug Silver, president of Balfour Inc., a Denver-based mineral consulting firm, is also optimistic.

“Silver topped $7 this year, and we all know it wouldn’t take a lot to get it back up there again, he said.

“If silver prices take off, your local companies are going to be the first beneficiaries.”

Coeur d’Alene Mines, Sunshine and Hecla are among the few primary silver-producing companies in the country, Silver noted.

They’re experts in their field, and they have the history and the credibility to go to investors to raise the capital for expansion, he added.

Prices for other metals are also part of the equation.

Lead and zinc, byproducts of mining in the Silver Valley, have also seen depressed prices over the past year.

Gold prices, meanwhile, tumbled from $387 an ounce in 1996 to below $300 an ounce most of this year.

Low gold prices were part of the reason Spokane-based Pegasus Inc. filed for Chapter 11 bankruptcy earlier this year.

Those depressed prices are also making Hecla and Coeur d’Alene Mines cautious as they look at new gold projects.

Coeur d’Alene Mines completed environmental permitting on its Kensington gold mine north of Juneau, Alaska, this year, but has not yet set a date to begin the two-year construction phase.

With gold prices so low, the company reworked its mine plan to lower costs, said Gordon Bigler, director of investor relations.

The cost of mining an ounce of gold at Kensington is now below $195 - nearly $100 less than originally planned. However, the changes prompted a second environmental review, Bigler said.

Hecla is searching for a new gold property to replace its La Choya Mine in Mexico, which will close at the end of the year. It, too, is moving cautiously.

“We’re very careful to find a property that will make money at low prices,” Veltkamp said.

Hecla has some of the lowest-cost gold mines in North America, she said. “We don’t want to raise that cost profile.”

Analysts expect a slow recovery for gold .

“I know as an industry person, I should be going ‘rah, rah, rah,”’ Silver said.

But nothing he sees points to a quick turnaround.

Many believed that the Asian crisis would push up gold prices, since investors look to gold as a hedge against currency devaluation.

In fact, Asian investors couldn’t afford to buy gold, and many sold what they owned.

“It not only brought more supply into the market, we also lost important consumers,” Silver said.

The CPM Group is predicting a gradual rise in gold prices over the next two years.

Bright spots are record sales of one ounce eagle gold coins by the U.S. Mint, and increases in the value of gold mining stocks, analysts said.

“You’re looking at $300 to $350 to $400 in the medium term,” Rosta said. “Nothing like $500 per ounce.”

This sidebar appeared with the story: MINING MEETING More than 3,000 people from the mining industry will gather in Spokane this week for the 104th annual meeting of the Northwest Mining Association. The meeting runs Monday through Friday in the Spokane Convention Center. Montana Lt. Gov. Judy Martz will give a keynote address at 1:30 p.m. Tuesday on setting high standards for the modern mining industry. The address is free and open to the public. Other convention speakers include Alaska Gov. Tony Knowles; Jack Thompson, chairman of Homestake Mining Co.; and a variety of other leaders from government and private industry.