Silver Dragon Silver Production Commencement In Lock-Step With Rise In Silver Prices

Silver Dragon Resources Inc. (OTCBB: SDRG), a mining and metals company focused on exploration and development in proven silver districts globally, similar to companies like Silvercorp (NYSE: SVM) and Minco Silver Corporation (TSE: MSV), recently announced formal commencement of silver production at its Erbahuo silver mine in Wengniute county, Inner Mongolia, China. With gold crossing a record $1600 per ounce today and silver’s September futures contracts already up to $39.76 per ounce, Silver Dragon’s production start-up seems well-timed.

Tortoise And The Hare

Silver is often overlooked by investors, in preference to the glitz and glamour of gold. But using a 200-day prior benchmark, percentage gains on silver holdings have far outpaced gold. The chart below illustrates this phenomenon using the ETF proxies SLV (iShares) and GLD (SPDR Gold Shares).



As can be seen above, a $10,000 position in SLV taken in September 2010 would today be worth about $17,777, while a $10,000 position in GLD, taken at the same time, would now be worth only about $12,000. This consistent outperformance of silver over gold helps to make sense of Silver Dragon’s focus on the less glamorous metal.

70% Of The Pie

The Erbahuo mine is 70% owned by Silver Dragon through its subsidiary Chifeng Silver Dragon Resources & Technologies, Ltd. and is operated by Chifeng Silver’s partner Guangxi Hongteng Mining, Ltd. (GHM) as part of a five-year arrangement. Silver Dragon’s press release last week stated that GHM expects to derive about 160,000 ounces of silver from the Erbahuo mine by year-end, from roughly 30,000 to 40,000 tons of silver ore. At the September silver futures price of $39.76 per ounce, this would represent more than $6.36 million of production in less than a half-year, 70% of which would belong to Silver Dragon.

Analysts’ Bubble Concerns May Be Irrelevant

Though some precious metal market analysts worry that gold and silver may be topping out, there’s an important difference between refined metal holdings and equity holdings in a producing mine. While price downdrafts negatively affect commodity values, good quarterly reports can positively affect stock prices, leaving plenty of room for mining companies to report record profits and achieve stock gains.

At the same time, metal commodity naysayers are confronted by national and global realities which tend to support precious metal prices. Currently, there is spreading global infection of uncertainty over European economic stability, with the added temporary unease over the U.S. debt-ceiling impasse. And even if the U.S. debt ceiling is raised, investors will only conclude that the economy is in for more inflation. These factors have contributed and continue to contribute strongly to precious metal price gains.

In part of a research note quoted by MarketWatch, attributed to Anne-Laure Tremblay of BNP Paribas (EPA: FR:BNP), “Silver could outperform gold once more towards the end of summer, and we would expect the gold-silver ratio to start declining once more as a result,” Tremblay was quoted as saying.