JAMES PHIPPS
INVESTMENT CONSULTANT
EURO PACIFIC CAPITAL

COMPANY: Pan American Silver
TICKER: PAAS (Nasdaq)
PRICE: $24.73 (as of 4 p.m. yesterday)
52-WEEK RANGE: $12.31-$25.57
MARKET CAPITALIZATION: $1.67 billion

James Phipps is an investment consultant with Connecticut-based Euro Pacific Capital. Pan American is a silver mining and production company based in Vancouver. Mr. Phipps spoke to David Dalley of The New York Sun about why strength in the silver market is good for Pan American.

What does Pan American do?

They’re the largest primary silver producer in the world. They started as a junior mining company a few years back when they recognized that we were in the midst of a period where silver supply was only meeting about 75% of overall demand. Back in 1980 we had 10 billion ounces of silver aboveground. Over the last 20 years, we have seen those supplies diminish. The U.S., for example, has sold every ounce of silver it has. The current aboveground inventory is approximately 300 million ounces, which is about three months’ supply.

Why is silver important?

In the past century, it has taken on a new role as a vital industrial commodity. It’s the highest-quality, best conductor of all the metals, and it’s used in practically every electronic product out there – from keyboards to LCD screens. High-speed electric lines use a great amount. A whole range of applications have developed, and that’s caused a significant increase in demand. The monetary role of the metal has also been reasserting itself. People are looking to silver once again as a monetary metal.

What has the price been doing?

The price had been artificially low for a long time. It languished in the $4 to $7 range, peaked at $50 back in 1980, and then fell to as low as $4 in the late ’90s.

Why?

Basically because governments were selling off their reserves and it wasn’t replaced by mining production, because mining costs are far in excess of $4. Many of the largest primary silver producers went bankrupt. Since 2000, however, uranium and silver have been two of the best-performing assets. Silver’s move from $4 back then, to over $10 today – a 20-year high – is, in my opinion, a powerful indication of people’s increasing loss of confidence in the U.S. dollar, and currencies in general. That’s based, among other things, upon the fact that interest rates have been artificially low for so long, and money supply has been increasing at an unprecedented rate. There has been lots of money chasing limited resources, and that has been inflationary.

Why Pan American?

PAAS is one of the success stories we’ve witnessed over the last few years. They’ve been very aggressive in acquiring out of the money deposits when silver was only $4, and now that it’s $10, their profitability is set to improve dramatically. They’re projected to grow earnings by 205% this year, and 50% next year. Their goal is to go from a projected 14 million ounces this year to 25 million by 2008. So they offer enormous leverage to the growing price of silver.

What is the stock worth?

As long as silver continues its up trend, I would not be surprised if the commodity breaks into the $15 to $20 range in the second half of the year. In that scenario, PAAS should easily move above $30 and possibly hit $40 over the next year.