A surge in institutional investor interest in Durban Deep


By Theodore Butler
March 16, 2004

Last week the state copper mining company of Chile,
Codelco, made an extraordinary announcement. Actually,
an extraordinary announcement was also made last year,
when Codelco first decided to withhold 200,000 tons of
its roughly 1.2 million-ton annual copper production
until world copper inventories declined from excessive
levels and prices recovered from then-depressed levels
of around 70 cents per pound.

Now that copper prices have recovered (copper recently hit
eight-year highs of $1.40) and inventories have declined
sharply, Codelco announced that it sold 75 percent
(150,000 tons) of its stockpile (to China).

There is no way to praise Codelco management enough for
a magnificent performance. It was the mining industry's
grand-slam of the decade.

Not only did the company make a killing on its brilliant
strategy (around $200 million in inventory profits), it behaved
as a miner should behave when faced with unsatisfactorily
low prices for its product. Instead of dumping more product
on the market through hedging and forward selling or
increasing production when prices are low, Codelco
withheld and trimmed production until prices improved.

I hope the silver mining and resource companies learn from
and follow Codelco's lead. It's a good idea whose time has

I'd like to offer a constructive solution to the silver miners
and resource companies that will potentially offer great
benefit to their shareholders.

Investors in silver companies recently have enjoyed outsized
gains. (In the interest of full disclosure, I have had and do
have interests in silver companies.) It appears to me that
most of the gains in silver share prices have come as a
result of anticipated increases in the price of silver. I say
this because the rise in the price of silver to date has not
resulted in any earnings to speak of for the silver miners.

Even at $7 per ounce and the highest prices in six years,
it would appear that most primary silver miners, like
Coeur d'Alene (CDE), Hecla (HL), and Pan American
Silver (PAAS), will be reporting profits for the current quarter
of mere pennies per share. Clearly, if the silver miners hope
to earn large amounts, we must have sharply higher silver

My solution will help create a true free market price for silver.

The solution is simple: Just follow Codelco's lead.

Producers, like CDE, HL and PAAS should withhold one
quarter's worth of silver production from the market. Resource
companies like Apex Silver, and others flush with cash, should
buy the equivalent of one quarter's anticipated production.

This production should be withheld until the COMEX silver
short position is in line with the short position of all other
traded commodities.

To be fair, similar solutions have been suggested before
by others. For instance, Jason Hommel made a recent
suggestion that the silver miners should invest all, or
most, of their corporate cash in real silver. This was too
radical an idea for the miners, although it should be
pointed out that had they followed Hommel's suggestion,
immense profits would have resulted. And since then the
silver companies have raised staggering amounts of
corporate cash.

My solution is not radical and it's easy to do. We're not
talking a lot of money, because silver's so cheap. In fact,
some silver companies could decide to withhold more than
one quarter's production. More importantly, for the first
time in decades, the silver mining companies are actually
able to do it. That's because they are flush with cash
arising from a flood of recent share offerings (common
stock and convertible debentures).

Withholding a quarter's worth of silver production would be
a piece of cake financially. It would also be a tremendous
service and reward to shareholders, the real owners of the
companies. And please consider: In this age of ultra-low
cost money, there is little real damage in the loss of 1
percent short-term interest returns.

Let me give you some examples of just how affordable this
would be for the silver companies.

Coeur d'Alene Mining Corp. has more than $250 million in
the corporate till and would only be temporarily denied the
revenue of one-tenth of that amount, or $25 million, if it
held one quarter's worth of silver production off the market.

Apex Silver, currently a non-producer, now has more than
$400 million in cash and would need only 10 percent of that
amount to buy 6 million ounces of real silver, one quarter of
Apex's often-announced projected production.

Why should silver companies withhold or buy one quarter's
worth of silver production?

Let me count the ways.

For one thing, it can't hurt them much financially and may
help them significantly. At worst, if silver prices decline from
here, the loss they would have on the withheld/purchased
silver would be minimal. It remains dimes to the downside,
dollars to the upside.

Even after the recent $2-plus to the upside, it is still dimes
to the downside, in my opinion. Besides, even if silver does
move dimes to the downside temporarily, the loss on the
withheld or purchased silver will be peanuts compared to
the potential loss of market cap to shareholders from a
falling silver price.

Remember, it is the price of silver that will determine the
long-term viability of the silver-mining companies.

On the other hand, the potential rewards are great

Just as Codelco did in copper, silver companies could
see double or triple gains on this inventory.

There's tiny risk to the downside, giant potential to the

Every silver company shareholder expects higher silver
prices, otherwise he wouldn't be a shareholder. These
shareholders will be ecstatic if a small amount of the
companies' cash were used for a real silver investment
-- especially when they realize why withholding production
is such a good idea.

Public shareholders of silver companies, as the real owners,
sometimes have interests that differ from management's.

For instance, CDE recently trumpeted the extraction of the
100 millionth ounce of silver from its prolific Rochester,
Nevada, over its near 20-year history. What they didn't
announce was how the shareholders benefited.

I doubt if many, or any, of those ounces were produced at
a profit. All shareholders had to show for the 100 million
ounces was a big hole in the ground (and admittedly, the
cash flow that may have kept the company alive). If we are
moving into an era of sharply higher silver prices, the 100
million ounces, in retrospect, would surely have returned
a lot more if they had been withheld for mining in the
future. Holding back some production now, in anticipation
of those higher prices, would go a long way toward
rewarding shareholders for the dissipation of a finite

Perhaps the best reason for the silver companies (as well
as the byproduct silver producers), to withhold production
is the favorable effect it can have on price. Let's face it --
the silver miners have been tied to the whipping post by
the naked shorts. They have not lifted a finger to defend
themselves from the more-obvious-by-the-day silver
manipulation. Incredibly, most silver company
managements still deny even the possibility of the silver
manipulation. Here they are badly out of step with the vast
majority of their public shareholders. (By the way, my
definition of public shareholders are those who paid for
their shares with hard-earned money and were not given
their shares and options regardless of performance.)

For 20 years the naked shorts on the COMEX have
engineered the theft of the miners' real silver at uneconomic
prices for 20 years. Mine management have rewarded
themselves while shareholders have not seen a penny's
worth of dividends. While share prices are sharply higher,
due to anticipated higher silver prices, shareholders are
weary of the silver price being manipulated.

For mine managements to stand up for themselves and
their shareholders and refuse to further donate scarce
product would fill shareholders with joy. If management
doesn't believe that, let them ask their shareholders.
Or better yet, as a shareholder, don't wait until you
are asked -- tell management now just how you feel
about holding 10 percent of your companies' cash in real

The companies that do decide to withhold or purchase
one quarter's production should make sure it's real silver
in their possession, or registered COMEX warehouse

The timing is right for the miners to act, as the COMEX
naked short position has grown more extreme and
manipulative. The COT report, for positions held as of
March 3, shows that the total commercial net short
position has grown to a record of more than 488 million
ounces (futures plus call options), with the 8 or less
largest traders net short almost 325 million ounces.

Sometimes I hear people say that when I use the gross
short position on the COMEX (currently around 900
million ounces) that figure contains spreads and
arbitrages and may not be a pure short. That's why I use
the net short position figure.

Incredibly, the net short position in COMEX silver has
grown so large and manipulative that, even on a net basis
this short position is almost as large as total world annual
production, in addition to being 10 times larger than annual
U.S. mine production, as well as more than three times
larger than known world inventories. No other commodity
has such a net short position.

With such a brazen and uneconomic massive short position,
dealer-engineered selloffs can't be ruled out, although this
monster short could just as easily blow up in the dealers'
face. Holding tight is the order of the day.

It is becoming increasingly clear that the manipulative short
position is running smack into a tightening wholesale
physical market. Even though the dealers added 30 million
net paper ounces short in the latest reporting week, the real
physical silver story is very different.

I've been told that the Central Fund of Canada still hasn't
received the last million to million and a half ounces of the
5 million the fund purchased four months ago. Further, Central
Fund was told it may take months longer.

Huh? Does that sound like the kind of news to make someone
aggressively short silver to the tune of tens and many hundreds
of millions of paper ounces? And if recent talk from reliable
sources is true in regard to a Canadian individual buying 8
million ounces for delivery, you have to wonder where the real
silver will come from.

The simple fact is that without the massive naked short
position on the COMEX, the price of silver would be sharply
higher. This is so basic tat I hesitate to point it out. Yet so
many, like mining company managements, pretend not to
make the connection.

Please take the time to pass on my suggestion to the mining

Lately I've noticed a curious trend developing in the
establishment silver research and analytical community. More
analysts are commenting on the COT position on silver and
are commenting on the absolutely huge size of the total
commitment. But instead of focusing on the obvious -- the
uneconomic short side of that position -- they are talking only
about the long side.

I don't know whether to find this humorous or disingenuous.
While it's true that the tech funds that currently populate the
long side of COMEX silver are subject to sell at certain price
points that can cause a temporary price decline, what the
establishment analysts seem desperate to avoid is the basic
difference between a long and a short.

Buying something, anything, or going long, is a very natural
and everyday occurrence for just about everyone. Selling short
anything -- that is, selling something you don't own but you
sell anyway -- is a unique transaction. Most people will never
do it.

I know selling short is an integral aspect of commodity futures
trading, but when an extraordinary level of both buying (longs)
and selling short exists to the point where more is bought and
sold short of a commodity than exists in the world, looking only
at the long side is nuts. A 12-year-old should be able to tell you
that the short side is the problem.

All longs have to do is write out a check to take delivery if they
so choose. Shorts may have to scrape up material that doesn't
exist, a distinctly more difficult exercise. And on top of
everything else, you must remember that the longs are basically
many in number and unrelated, while the naked shorts are a
concentrated few who seem to read off the same playbook.

Which side do you think should be looked at?

I know many are concerned with the lack of action or response,
so far, from the Commodity Futures Trading Commission,
NYMEX/COMEX, and New York Attorney General Eliot Spitzer,
and I have been urged to take further action. I understand the
frustration that many feel (I feel it too) about the lack of
regulatory action to what is, in essence, a crime in progress.

Here's my perspective.

First, be sure to distinguish between the three. The CFTC and
the NYMEX are the regulators of record here and their record
is deplorable. Even though preventing manipulation is their
first responsibility, they have basically looked the other way
for the entire life of the manipulation.

Spitzer is not the principal regulator in COMEX silver matters.
He is the last resort. In addition, Spitzer's record is spotless
when it comes to representing the public's interest. Unlike
the other two. Spitzer has accomplished much in silver
already. I believe his awareness of the problem will prevent
a delivery default and arbitrary rule changes designed to
punish legitimate COMEX silver longs.

I would ask you to look at a chart on silver and plot the price
change since Spitzer was notified of the COMEX silver
manipulation -- the end of September. If you feel it's just a
coincidence that the price appears to have broken its
decades-long manipulative pattern and that Spitzer has been
doing nothing, I would suggest you think about it some more.

In addition, I have recently uncovered what I feel is proof that
the large concentrated commercial shorts, most probably AIG,
have manipulated the price of silver. I'll have more on that in a
future commentary.


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