Why Silver Prices Are Set to Explode: Insights from Chris Ritchie

Craig: Hello again from Sprott Money and sprottmoney.com. It is the month of August 2024, and it's time for your "Ask the Expert" segment, that podcast we record every month, where we bring in a mover and a shaker from the metals industry to see what they think. See what they think the metals are doing, see what they think the mining shares are doing. And this month, it's a pleasure to introduce to you the president of SilverCrest Metals, gentleman by the name of Chris Ritchie. Chris, great to see you.

Chris: Thanks, Craig. Appreciate you having me on.

Craig: Well, it's great to have you on. And I can't wait to pick your brain on a few things. I want, before we get started, though, just that reminder, this content just doesn't appear by magic, all right? This is all sponsored by Sprott Money. So you wanna keep them in mind every time you're in the market for physical precious metal, which should be often, given the circumstances these days. You go to sprottmoney.com, and check out what their deals are. Right now they're offering something pretty cool. It's called a Eternal Sun Round, for you Canucks up there. You probably like that sort of thing. One-ounce silver rounds. Very, very cool. They're right there on the home page of sprottmoney.com. You buy more than $500 worth, they will ship it and insure it for free. So, go to sprottmoney.com, and check it out. Of course, you can just call them, too: 888-861-0775.

All right. So, let's bring in Chris. Again, he's the president of SilverCrest Metals. You can... They trade in Toronto. They trade in New York. They got a lot of weight to carry with these symbols. You gotta make sure you guys are kicking some rear end here, because the symbol, up in Canada, SIL. And down here in the States, it's SILV. So, I mean, how can...you can't mess this up, Chris? I mean, you're carrying the torch, really, with those symbols.

Chris: I have no idea how those symbols were left over when we got going. I have no idea.

Craig: Isn't that crazy? You would think that'd be in hot demand.

Chris: Absolutely.

Craig: But anyway, publicly-traded company, and one that we'll discuss here in a minute. But, again, it's a precious metal company. They mine silver, but also some gold, so I've gotta talk to you first about those markets. I mean, what a, such an interesting year we've had, Chris. We began the year, here in the U.S., everybody was thinking we're going into recession, and the Fed talking about six or seven rate cuts. And over the course of the first four or five months of the year, that rate cut forecast goes basically to zero, the dollar index rallies, interest rates spike, and gold still broke out, and silver still rallied into the $30s. I would imagine you've gotta keep a pretty close tabs on the precious metals and their prices. What are your thoughts as this year is unfolding?

Chris: It's amazing. There's a short-term mindset and a long-term mindset, and trying to run a company with a long-term mindset, there's some data points here that just are not...you know, they're just so compelling. And one of them is, you know, the U.S. has increased the debt ceiling 74 times since 1960. So, the amount of people who are choosing the U.S. dollar, and let's be clear, it is the best fiat currency, you know, versus a bunch of basket cases, but we're choosing to store our wealth in an instrument where they increase the debt ceiling more than once per year...

Craig: Yeah.

Chris: ...for the last 60, 70 years. So, there's some big, obvious trends there in the big term that are quite significant. Other ones that I pay attention to is the gold/silver ratio. I mean, you've obviously had the central bank buying. So, the people that have unlimited access to the printing press are choosing to use that printing press to buy gold.

Craig: Yeah.

Chris: Right? And then, ironically, it's a lot of the mining companies, who have exclusive access to the gold and silver, are selling it for dollars. Right? So, it's a little back and forth. But another one that I pay attention to is, yeah, the silver/gold ratio, I mean, it's 90 to 1 right now, is pretty extended while gold's at near all-time highs.

Craig: Yeah.

Chris: So, I'm looking at this in a world where monetary policy has broken down. We have no choice but to print our way out of this. If we were to pull the rug out from underneath everybody at this moment, and try to balance a budget, it's a calamity that we are not used to. And after kicking the can forever, to do that sort of an abrupt turn is something no politician wants to own. So, I just, you know, follow the needs of a politician, and it's to make people happy. And we've got an aging demographic, that are gonna consume more resources, and exit their taxpaying years. We cannot make up the gap by any other way than printing, in my view. So, this is just a continuation of something that's gone on forever. And I'm just a believer in this trade continuing on.

Craig: It's interesting you bring that up, because, as we record this, it's the 15th of August, which is the 53rd anniversary of President Nixon "suspending..." like my air quotes? Suspending the convertibility of the dollar into gold. A fun thing, if people wanna do some research on this, I'm trying to remember what the, I think the website is wtfhappenedin1971.com, something like that. I just posted it to my site today. And they've got all the charts of how income disparities and wealth disparities, and everything that has occurred since 1971, and it's led us down this path. And like you said, even though it's election season, and all these politicians wanna talk about balancing the budget, it's just, that's not gonna happen. As you look forward, especially to silver, which is your primary product, what do you think of the studies put out by the Silver Institute that now show a collective maybe 700 million ounces of deficit over the last couple of years, supply deficit?

Chris: Yeah, again, going to long-term trends, it takes an awfully long time to bring a mine from first drill hole to production. And we know that since the Global Financial Crisis happened, there's been a lack of capital investment going into building new supply. So, if we're already sitting at this deficit moment, and that's the case, but inflation's kicked up so much, the profitability still isn't there to incentivize money to come back to the space. So, even if it did, even if the money came back today, to say, "Let's go build new mines," or search for new mines, the lag time of the new supply is so long that this supply deficit, I think, is only gonna get more pronounced. Right? You can't flip a switch and bring on new mine supply. You just can't. So, a big driver for this industry is watching that capital investment, and if it's not happening today, we're not seeing meaningful new supply for a very long time in the future. So, if we already have the indication that we're in a deficit, and we don't have new money coming in, that's a really interesting starting point, when you talk about catching a cycle.

Craig: Yeah. Yeah. You know, and what's, why I wanted to visit with you, as a mining executive, is that so many folks, I'm sure, that listen to us, listening right now, I think we all stack metal. I stack metal. I'm sure you do, you know, all for these reasons, because of this implosion of this debt-based system, and the dollar devaluation that's gone on for 53 years, and will continue to go on. And we hold precious metal as a hedge against all of that, logically, right? And a lot of us also own mining shares because we're like, "Wow, you know, gosh, the leverage they provide," you know, and all that kind of stuff. But yet, some of these companies, man, like, people buy Newmont because it's the biggest one. But if you pull up a chart of Newmont over the last 40 years, gold's gone up six times and Newmont's basically the same price it was in 2004. So, you and your company are doing something... I mean, it might sound like it's radical. To me, it sounds like common sense. And I would think a lot of people here will think it's common sense, so let's talk about it. You're kind of going off a different path in how you want to manage the balance sheet, let's say, of SilverCrest. So, tell... Let's start there. Tell everybody about how you came to this idea, and what the idea is.

Chris: Yeah, thanks. So, we are blessed with an incredibly high-quality asset. We've been in commercial production for seven quarters. Our operating margins are about 60%. We paid off $90 million of debt in the first seven months. And what this means is the quality of our asset gives us flexibility and choice. And what we decided is what we felt obligated to do, was we need to examine all the choices that we get. And at the time of entering commercial production, what we did is we said, well, what's the true cost to produce an ounce? Like, you mentioned companies that their stocks aren't doing very well. A big chunk is, this is a really difficult industry. It's hard to bring on new supply. We spend huge amounts of capital over long periods of time. And the ASIC, or all-in sustaining cost that people typically reference, it's an operating cost of today. It does not include all of the costs, all of the risks, all of the inflation.

So, what we did is we just started from scratch, and we said, "What is the true total cost for us to produce an ounce?" Right? Pretty basic stuff.

Craig: Yes. Yeah.

Chris: So, it's the cost of the land, it's years of exploration, it's developing the mine itself, it's building the plant, it's putting inflation on our costs. We threw everything at it, and then divided it by how many ounces we have today. And the number we got was over $25 an ounce, pre-tax.

Craig: Okay.

Chris: Okay? When we learned that number, silver was about $18 or $19. And the various obvious question that our management team and our board had was, "Well, we've paid off all of our debt."

Craig: Yeah.

Chris: "If we sell our metal today, all we're doing is crystallizing a loss..."

Craig: Yes.

Chris: "...to get a fiat currency we don't want, to start the process over again, which is 15-plus years. And we're then choosing to store our earnings in a fiat currency that doesn't protect ourselves from inflation, to try to be the 1 in 500, 1 in 750 companies that makes it." So, we did not have to sell our metal at the time. So we said, "Holding metal is a capital allocation choice. And when it's below the cost to produce it, it's actually more risk to sell it than it is to hold it."

Craig: Makes sense.

Chris: So, it's pretty basic stuff, but it all starts with the fact that we have that choice. So, what we do operationally is we sell all of our metal at the asset level, we pay our taxes. The Mexican government wants their money. And then the default choice the world has been conditioned to is to think that holding our wealth in U.S. dollars, that the U.S. dollar, or any fiat currency is a store of value. And it is not. It's a convenient medium of exchange.

Craig: Right.

Chris: Right? So, we have Canadian dollars on our balance sheet, Mexican pesos on our balance sheet, U.S. dollars on our balance sheet. We have no clue why, not just mining companies, why any company in the world, in any industry, doesn't choose to hold gold and silver on their balance sheet to protect themselves from the inflation that everybody faces every day.

Craig: Chris, you mentioned earlier, and most people listening to us know this, central bank gold demand, right? This is now, they're gonna be the third year in a row of record central bank gold demand. Central banks are sitting on dollars that they've accumulated through trade, right? And they get their dollar foreign currency reserves. And they take those dollars and some of them, and they buy gold.

Chris: Yep.

Craig: At the micro level, compared to that, how are you not doing the same thing?

Chris: It's conditioned. This is something that's just been deeply ingrained, and I think a lot of people just haven't had this conversation. And any company that reports in U.S. dollars, it becomes the de facto.

Craig: Yeah. Yes.

Chris: We just don't compare the U.S. dollar to anything else. So, the question is, you can hedge your Canadian dollars. You can hedge your pesos. How do you hedge your U.S. dollar?

Craig: Right, right.

Chris: And one of the data points that we looked at is we took 400 assets, mining assets, from 1990 to 2021. And what we learned was that the inflation, per year, the compound annual growth rate of that inflation per year, was 8% a year.

Craig: Oh, God.

Chris: But guess what? The correlation to gold to that inflation was 0.97.

Craig: Yeah, yeah.

Chris: So, this should not be rocket science. But basically, our product, gold, has functionality, but yet we don't use it to run better businesses. So, what we believe strongly, we need to hold gold and silver, to protect ourselves from the fact that we spend large sums of money over long periods of time. Right?

Craig: Just like central banks. It's the same thing.

Chris: It's better governance.

Craig: Yeah. Absolutely

Chris: It's better governance. And these are the conversations we're trying to have, and at the same time, very simply, we wanna be that instrument that gives our investors more exposure to gold and silver, while, one ounce at a time, we're reducing the amount of risk that the investors are exposed to, right? Because the more we hold, you don't have mining-related risk or inflation risk or government risk, for ounces that we hold free and clear.

Craig: Yeah. Are you retaining what you've mined? Or do you sell all that you mine and then go to the market with what's left over, and buy some back?

Chris: So, operationally, you know, we sell it all, because the Mexican government says, "Hey, we want our tax revenues."

Craig: Yeah. Right.

Chris: Right? And just logistically, it's more sound this way, accounting purposes. But the brilliance of the design is simply that it's just another currency we have on the books.

Craig: You're right. Right.

Chris: So, it's an FX trade.

Craig: Right.

Chris: And we choose to hold it. And whether it's, say, hey, we have 5%, 10% of our net worth, or we hold enough to be equivalent of our annual operating costs, or we just wanna have it in the metal. So, we've got about, probably a little over $30 million, and we've only been in production for seven quarters, paid off $90 million of debt. We've got $91 million of cash, and we've got about $35 million of bullion on our balance sheet. And our objective is to continue to give our investors more and more exposure to the currency they want.

Craig: As you've... I'm sure you've got friends in the industry, right? You guys all know each other. This is not a radical or revolutionary idea. It's pretty simple and logical, but I would imagine, to the geologists that run mining companies, they're probably like, "[vocalization 00:16:30] [inaudible 00:16:31] you're speaking Latin now. I don't know what you're talking about."

Chris: This is a really challenging business. And I saw the Colorado School of Mines had a data point saying only one out of 750 projects actually makes it to production.

Craig: Yeah. I bet.

Chris: [crosstalk 00:16:47] we need deeply technical people to run these companies. But that's, again, that's a different skill set than someone to step back and look at capital allocation. And we know this from how the industry has performed, gold and silver have done far better than mining stocks. And sometimes that's a tough pill for people to swallow, to say that there are points in time where the best thing you can do is not build a mine, not spend money on some of these projects. You know, let's be less speculative and more conservative. And until the incentives exist to build new mines that are profitable, including every dollar spent, then maybe we shouldn't. And that conversation is one we're trying to have with as many people as possible. Because right now, we hear the mantra all the time. "We need higher prices to build new mines." I'm like, no, no, no, no, no. We need higher margins. And what we've seen is the costs have been going up just as fast as the metal price. So the business is not getting any healthier.

Craig: Right.

Chris: Right? It's not.

Craig: I'm sitting here thinking...I'm trying to think of any product that comes to mind. Blue jeans Right? If Levi Strauss was just simply content to manufacture their blue jeans, and sell them at the price that, where they build in a 0% inflation model for all their costs that go into manufacturing their blue jeans, they'd be bankrupt. Nobody would own those... You know what I mean?

Chris: Any other industry that sells their product below the cost to produce it goes out of business quickly.

Craig: Yes. Exactly.

Chris: And in the lumber industry, we're seeing it now, where they're shutting down mills, and they're not harvesting as much wood because they're holding back the product. And the trick, and we saw this in COVID with oil, when every storage facility was full, the price of a marginal barrel of oil was negative.

Craig: Went negative. Yeah.

Chris: And the trick with mining companies, quite often, is once you start producing, whether it's coal or copper or iron ore, you have to sell it. You just logistically can't hold it all back.

Craig: Right.

Chris: But guess what? With gold and silver, A, you can store it extremely easily, and B, it's a better money anyway.

Craig: Right. Exactly.

Chris: So, we have this choice. So, basically, what happens post-production is something our industry doesn't talk about. So there's this giant opportunity to make additional margins on our ounces. You know, we do not have to be price takers.

Craig: Yep.

Chris: Right? And this whole conversation is something that we wanna go out and talk about. If the product is selling at a lower cost...or lower price than the cost, hold it. Take that risk. Because selling it is a greater risk.

Craig: Mm-hmm. Mm-hmm. You think...I mean, I'm just thinking of all kinds of examples in my mind, of other industries and management styles that employ this type of thing, whether it's the central bankers that are moving out of fiat into gold. I mean, maybe it's kind of a stretch to think of Apple and these companies that are buying back shares and that sort of thing. But again, they're looking for things to do with their earnings, and the retained earnings, and rather than just do what, buy some of your own product back, and hold it as a hedge against your increasing costs of production. I don't see where this is complicated.

Chris: It's the lack of choice that we have. And the market has yet to reward companies for doing this. And, I mean, if you do separate out the miners for the royalty companies, for example, the royalty companies trade at better multiples. And what an investor gets when they invest in a royalty company is more exposure to the metal, and the streams of metal they have purchased. And they've offloaded the mining-related risk to the miners. So the investor gets more exposure to the metal, less exposure to mining. Right? So, again, one ounce at a time that we put on our balance sheet, that one ounce should get that treatment.

Craig: Right.

Chris: So, we believe, if we do get rewarded for having a better cost of capital, or for having a better business model, I should say, and giving the investors that exposure, we're hoping that that helps maybe kickstart a broad, industry-based conversation about, "Guess what, guys? We are part of the problem."

Craig: Right.

Chris: "We suppress the price of the metal. We're selling it regardless of profitability." And I think it starts with, if we need to see a proper return, including all costs, all money spent, we're gonna be taking a whole lot of supply off the market.

Craig: I just wish you the best with this, because it's gonna benefit everybody. It's gonna benefit the stacker...

Chris: Absolutely.

Craig: ...because there's less metal that's floating around, that then the bankers can leverage, you know, or to getting metal out of banker hands, into company hands and individual hands. So, it benefits the stacker, it benefits the investor in the mining shares. I mean, it's just a win for everybody. So, I sure wish you the best in not only executing this plan, but then showing the results, for your shareholders, but then that other companies will look at that and go, "Oh. Maybe old Chris is onto something here."

Chris: We've struggled as an industry to capture the imagination of that marginal audience.

Craig: Yes.

Chris: And we've seen it with things like Nvidia and Tesla, that, and Bitcoin, where they've created communities around belief in what these companies are doing. And unfortunately, we need to earn back the trust of that marginal investor. And that's why we're trying to be as transparent as we are about the risks and the costs and the inflation. And the irony is that we wanna then re-prioritize the product. Right? Why call it precious metals if we as an industry don't treat it as precious?

Craig: Yeah, exactly. That's exactly right, brother.

Chris: Yeah.

Craig: Well, Chris, thank you so much. This is, I'm sure, I mean, not only for me, everybody listening is, you know, light bulbs are going off in their head, and thinking, "Yeah. Dang it, that's exactly right." So, thank you so much, and I hope we can keep in touch so that you can bring us, you know, keep us posted on how things are going, quarter by quarter and year over year, and the impact that this is making on the balance sheet at SilverCrest, but also on the share price. This has been terrific. I very much appreciate you taking some time to sit down and fill us all in.

Chris: Perfect. Well, we hope you have some success in spreading the word, and we really appreciate you having us on.

Craig: Well, it's been our pleasure. And, in terms of spreading the word, here comes the last thing I always ask of everybody before they leave. Hit the like button or the subscribe button on whatever platform you're watching this, whether it's YouTube or Apple Podcasts or whatever. You may think that doesn't accomplish much, but if enough of us do, like if enough of us take metal off the market, enough people hit that like and subscribe button, the algorithms pick it up, the Sprott Money podcasts are more likely to show up on people's screens, and we get more and more eyes and ears on this content, and everybody wins. So, hit that like and that subscribe button on your way out.

And, be sure to check back. It's only halfway through the month. We've got a lot more content coming. You can find it all, sprottmoney.com. So, keep an eye on that website as we get deeper in the month, and obviously, every month for the rest of the year. Chris Ritchie, thank you. It's been great pleasure to visit with you.

Chris: Thanks so much.

Craig: And from all of us here at Sprott Money and sprottmoney.com, thanks for watching and listening, and we'll have more content for you as August continues.