Some excerpts:

I’d like to reflect specifically on ECU Silver Mining Co., Inc., not only because it is our largest holding but because it has progressed further than most developmental and exploration companies in this sector. ECU recently reported 170 million silver-equivalent ounces in their 43-101 report, confirmed by the independent mining auditor, Micon and Associates. In addition, it was revealed that ECU has another 400 to 800 million silver equivalent ounces in the not-yet-proven “potential” category. Management will convert additional “potential” ounces to a resource category through additional drilling and lab testing. A milestone will be reached when ECU converts merely 10-15% (80 million) of the “potential” ounces. At this point, it will give ECU a total of 250 million silver-equivalent ounces, or 5 million gold-equivalent ounces (50:1 ratio). At this quantity of ore, major mining companies, hungry to replace their depleted resources, will begin to take a serious look at a company for acquisition or joint venture purposes. Of course, ECU will continue to convert additional “potential” ounces to the higher categories, enhancing the valuation even further. These silver-equivalent ounces only pertain to the precious metals gold and silver, whereas the base metals of copper, zinc, lead, etc. increase the overall quantity even more. With the annual meeting approaching in late June, 2008, I suspect management would very much like to reach this milestone by then.

Notwithstanding the depressed level that ECU’s stock currently trades, let’s examine the appropriate valuation and compare it to the current price. According to independent mining analysts, when the price of silver was as low as $12/oz., the industry assigned a valuation for “in-ground” (yet-to-be-mined) silver of $3/oz. Today, with silver significantly higher at $16+ (down from $21/oz. pre-Bear Stearns), this is a very conservative applied value. Thus, assigning a quantity of merely 170 million silver-equivalent ounces, ECU’s market cap should be $510 million. When the company reaches 250 million silver-equivalent ounces, the market cap of ECU would be fairly valued at $750 million.

Astonishingly, the inappropriate weakness in the stock has driven ECU’s market cap down to $349 million, 32% below fair value with no additional silver-equivalent ounces beyond the previously-confirmed 170 million. At 250 million silver-equivalent ounces, ECU market cap and share price should be 115% higher than it currently stands in this depressed environment. Beyond 250 million ounces, the valuation diversion gets even more ridiculous.

With 28 years’ experience in financial markets, I’ve seen numerous examples of inappropriately priced assets. Oftentimes assets are insanely overvalued, like tech stocks during the 2000-2003 tech bubble; sometimes they are ridiculously undervalued like major bank stocks (ironically) in 1990-91 when they traded below book value with 6-8% dividend yields. In time, patience is rewarded when an asset trades so cheaply. In the case of the mining companies, there is little doubt in my mind that we will prosper as we wait out the current downturn.

Wistar W. Holt