Specious Argument

Today, Canada celebrates its 142nd anniversary of confederation. I hope all my fellow Canadians have a terrific Canada Day.

I took this picture of a Canadian Girl in 2007 during Canada Day celebrations at Prince's Island in Calgary, Alberta. If you click on my picture, you will be taken to my Flickr site where you can see more of my pictures.

I have been battling and continue battle major computer problems. This weekend, I will be reinstalling Vista for the fourth time in a month's time

I hope to beat my computer problems into submission shortly and resume posting to my blog.

Those of you who use a credit card—and who doesn't these days—must read Charles Duhigg's terrific New York Times article titled What Does Your Credit-Card Company Know About You? (free registration might be required). And for those of us who like to think about how credit cards might influence the economy, here's an interesting quote from the article:

If a credit-card company detects unsettling patterns, it might start cutting credit lines, raising interest rates or accelerating repayment schedules. (Companies are expected to withdraw $2.7 trillion of credit by the end of 2010, according to a March report from the Meredith Whitney Advisory Group, a banking-analyst firm.)

This smokey and hazy photograph of the Bow River in Banff National Park was taken in 2006 when there was a large forest fire in Washington state. The picture is hosted at Flickr. If you click on the picture, you will be taken to where you can view a larger version and see more of my pictures.

As preparation for my review of first quarter 2009 results of Blue Nile, Inc. (NILE), you might wish to read Blue Nile First Quarter 2009 Financial Results, my synopsis of the Blue Nile's fourth quarter 2008 results, and Eric Savitz's article at Seeking Alpha.

Prior to the release of the fourth quarter results, analysts had the following expectations:

The company's results were ahead of expectations with revenue at $62.4 million and earnings of $0.13 per diluted share. According to Yahoo Finance, analysts have revised their estimates as follows:

I listened to Blue Nile's conference and thought it was positive. Using Seeking Alpha's transcript, I will highlight key items in point form.

• Sales declined 11.4% for Q1, which is better than earlier indications mentioned last conference call of about a 15%.
• Bridal jewelry category, which includes diamond engagement rings and wedding bands performed better than average overall sales and made up a larger proportion of the overall sales than it was last year.
• High cost jewelry exceeding $25,000 was most affected by the downturn.
• Diane Irvine, President and CEO indicated that the company performed well, "Our ability to achieve EBITDA growth from a year ago despite a decline in sales is significant and it was driven by our focus on profitability, specifically the expansion in gross margins and a laser focus on costs."
• Company expects to have strong positive full year cash flow exceeding $11.8 million, which is the trailing 12 month cash flow.
• Inventory was down 17% year on year.
• Company has no debt.
• Company is seeing signs of improvement customer sentiment and overall retail sales, though the company remains cautious in its near term outlook. However, the company has a much stronger positive outlook for the longer term.
• Jewelry industry remains in chaos and this is presenting both challenges and opportunities. The challenges stem from other jewelers exiting the business and dumping their inventory onto the marketplace. The opportunity, of course, is that Blue Nile is strong financially and should capture more market share by providing its customers with better value and better customer service.
• Diamond prices have declined 20% from market highs and are 5% to 10% below prices one year ago.
  • Unlike the brick and mortar jewelers that carry about one year's worth of inventory, Blue Nile is a just-in-time retail operation. Thus, it is able to pass along the majority costs savings of decreased diamond prices to customers. This action helps to increase market share and provide a slight boost to gross margins. Recall that Blue Nile was able to offer customers better value because of its lower cost structure. Reduced diamond prices further enhances its competitive position.
• The website will undergo a major revision later this year.
• Although international sales are small today, international growth continues to look exciting with expansion beyond Canada, the UK, and Ireland. Blue Nile now offers shipping to over 40 markets worldwide.
  • Customers can purchase goods from Blue Nile using their own local currency, which will help provide comfort and security.
• Orders were down 13% from a year ago; however, average order value was up 1.5% to $1662. As mentioned, bridal jewelry composed a larger proportion of the overall mix.
• Gross profit was $13.2 million and gross margin rose from 19.8% in Q1 2008 to 21.2% in Q1 2009. The increase in gross margin is attributable to three factors: increased margin because of lower diamond prices, lower metal prices, and improved sourcing of products.
• EBITDA, increased from $5.2 to $5.3 million year on year.
• Net income was $1.9 and earnings per diluted share were $0.13 versus $0.16 a year ago.
• Company ended the quarter with a cash balance of $32.3 million. Because of the holiday purchase cycle, the significant payables were reduced. This results in a negative cash flow from operations during the first quarter. As stated, the company expects to exceed $11.8 million in non-GAAP free cash flow for the full year.
• No explicit guidance for the remaining quarters; however, the company expects improving sales trends with Q2 and Q3 below last year's levels. Q4, which was adversely affected last year, should have positive growth this year. EBITDA for 2009 should exceed 2008 EBITDA level.
• Notable Question and Answer Comments:
  • The second half of the quarter was stronger than the first half.
  • Because of the company's strong position, it is gaining more influence within the industry and other vendors are seeking to work with the company.
  • Diane Irvine commented: "With respect to the websites, specifically I think you’ll see a very significant change in our new website that we’ll launch later this year before the beginning of Q4 and it will really be the most significant change we’ve done to the website from a branding standpoint. So, I think elevating the level of specialty of our brand and the beauty of the product that we are selling, but it’s really designed to showcase the premier aspect of our brand."
  • Diamond mines reduced output in reaction to reduced consumer demand and jewelry bankruptcies with their inventory dumped on the marketplace. As excess diamonds are in the process of being sold, diamond mines are beginning to increase production again.
  • Despite new entrants into the online jewelry space, Blue Diamond believes that it continues to enhance its competitive position each quarter.
  • Diane Irvine mentioned that although bridal jewelry has a high price point and therefore a lower gross margin, Blue Nile had a larger proportion of bridal jewelry sales and increased gross margins. The increased gross margins are the results of lower diamond prices, lower metal prices, and better sourcing of products.
  • Marc Stolzman indicated that the vast majority of the reduced costs in diamonds and metals are passed along to the customer. This helps Blue Nile gain market share against its brick and mortar competitors who have a year's worth of inventory to work through.
  • Internet shopping bots don't do well when comparison shopping for diamond rings because diamond rings are specialized and differentiated products and not UPC coded. Thus, it is difficult to use a mechanical means for comparison. Customers are, however, sensitive to promotional activity and price points. Blue Nile is using that knowledge as part of its marketing plan.
  • Brick and mortar jewelry retailers remain in a very difficult environment. Bankruptcies are announced frequently. Liquidation is a headwind but the opportunity is less competition in the future. Also, the liquidation tends to be in the non-bridal jewelry.

On Monday, 11 May 2009, Diane Irvine appeared on CNBC's Fast Money show. Please view CNBC's video below (for those viewing by email or by RSS, you might have to visit this website to view the video):

Key themes from the CNBC segment:

• Irvine: Captured many of the points previously discussed and mentioned that the company still has plenty of runway ahead of it:
  • The company presently has about 4.5 percent of the engagement ring market and it believes that 15 percent is a reasonable target value.
• Jeff Macke: Just watch the cash flows. As long as strong cash flows remain, stock price doesn't matter much.
• Guy Adami: Price to book is over 30 times and there is a huge short interest.
• Tim Seymour: Echoes Guy's huge short interest concern.
• Pete Najarian: Recent trajectory has been too strong—wait for a pullback.

Let's examine their comments. But before doing so, I will provide some additional data and graphs.

Please note that you can click through the next two graphs to see full sized versions.

I agree with Jeff Macke. As long as the company remains focused on its business and its cash flows remain strong, share price isn't that important. Given the overall uncertainty in the economy, it's hard to provide a definitive price target. Looking at the Revenue chart above, we see the importance of the fourth quarter. Furthermore, if you look at some of the prominent analysts, one maintains his call for $18 per share from earlier this year. Good luck with that price forecast. Another analyst had a $30 price target earlier this year and is now at $50 per share. That's an amazing change in a short period. And, just to show you how smart I am, I was forecasting a share price of $20 – $25 per share so long as the S&P remained between 800 – 900. I was too bearish. However, to my credit, I knew the share price was difficult to determine and believed that Blue Nile would go higher as the economy improved. I was and remain long Blue Nile shares.

Guy Adami raises an interesting point with price to book value. Though, it's somewhat misleading. Blue Nile uses its surplus cash to repurchase shares, thereby reducing book value. Think of the situation this way: Blue Nile could have let its cash pile up on its balance sheet. Then, it would have a substantial book value, but more shares outstanding and a lesser cash flow and earnings per share metrics. As an investor, would you prefer a) high price to book value, capital returned to shareholders through repurchases, with fewer number of shares outstanding, and comparatively high cash flow to shares; or b) lower price to book value, cash sitting inefficiently on its balance sheet, with greater number of shares outstanding, and comparatively low cash flow to shares? The reality is, Blue Nile is not a capital or infrastructure intensive business. And that's what makes it successful against its brick and mortar competitors. So don't get led astray by looking at book values. As long as the company continues to return cash to shareholders, the book value will be low and the price to book value will be high.

Guy Adami and Tim Seymour commented on the huge short interest. There's always been a huge short interest. According to Yahoo, there is a 42.2% short interest against the available float. Five days ago, Twitter user jkutti2000 commented that she or he was unable to locate stock for a short. But I must warn you, shorting Blue Nile is challenging at best. Just look at the folks who were short three months ago. Again, the short interest was extremely high. Professional short seller Doug Kass, general partner of Seabreeze Partners Management, Inc. and commentator for The Edge Column on RealMoney Silver (subscription required—part of TheStreet.com family), has written rules that he uses. Of his written rules, at least two are appropriate here: "3) Create a diversified short book. No individual equity position should exceed 2% of your portfolio's assets" and "8). Avoid illiquid and heavily shorted stocks. If you don't, eventually a short squeeze will be the outcome, and with it will be heavy losses." So for those shorting, I urge caution.

Given that I am long, do the shorts bother me? No, not at all. In fact, they are best poison pill against a take-over by a larger and likely slower growing company. While a onetime share price pop is always appreciated, I'd prefer to enjoy several years of strong growth and strong share price appreciation. If a take-over were announced, shorts would have trouble locating shares and the share price would jump up substantially.

Pete Najarian mentioned that he was concerned that Blue Nile has moved too far too fast. The stock has pulled back, more than the market during the past few days. Last Friday, the stock spiked to over $51 per share and closed today (13 May 2005) $42.02. Will the stock pull back much further? I don't believe so. But if the general market enters a severe correction again, Blue Nile stock will not be immune.

Overall, I am impressed with Blue Nile. While their competitors are fretting about how to pay the bills and, unfortunately, closing stores and layoff staff, Blue Nile remains focused on running the business better. The company's survival is not in question, unlike much of its competition's, and the company is taking market share. It is expanding internationally with a smart strategy of allowing foreign customers to use their local currency for purchases. Blue Nile continues to benefit from its just-in-time retail model, unlike its competition that is stuck with expensive year old merchandise.

In terms of a share price target, that is extremely difficult, if not impossible. There are smart people who believe that we have not seen the worst in the economy. If the economy were to tank, Blue Nile would not escape. Conversely, others believe that the worst is behind us. Using that scenario, I believe Blue Nile will only get better and stronger with a higher share price. Earlier this year, I thought my prior forecast of $20 – $25 per share under an S&P of 800 – 900 was reasonable. I had several commenters on Seeking Alpha thinking that I was much too bullish. Reality is, in hindsight, I was much too bearish. If I had to guess now, I would say that Citigroup's Mark Mahaney's forecast of $50 per share seems reasonable. In summary, if the economy strengthens over the summer and into the fall, $50 will be too low. The converse is also true.

Disclosure: I am long Blue Nile stock.

A picture of Calgary Downtown in early spring, which is hosted at Flickr. If you click on the picture, you will be taken to where you can view a larger version and see more of my pictures.

I will discuss the Pan American Silver Corp. (PAAS) fourth quarter conference call held on 19 February 2009. More specifically, I will provide a short summary of the conference call's major themes and then discuss the company's individual mines, all in point form. And I will wrap up by discussing the company's outlook.

In addition to transcripts of the company's conference call (see Seeking Alpha's transcript and the company's website for its transcript (PDF, 72.1 kb)), I used the company's press release and financial statements (PDF, 2.3 mb). Pan American's information, though somewhat chaotic, is worthwhile reading.

General Comments

• In prior quarters, the company endured unprecedented volatility in construction and wage costs, energy prices, metals prices, and foreign exchange movements;
• Reduced headcount by 500 employees and contractors;
• Senior executives took a 10% wage rollback;
• Deferred almost all of our Greenfield exploration programs and significantly reduced Brownfield exploration programs;
• Canceled discretionary capital expenditures;
• Reduced or eliminated external consultants and contractors and where elimination was not an option, company requested that charge out rates be reduced;
• Believes that it effectively replaced all the proven and probable reserves that were mined, or were lost due to lower price assumptions and the company started 2009 with a healthy 224 million ounces of silver in proven and probable reserves;
• Completed construction of Manantial Espejo silver and gold mine in December, and are ahead of planned commissioning timetable;
• Expansion of San Vicente was 92% complete at the end of December;
• Produced 4.6 million ounces of silver at a cash cost of $8.24 per ounce;
• Recorded a net loss of $33.3 million or $0.41 per share, which included an atypical charges of $35.5 million;
• Generated a very modest positive adjusted cash flow from operations of $4.3 million
• Produced almost as forecast; company record 18.7 million ounces of silver, at a cash cost of $5.96 per ounce, registering its 13th consecutive year of growth;
• Recorded net income for the year of $24.6 million or $0.31 per share;
• Generated a record adjusted cash flow from operating activities of $95.6 million or $1.19 per share;
• Pan American Silver has produced 1.7 million ounces of silver in January of 2009 at a cash cost of $5.97 per ounce reflecting the successes of its cost saving initiatives that were launched in the fourth quarter of 2008, where it had produced 4.6 million ounces of silver at a cash cost of $8.24 per ounce.

Alamo Dorado, Mexico

• Fourth quarter production was again led by Alamo Dorado's 1.4 million ounces of silver in Mexico, at a cash cost of $6.18 per ounce;
• Production was slowed in mid October after hurricane Norbert hit the mine in the surrounding areas;
  • The surrounding communities and access roads incurred heavy damage, but fortunately the Alamo Dorado mine had minimal impact and its environmental protection systems held up well;
• Produced over 518,000 ounces of silver at a cash cost of less than $5.50 per ounce in January of 2009; and
• Company anticipates delivering a solid first quarter 2009 performance.

La Colorada, Mexico

• Produced 962,000 ounces of silver at a cash cost of $8.50 per ounce in the fourth quarter of 2008;
• Significantly reconfigured the La Colorada operation during the fourth quarter and into January of 2009, reducing the overall mining rate 27%, from 31,250 tonnes of ore per month in the fourth quarter, to 22,800 tonnes per month planned for 2009, while increasing the grade of ore mined;
• Targeting grades of 436 grams of silver per tonne and 1.57 grams of gold per tonne during 2009. This compares to 362 grams per tonne of silver and 0.43 grams per tonne of gold achieved in the fourth quarter of 2008; and
• This reconfiguration allows the company to knock out marginal ores reducing the operating costs from $8.50 per ounce achieved in the fourth quarter to an estimated cost of $8 per ounce in 2009; the mine has been successfully reconfigured and the company has just completed three critical ventilation raises setting us up well for achieving our 2009 forecast.

Peruvian Operations

• Company's Peruvian mines are heavily reliant upon byproduct metal prices;
• Peruvian operations produced 1.8 million ounces of silver at a cash cost of $10.33 per ounce; heavily burdened by falling base metal prices and the lingering cost escalation, as well as production disruption caused by a pinion and gear failure on the primary ball mill at Huaron and a loss of a drive motor on the main underground access shaft at Morococha, which has both been rectified going into 2009;
• Reduced workforce by 724 individuals;
• Minimized discretionary spending, and limited mine development to less than two years and reconfigured mine plans to target higher grade ores;
• Company announced in early 2009 that it was beginning preparations to suspend operations at Quiruvilca as a consequence of the lower prices;
• Changes are beginning to show benefits as operating results improved during January 2009 show 686,000 ounces of silver produced at a cash cost of $6.53 per ounce or a 37% improvement over the fourth quarter of 2008 including achieving the positive cash flow from its Quiruvilca mine as it prepares for suspension;
• After the fourth quarter conference call, the company reported on 3 April 2009 that Union workers at its Morococha mine in Peru initiated a strike yesterday after the Company and Union representatives failed to reach an agreement with respect to an increase in base pay and benefits.
  • Contract workers are currently carrying out underground mining operations at a reduced rate while the company attempts to resolve the matter;
  • Taking advantage of reduced production rate to perform maintenance;
  • Believes that production disruptions at Morococha will not materially change the company's overall annual forecast of 21.5 million ounces of silver.

San Vicente, Bolivia

• Producing 361,000 ounces of silver at a cash cost of $6.10 per ounce, while advancing the plant construction project to 92% complete at year-end;
• Opened first mining level under new high grade litoral vein, which was largely responsible for lifting the ore feed grade in the fourth quarter to 472 grams per ton of silver, compared to the previous quarter of 324 grams per ton of silver, along with 2.6% zinc and 0.4% copper;
• Total capital expenditure through yearend was $64.7 million with a total estimate on completion now at $71.3 million, within about 10% of its previous estimate;

Manantial Espejo, Argentina

• Company very pleased to report that its startup at Manantial Espejo in Argentina is advancing extremely well following the first doré poured on December 29, 2008;
• Overcame tremendous obstacles at Manantial Espejo relative to unprecedented demand for mine development equipment, materials, and personnel in a country that is just beginning to accept the benefits of mining and the company endured some incredibly hostile climatic conditions in this remote location;
• Produced 207,000 ounces of silver and doré bars at Manantial Espejo in January 2009 at a cash cost of $2.22 per ounce, with gold as a byproduct credit;
• Had another 114,000 ounces of silver contained in precipitant waiting for melting at the end of January; Company had to put double shifts on in our refinery, which is a kind of startup problem everybody only dreams about;
• Plant processed nearly 38,000 tones of high grade ore in January, which is about 61% design capacity and ahead of ramp up projections; The silver and gold recoveries in January were 84% and 93.5% respectively which is within 9% of the silver design and 1% of the gold design also well ahead of ramp up expectations;
• February is progressing well and company expects to reach design capacities and recoveries by the end of March 2009 and to declare commercial production in the first quarter;
• Achieved positive cash flow in February and established final mine development costs at $224.6 million inclusive of $29.7 million of recoverable VAT tax; and
• Confident that Manantial Espejo will achieve its annual average 4 million ounces of silver and 60,000 ounces of gold production for many years to come.

Exploration Plans

• Exploration program covered and defined during 2008 a total of 26.9 million ounces of silver, more than replacing the 22.2 million ounces mined;
• Lower base metal price assumptions, coupled with higher cut-off grades, downgrades of 8.8 million ounces from reserves to resources, resulting in a corporate proven and probable reserve of 223.7 million ounces as of December 31, 2008, only 1.8% lower than the year before while ore reserves increased by 1% to 701,000 ounces.
• Note that reserve quantities are highly dependent upon metal prices and are thus volatile;

Huaron, Peru

• Proven and copper reserves increased 5% or 3.2 million ounces after subtracting ore mined during 2008, to a total of over 62 million ounces. Measured and indicated resources stand at 11 million ounces, and inferred resources contained over 30 million ounces, making Huaron one of the company's largest silver resource;
• The most significant increase came from the Pozo D area where the company added 5.7 million ounces.

Morococha, Peru

• Proven and probable reserves increased by 10% or 3.1 million ounces net of 2008 production, to a total of over 35 million ounces; measured and indicated resources, add another 15.7 million ounces, while inferred resources account for additional 40.8 million ounces.
• Best exploration results have been achieved in the Morro Solar vein, where the company added over 10 million ounces of resources, of which 4.5 million ounces have been upgraded into proven and probable reserves; exploration will continue at Morro Solar and parallel veins in 2009, as only a small portion of the 2.5-kilometer long vein has been drilled.

Quiruvilca, Peru

• Experienced a loss of 4.1 million ounces because of mine production and the Company’s intention is to prepare the mine for a period of care and maintenance.

Mexico

• La Colorada added 4.6 million ounces of silver, and at San Vicente 1.4 million ounces—basically replacing all the reserves mined during 2008; and
• Alamo Dorado experienced a reserve loss of 5.9 million ounces because of mine production during the year.

Manantial Espejo, Argentina

• Company holding over 25,000 hectares of land around Manantial, which contains a very large number of outcropping quartz veins. Some of them have been partially drilled but most are completely unexplored.

Concluding Exploration Comments

• 2009 Exploration Program contains a total of 53,000 meters of diamond drilling at a cost of approximately $4.8 million
• Exploration efforts will remain largely focused on our operations and on a limited number of select high-potential projects in Mexico and Peru, while maintaining important land positions in both countries

Financial Details

During the conference call, the company's chief financial officer, Robert Doyle, discussed metal price disappointments, capital expenditures, unexpected foreign exchange rate movements, write-downs, and various financial ratios. While important, I am not going to burden you with those details. You can, if interested, read the transcripts.

What did catch my attention, however, were the company's metal price assumptions for 20009:

• Silver: $10.00 per ounce;
• Gold: $725 per ounce;
• Zinc: $1150 per tonne;
• Lead: $1300 per tonne; and
• Copper: $3500 per tonne.

In the company's press release and financial statements, it indicated that for 2009 it expected sales as percentage:

• Silver: 58%;
• Gold: 16%;
• Zinc: 14%;
• Lead: 6%; and
• Copper: 6%.

Let's return back to the conference call. Doyle also mentioned that the company has no debt and has an undrawn $70.0 million revolving credit facility. In today's environment, that's a huge positive.

Management's Outlook

• In forecasting its 14th consecutive year of growth in 2009, the company plans to produce 21.5 million ounces of silver at an average cash cost of $6.28 per ounce. Moreover, it plans to more than double—actually almost triple—its gold production; and is planning on producing 85,000 ounces of gold in 2009;
• With the start-up of Manantial Espejo, and the expansion of San Vicente fuelling its growth, the company anticipates a significant reduction in its overall exposure to base metals. It estimates that in 2009 silver will account for 58% of its revenues, while gold sales should account for another 16%. 74% of its revenues are now exposed to precious metals;
• Preparing its highest cost operation, Quiruvilca, for a period of care and maintenance (read: retired);
• With the company's recent financing, no debt, an untapped line of credit, and expected positive operating cash flows this year, Pan American Silver is exceedingly well positioned to aggressively look for new growth opportunities where it can make a positive contribution; and
• Company believes that, with the current financial and economic global chaos, gold and silver have the potential for significant price appreciation this year.

My Overall General Impressions

Please note that you can click through the above chart to view a full size version.

The above chart shows Pan American Silver (PAAS) versus iShares Silver Trust (SLV) for about the past two years. The iShares Silver Trust is an ETF that tracks silver. As we see, for the first year, both Pan American Silver and iShares Silver tracked reasonably closely to each other. But in the past year, Pan American has fallen relative to iShares Silver. And that's not good.

In a perfect world where silver prices rise, silver mining companies should rise faster. They should rise faster because they have fixed and variable costs that should be largely independent of silver prices. In reality, however, when prices are high, everything is high, including costs. Commodities prices as well as labor, construction costs are also high. In Pan American's situation, rising silver prices, which are good, were met with higher labor and other costs, which are bad. And then commodity and precious metal prices tanked while costs came down much more slowly. This challenging problem is not unique to Pan American. Many commodity related companies experienced this painful situation.

Looking forward, prices for gold and silver have risen off their lows but down from when the conference call took place in mid February. How will gold and silver fare for the remainder of the year? That's impossible to answer. Some might believe that we are through the worst of the financial and economic turmoil. If true and the economy does begin a modest recovery, investors might dump precious metals and move into other areas. Conversely, if the recovery seems weak or does not take hold, investors might want greater exposure to precious metals to protect themselves against the fallout.

Where do I stand? I am hopeful that the international leaders will be able to ease us back toward a recovery. My fear, however, is that with all the exuberant printing of money, there will be, or at least feared, a strong bout of inflation down the road. Put differently, I am confident that in five year's time the ratio of U.S. dollars in circulation to the tonnes of gold in existence will have increased, perhaps substantially so. Thus, I like having exposure to gold and silver. And, I believe that Pan American Silver is the best managed silver mining company.

Incidentally, iShares Silver trust currently has 270.4 million ounces in trust, and back in September of 2007, it had only 139 million ounces.

I further believe that Pan American Silver will outpace iShares Silver Trust. There are substantial risks, however, that it might not. According to the company's press release and financial statements, the company's expected sales by jurisdiction are as follows:

• Peru: 34%;
• Mexico: 31%;
• Argentina: 28%; and
• Bolivia: 7%.

Unfortunately, some of these countries are interesting places in which to conduct business. Pan American has no political risk insurance, probably because it is very expensive and does not protect against rising royalties and taxes. If not protected against rising royalties and taxes, then what's the point?

As an aside, some investors believe that certain price ratios should prevail. That is, gold should be X times the price of silver. Or that there is a relationship between the S&P 500 to gold and silver prices. Or that gold and silver price should be priced relative to oil. I don't subscribe to those theories.

I greatly respect Bill Fleckenstein of Fleckenstein Capital (subscription site). He informed his subscribers of both the dotcom and real estate bubbles well before they were popular with the mass media. He has repeatedly stated on his site that the gold silver price ratio is just that—a ratio. In fact, in responding to a subscriber on 17 August 2005, he stated, "the gold silver ratio - is just that-a ratio...it has no real value...there is no 'norm',imo." And for those of you unaware, Bill Fleckenstein is a director of Pan American Silver.

Wrapping up, I am long Pan American Silver because I believe that it is an extremely well managed company. I further believe that there is a strong chance that with central bankers printing money as fast as they can, there will be inflation once the recovery takes hold. And that higher inflation will cause higher commodity prices, including higher silver prices. Put differently, there will be a greater increase of dollars in circulation tomorrow than an increase of gold and silver in existence. And that should bode well for the shareholders of Pan American Silver.

Disclosure: I am long Pan American Silver Corporation shares.

Kananaskis Sky is the title of the photograph above, which is hosted at Flickr. If you click on the picture, you will be taken to where you can view a larger version and see even more of my pictures.