Clive Maund
gold, silver, & oil shares


originally published August 29th, 2010

ECU Silver is a stock that is regarded as grossly undervalued both in relation to its established mineral resources and to its state of development as a company. We haven’t looked at it for quite a while, as although the stock has made some tradable fluctuations it has essentially been bogged down in a basing pattern since the start of last year. Now, however, there are indications that it is about to break out of this base area, a development that can be expected to synchronize with gold and silver breaking out to new highs to begin an important new upleg.

We’ll start by looking at the long-term chart, to gain an overall perspective on the evolution of the company. Many of you may recall that ECU made major discoveries at its Velardena properties in the middle of the decade. This caused the stock price to soar, and happily we were around to participate in that, but as Greenspan would put it, it led to a period of “irrational exuberance” when the stock price raced way ahead of the fundamentals, as it’s one thing to discover a mineral resource and quite another to get to the point where you can bring it to market. So once the excitement of the discoveries abated, a long hangover set in which saw the stock price retreat steadily as the company embarked on the long road to create the infrastructure to bring its highly impressive resource assets to market. Most modern investors do not like terms like “long road”, “commitment” and “patience” and they certainly don’t like stock issues, so the stock price went down and down as the company went ahead and laid the foundations for future production and the shares in issue swelled from about 150 million at the time of the discoveries to a weighty 307 million or so now. There are 2 points to make regarding the number of shares in issue, which we would normally find off-putting. One is that ECU has grown its mineral resource from 1.6 million tons in July 2005 to an enormous 30 million tons. So the stock price has less than trebled since then, while the resource base has increased by a factor of 18.75 times. During this period the number of shares in issue has grown from about 150 million to about 307 million, while the price of silver has more than doubled and the price of gold has tripled, more than cancelling out the impact of the higher number of shares. So it is therefore fair to say that a less than threefold increase in price from 2005 has occurred while there has been an 18.75 fold increase in the resource. From this simple calculation we can deduce that ECU stock is very attractive here on fundamental grounds despite the seemingly high number of shares in issue. The other point worth making is that about 40% of the stock is tightly held by a number of big investors, reducing the supply on the open market substantially, and making a hostile takeover of the company very difficult indeed. Now we will look at the charts to see how the price pattern is shaping up.

Starting with the long-term chart we can see how ECU rocketed up in 2006 on news of its discoveries breaking. Then, after a large top area formed, it went into a long and persistent decline which ended up taking the price right back almost to pre-discovery levels. As mentioned above, due to the massive increase in the resource base and the advances the company has made towards production, the selling that drove the price down is now regarded as having been way overdone. In other words the stock is viewed as being way undervalued relative to the company’s proven resources and current position. It is evident from this chart that other savvy investors are well aware of this fact, which is why a clear base pattern has been forming, that we will now look at in more detail on the 2-year chart. Before leaving the long-term chart it is worth taking a look at the volume indicators at the top and bottom of the chart. The Accum-Distrib and On-balance Volume lines have remained buoyant despite the severe decline in the stock price between 2006 and 2009, which is a positive sign that bodes well for the future, for this signifies that there was no great weight of selling on the decline, which was occasioned by continued light selling in the absence of bids, and the decline towards the final lows accelerated as the stock got caught up in the general selling panic late in 2008. A clear Cup and Handle base has formed over the past 2 years, which we will now examine in detail on the 2-year chart.

On the 2-year chart we can see that the stock price finally bottomed in March of last year, after which a fine, clear Double Bottom developed as the price later returned to test the March lows in August - September. It then drove clear above its 200-day moving average which then turned up for the first time in well over 2 years, but the time was not right for breakout and sustained advance, so it slipped back again and ran off into a gentle downtrend that has persisted up until the present, and which has taken the form of a bullish Falling Wedge, that also comprises the Handle of the Cup and Handle base pattern. As this Handle reaction developed we can see that volume has died back in a satisfactory manner. This Cup and Handle base certainly appears to be complete, and it is regarded as no coincidence that gold and silver are on the point of breaking out to new highs. If they do it would be a fitting point for ECU to break out of this base pattern to enter a major uptrend, and here we should note that what differentiates ECU from other silver companies is that ECU’s mineral resource has a large gold component. Gold actually makes up almost half of ECU’s precious metal content - so ECU Silver could by rights be named ECU Gold and Silver, although the existing name is more tidy.

While it would have been good to buy ECU stock before last week’s sharp rise, our charts show that in relation to the overall pattern there is still everything to go for here, for the stock is still some way from breaking out of the base pattern, and is at last in position to embark on a major advance after several difficult years.

Although the company is faced with challenges - it has, for example to deal with a $17 million debt , and has to construct a new higher capacity mill to process its resources - these are normal growth experiences and it is expected to successfully roll over the debt as it has in the past, and once financing for the new high capacity on-site mill has been organized, it should be possible to get it completed in as little as 8 to 12 months. Otherwise, logistics and infrastructure are already excellent, with the company’s mines mostly grouped together near to the 2 existing mills, which are very close to a new 2-lane highway. By far the largest mine, the Santa Juana mine has been developed and prepared to go into large scale production, with new modern office facilities being completed right now above the mine. As an exploration company ECU continues to search out new prospects and has located more rich prospects in the direction of Durango. The narco gang problems in Mexico, which have been attracting lurid headlines in the international press, while by no means over, are being brought under control to a greater extent than is generally realized. In any case, the challenges facing the company have already been factored into the stock price and thus discounted, which is why it is still trading at such a low level, and since we know that the market looks ahead, it is clear that in the face of the expected advance in the price of gold and silver the stock price won’t wait until the new mill is completed before it advances, particularly once investors refocus on the most important single fact - the enormous mineral resource that is already delineated and in the company’s possession.

In conclusion ECU Silver is regarded as a solid gold and silver stock with the prospect of substantial gains from the current low price, and is thus an attractive addition to any investors Precious Metals portfolio.

ECU Silver website

ECU Silver Mining Inc, ECU on TSXV, ECUXF on OTHER OTC, closed at C$0.66 and $0.6324 on 27th August 10