Gates Putting Some Money In Silver Miner (Published 1999) (2024)

William H. Gates 3d, the world's richest man and the chairman of the Microsoft Corporation, has bought 10.3 percent of the Pan American Silver Corporation, a tiny silver mining company based in Vancouver.

The roughly $15 million investment, made by Cascade Investment L.L.C., one of Mr. Gates's personal investing companies, was made public in a filing with the Securities and Exchange Commission yesterday.

Although Mr. Gates's investment in Pan American Silver is a fraction of his net worth, it is nevertheless a significant vote of confidence in the metals markets. News of Mr. Gates's purchase comes at a time when precious metals prices are jumping.

Yesterday, the price of gold rose 9 percent, the biggest gain in almost two decades. The December gold contract touched $329 before settling back to $310 yesterday, capping a two-day rally ignited by the news that 15 European central banks would limit their sales of gold reserves over the next five years. Silver rose to $5.77 an ounce yesterday, up 7.6 percent. Rising prices for gold, silver and oil, among other commodities, are giving rise to renewed concerns about inflationary pressures in some parts of the financial market.

Mr. Gates's investment in silver places him in the company of Warren E. Buffett, often referred to as the sage from Omaha for his investing success over the years. Mr. Buffett bought 130 million ounces of silver in early 1998. The hedge fund manager George Soros is another believer in silver.

Mr. Gates hired Michael Larson, a former bond fund manager, in 1994 to manage his personal investments. In addition to the Pan American stake, Mr. Gates owns 10.8 percent of Schnitzer Steel Industries, a scrap recycling company, and 9.7 percent of Warner Chilcott P.L.C., a maker of prescription pharmaceuticals. He has also invested in several biotechnology companies, including a 14.6 percent stake in the Corixa Corporation and a 13.2 percent holding in the Icos Corporation.

Mr. Larson, the son of an industrial engineer, started buying shares in Pan American Silver in February and added to that position in August. In the filing, Cascade is said to own 3.15 million shares. Mr. Larson was not available for comment yesterday.

Rosalie C. Moore, vice president for corporate relations at Pan American, reckoned that Cascade paid approximately $5.25 a share for its stake. The stock closed yesterday at $6.5625 in Nasdaq trading.

''Michael Larson was very personable, very laid-back and unpretentious,'' she said. ''He asked very smart questions and knew a lot about the silver market before we walked in to talk to him.''

Pan American was created in 1994 when Ross J. Beaty and John H. Wright realized that few companies could be considered a pure bet on silver. That is because 80 percent of the world's silver production is a byproduct of other mining activities -- such as the production of lead, zinc, copper or gold. According to Ms. Moore, there are no more than 25 primary silver mines in the world that derive at least half of their revenues from sales of silver.

In the last five years, Pan American has bought all or portions of mines in Peru, Mexico and Russia. Mr. Beaty and Mr. Wright were able to acquire the properties for pennies on the dollar because the mines were not profitable at prevailing silver prices. They then made the mines feasible by cutting costs. In the mine in Peru, for example, Pan American management increased production by 50 percent while reducing the work force by a third. When the mine was acquired in 1995, its cash cost to mine silver was about $6 an ounce. Now it is $3.78 an ounce.

Silver may be a compelling investment for Mr. Gates because consumption has been far outpacing supply. In the last year, demand for silver has grown 5.5 percent. And in the last decade, Ms. Moore said that 1.6 billion ounces of silver were used that were not replaced.

Because silver accounts for only a tiny portion of the cost of most medical and technological products, bulls on silver believe that even if the price goes up, users will not look for replacement metals. That means demand should remain high.

Pan American Silver is not yet a profitable company. In the first half of the year, the company had a loss of 12 cents a share, more than the 7 cents a share lost a year earlier.

But with the price of silver rising and Pan American's costs to mine the metal declining, the company's future appears promising. If its mines in Mexico and Russia begin operating next year, the company's production will rise to 22 million ounces in 2001 from 3 million ounces, according to Ms. Moore. The cash cost of producing the silver will drop to $2.50 by 2001 from $3.78, she said.

At that point, Ms. Moore explained, as the price of silver rises, more of the increase will translate into sales for Pan American. ''If silver rises by 10 percent,'' she said, ''our revenues will go up 8 percent.''