Saturday, August 25, 2012

Royal Silver Company Bonds: Ponzi or Plodding?

Royal Silver Club - World's First Silver Bond from Royal Silver Company

You might not be familiar with Royal Silver Company if you don't follow the Silver coin market, but over the last 24 months this company has built quite a name amongst coin collectors for their .99999 (5 x 9s) Silver coin products (technically they are rounds as they aren't legal tender). Most Silver coins are produced in a lower finesse such as the American Silver Eagle (.999) or Canadian Silver Maple (.9999), so these new coins from Royal Silver Company became somewhat a novelty for collectors, chasing the finest Silver coin available on the market.

This is a blurb available on the Royal Silver Company's website:
Royal Silver Company is Bolivia's only silver refinery and custom smelter. We sell a retail product: the world s first .99999 pure silver coins. Our retail product is sought after by collectors and silver coin investors, for its unique purity and limited availability. We charge a high premium over spot silver, limiting sales to match our production capacity.
In mid 2010 they released their first coin in this fine grade, the 2010 Andean Cat:

Royal Silver Company 2010 Andean Cat 1oz Silver Coin
While I can appreciate the novelty of owning the finest Silver coin I must admit their first coin certainly didn't do much for me from an aesthetic point of view. However their designs have improved over the course of the past two years:

Royal Silver Company 2011 Blue Throated Macaw & 2012 Anaconda

Around 12 months ago (July/August 2011) the Royal Silver Company started offering (reportedly the world's first) "Silver Bonds" in order to expand their operation in Bolivia. A total of 400 certificated were/are on offer at a cost of $5000 (potentially raising up to 2 Million Dollars). 

This Royal Silver Company Silver Bonds made news on Yahoo Finance:
Royal Silver Company is a Panama corporation with a wholly-owned subsidiary in Bolivia.  The company uses an advanced hydro-metallurgical method for producing silver from mined ores.  Furthermore, the company uses zero emission technology in order to produce certified .99999 silver.  The company currently employs about 75 people.

The company has a new limited membership opportunity for silver.  Royal Silver Company is offering 400 memberships at a cost of $5,000 each, as long as spot silver is between $35 and $40.  The cost of membership climbs to $5,625 if spot silver is between $40 and $45.  Each membership acts like a bond, a silver bond.  Each silver bond entitles the holder to receive a 1 oz silver coin each month until the silver bond matures in 2 years (24 total silver coins).  Upon maturity, the holder receives their initial dollar investment back.  This may appeal to investors, because it is rare to find an investment that pays you interest or dividends in physical  silver .  However, the downside of course is that the initial payment is paid back after two years in U.S. Dollars .  The company’s website contains more details and even explains that investors can sell their membership back to Royal Silver Company anytime before the 2 year maturity is due. Yahoo Finance
Well known YouTube personality stellaconcepts (aka John Christian, online entrepreneur behind Top Stocks & Spotmex) also plugged these Silver Bonds on his YouTube channel:

These paper certificates were to provide bond holders (/club members) with a regular stream of Silver coins paid (in place of cash interest a bond would normally pay), with the redemption of the bond possible at any time over it's life or otherwise paid out in full at the end of the 2 year term (in US Dollars). As stellaconcepts points out in the above video, it's possible to hedge your exposure to currency movements for those who were concerned about loss from a change in the exchange rate.

Being a member of the club also allowed you to purchase coins wholesale up to the value of your bond ownership (e.g. owning a single $5000 bond allowed you to purchase up to $5000 in Royal Silver Company coins at wholesale prices, $3 over spot), meaning return on investment would be quite significant (should everything go to plan):

Royal Silver Company - Silver Club Projected Return

You can read more about the bonds on the Royal Silver Company website (they call the program Royal Silver Club): Link to Brochure.

The brochure outlines risks associated with the investment including the following warning:
Risk: Royal Silver Company could become insolvent and unable to pay back Royal Silver Club members.

Management response: Royal Silver Club membership funds will be used to buy silver concentrates, crude silver, and crude gold. Club funds will be liquid, either as concentrates, silver, silver coins, or gold and gold coins. Only 400 memberships will be sold. Management will do everything possible to build a loyal investor base for future projects. Our best interest is served by making The Royal Silver Club an outstanding success.
There was little said about the program (from those who invested) for some months. Some positive feedback from a member on Silver Stackers was reported in January:
"I just want to give some good feedback about Royal Silver Company. 6 months ago I bought into the Royal Silver Company Clubmembership (1 bond) and to date I have 6 coins as promised with no dramas." Link
It seemed that all was on track. 

The CEO of the company (Brian McConnell) posted every now and again on the Silver Stackers forum, including this in April this year:
What a difference 9 months makes.  If a person had invested $5K in physical silver at $41.66 and purchased 120 ounces, he or she would be losing 26%--a $1,300 loss on a $5,000 investment.  But those who advised buying silver and who said Royal Silver Company would not honor its bond, don't post in hindsight to say they were wrong.  So I thought I'd point out the obvious answer to the original post--buying a Membership was the best decision.  From the time of the post, Members of the Royal Silver Club have received 6 to 9 free coins per Membership and their investment has increased in value against the AUD.  All Members wishing refunds have received them, so their investment has been proven liquid.  Some Members make money buying our coins for wholesale and re-selling at higher prices.  In all, Members have received the benefits of free silver, wholesale silver, and capital preservation.  Buying the world's first silver bond--The Royal Silver Club--has proven to be a sound investment with a good return--and most important--no loss of capital.  Obviously the skeptics will have something negative to post as soon as I put this up, but facts are difficult to deny.  Oh, yes, in case it is not obvious, I am the CEO of Royal Silver Company.  I am grateful to this forum for helping to develop our world-wide reputation for producing nice rounds.  And I thank forum members who have invested with our company. Link
However on June 13th this year Silver Stackers forum member Dusty posted discontent with the service he had received from the Royal Silver Company (relating to timely delivery of coins as part of the Royal Silver Club of which he had 3 memberships) and advising us that he had cancelled his memberships to this program (and in turn expecting return of his capital within 30 days as per conditions outlines by the company). You can read the post in it's entirety here (Link) and Dusty is also organising a sorted timeline of events for me which I will post on the blog at a later date.

The thread also highlighted other poor turn around times which customers of the company had received (although not all explicitly the fault of Royal Silver Company):
1. "I too am having problems with RSC. I placed an order on June 5 and wired out the money. As of right now, they still do not show the wired funds in my account and they have not responded to my email from the other day."

2. "I had a serious wait to get the 2010 cats. I ordered them late November '10 and got them April '11. Sounds like the communication system hasn't improved from the time I ordered to the OP's experience. I recall sending numerous emails and although I got responses promising they'd be sent soon, at the end it went silent until I received a  PM here that my coins might be in a lot this person received from Brian and indeed they were."

3. "Same experience when I did the first group buy for Andean Cats a year or so ago. Between the wire fees, delays, dealing with FedEx/Customs, was a terrible experience. Despite many many requests to do another group buy, I just didn't want to deal with the hassle."
Brian McConnell (CEO, Royal Silver Company) also responded in this thread (here), part of which is below:
Royal Silver Company has successfully delivered coins around the world for 2 years, since we first started minting.  EVERY order on our books has been delivered or will be delivered.   Anybody who has ever canceled an order has received a refund.  Anybody who wanted a coin replaced has received a replacement.  (We replaced hundreds of early coins, at our cost, with higher-quality strikes). We do this from the most challenging business environment in the Western Hemisphere, from a land-locked, impoverished country high in the Andes Mountains--a country with little industrial development, expensive transportation to world markets, no access to capital markets, governed by people who do not share our free-enterprise values, where the rule of law is a foreign concept, and where people speak Spanish, not English.  Holidays are many, strikes are common, blockades are the order of the day.  Bolivia is the Wild West in every sense of the word. Continues
Later in the thread Dusty says his refund was supposedly being processed on June 13th, the day he posted the thread, however as of July 26th he was yet to receive a refund or be kept filled in on it's progress (and was also missing several dividend coins).

On August 6th Dusty advised members on Silver Stackers that the CEO of Royal Silver Company had promised the return of his $15,000 (for 3 Royal Silver Club memberships) by the 15th of August. The date came and went and Dusty still hasn't received a refund of his $15,000 invested into the Silver Bonds. 73 days later when the company claims they will repay within 30.

Another member on Silver Stackers (Wiowi) who private messaged me said the following about his experience with Royal Silver Company:
I too have come against a blank wall with responses from RSC/Brian MCConnell.  I have one membership, the certificate was signed on 3/01/2012.  I received 3 coins at that same time, but none since then.  I thought this was a poor performance from RSC and Brian, and after reading about your (Dusty's) misfortune I decided to ask a few questions too.  During the last 10 days I have sent emails to RSC via their "contact us" on the website, to Brian directly and to the Commercial Registry of Bolivia (FUNDEMPRESA).  In those emails I requested return of my $US5000.00 (giving 30 days notice) and that they forward me my outstanding membership coins.  I also requested acknowledgement of my emails, but I have not received a reply.

The last communication I had from Brian was this on 14/07/2012....

"(my name):
We have been delayed to all customers and Members on silver coins for refining issues that have been resolved, finally.  Australian Members are behind by 6 months.  We will be sending coins to Australia shortly to bring everybody up to date.  Thank you for your patience.
This brings us to the question posed in the post title: Are the Royal Silver Company (Royal Silver Club) Silver Bonds a ponzi scheme or is the company just plodding (slow) with delivering what they promise?

My read of the situation (given most customers appear to eventually receive their products) is that the company most likely just has cash flow issues, rather than it being intentional purpose to deceive and retain customer funds. However an investment like this can go bad even the most well intentioned people at the head of the company.

These events are likely to leave a bad taste in the mouths of those involved and who have read the experiences of those affected, so it makes me wonder how easy the next company with an innovative investment opportunity might fare in the precious metals coin market...

My advice if you want a guaranteed investment in the precious metals market, then forget mining companies, forget unallocated accounts, forget bonds or any other form of paper investment and stick with purchasing physical Gold and Silver!

Addendum (added October 18th, 2012):  

As of late September Dusty had received a full refund for his bond holdings (Royal Silver Club), but others I'm aware of who had also submitted requests for refund are still waiting (Edit December 31st, since confirm received). In short I don't think Royal Silver Company is trying to "scam" any bond holders, but these liquidity issues should make readers think about the risks associated with investing in the Royal Silver Club (Silver Bond Program).

Response from Royal Silver Company CEO Brian McConnell (added December 31st, 2012):

Dear Bullion Baron--thank you for being fair minded.  Of course, you have only heard one side of the story, since dissatisfied customers are quick to complain on the internet, but slow (or never) to write that their issues have been resolved, which leads the average reader of your posts to assume that our company is a scam, which it is not.  Please take the time to read this response to the negative things you have posted against Royal Silver Company.

Here are the facts:  except for 3 recent requests, all Membership refunds have been wired to the Members requesting refunds, and we most-times include extra to cover their bank fees.  The remaining 3 refund requests will be wired after the New Year’s break (around January 7).  Yes, it is true that we were delayed with refunds beginning May of 2012, as one irate Australian customer frightened other Members into asking for refunds as he flamed us on the Silver Stackers forum to such an extent that the moderators closed his posts, only to have him continue his rants on YouTube, other forums, and other threads on the same forum.  Only reluctantly and only when asked directly by other Silver Stackers did he admit that yes, he had received his refund.  After that, his credibility was called into question.  However, he did cause a “run-on-the-bank” that saw us refunding over $400,000 in Memberships.  For a modest-sized company such as Royal Silver Company, this reversal in cash flow took a while to resolve.  We stand behind our promise to Members that their investment is liquid and that we will refund their investment, when asked.  If I can plug my own product for a moment, please bear in mind that The Royal Silver Club was the world’s first silver bond and that it proved a good investment during 2011 and 2012 as silver declined in price.  Our investors did well, since their capital is safe and they have received silver coins with no cost basis (free), such that they now own 15 to 18 silver coins (or less, depending on when they purchased a Membership) that are basically free.  Even at today’s silver price, this is a better return than a typical bond--plus our coins do not re-sell for the price of silver, but for much more, so the return on investment is much higher than any other corporate bond.  Besides being an unique investment, The Royal Silver Club has proven to be a profitable and safe investment--considering how many corporate and sovereign bonds have become worthless since last year, I feel we offered our customers a good return in a product that means more to them than the few dollars that the normal bond or savings account pays these days.

Regarding delays in the delivery of coins.  Yes, it is also true that Members in Australia in particular suffered long delays in receiving their free coins as we developed distribution channels.  I admit that delivering coins free of charge to customers on every continent from the land-locked country of Bolivia proved to be more of a challenge than I first expected, but as I write this, most free coins have been delivered already, with more on the way the first week of January.  All Members will be brought up-to-date by January.  What most complainers fail to mention is that I voluntarily added one extra free coin to the 12 free coins per year that we contracted.  In other words, Members received or will receive an additional coin, even though that was never part of the original contract.  We added the additional coin because the decline in the price of silver went in our favor, so I decided to give our customers something extra.  What other company have you ever heard of that voluntarily pays their bond-holders more than originally contracted?  None, except Royal Silver Company.

Coin customers who pay for their orders receive them within our Terms of Service, with few exceptions.  Yes, there were some exceptions in 2012, especially as our ability to make silver was hampered by the “run-on-the-bank” that impacted our cash flow.  However, all credit card customers receive their orders within our Terms of Service (most people fail to read the fine print, but they agree to our Terms of Service with each and every coin order), and most cash customers also receive their shipments within our Terms or shortly thereafter. 

Please understand that we are the only mint in the world to take raw rock, extract the silver with zero-emissions patented technology (US Patent 7,892,505), refine the silver to the highest purity, and mint proof-like finish coins, all under one roof and with no pollution to the environment whatsoever.  Then we ship each order to the customer, no matter where in the world they live, from the impoverished country of Bolivia (one of the most challenging business environments in the Western Hemisphere).  Also, we are the only mint to offer customers an independent certification of the purity of each and every batch of silver we refine.  Other mints offer absolutely no assay of purity, or only an in-house assay signed by their own assayer.  SGS, the largest standards and testing organization in the world, independently certifies cuttings we take from each batch of silver coins.  So customers can be sure that Royal Silver Company truly offers the purest silver coins in all of human history.  It may take longer, but we refine each batch of silver to 5x9, even if we have to re-refine several times.  This sort of extraordinary craftsmanship takes time and effort.  For the modest premium we ask, we offer the most unique silver coins in the world, that in all parts of the world re-sell for much more than our store premium.  And Club Members receive our coins for wholesale price, less than the cost of the average generic rounds that have no re-sell premium at all.

Regarding me being slow to respond to emails, please be fair.  I receive about 200 emails per day, most of which require some response.  At times I travel to remote parts of Bolivia and my inbox fills beyond my ability to go through it quickly.  I defy you or anybody to write to Bart Kitner of Kitco about a coin order and receive a personal reply, or to the Director of the Perth Mint, or US Mint, or Chinese Mint about a small coins order and receive a personal reply, yet I try and respond to everybody who writes, no matter if they only ordered one coin.  All you ever see is “Brian does not return my emails.”  Wow.  If people would write to us using their Royal Silver Company store account, then our English-speaking customer service rep will see their mail and respond quickly, but many customers write to me directly on my personal email and expect an immediate reply.  That is unrealistic to say the least.  Yet I do respond eventually.  Please believe me when I say that dealing with the retail public around the world requires the patience of the biblical Job.  I am not complaining, just explaining.

In 2013 Royal Silver Company will expand operations to become Bolivia’s largest zinc and silver smelter.  We hit a speed-bump in 2012, but have overcome the difficulties of working from Bolivia to build our company into one of the largest.  You and others will read about us in the popular press as we become the most important zinc and silver producer (metallic silver and zinc, not just minerals) in our region of the world.  It takes guts and courage to invest in Bolivia these days, let me tell you, but we are committed to the industrialization of Bolivia more than any other company I know.

Finally, if customers would apply a reasonable amount of patience, they will receive the most ethical, and purest silver coins on Earth.  Every order on our books has been or will be shipped.  Period.  If you and your readers will just look at the YouTube videos of satisfied customers opening their packages and displaying their Royal Silver Company coins, you will see a level of enjoyment and awe that is rarely shown for other silver coins.  These days, a modest amount of money rarely buys the sort of satisfaction you see expressed by our customers as they proudly show off their silver coins from Royal Silver Company.  I can’t offer the fastest, but I do offer the world’s best.

Thank you again for reading this post.

Best regards,
Brian McConnell, CEO Royal Silver Company


[CLICK HERE] To subscribe to blog updates via email (free)


 Buy bullion online - quickly, safely and at low prices