By Andrew Klips · Tuesday, September 20th, 2011

Silver Dragon Resources Inc. (OTCBB: SDRG), a mining and metals company focused on exploration and development in proven silver districts globally, similar to companies like Minco Gold Corporation (AMEX: MGH) and Coeur d’Alene Mines Corporation (NYSE: CDE), continues to prove the value of Chinese properties while the country’s silver demand is exploding.

China’s Silver

Silver production across the planet has been seeing a recent shift in leaders to some degree over the past five years.  Peru has held its roll of king of global production for a number of years, but 2010 saw a changing of the guard as Mexico slid past Peru into the number one slot by producing 128.6 million ounces in comparison to Peru’s 116.1 million ounces.  Gaining ground, and holding the third position with 99.2 million ounces produced in 2010 is China, a country that often times goes overlooked for its prolific annual silver production.  Perhaps this is because China doesn’t have a single silver mine in the top 20 for the largest producers of silver while Peru and Mexico hold three of those spots out of the top seven.  Be that as it may, annual silver production in China has risen by 31.5 percent in four years from its 2006 total of 75.4 million ounces.

Silver production in China is certainly up, but so is demand.  Already seeing a 30 percent increase in demand as compared to 2010, Albanian Minerals President and CEO Sahit Muja recent stated that “Silver demand in China and India is set to rise 40 percent in 2012.”  China in particular has been seeing demand rising at a searing pace with net imports increasing four-fold to exceed 3,500 metric tonnes in 2010.

Proving a Project is Worth its Weight in Silver

Looking to add to China’s rise in production and capitalize on demand issues, Silver Dragon Resources Inc. has taken a step forward in validating its Dadi Silver Polymetallic project (for which Silver Dragon holds a 40% interest) located in Inner Mongolia, China, through the completion of a preliminary feasibility study in accordance with Canadian Securities Administrators National Instrument 43-101 Standards of Disclosure for Mineral Projects.

The economic analysis estimates that at a 40 g/t cut-off grade, the Dadi project will generate net cash flows over the seven-year project life of $207 million, of which $82 million will accrue to the Company. The report estimates an internal rate of return (IRR) of 175% and a net present value (NPV) of $142 million applying an 8% discount rate. The IRR is 153% and NPV is $55 million. These figures are based on mineral resources and not on mineral reserves. The economic analysis included was based on measured and indicated resources. Inferred resources were not included in the economic analysis.

Measured?  Inferred?  What’s the difference?

The economic analysis being based on measured and indicated does not leave a great deal to chance.  Mildly explained, “measured mineral resources” are the part of the mineral resource which allows for densities, physical characteristic, grade, mineral content, etc. to be estimated with a high degree of confidence.  An “indicated mineral resource” is that part of a Mineral Resource for which tonnage, densities, shape, grade, mineral content, etc. can be estimated with a reasonable level of confidence and is based on exploration, sampling and testing information gathered through acceptable techniques (i.e. drilling and trenching).  Inferred resources – while they indeed could be correct or even underestimated – are the portion of the Mineral Resource for which tonnage, grade and content are estimated with a lower level of confidence.  Although the geological evidence is present, verification has not occurred, hence the reserves are “inferred.”  Think of “measured mineral resources” as the “low-balling” of what minerals a mining company hopes to extract from the earth.  For obvious reasons, feasibility reports and economic analysis, which basically define whether or not a project is worth taking towards production or not, are based on information that can be discerned with the highest degree of confidence.  There can be little doubt that Silver Dragon has hit a home with their most recent report, propelling the company into the next tier of mining companies.