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1. Volume 12, #4 March 2009-1 ...Discovering value in natural resource stocks Investing in an Uncertain World (A presentation delivered March 1, 2009 at the Prospectors…
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  • 1. Volume 12, #4 March 2009-1 ...Discovering value in natural resource stocks Investing in an Uncertain World (A presentation delivered March 1, 2009 at the Prospectors and Developers Association of Canada annual conference in Toronto) T he world has just experienced the Of course, there is no assurance that this is was particularly scary, because banks, greatest destruction of wealth ever. the bottom of the market. However, it is which are supposed to be solid and Share prices around the world are clear that there is a great deal less risk reliable, were the most vulnerable, at least down 50% or more. General Motors, long today than there was a year ago. in the U.S. and Europe. the backbone of American industry, has lost 90% of its value from a year ago. In the face of the present uncertainty, I am Investors saw gold once again hold its Some of the big American banks are gone going to outline 3 investment ideas that I value in a time of crisis. As a result, there completely, with shareholders losing believe will do well, regardless of the has been a huge inflow of wealth into the everything. direction of the broad markets. gold market. There has been such strong demand for gold coins and bars, that there Is the worst over? I don’t know. First, let’s look at gold. is a shortage of physical product. The U.S. government is throwing a trillion Many investors over the past few months Exchange traded funds and similar invest- dollars, and counting, at bailouts and eco- have taken refuge from the financial crisis ment vehicles have become extremely nomic stimulus. That huge handout seems in the safe haven of gold. popular. Gold ETFs now hold 45 million to have stabilized the situation in the U.S. ounces of gold, an all time record. Gold But, Europe is also facing some serious Sure, gold took a hit at the height of the has become the quot;most favored assetquot; of problems. crisis. But, it was nowhere near as bad as investment advisers. nearly every other investment. Gold Some people see more downside before a recovered quickly. Gold equities were also For the first time in nearly 3 decades, the recovery. Others see this as the bottom. hit hard by the financial crisis. The share investing public is looking favorably on It’s hard to know what to expect; and prices of the larger companies have also gold as an investment. And yet, gold stub- therefore it’s hard to know what to do as recovered strongly. bornly refuses to break through $1,000 and an investor. overtake the record price set a year ago. The meltdown in the financial markets After an experience like last year, and with scared the hell out of people. This crisis Some people are puzzled as to why this so much uncertainty remaining, many intense level of gold buying by investors INSIDE people will be tempted to give up on has not resulted in larger gains in the gold investing. Or worse yet, they will wait price. The reason is that investor demand on the sidelines until the popular media is only part of the picture for the gold tells them how great things are in the market. Let’s have a quick look at some of 1– Company Updates investing world. Normally, the popular the other factors influencing gold. 3– Brief Updates press being positive on any investment topic signals the top of the market. Gold is unique in that nearly all the gold 6– Initiating Coverage ever mined is still available to the market. But, the top of the market is precisely The European Central Banks are among 7-Most Favoured Companies when many people come back into the the largest holders of gold. Their sales markets. It takes a great deal of courage over the past decade have been a major 8– Conferences to invest contrary to popular wisdom. factor in the gold market. ———————————— But, that is exactly how you make money The last Issue was in the investing world. You buy when The European banks have agreed not to February 2009-1 others are afraid, and you sell when sell more than 500 tonnes (or, about 16 others are greedy. million ounces) of gold a year. March 6, 2009 1 www.ResourceOpportunities.com
  • 2. Resource Opportunities Jewelry makers do the opposite. tion is falling. Equally importantly, the Gold Supply & Demand Estimates overall reserves in the gold industry are Year from Oct 2007 – Sept 2008 The big swing variable, and therefore the declining. most important determinant in the short- term price, is investment demand. When The larger gold companies have grown investor buying overwhelms the slow- through mergers, but those mergers have down in other sectors, the price rises. been dilutive: the amount of gold Economists will tell you that when the reserves per share has declined substan- price of a commodity increases, demand tially over the past few years. falls and production increases. Economic theory doesn’t necessarily apply in the Most of the gold production is now com- mining world. The gold price has more ing from mines that are more than 15 than tripled in the past 8 years, yet years old. The pace of mine closures will demand continues to rise. accelerate, putting further downward pressure on the level of gold production. On the other hand, the supply of gold, In spite of a five-fold increase in spend- also contrary to economic theory, is ing on exploration by gold companies, falling as the price rises. the industry cannot find enough new deposits to even replace the gold being Gold mine production has been falling mined each year. for several years now, even though min- ing companies are producing all the gold Geologists have spent decades scouring they can to sell into a strong market and the earth. The big, high grade gold de- a rising price. Economic theory simply posits that are sticking out of the ground does not stand up to geologic reality. It is have been found, developed, and are not easy to increase gold production. It’s largely mined out. New discoveries will For the past three years, they have sold hard to see on the slide below, but gold be smaller, lower grade, more remote and less than the quota. However, that might production peaked in 2002, and is pro- deeper. change with the banking crisis. jected to continue to fall. The chart of gold grades over the past Another large holder of gold, the Interna- For years, the large gold companies have several years also presents an interesting tional Monetary Fund, or IMF, has been grown through acquisitions. While Bar- picture. You can see the grade for the talking about selling some or all of its rick and Newmont, for example, are each gold industry has fallen sharply over the gold for years, and again, the financial bigger than they were a few years ago, past few years. crisis may result in more of their gold on the industry is shrinking. Gold produc- the market. Other Central Banks are buy- ing, offsetting part of the European sell- ing. The Asian nations hold a very small por- tion of their reserves in gold. China, with $2 trillion, the largest foreign currency reserves of any nation, holds less than 1% in gold. There is speculation that China and other nations might increase their gold holdings. Physical demand for gold is dominated by the jewelry market. Jewelry demand in the developed world has fallen sharply with the recession, offsetting growth in jewelry demand in the emerging econo- mies. A very important factor in gold is the see -saw between investor demand and jew- elry demand. Investors tend to buy as the price rises and sell as the price falls. March 6, 2009 2 www.ResourceOpportunities.com
  • 3. Resource Opportunities The average gold grade of producing Global Gold Exploration Expenditures mines is now less than 1.3 grams per tonne. When I started my career in the mining industry, what is now the average grade for the industry would have been generally considered a geochemical anomaly, not a mine. With 8 years of rising gold prices, production continues to fall. What does all this mean to an investor? Well, there are many reasons to believe the gold price will go higher, perhaps a lot higher. But, not necessarily right away. In fact, gold has a nasty habit of dropping back after it makes a big move. But, regardless of what happens to the gold price in the near term, the gold mining Junior vs. Senior Gold Stocks industry desperately needs new deposits. Shareholders of companies that find new deposits will be richly rewarded. And, since it is getting harder to find new deposits, companies that have gold depos- its hold extremely valuable assets. The value of many deposits is not being recog- nized now, but over time, investors and the major producers will attribute higher values to the gold deposits now in the hands of the juniors. On top of that, the juniors are adding value by expanding and upgrading their deposits. This slide shows the relative value of junior gold companies versus the larger companies. For several years, the smaller companies outperformed the majors. But, Global Average Mine Grades late last year, the juniors were clobbered much worse than the larger companies. The majors and the mid-tier companies have rebounded, and some of the more established development companies have recovered some of the losses. The smaller companies are only beginning to recover. So, investment idea #1: emerging gold producers and companies with advanced stage deposits Many gold companies have seen big price gains, but there are some companies that have not yet been discovered by investors. Just remember: Not all small gold companies are created equal. Be selective. March 6, 2009 3 www.ResourceOpportunities.com
  • 4. Resource Opportunities are at least a couple of years ahead. sources contain an additional 106 million By investing in advanced exploration and There will be literally hundreds of small ounces of silver, 356,000 ounces of gold, development companies, you gain companies that arise in the green energy 301 million pounds of lead and 498 mil- exposure to the gold market, and therefore business. It will be like the mining sector, lion pounds of zinc. benefit from gains in gold. At the same where a huge amount of innovation and Juanacipio is one of the largest and richest time, you own companies that are development is being done by small silver deposits in the world. It’s not sur- growing and are adding value public companies. We have some prising that the partner would want the independent of moves in the gold price. information on our website that provides whole thing. an introduction to that sector. Now, very briefly, let’s touch on The takeover offer was announced on Investment idea # 2. Base metals are December 1, at a low point in the market. So, Investment idea # 3: Start getting totally out of favor right now. The same Even then, the offer was below the cur- familiar with Green Technology, goes for uranium. It seems that few rent trading price and only one third of especially related to energy. people in North America want anything to the high that the shares reached in the do with base metal companies or uranium previous year. Mag shares have since companies. It’s as if investors think we traded consistently above the offer price, Company Updates have stopped using metals and will never leading pundits to describe the offer as a need any new metal mines. People who “take-under” offer. MAG Silver take a longer term view can find (MAG-TSX) exceptional values. Canadian take-over procedures require that Mag present shareholders with an Mag is conducting an aggressive explora- independent valuation. The junior claims A little side comment: If you look at the tion program on several of its silver pro- top 100 mining companies in the world, that its partner has refused to provide all jects as it continues to resist the opportun- of the required information. As that drama 18 of those companies are Chinese, istic takeover offer made by its joint ven- unfolds, Mag has 12 drill rigs operating including the number 3 company on the ture partner. The company is intent on list. The Chinese take a longer term on its various properties, striving to iden- demonstrating that it merits a higher perspective than Westerners. They are tify enough ounces to justify a higher valuation than the US$4.54 per share of- going around the world now quietly price. The company has announced a $17 buying up base metals. Already this year, fer from Fresnillo plc. million program, involving 28,000 meters they have invested $25 billion in energy of drilling at the Juanacipio project and That London-listed Mexican miner earned 30,000 meters at its wholly owned pro- and base metals and they are advancing a 56% interest on Mag’s Juanacipio silver jects. on two other very large deals. Many deposit and also holds 20% of Mag’s European investors are also taking a shares. The major’s Fresnillo mine on the Mag had over $50 million of cash at the longer term perspective and quietly adjacent property ranks as the largest sil- start of its spending spree. That treasury buying base metal companies. ver mine in the world, with annual pro- provides lots of power for the highly suc- Exploration companies with billion dollar duction of 31 million ounces annually. cessful exploration team that made the ore bodies are now trading for a few discovery at Juanacipio. pennies a share. Their shares may not pop The Juanacipio deposit is clearly an ex- tension of the rich silver system that sup- With a steady flow of good exploration next week or next month, but in due ports the adjacent mine. Mag commis- course, many of those companies will results, and a market price well above the have values several times higher than the sioned an independent study that showed offer price, the Mexican company has so somewhat higher resources than the fig- current share prices. far not blinked. ures published by Fresnillo. The Mag Investment idea # 2: Selected base metal figures (which had to be revised due to an The best prospect for near term value error by the independent engineers) shows creation seems to be the 100%-owned and uranium companies that have an indicated resource of 2.95 million ton- Cinco de Mayo property in northern Chi- established resources. nes of 879 grams per tonne silver, 2.22 huahua State. Hole # 84 cut a 2.72-meter Now, investment idea # 3: This is really a grams per tonne gold, 2.39 per cent lead zone grading 462 grams per tonne (13.5 topic for a whole investment conference. I and 4.15 percent zinc. An additional in- ounces per ton) silver, 10% lead and just want to plant a seed in your minds at ferred resource has 7.21 million tonnes of 13.6% zinc in a zone called the Jose 458 grams per tonne silver, 1.54 grams this time. manto. Results demonstrate that the Jose per tonne gold, 1.89 percent lead and 3.14 manto is part of a large carbonate replace- percent zinc. The total contained metals in ment deposit system. Drilling is continu- Over the next decade, the movement the indicated resource are 83 million away from carbon fuels, that is: oil, ing with three drills. natural gas and coal, is going to gain huge ounces of silver, 210,000 ounces of gold and 155 million pounds of lead and 269 momentum. Look at the initiatives that With Fresnillo holding 56% of the pri- million pounds of zinc. The inferred re- Obama has put forward. In Europe, they mary asset (and operating the adjacent March 6, 2009 4 www.ResourceOpportunities.com
  • 5. Resource Opportunities mine), a competing bid has not come Aurcana Corporation (AUN.V; Last updated February 2009-1 forward. The share price has declined C$0.105) has nearly completed a prelimi- from the recent high as time ticks by with nary economic assessment on its Shafter Freewest Resources (FWR-TSXV; neither another offer nor a higher bid. It silver mine, located in southwest Texas. C$0.26) has made another new chromite is up to each shareholder to tender to the That study will be followed by a prefeasi- discovery on its wholly-owned McFaulds offer or simply hold their shares. bility study due in the summer. The pro- property in northern Ontario: 4 holes ject has a measured and indicated re- drilled below the Black Thor chromite Perhaps shareholders might expect the source of 24.6 million ounces of silver discovery encountered a new zone, with parties to work out a split of the com- and an inferred resource of 22.8 million assays up to 37 meters of 32% chromite. pany, letting Fresnillo get what it wants ounces silver. Plans call for silver pro- The new zone, called the Black Label (Juanacipio), and leaving the other assets duction at a rate of 3.2 million ounces per zone, is thought to be associated with under the control of a team that could add year. The mine has extensive under- platinum, palladium and nickel minerali- more value for shareholders. ground development in place, allowing zation. The discovery will be followed up the project to move quickly to produc- by further drilling. Price March 6, 2009: C$0.41 tion. The studies at Shafter will be used Shares Outstanding: 49 million to help the company find financing to Recent drilling at the Black Thor deposit Shares Fully Diluted: 52 million has returned assays up to 30 meters of develop the mine. Market Cap: C$ 20 million 40.3% chromite. Black Thor and Black The La Negra silver-lead-zinc-copper Contact: Investor Relations Label are located 4 kilometers northeast mine in Mexico continues to operate at 604-630-1399 of the Big Daddy chromite deposit, an- 1,000 tonnes per day, but the low metal other high grade deposit recently identi- www.magsilver.com prices have squeezed profits. The fied by Freewest and its partners. Spider Last updated December 2008-1 Rosario mine was put on hold as metal Resources (SPQ-TSXV) and KWG Re- prices plummeted and the company chose sources (KWG-TSXV) have each earned Brief Updates to focus on development of the Texas a 25% interest in the Big Daddy project. mine. Altius Minerals (ALS-TSX; C$6.26) Freewest now has three chromite deposits reported earnings from its third quarter Shafter is an attractive silver mine devel- on which drilling continues to push out ended January 31, 2009 at $31.6 million opment project. If the company can se- the limits. The company has various or $1.11 per share. These earnings came cure financing on favorable terms, there other projects, with joint venture partners from the forward equity settlement of 2.5 is considerable upside potential in the funding several of them. The most sig- million shares of Aurora Energy for earn- share price from the current level. nificant is the Clarence Stream gold de- ings of $38 million less $6.7 million in Last updated December 2008-2 posit in New Brunswick on which an tax. Altius reported $689,000 in earnings updated resource estimate is expected from its 0.3% net smelter royalty interest Exeter Resource Corp (XRC-TSXV; soon. from the Voiseys' Bay nickel-copper- C$2.72) encountered another very long cobalt mine in Labrador, down from drill hole intercept from the ongoing pro- Freewest is so far getting little credit for $1.38 million in the same quarter of last gram at its Caspiche gold-copper por- the very significant discoveries in north- year due to depressed metal prices. The phyry project in Chile: The hole cut an ern Ontario. Those deposits, along with company also reported interest income of impressive 1,214 meters of 0.9 grams per discoveries in the area by other compa- $1.38 million compared to $2.3 million in tonne gold and 0.33% copper. This hole nies, are now capable of supporting infra- the same quarter last year as a result of supports the notion that mineralization structure development. The provincial lower interest rates. extends well beyond the limits of the government is looking closely at road previous drilling on the project. access and at least a couple of major met- Altius has fourteen mineral properties, als companies are already evaluating the several with joint venture partners, and Exeter is wel
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