World Of Wallstreet

An Interesting Chart Of Copper Prices And LME Inventories

Investor Vilage's SevenMileBch brings FCX's has an interesting chart of copper prices and LME inventories to our attention:

This chart says (by my reading):
(a) LME inventories trend very strongly. From this I conclude that the inventory level will probably keep increasing. This is already well understood.
(b) As LME inventories rise, the price of copper, in general, falls. This is already well understood.
(c) The price of $1.50 where we are currently has the same inventory as the $1.50 copper price was with falling inventory levels. This is an interesting fact, but is perhaps a coincidence.
(d) If price follows inventory levels and inventory levels keep rising the price could fall well below $1.00 down to even $.75.
(e) My expectation is for copper to fall from its present $1.50 level down to $1.20. That should be low enough to take a significant amount of production offline.

I wish I had had enough guts (and cash) to go short copper when it was up there near $1.60 earlier this week.

MontyHigh

Valuing Jr Producing Gold Miners, Part 9: Dynasty Metals (DMM.TO), Dealing With Political Risk

This post continues the series on Open Pit Gold miners begun here, continuing here, here, here, here, here, here and here now profiling another gold miner in which I just opened a speculative position. I have broadened the scope of the series to include underground miners.

For what its worth, of the stocks covered so far, I still hold Castle Gold Corp, Semafo, B2Gold (well, Central Sun Mining actually which will be bought by B2Gold) and Metanor Mining. I have been accumulating this piece's company, Dynasty Metals (DMM.TO).

Dynasty Metals is a near-producer gold mining company with a large amount of great rocks located in politically risky Ecuador. With the passage of the new mining legislation, the politics in Ecuador have improved substantially. This explains why I am willing to accept the political risk.

Dynasty has three projects. The Zaruma project is due to start commissioning in March 2009. Together the projects have almost 3 million measured and indicated oz and 6.46 million M&I&I oz. As such, it is bigger than most Jr producers profiled in this series. 

Zaruma is a high-grade (14 g/tonne) underground mine that is expected to produce, initially, 100K oz/year. The processing plant has the capacity to support increased production to 250K oz/year with minimal capital expense. The 100K oz/year number is used for comparison purposes. This provides a 10 year mine life using the M&I ore and a 20 year mine life using M&I&I. Inca Kola News' Otto Rock estimates as cash of of $280 /oz. I'm going with $300 / oz. Still it is a low-cost producer.

The remaining two project look very attractive also with high-grade ore. There are tonnes of exploration upside for all three these projects.

As far as political risk is concerned, the passage of the mining law opens the way for Dynasty profitably getting into production. There is still risk as there are windfall profit tax provisions whose impact on Dynasty is unclear at this time. I got lucky and jumped out of Oceana right at its near-term top.

Here's my qualitative summary of the Dynasty situation:

• Con - Ecuador political risk. Of course, this cuts both ways in that further improvement would lead to an increased valuation and takeover prospects for Dynasty.
• Pro - Very near-term production.
• Pro - Very high-grade rocks leading to low cash-cost production.
• Pro - Excellent production increase opportunities with minimal capital expense.
• Pro - Two excellent additional projects that are ready for feasibility studies. These allow for longer term growth and make Dynasty Metals a mining company that can "grow up" to mid-tier status (or be a takeover target). 
• Pro - Excellent exploration upside for the existing projects.

For now, the pros outweigh the cons, especially given that I have little other political risk in my holdings. The thing that pushed me to dump my Oceana Gold for Dynasty Metals was the cash cost. I expected, correctly, that the recent gold price weakness would impact Oceana, with its high cash cost and debt, more than other gold producers and so switched to the low-cast cost Dynasty Metals.

The table below shows that at 100K oz/year, Dynasty Metals is competitive on a price to annual oz and price to operating cash flow basis. If they expand beyond 100K oz/year in the 2010 time frame then Dynasty becomes superior as far as these metrics are concerned. Dynasty is superior as far as price / oz in the ground is concerned. It also has a low cash-cost which reduces gold price risk.

The daily chart (below) shows that Dynasty Metals has already enjoyed a five-bagger off its November lows. This is a case where having a good understanding of Latin America politics can provide a real investing edge. Just one more reason to follow Inca Kola News. I did not enjoy that jump. The chart shows that Dynasty is at the lower end of a steeply rising channel and the fibonacci numbers indicate that it is targeting the previous high of $5.71 which, if hit, will be around the middle of the rising channel. 

The weekly chart (below) shows that Dynasty has more than a double to go to reach its earlier highs and that it is consolidating around the first fibonacci number.

The next catalyst for Dynasty is the start of plant commissioning scheduled for the end of March 2009. Dynasty recently did a private placement and is cashed up to go into production. I expect I'll hold my Dynasty position until either my macro view on Gold changes or at least until the mine has had a couple of good quarters of production.

Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents (plus Otto Rock's No BS report, only $10). As you know, I am a software engineer, not a financial advisor.

MontyHigh, www.worldofwallstreet.us

Mickey Fulp: The Good, The Bad And The Butt-Ugly

I actually watched that Clint Eastwood movie last week for the first time. Pretty entertaining, but too long.

Here's Fulp article where he describes how to do a first-level evaluation of Jr explorers: http://news.goldseek.com/GoldSeek/1235718780.php . I recommend it.

So, let's apply his classification system to some Jr producer (or near producer) stocks I'm familiar with:

The Good:

• Castle Gold, Capital Gold, Minefinders, Western Goldfields, Alamos Gold - gold miners with heap-leach deposits. These are low capital expense (start up cost) mines.
• Nord Resources - miners with copper-oxide SX-EW leach deposits. These are low capital expense (start up cost) mines.

The Bad:

• Aurcana Corp's La Negra Project, Most Silver Miners - polymetallic underground deposits.
• Oceana Gold's Didipio Project - gold-copper porphyry deposits. They require too much capital.

The Butt Ugly

• Roca Mining - Molybdenum.
• Roca Mining - Specialty Or Rare Earth Metals (Tungsten).

When I look at this small list I realize how ill-informed I am about the universe of Jr miners. There is much to learn.

Leave me a comment if you have a stock you think worth classifying with Fulp's system.

MontyHigh, www.worldofwallstreet.us

Japan Has A Trade Deficit: Exports Down 46% Year-Over-Year

The world has changed.

Ambrose Evans Pritchard again (click here).

MontyHigh, www.worldofwallstreet.us

Uranium Fundamentals: Before You Jump Into Uranium Stocks

Check out the Carter's webcast from the BMO mining conference: http://audability.com/AudabilityAdmin/Clients/BMO/10679_223200980000AM/lobby_day2.aspx?Event_ID=679

Doesn't look like a slam-dunk to me, despite what Jim Dines claims. If expect Uranium prices to rise please leave me with a comment or link with your thinking.

MontyHigh

Urban Survival: An Interesting Explanation For The 2nd Great Depression

I like this site, Urban Survival, a lot. You get lots of ideas you haven't heard elsewhere. A little filtering is needed, but I like thinking new thoughts.

Here's the idea:
"Reports are out that the San Francisco Chronicle is in danger of closing.  If it happens - and only a couple of weeks of miracle-level expense whacking seem to stand in the way - another 340-thousand paid circ paper could bite the dust.

---

Here's a thought (which  is  just one tiny section of this weekend's Peoplenomics report) that will help you see how the Internet has played the same role in the current Depression that the evolution of the internal combustion engine played in driving (poor pun intended)  the 1920's-1930's Depression. 

 

According to researcher of the time (Richard Ely's work at Northwestern Univ, just to name one) the cause of the Great Depression was quite simple:

• Gasoline powered farm equipment was coming on line in the 1910's and 1920's which ended the need for draft animals to run American farms and move goods around.

• This left farmers with 7-million acres (or more) of land formerly used for grazing.

• But while the demand for draft animals was disappearing, the mortgage payments weren't.  So, farmers planted more crops thinking if they just worked more land, that would somehow save them.

• Obviously, it didn't.  That simply led to over-production which in turn led to the prices collapsing and the whole Great Depression.

• Bankers of the time were busy trying to cover their own asses and weaseling more social control, not to mention setting the stage for the next round of growth.

 

Now, let's zip forward to our evolving Second Depression or Greater Depression that we are now in because there's a sequence here that's almost identical:

• The evolution of the internet reached its pinnacle in 1999-2000 with the internet bubble.

• Over time, the internet has been tearing apart the fabric of retail and distribution - in a way that's similar to the excess grazing land of the 1920's and 1930's.

• In the modern case, which the SF Chronicle case underscores (yet again) the bills don't stop for commercial buildings/printing presses any more than the mortgages stopped in the 1930's.

• As a result, there is over-production of information as the New Media is fighting a battle of attrition against what's left of print.

• Oh, and did I mention bankers are trying to solve the wrong problems? Car/travel demand goes down as information becomes ubiquitous, right?  Why fly when a web cam will work?  The huge lifestyle change is underway if you have any presence of mind at all.  But most don't so the change drags out over a couple of decades...like before."

What do you think?

MontyHigh

Obama Speech: Nothing New

I wish I could completely ignore politics when it comes to investing, but I can't.

Here's my summary of the speech from an investing perspective:

• Energy - $15B spending on renewable energy (electricity) and "a market-based cap on carbon pollution".
• Auto Industry - don't expect much as they get what they deserve.
• Health Care - a major "reform" is coming to be justified as cost-cutting.
• Taxes - higher taxes for the over 250K/year crowd are coming.
• War - the war is expanding from Afghanistan into Pakistan.
• Waste - speech has a lot of baloney about avoiding waste. This is, IMO, just cover for spending.
• Banks - speech has a lot of baloney about not giving money to CEOs. This is, IMO, just cover for giving the banks a lot more money (soon).
• Education - more nice sounding stuff to make it sound like the public is going to get a slice of this spending.

Of course, its always interesting to read between the lines about what wasn't said:

• War - nothing on getting us out of these stupid wars or reducing America's overseas military footprint.
• Nuclear Power - not mentioned.
• Actual Financial System Reform - uptick rule, naked short selling, insider trading, leverage limitations, size of institution limitations (so they aren't too big to fail), moral hazard reform.
• Prosecutions Of Financial Wrong-Doers

MontyHigh

Obvious (But Original) Thought About The Gold Stock To Price Of Gold Ratio

The following graph has been commented upon by various Gold stock investing news letter writers, aka pumpers.

The argument is that gold stocks (as represented by the $HUI index) have not been doing as well as the price of gold itself; that previously, gold stocks were substantially higher relative to gold than they are now. With the usual reversion to the mean, this means that gold stocks "should" rise relative to the price of gold going forward. This means they are a better investment, in some sense, than gold itself.

Up until having my original thought, I considered this to be a pretty valid argument.

Just eyeballing the chart we see that a ratio of about .5 is about right for the "previous" mean that the stocks (and gold) "should" be reverting to. The ratio is now about .3. That is, 40% lower than this mean we are discussing.

Now, that's an interesting number. Down 40%. Sounds like the general stock market. Down roughly 40%.

Here's the original thought: Maybe the reason why gold stocks are down 40% relative to the price of gold is because they are stocks and, like all stocks, they were overvalued back in the good old days (2004 to 2007) and have come down accordingly. If that is the case, then you can't really expect gold stocks to revert to that overvalued, "bogus" mean. In fact, relative to gold they may, like all stocks, continue to fall (going forward).

Look at the chart again. They could easily fall to a ratio of .15 (the low from the previous, very mild recession). That would be another 50% loss relative to the price of gold. Now, that's a new thought!

What do you think?

MontyHigh, www.worldofwallstreet.us

Ambrose Evans Pritchard: Railway freight in China’s Shanghai region plunged 31pc in January

http://www.telegraph.co.uk/finance/economics/4799926/China-nears-deflation-trap-as-rail-freight-collapses.html

So much for decoupling (or for China leading the world out of recession any time soon). Pretty important piece, I think. Think the mainstream media will cover it?

MontyHigh

Nassim Taleb: U.S. Banking System Is "Designed To Blow Up"

This guy is my hero. And they actually give him a chance to talk without interrupting too much.

http://www.bloomberg.com/avp/avp.htm?N=video&T=Taleb%20Says%20U.S.%20Banking%20System%20Is%20%60Designed%20to%20Blow%20Up%27%20&clipSRC=mms://media2.bloomberg.com/cache/vmMd4PSxEKeE.asf

Best explanation I've heard, at a fundamental principle level, about why the financial system is failing. 

MontyHigh

Is Gold Overbought? How Far Will It Run? Recent History As A Guide

I don't know how much credence to give what I'm about to present. It is an example of using inductive reasoning to estimate the future of a complex system based on inadequate past data and inadequate in depth knowledge of the internals of the system. In other words, we are in the usual situation as far as predicting market prices are concerned. Nassim Taleb would be horrified if I claimed that this was an accurate prediction.

There is no way to predict the future price movement of gold with certainty. As a side note, this is one thing that leaves me less than fully satisfied with Jim Sinclair's commentary: Sinclair claims certainty. I think this is a disservice to his readers, as I am with Taleb in believing that there is no "certainty" when it comes to predicting the future. 

This piece provides the best evidence I know of for estimating how far the current run will extend. If you know of better data and analysis please leave me a comment.

Gold is running. It just broke $1000 (see below). Is it overbought? Will it keep running? Frank Barbera, who I admire, is interviewed in this week's Financial Sense New Hour. His view, if I summarize correctly, is that gold stocks are clearly overbought and gold looks overbought and that investors should be careful at this point.

RSI is a simple measure of price momentum. On Friday, the same day gold broke $1000, RSI broke 70. 70 is the classic overbought level for the RSI indicator. This article looks at what the RSI breaking 70 has actually meant recently in this gold bull market. Its conclusion is quite the opposite of Frank Barbera's.

Gold has been a bull market for years and its RSI has broken the 70 level three other times in the last three years (see below), in 2006, 2007 and right at the start of 2008.

Just eyeballing the above chart leads to the conclusion that, when the Gold RSI (on those occasions) broke 70, the price of gold continued to rise nicely. This piece looks in detail at what happened afterwards and quantifies those runs. It, starting from when the RSI broke 70, looks at the:

• number of weeks until that run's price peak.
• percentage gold price move to that run's price peak.
• number of weeks until the RSI touched or crossed 50 (neutral). This is given as an example trade exit signal.
• percentage gold price move to the RSI touching or crossing 50.

The first crossing of RSI 70 took place on March 30, 2006.

The second crossing took place on September 6, 2007.

The last crossing took place on January 2, 2008.

The table below quantifies the results. The target prices are arrived at by assuming the same percentage rise occurs for the current as for the run in question.

I find these results to be surprisingly consistent. At this point, I'm looking for gold to continue to rise for 6 to 10 weeks with a $1200 target price. I will then begin to look for a top and the right place to trade out. I'm looking at the gold RSI falling below 50 as a possible stop.

For me, my expectation of a continued rise in the price of gold (based partly on this analysis) is strong enough, given the fabulous fundamentals of the Jr producer gold mining stocks I hold, to leave me fully invested in those junior producers.

As you know, if you follow my posting on the World Of Wallstreet web site, these Jr producers are estimated to have a 2010 price to operating income ratio of 3 to 1 (or less) at $800 gold. I consider this greatly undervalued as gold mining stocks usually have an over 10 price to operating income ratio. 

Thus, with this estimate of the current gold run, the positive fundamentals for gold and the margin of safety in these gold stocks, I believe I have a reasonable basis for expecting a positive outcome from my investment strategy. Everyone should certainly do their own due diligence and make their own investing decisions.

MontyHigh, www.worldofwallstreet.us

For the record, the stocks I hold and especially like are:

• Gold Resource Corporation (GORO.OB)
• Castle Gold Corporation (CSG.V)
• Semafo Inc. (SMF.TO)
  
• Metanor Resources (MTO.V)

I also hold and like, to a lesser degree, the following:

• La Mancha Resources (LMA.TO)
• Dynasty Metals And Mining (DMM.TO)
• Troy Resources (TRY.TO)
• Oceana Gold Corporation (OGC.TO)
• CGA Mining (CGA.TO)
• New Guinea Gold Corporation (NGG.V)
• Douglas Lake Minerals (DLKM.OB)

This is not a recommendation to buy any of these stocks or gold itself but is merely an analysis of a possible scenario for the price of gold, going forward.

FWIW: What I've Been Selling And Buying

I'm done rearranging holdings for at least a couple of weeks I think.

Here's what I've been selling lately:

• First Majestic Silver, FR.TO - Changed my view about management, don't like silver right now. Also, flagship mine is near the USA border of mexico which I consider politically unstable.

• CGA Mining, CGA.TO - because of the issue Bobwins mentioned which was a red herring, but it wasn't the cheapest. Still have some.

• Impact Silver Corporation, IPT.TO - love this company's management, but don't like silver. It is a very small company.
  

Here's what I've been buying:

• Castle Gold Corpation, CSG.V - very undervalued. Spoke to a big stock holder recently who said he thought management was open to some kind of merger / combination. Far from the riskiest parts of Mexico.
• La Mancha Resources, LMA.TO - seems very undervalued, but I haven't gotten a full grip on the financials. I went for it because its so undervalued and its not Mexico.
• Oceana Gold Corporation, OGC.TO - very leveraged to price of gold with a world-class gold / copper project half built needing financing. This is a central sun mining play from my perspective as I think some kind of deal will get worked out.
• Troy Resources, TRY.TO - very competent management and they pay a dividend. Good price to operating cash flow, bad on price to oz in ground. Recommended by Inca Kola News' Otto Rock.
• Dynasty Metals And Mining, DMM.TO - in recently politically improved Ecuador. Very cheap for the size of the company and number of oz. Given the ok by Otto Rock.

That's it. Just some ideas and things to look into. This is not a recommendation. Do your own due diligence.

MontyHigh

Text Book Investor Psychology...

Here's a quote from a mining investing board after the board favorite announced some desperate financing with the sharks (with more financing needed to keep the company afloat) and the stock price tumbled 25%. I think its a text-book example of investor sentiment:

"Holding XXX and bought some more yesterday. No sense of bailing if your in the red. Give them a chance to close the financing. Should know by early next week.

If I was in a profit position on this latest purchase, I would take some profit but keep some thru next week when financing is due."

It shows how there is a strong bias against accepting losses. If someone has a profit, they want to book it. If someone has a loss, they want to "double-down" so that they can avoid admitting they made a mistake.

This is what I want to stay away from. This is part of what they mean when they say that you should leave emotions out of your investing decisions.

At this point, this investor is "trapped" into a losing position and, if he follows the text book, will hold no matter how far it goes down. Should the stock ever get back to where he bought it he will give a sigh of relief and get out.

This is one of the strongest arguments for why one finds technical "resistance" and "support" in stock prices. Its this selling that occurs which is psychologically based on where an individual investor "gets back to even".

What I would hope I would do in this kind of situation is to get out a spreadsheet and analyze where the stock price is at the current time and the conditions surrounding it. I would want to decide whether I would rather have my money here or some other place (given the cost of selling it, tax considerations and getting into the alternative) based on the fundamentals and the technicals of the alternatives and then make a no-looking-back, zero-based decision.

By the way, I have been doing some shifting around of my portfolio lately based on just such considerations.

MontyHigh

Judging Gold Mining Drill Results

Someone on a message board asked how you evaluate gold mining drill results.

Here's my response. Let me know if you'd think my numbers are off or if you have anything to add.

"Judging Au Drill Results

Well, I've been reading a bunch of them for the last year and here's what my faulty brain says:
(a) Make a distinction between open pittable and underground.
(b) Open pittable - make a distinction between oxide (heap leach) and sulfide (needs a mill).
(c) Open pittable heap leach - .5 g/tonne is the lower limit. Higher is better, of course.
(d) Open pittable sulfide - 1.5 g/tonne is the lower limit.
(e) Underground - 3 g/tonne is the lower limit. Anything above 6 g/tonne is quite good.

Of course, there are other issues as well:
(a) Infrastructure - are there roads and power. Is there already a mill (mine reopener). The closer to production with minimal capex the better.
(b) Size - how big is it? The more oz the better. The big boys are looking for 2 million oz or more at this point. This could go down going forward (or if the grades are good).
(c) Strip Ratio (open pit) - I need to learn more here. Any help from the board?
(d) Recovery - 85% seems like "good". Some heap leach operations are in the 60% range (e.g. SMC's nicaragua mine everyone was excited about. They had to switch to a mill).
(e) Management Competence - self explanatory. I consider New Guinea Gold to be competent explorers and incompetent mine developers / operators. First Majestic is clearly competent.
(f) Management Shareholder Friendliness - My opinion of First Majestic has just shifted with this latest dilution. They seem to want to build an empire rather than make money for share holders.
(g) Permits - always a big issue.
(h) Political Risk - will the government put outrageous taxes on it or confiscate it."

MontyHigh

It's Different This Time...

  Recs: 0

I believe this is original, but that you'll be hearing this from genuine "Gold Experts" soon.

 

The market crash we are having is different this time. Different from everything that's been happening since last summer.

 

The difference is that gold, silver and especially gold and silver mining stocks and especially Jr producer gold and silver mining stocks are going up while everything else goes down. Last summer and last fall they were hammered, harder than the general market. Today in particular (and the last week overall) has really been different.

 

I think we have passed a real turning point. The last real turning point, IMO, was Jul 2008 when the commodities (including gold and silver) got killed and the dollar went up.

 

I guess you could say that this turning point is a another significant turn downwards for the global economy. The desparation of the situation is sinking in such that lots of people who never would have dreamed of gold and silver are grabbing for it as a life line.

 

The amazing thing is that the Jr producer gold stocks I follow still have a price to operating cash flow ratio of 3 and under at $800 gold. This means there are clear fundamental to back up any stock price rises. This isn't a mania (yet) unlike the Internet stocks. There is clearly room for multibaggers with these if gold continues to ascend, even gently.

 

I had three of my stocks jump double-digit percentages today and almost all of the rest were up more than 5%.

 

Of course, we'll see and I'm just a software engineer, but I think things have changed. If I'm right and this is a significant, multi-month turning we could see some really crazy-good times like we had with the base metal mining Jrs in the first half of 2007.

By the way, when you are in the middle of one of these things, forget about the concept of "over bought". When Jr producers are seriously undervalued (like the gold stocks are), they can go up nearly every day for a month. That's what happened with the Jr base metal miners in the spring of 2007 and I think conditions are better for the Jr gold mining stocks than conditions were for the Jr base metal miners.

The hard part is going to be knowing when the party is over. In the case of base metals, the LME inventory levels (and even the metal prices themselves) told the story. Maybe the amount of GLD holdings will have a similar role for gold on this run.

 

MontyHigh

Best Of The Podcasts: Marc Faber Interviewed By Jim Puplava

FinancialSense had a really excellent interview today(click here for the web page or here for the MP3 download).

Jim Puplava interviews Marc Faber. In contrast to most of the interviews you see where Faber (e.g. CNBC, Bloomberg), Jim Puplava "gets it" and really helps Faber get his own ideas out rather than the usual "don't you think" rebuttals that keep things from really getting going. I've been critical of Puplava in the past, but he was really great here.

Here's my notes, but I recommend actually listening to the pocast:

• Second Half Of 2009 Recovery - the same guys who were predicting a goldilocks economy and then a soft landing and then a 2nd half of 2008 recovery are the guys predicting a 2nd half 09 recovery. They have been wrong all along; why should they be right now? The economic downturn is going to be long, much longer than folks think.
• US Government Debt - the government is falling into the same mistake as all those "exotic" mortgage buyers who got into debt with short-term teaser rates. The government is financing its deficits with short term debt when it should be making use of the lowest rates ever by locking in long-term rates. Interest rates hit there lows in Dec 08 and are moving up.
• What's Up With The Economy - Falling assets are making consumers shift from spending to saving. This is normal and desirable (given that they don't have enough savings anymore), but the government is fighting it. They are printing more and more money and cutting interest rates to dissaude folks from saving. Eventually this will be highly inflationary. Not now. The longer we stay in the recession the more money will get printed up and the bigger the inflation will eventually be. This week's stimulus package is not the last. There will be about five stimulas packages and none of them will work. Faber expects staglation eventually. Weak economies have high inflation because deficits are big and central banks print money.
• US Dollar - won't all these deficits and dollar printing trigger a dollar downturn? In the long-term yes, but not now. US trade is shrinking. When US trade shrinks, global liquidity shrinks and that is good for the dollar. This is what has been happening since last summer. When US trade increases global liquidity increases and the the dollar falls. That is what happened from 2002 to the summer of 2008. Right now, (while trade is shrinking) the dollar is ok against all other currencies except gold. The US is different from Argentina. Its foreign debt is in its own currency. Don't worry about the supply of treasuries or inflation. One day, when the global economy recovers the dollar will fall and inflation will be a big problem. This could occur suddenly, but its not for now.
• Gold - negative inflation adjusted interest rates are good for gold and that is what we will have for a while. Gold is a preferred asset. Gold seizure may happen when US lenders demand it (and gold) to service US government debt. One should store one's gold in Dubai or Singapore. 
• US Stock Market - still overvalued despite the worst-ever 10 year performance and despite previous situations of bad 10-year performance preceding good performance. The stock market cap as a fraction of GDP is still higher than previous major stock market tops (73, 63, 29). You can't trust P/E ratios because US corporations lie and cheat to make earnings look better than they really are. 
• China - emerging markets are more cyclical than the US economy, especially the Asia producers. The Chinese have learned from the Americans how to lie and cheat on economic statistics. The Chinese economy is not growing by 7%. It is actually contracting. 40% of the Chinese economy is export related and another big chunk is capital spending to support exports. Exports are way down (look at Taiwan and Korea for example) and will continue to go down. Their stimulus package won't help their overcapacity problem and isn't big enough to make up for the export-related hit the economy will take.
• Resource Stocks - Mining companies bottomed in November 08. Thinks mining exploration and oil exploration stocks might be good at this point just because they have been so brutally taken down.
• War - War goes in long-term cycles just like the economy. The War cycles are ramping up, but it won't be traditional war like WW 2. It will be guerilla war and terrorist attacks. This US military is clearly unprepared for this kind of war.

Seems really on the mark and matches my own outlook at this time.

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Mauldin Summarizes The Case For Being Bearish

John Mauldin used to be one of my favorites. He hasn't been doing much for me lately as he seems to be somewhat behind the curve. Compared to many of the guys I listen to, Mauldin is "mainstream" (like Don Coxe). So, when he "gets it" I consider it to be telling and a bit of a confirmation of the usual voices "out there" I listen to.

This week, Mauldin, in a piece entitled "Time for a Reality Check" summarizes pretty darn well the case for being bearish about the economy and stocks. At this point, I'd like to raise a little cash so I could go short, but I don't know if I will.

Here's the piece. Pretty short, covers the four most important things to consider:

• Emerging market economies (including China) are flat out collapsing.
• European banks are probably extravangantly bankrupt and way to big to bail.
• The reason why Geithner "non-specific" about his bank bailout plan this week is because what's need to save the USA's banking system is way bigger than is pallatable at this point.
• The stock market, given the actual outlook for earnings, is still way overvalued with a P/E of something like 30 to 1.

Click here or here to read it.

MontyHigh, www.worldofwallstreet.us

Best Of The Podcasts: Donald Coxe's Weekly

As you may know, Donald Coxe has left BMO capital and has set up his own shop (click here). He was among the first to catch the commodity wave and those who have been following his advice for a while have made a tonne of money in a pretty mainstream, low risk fashion. Like all of the long-term "stronger for longer" crowd his picks have taken quite a hit since July 2008, but Coxe was among the first to admit what happened and how he missed that change. That keeps him on my favorites list.

For a long time he has had a weekly call for his subscribers that was posted on the web where there was no security on the call and was widely listened to by lots of non-subscribers. For now, at least his calls are open to everyone. I for one hope he keeps it that way. Here's the link (click here) to these weekly calls. The calls are consistently above average compared to other investing podcasts (particularly on the content to self-aggrandizement ratio), but this week's call gets my "Best Of The Podcasts" award. 

I recommend listening to the whole half an hour call, but for the cliff-notes version, here's my notes:

Donald Coxe Call 2/13/2009

Charts show the INDU (down) vs Gold (up) since the US election.

There are two interpretations of gold's rise:
(a) Obama's program won't work - flight to safety (fear).
(b) Obama's program will work - inflation is coming.

Coxe votes for (b).

Current situation is, in Coxe's view, a lot like the 70s.

From the 70s we know that commodity stocks are what recover strongly after a recession with large monetary growth. This has already started.

By the way, things were way worse in 1974.

So, the market doesn't know if Obama's 2 T$ will work, but if it does commodities will come back hard.

The crucial difference from the 70s is housing and the baby boomers. The baby boomers needed housing in the 70s. They need to sell housing now (this is a demographic-based deflationary factor which is global for the developed world).

A 50% premium (contango) for WTI crude oil from spot to Dec 09 is something Coxe has never seen before. What we are seeing is, despite the global slow down, dec 2010 oil is $60. This explains why the oil stocks are starting to pick up. US consumpion has not fallen by 5-6%. The actually demand for oil has not fallen off a cliff. Industrial commodities have fallen off a cliff, but oil stocks.

Things are turning. IBD shows chemical fertilizers has gone from 150th industry to 50th.

Coxe thinks there's a strong possibility that two centuries of global warming has ended and global cooling has started. Spot corn is $3.66, dec 09 corn is $4.07, dec 10 is $4.57. Farmers can make a lot of money with these prices.

So, we already have two commodity groups which are moving up strongly. You can make money in oil and agriculture/fertilizers. Market won't make big bets either way on Obama's program succeeding at this time.

Coxe says again. A downturn that begins with the financials (bank stocks) doesn't end until the bank stocks recover. Coxes can't say this downturn has bottomed until the bank stocks recover.

Coxe admires Obama, but the bail out bill was created by Pelosi is long on far-out liberal programs could never get through congress under ordinary situations and short on genuine economic stimulus. E.g. 4 B$ for ACORN.

Keynes said its better to have someone dig holes and fill them in than to have no activity. So, this bail out stuff may have a short term benefit. The long term addition to the built-in deficit is bad but that is long term.

So, will it work? The money supply is growing. That's good. Once the money supply starts growing things (economy? stocks?) can turn up really rapidly. In addition we have these bail outs for the banks. As long as they help the ones that can do something useful, Coxe doesn't mind if they help the ones that don't deserve it (big wallstreet firms).

They should give money to the banks that give money to people face-to-face, e.g. letters of credit. Coxe says there are signs trade is coming back.E.g. Baltic dry index has doubled (from a very low level). China money supply and velocity is picking up. Claims China did a better job of doing Keynesian stimulation than the west. If you care about commodities, China is what counts.

Coxes expects the global recovery will come later this year led by China and India. India is still growing and has done a lot of stimulation itself (monetary growth, help financials).

If you don't look at the money-center banks, what you see is that regional banks (NE, midwest, southeast) are out-performing.

Summary: Even if Obama's stimulus is doing bad things giving money to bad people, then its better than nothing. Take the political debate out of it. Don't sulk. Its likely that we'll get a turn. So follow the signals. The industries that are out performing now will probably continue to out perform 6 months from now.

MontyHigh, www.worldofwallstreet.us

Northbeach2000: Portfolio Update

This is my first portfolio update post this new year.  A couple of reasons for that - the most important being that I didn't think that I had anything intelligent to say that I had not already expressed in earlier posts.

 

I remain committed to Gold and the PM producers.  Following the concept of KISS (keep it simple, stupid), the reason for this is simple - We are now trusting the same group of idiots in Washington and WS that got us into this financial mess with the task of now getting us out of it.  What makes this even more bizarre is that we are now also trusting them to spend $trillions of dollars that we don't have (thus must borrow) in this effort with little or no accountability.  As an American, I sincerely hope this works, but I'm not betting on it.  As a result, my large exposure to the PM sector is not something that I see going away anytime soon.

 

My portfolio continues to get more "golden" as these PM stocks continue to outperform my energy stocks.

 

Current Portfolio:

 

PM Stocks (68%) -  Yamana Gold (AUY-15.3%), Silver Wheaton (SLW-14.9%), Gammon Gold (GRS-14.1%), Jaguar Mining (JAG-13.1%), Alamos Gold (AGI:TSE-10.6%)

 

"Oily" Canroys (18.4%) - Crescent Point Energy Trust (CPG.un:TSE-7.3%), Baytex Energy Trust (BTE-6.9%), Penn West Energy Trust (PWE-4.2%)

 

Canadian E&Ps (9.8%) - Encana (ECA-5.4%), Canadian Natural Resources (CNQ-4.4%)

 

Energy Spec Stocks (3.8%) - Enhanced Oil Resources (EOR:TSEv-2%), North Peace Energy (NPE:TSEv-1.8%)

 

FWIW, I have not done a trade since my last portfolio update.

 

JMO.  We all bet our own money and take our own chances.

Northbeach2000

Editor's Note: I'm itching to get into oily energy stocks given the recent drop in oil prices, but have not pulled the trigger yet. If gold doesn't jump next week and if oil stays under $40, I'll probably start the transition. I'm getting nervous about precious metals as the trade gets more crowded. This list of oily producers is probably what I'll ease into while I search for even more undervalued Junior producers and near producers. 

Metanor News Release: Drill Results For Hewfran

Well, here's the money part of the news release (click here for the whole release):

"A drilling campaign tested the continuity at shallow depth of the gold bearing zones exposed on surface after the stripping program. Diamond drill hole B-137 returned directly under the stripped area an intersection of 3.72 g/t Au over 4.20m at a vertical depth of 45m and hole B-142 drilled approximately15m to the east returned at the same elevation an intersection of 3.10 g/t Au over 6.0m. On the same section, hole B-143 intersected at a vertical depth of 70m a gold bearing zone grading 3.01 g/t Au over 4.20m. Diamond drill hole B-145 intersected the West zone 75m to the west and at a vertical depth of 90m with a gold intersection of 2.87 g/t Au over 3.15m. At greater depth, diamond drill hole B-128 returned on the same section than hole B-137 and at a vertical depth of 140m, a gold intersection of 3.78 g/t Au over 2.9m and approximately 60m towards the east diamond drill hole B-132 intersected the West zone at a vertical depth of 170m with an intersection of 5.13 g/t Au over 5.15m.

These results indicate that in this sector the West zone is continuous from surface to the elevation 180m below surface where the resources have been evaluated in 2005."

My take is that:
(a) The widths are pretty good (4.2m,6.0m,4.2m,3.15m, 2.9m, 5.15m), but the grades are just ok (3.72,3.1,3.01, 2.876, 3.78,5.13 t/tonne).
(b) This find is not good enough to justify a major new development (mine and mill), but the fact that is that its right next to the existing mine and mill makes it nicely economic. The fact that it starts right at the surface means either starting with an open pit or a decline type mine makes sense which makes it even better.

It should serve to help make up for Metanor's only weakness, a relatively high price to oz in the ground ratio.

Metanor is great (way undervalued) on a price to annual oz ratio and price to operating cash flow ratio (click here), but is only middle of the road on price to oz in the ground ratio.

Overall its a positive result, but I think the market is waiting for confirmation that the current mine is running well and producing cash flow and that there is a good plan for keeping it going (and expanding it). Seems to me production results and an enlarged Barry deposit NI43-101 would give this stock quite a pop.

Now, was the recent pop from the 40s to the current high 50s (nearly 50%) a result of this leaking early or might we see a little more pop from this result? Time will tell. I'm pretty confident about my Metanor investment.

Of course, everyone should do their own due diligence and this is not a recommendation to invest in Metanor.

MontyHigh (www.worldofwallstreet.us)

Denali Guide: 5000 Stocks, Has The Market Bottomed?

Editor's note: I'm learning from Denali Guide to watch the Wilshire 5000 rather than the DJIA as the best window on the general market.

5000 STOCKS

YOU BE THE JUDGE - DID IT TEST THE BOTTOM SUCCESSFULLY - Did it establish a higher bottom ? A picture is worth a thousand words, yes?

Carry on !

Denali Guide (http://denaliguidesummit.blogspot.com/ )

Four Excellent News Sources: Denninger, Urban Survival, Inca Kola, Jesse's Cafe Americain

Here's four great off-the-radar screen sources for business news:
Denninger http://market-ticker.denninger.net/ - commentary on the financial meltdown. Very accurate, very shrill (Lord have mercy).
Urban Survival http://urbansurvival.com/week.htm - commentary on the economic downturn using sources you wouldn't find anywhere else.
Inca Kola http://www.incakolanews.blogspot.com/ - Latin America business news and commentary from a mining perspective. Surprisingly, has a non-standard, sympathetic outlook on a variety of LA political figures demonized in mainstream press. I haven't quite figured this out yet, but I'm spinning up as fast as I can.
Jesse Cafe Americain http://jessescrossroadscafe.blogspot.com/ - commentary and analysis on the financial meltdown from a professional trader.

These guys are a perfect example of why news papers are going out of business and why network and cable TV news viewership is dropping off a cliff.

Enjoy,

MontyHigh, www.worldofwallstreet.us

Oops, I Think He Said Too Much

How quickly can things really fall apart for the USA? Listen to US Congressman Paul Kanjorski describe what happened one day back in September 2008. Start 2 minutes in and listen for 1 minute and 45 seconds to 3:45.

My favorite quote in this is: "Here's the facts, and we don't even talk about these things". Oops, I think he said too much. But, did you get that? The really important things out government won't tell the public. Why not? Are we too stupid? Why is that?

http://www.infowars.com/rep-kanjorski-550-billion-disappeared-in-electronic-run-on-the-banks/

Ok, after listening to this, the question I want to know is: Who was that who pulled 550 billion$ electronically out of the USA in an hour or two. Who was it who was going to pull 5.5 trillion dollars electronically out of the USA in 3 hours. 

Here's another juicy bit start 4:58 seconds into this: "We're really no better of today than we were three months ago".

What do you think? Is this guy an old bozo who doesn't know what he's talking about? Has he been BSed by the Federal Reserve and the banksters? Is there something going on that the US government is flat-out too afraid of to discuss frankly with the public?

His answers make me ask more questions.

MontyHigh

Valuing Open Pit Gold Miners, Part 8: Oceana Gold (OGC.TO), A Speculation With Upside

This post continues the series on Open Pit Gold miners begun here, continuing here, here, here, here, here and here now profiling another gold miner in which I just opened a speculative position.

Oceana Gold is a two-mine New Zealand gold miner with a half-built, now needs financing, world-class gold-copper project in the Phillipines. The company has a stock price of $C.41 and is levered up with $1.75 / share of debt. This leaves it pretty darn leveraged to the price of gold. The things that made me buy into are:

• Great Project Needing Financing - at 1.5 g/tonne gold and .5%  copper the Phillipines project is truly one of the great gold projects in the world. It has 1.7 million oz of proven and probable gold and 380 million lbs of proven and probable copper. Even with today's copper prices it should have a negative cash cost. Its half built and, economically, completing the project is a no-brainer. Gold stocks with these kind of projects have been jumping lately as financing has become available. Examples include Orezone (takeover with 50% premium), Central Sun Mining (a 4-bagger after takeover battle), Nova Gold (four-bagger) and Apollo Gold (two-bagger) and others.
• Existing, cash-flow positive mid-tier level (280K oz/year) New Zealand gold mines with falling cash-cost (due primarily to reduced electricity costs from reduced oil prices).
• Incredible metrics due to the debt/based leverage.

The things that I don't like are:

• All that debt - means there is a possibility of the stock going to zero if the price of gold falls far enough.
• Hedges - about half of 2009 and 2010's gold is hedged at NZ$ 774. This limits the short-term upside for OGC.TO.

Here's the table that shows that Oceana Gold is undervalued, by a factor of ten at least, relative to Alamos Gold when the ratios are based market cap. If you use enterprise value (market cap plus debt) in the ratios, Oceana Gold is valued roughly at the level of Western Goldfields. This shows that Oceana Gold has margin for an explosive revaluation upwards if the Phillipines gold-copper project financing can be worked out well. The odds of this are high, in my view, given the way that gold producers have been able to get financing lately.

The two lessons I get from the the chart below are:

• The stock has bottomed and has turned up as the fear of it going to zero dissipates.
• The stock has quite a long way to rise (7-bagger) to get back to its former highs.

I'm holding a reasonably small position this stock until news of a financing or JV occurs for the Phillipines project. I will stop-out if the price of gold tumbles. I'm expecting a pop of 50% to 100% when that occurs. For me it is a speculation, not a long-term investment.

The next planned catalyst for this stock is the quarterly financials (and conference call) which are due 19-Feb-2009. There should be an update on financing options for the Phillipines project at that time. The production numbers have already been announced, but the cash-cost for those numbers and the status of the balance sheet will also be of interest.

Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents. As you know, I am a software engineer, not a financial advisor.

MontyHigh, www.worldofwallstreet.us

Quite Good Employment / Unemployment Chart

Wish I knew what blog this came from so that I could give them credit.

To me what is most noticeable is how past recessions have had V-shaped YoY Change Employment (red). Of course, for the current situation there is no telling how much further we have to go.

MontyHigh

Valuing Open Pit Gold Miners, Part 7: Metanor, Initially Open-Pit

This post continues the series on Open Pit Gold miners begun here, continuing here, here, here, here and here now profiling another gold miner in which I have a good fraction of my portfolio invested. 

Metanor is a Quebec gold mill / mine reopener that is beginning production with its open-pit Barry Deposit. Quebec is about as mining friendly and politically low-risk as any location in the world. The Barry pit was originally expected to be mined for a year or so to produce cash-flow to support the reopening of the underground Bachelor Lake mine. Last summer Metanor announced better than expected drill results for the Barry Deposit which should extend its mine life, but no NI43-101 report has been released. Thus, on a conditional basis I'm including Metanor in this series.

World of Wallstreet has covered Metanor in the past (see here and here and has been extensively covered by Gold Stock Stragist web site, click here). FWIW, Metanor has been a Jay Taylor top pick on and off-again for the last year or so.

Metanor announced commercial production on 1-Oct-2008 and has announced precious-little since except a flow-through private placement to increase its exploration. In November they announced some promising but not definitive exploration results. The interview with the CFO (click here) covers a lot of exciting potential in terms of exploration adjacent to the mill, mill expansion and Barry exploration results. This did not take the form of an official release and was probably missed by many potential investors.

The table below (updated with yesterday's closing prices and using $800 for the 2010 gold price) gives my valuation of Metanor relative to the other miners covered in the series. Metanor looks clearly undervalued on a price to annual / oz and price to operating cash flow basis, but is even with the pack (or a little behind) on a price to oz in the ground basis. Its a little small (at 55K oz/year in 2010), but I believe there is a path for it to "grow up" by increasing its mill capacity and feeding the mill with an increasing amount of ore from the many nearby exploration targets.

As I mentioned, the only news coming out of Metanor since November has been the announcement of dilutive stock options and a dilutive private placement (and the hiring of a new CFO). The stock price went into the pits (with all the gold juniors) in November, climbed back into the $C.40s and has been languishing there (see below). A bunch of warrants expired out of the money in December 2008. They may have been holding the price down, but, with the private placement may have taken their place holding down the stock price. Metanor had not broken out like many of its peers listed in the table above, up until yesterday. The chart clearly shows a rapid increase in volume followed by a break out 20% up move in the stock price. That looks pretty bullish to me.

I am very comfortable with my Metanor position. It looks like an easy double to me from Metanore merely executing their plan and at least $800 gold holding. It should be a multibagger with either exploration upside, current and higher price of gold or an overall higher revaluation of gold miners. Where, besides producing gold mine Juniors can you find a 2010 estimated 2.0 price to operating cash flow ratio at lower than current commodity prices? I'd really like to know so I can diversify out of gold miners, but until I find valuations close to what I see with these gold miners, I am going to stick with them (at least as long as the gold fundamentals and price action remain bullish).

Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents. As you know, I am a software engineer, not a financial advisor.

MontyHigh, www.worldofwallstreet.us

Valuing Open Pit Gold Miners, Part 6: CGA Mining

This post continues the series on Open Pit Gold miners begun here, continuing here, here, here and here now profiling another open pit gold miner that I consider undervalued and have moved a decent fraction of my portfolio into.

CGA Mining is currently commissioning its Masbate open pit gold mine. Here's what I like about CGA mining:

• At 200K oz/year (with plans for moving up to 250K oz/year), CGA's Masbate project is as big or bigger than any individual mine discussed so far. With 7.75 million oz of Measured, Indicated and Inferred oz, it also has more gold than any other mine. It also has significant exploration upside. Altogether this makes CGA, in my opinion, more of a takeover target for a major than any of the other miners discussed so far.
• The Masbate project is not in Mexico, its on a island in the Phillipines. I'm trying to reduce my Mexican miner exposure. 
• CGA Mining has been executing its plan and has not slipped its schedule. The overall attitude I see management having is one of building a money making business. The first gold pour is expect in March 2009 which is where it has been planned since at least last summer. 
• CGA Mining has a strong balance sheet with almost as much cash as debt and with a good credit facility. I expect it will need no further financing to make it to the point where it is cash flow positive. One minor downside is that CGA mining does have gold sold forward (hedges) of about a year's production.
• CGA Mining has at least 83% institutional ownership (click here). I found (and lost) a reference that says it has 93% institutional ownership. Leave a comment if you can provide a link. I believe that the high institutional ownership will keep CGA management from being too greedy with options and other examples of "taking something off the top" and from trying to build an empire. I think the institutional management will be more amenable to a takeover offer should it come.  

Here's the valuation of CGA Mining relative to the others that have been discussed as of today's closing stock prices:

CGA mining compares favorably to all stocks except on on a price per M&I&I oz in the ground basis. CGA mining compares well with Alamos Gold (AGI.TO) and Western Goldfields (WGW) on a price to operating cash flow and price to annual oz basis. Furthermore CGA Mining has production growth plans (to 250K oz) while Western Goldfields does not. If you consider that 50K of Minefinder's 175K oz is actually "gold equivalent" silver then CGA Mining is significantly bigger (and with better growth potential) than Minefinders.

CGA Mining has a pretty bullish looking chart (see above).Here's some bullish qualities:

• Broke out above that downward trendline beginning May 2008.
• Broke out above its 50 day and more recently 200 day moving averages. 
• Has crossed over the first and second fibonacci numbers.

The bearish qualities I see include:

• The gap from $C1.10 to $C1.20 remains to be filled.
• The price has been finding strong resistance at the 50% fibonacci number and the trendline starting from March 2008.

Overall I consider the chart reasonably bullish. One could enter now using the 200 day moving average as a stop ($C1.30) or wait for it to clear $C1.55 (last fibonacci number) which would target the previous high of $C2.14.

I bought some CGA Mining because it seems like an undervalued, big, available takeover target that is run by quality management. And of course, where can you find a commodity stock with a sub-4.0 price to operating cash flow ratio guidance at lower than current commodity prices?

Finally, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents and does constitute a buy recommendation. As you know, I am a software engineer, not a financial advisor.

MontyHigh

Valuing Open Pit Gold Miners, Part 5: B2Gold Takeover Of Central Sun Mining

This post continues the series on Open Pit Gold miners begun here, continuing here and here and here now profiling another open pit gold miner that I consider reasonably undervalued and still hold a minor position in.

Central Sun Mining is a situation where taking a big risk has already yielded a big reward. I'll leave it to you to judge whether entry at this point is justified. 

Central Sun Mining, a Nicaraguan gold miner, got caught without funding for an medium-big open pit mine reopening. They started the conversion of their Orosi open pit mine from a low-recovery heap leach operation to a high-recovery heap leach operation and, more than half-way thru that upgrade, lost their funding-commitment from their bank. Their smaller underground Nicaraguan mine, Limon, continued production.

As you can see in this chart, their stock price crashed from over 2$ during the summer of 2008 to around $.10 in December 2009 as they, while having a valuable asset (the Orosi mine), desparately needed financing with no such financing apparently available. It seems that having a valuable gold property, while desparately needing financing, is a high-risk situation that one can make a profit by investing in. If you know of any such situations, please leave me a comment. 

Linear Gold (LRR.TO), an explorer with good exploration properties and a pile of cash just about big enough to get Orosi into production announced a rescue buyout of Central Sun Mining on January 5, 2009. The resulting merger seemed to have the resources to get Orosi into production and the resulting company appeared quite undervalued even without Linear Gold's own advanced development projects and its prospects for big cash payments from Kinross Gold, its best project's development partner.

On January 27, B2Gold announced that it had made a higher offer for Central Sun Mining which Linear Gold refused to match. As a result, it now appears that B2Gold will acquire Central Sun Mining. B2Gold is an explorer with big name management (former Bema Gold executives), a pile of cash and some pretty undeveloped properties. The only property that they have, that I'm aware of, with an NI43-101 resource assumes an $800 price for gold. I do not consider such a property economic and so do not include those oz of gold in my appraisal of the resulting company.

To confess my foiables, I was picking up a couple of arbitrage percentage points (I thought) by accumulating Linear Gold between Jan 5 and Jan 27 rather than SMC as I expected their merger to close. The lesson I learned (the hard way) was that in this kind of grossly undervalued merger its better to give up a couple of arbitrage percentage points and go with the stock that has the asset. I lost about 20% on my Linear Gold when the B2Gold announcement came out. Live and learn. My winnings on earlier SMC purchases covered those losses, but I was not the big winner in this situation that some were.

At this point, the combined company expects to produce 45K oz of gold in 2009 with the Orosi project coming online in Q4 2009. They expect 130 oz of gold for 2010 at a cash cost of $474. As such, I would call it a relatively high cost producer. The main upside from this guidance takes the form of higher-grade drill results adjacent to the Orosi project. An NI43-101 for these drill results are expected any day. They can be expected to increase the Orosi output, reduce its cash cost and increase its mineral resources. This increase is not included (as it is not available) in my analysis.

At this point, the combined company compares to the other producers discussed as shown in the table that follows (based on the Fri 1/30/2009 closing prices):

At this point, I find the combined company attractive relative to our reference producers (Alamos Gold Corporation, Western Goldfields and Minefinders) on a price to annual oz basis and comparable on a price to operating cash flow and price to oz in the ground basis, but not as undervalued as the other blue table entries. I expect that I'll hold my smallish position until the high-grade NI43-101 comes out and an assessment of how much this helps the valuation can be made. One thing I like about the combined company is it location. Being in Nicaragua it helps diversify my holdings outside of Mexico where they are currently overconcentrated.

It seems like a good value overall because, where can you find a commodity stock with a sub-4.0 price to operating cash flow ratio guidance at lower than current commodity prices?

Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents. As you know, I am a software engineer, not a financial advisor.

MontyHigh