World Of Wallstreet

Troy Resources (TRY.TO) Buys Intrepid Resource's Casposo Deposit

Editor's Note: Inca Kola News (click here) is on my daily must-read list. Great coverage of Latin American mining and resource investing with personal commentary on politics from an informed, local perspective I can't find anywhere else. You can also find a set of individual stock fundamental analysis reports on this site (called NOBS reports) at $10 each. I buy them just so I can learn from the author how to improve my  fundamental analysis.

IKN's author, Otto Rock, World Of WallStreet's Lead Latin American Analyst contributes this piece about Troy Resources (TRY.TO). Troy is stock I have bought a bunch of (having learned about it from Inca Kola News) that I am coming to admire more and more. These guys know what they are doing, do not have stars in their eyes and have built and are running a successful stockholder-friendly business.

3/25/09

Troy Resources (TRY.to) (TRY.ax) News

Map from Intrepid Mining website

Troy Resources today announced it was paying U$20m (straight from the kitty) to buy the 'Casposo' deposit in the San Juan region of Argentina from Australian miner Intrepid Mines (IAU.ax) (IAU.to). Looks like a good deal to me. TRY has had a full production facility in mothballs for some time and has made no secret of the fact that it's been looking for a place to put it, with an ideal deposit grading 3g to 4g/t Au. That's what they've found in Casposo.

Check out the paste of the PR below, but you'll note an envisaged six year mine life for 338k oz Ag (including inferred) and 9m oz Ag (incl inferred), so via memory and quick ballpark numbers, your humble correspondent expects Troy expects to run its mothballed plant basically at optimum speed, as 60k oz Au per year with silver credits sounds just right (note more gold than silver production expected to begin with, with the mix changing in the later years). Also, notably most of the gold deposit is already in the probable reserves column...that's positive. As for the U$20m pricetag, if we use the totally totalled 454,900oz Au Eq number (below) that comes out of the Casio at U$44/oz. That works.

Importantly, very importantly in fact, please note that San Juan Argentina is very much miner-friendly country. As mentioned several times on this blog in previous posts, Argentina can be pro or anti mining, the key being the provincial level of government, not the national or local township levels. San Juan is a province that welcomes mining and has a long history of mining activity. It is the province that is home to the Argentine side of Barrick's contentious Pascua Lama gold project, but as Casposo is just 700masl and the polemic Pascua Lama is over 4000masl up the circumstances are very different. Add to the mix that the deposit is low sulphide and (although I'm assuming somewhat) is unlikely to need use of cyanide to extract the gold (UPDATE Thurs AM: after a lesson in metallurgy from those who know this rock better than I, it seems my assumption was wrong. The likely solution is a cyanide circuit. Thanks due to the person kind enough to un-ignoramus me). Make no mistake, Troy is in pro-mining country.

This type of small deposit is tailor-made for Troy, a company with a track record of bringing mines to production quickly (again, see below). It will also be able to totally fund the project from cash held at bank, so no need to get sticky in the credit markets.

Bottom line: Troy Resources, my pick of 2009, has just added investor value. DYODD, because I own (avg buy C$0.84). Right now TRY.ax (Aussie listing) is up 6.3% at A$1.285 which is C$1.106 at current forex. TRY.to closed at C$1.01 today.

Here's the PR to enjoy (I did at least).

Otto Rock

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March 25, 2009

Troy to Acquire the Casposo Gold-Silver Deposit From Intrepid Mines Ltd

PERTH, WESTERN AUSTRALIA--(Marketwire - March 25, 2009) - Troy Resources NL ("Troy") (TSX:TRY)(ASX:TRY) - NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES Highlights - Troy has reached agreement to buy the Casposo gold-silver deposit in San Juan province of Argentina from Intrepid Mines Ltd ("Intrepid"). - The acquisition price is US$20 million on closing and US$2m on the 6th month anniversary of first production. Troy will fund the acquisition from cash reserves. - Troy will look to fast track the mine development utilising the gold plant it holds in storage in New South Wales, Australia. Troy Resources NL ("Troy") announces it has reached agreement with Intrepid to acquire its 100% interest in the Casposo deposit in San Juan Province in Argentina (to see Figure #1 please click on: http://media3.marketwire.com/docs/try325.jpg). Troy will fund the acquisition out of cash reserves. Completion of the acquisition is subject to receipt of any consent or approval under any law or regulation affecting the parties and to completion of a reorganisation of certain subsidiaries of Intrepid not intended to be included in the acquisition. Completion is also subject to the parties settling a definitive acquisition agreement on usual commercial terms. Commenting on the result, Troy CEO, Paul Benson, said: "This is an exciting acquisition for Troy. Casposo is an excellent deposit and Intrepid have done a great job exploring and proving up the resource. We see this as tailor made for Troy as we can use our in-house expertise to bring the mine into production quickly. Our aim is to minimise capital and time to first production by utilising an existing gold plant we hold in storage. Ken Nilsson who has built and operated all of Troy's mines will take responsibility for Casposo." "The March 2007 feasibility study completed by Intrepid envisaged a 6 year mine life with the first 4 years being fed by a gold rich open cut followed by 2 years from a silver rich underground mine. The Argentinean based Intrepid team of geologists working on the project have done an outstanding job to date and we look forward to this group joining the Troy team as employees and continuing the exploration program with the aim of adding to the resource inventory and extending the mine life." "The province of San Juan has a very supportive attitude to mining and we look forward to working with the local regulators and communities to bring the mine into production as soon as possible." Troy has a track record of building mines quickly, efficiently and at low cost and this will be Troy's third mine in South America. In 2002 Troy acquired its first mine, Sertao, as an in-situ resource and quickly sourced an appropriately sized second-hand plant in Australia that was refurbished and transported to Brazil. In addition, Troy completed an infill drilling program which increased reserves whilst awaiting shipping. Time from acquisition to first production was just 14 months with an initial capital of just US$8m. Plant construction including earth works took approximately 6 months. Andorinhas, Troy's second Brazilian operation was acquired as an in-situ resource in November 2006 and developed by relocating the mill and plant from Sertao. As additional milling capacity was required, a second-hand mill was sourced from Western Australia. Following the acquisition Troy converted the resource to reserve status, constructed the processing facility and developed the open cut mine and poured first gold in March of 2008, sixteen months from acquisition to first production with an initial capital cost of just US$16m. In mid 2007, Troy commenced development of the high grade Mamao underground mine which is now ramping up to full production. With Casposo we will look to similarly fast track development to bring it into production as quickly as possible and expect to utilise some or all of the gold plant we have in storage in Cobar, New South Wales to lower the capital cost and time of the mine development. The Casposo project is subject to royalties payable to the original owners of the property of US$6 per gold equivalent ounce on the first 450,000 gold ounces (less royalties already paid totalling up to US$900,000) and a royalty of US$5.00 per gold equivalent ounce for each ounce of gold produced in excess of 450,000 ounces. Casposo is a typical Low Sulphidation epithermal style gold-silver deposit where mineralisation is hosted within rhyolite breccias and andesite. Veins are typically banded quartz-chalcedony colloform - crustiform banded with quartz - carbonate infill. Mineralisation is associated with an assemblage consisting of quartz, chalcedony, adularia, calcite, illite, sericite and trace sulphides. Gold and silver occur as electrum, native silver, sulfosalts and silver sulphides. Mineralisation at Casposo occurs along a 10 kilometre long west-northwest-east-southeast (N60 degrees W) regional structural corridor, with the main Kamila Vein system forming a sigmoidal set 500 metres long near the centre. The main structural corridor consists of 2 parallel vein sets dipping to the southwest at -60 degrees to -65 degrees (B Vein & Inca Veins). A secondary mineralised trend comprises multiple north-south striking sigmoidal structures that dip to the west at -65 degrees (Aztec, AF, B North & MV1 - Mercado Veins). Ore shoots are typically lenticular bodies up to 200 metres in length and up to 15 metres wide. Work completed included surface sampling and geological mapping, trenching and pitting, detailed trench sampling of the vein systems, reverse circulation and diamond core drilling, an airborne magnetic survey, ground gradient-array induced polarization (IP) and pole-dipole IP surveys as well as bulk sampling for metallurgical studies. A feasibility study, commissioned in 2005, was competed in March, 2007. The latest Casposo Resource estimate was completed in July 2008 by AMEC International Chile. Open pit resources were contained within a Whittle pit shell using a gold price of US$760/oz. Resources below this were classified as underground resources with a cut-off grade of 3.5g/t Aueq. Grade interpolation techniques were inverse distance weighted. The Casposo project is subject to royalties payable to the original owners of the property of US$6 per gold equivalent ounce on the first 450,000 gold ounces (less royalties already paid totalling up to US$900,000) and a royalty of US$5.00 per gold equivalent ounce for each ounce of gold produced in excess of 450,000 ounces. Table #1 Casposo Resources and Reserves -------------------------------------------------------------------------- CASPOSO MINERAL RESOURCES -------------------------------------------------------------------------- Gold Silver Gold Gold grade grade equivalent Gold Silver equivalent Tonnes (g/t) (g/t) grade (g/t) Ounces Ounces ounces -------------------------------------------------------------------------- Open pit Indicated 1,882,400 5.39 130 7.05 326,000 7,854,100 426,900 Inferred 15,800 5.61 137 7.38 2,800 69,900 3,700 -------------------------------------------------------------------------- Underground Indicated 193,800 1.97 196 4.49 12,200 1,223,200 28,000 Inferred 8,800 2.43 294 6.21 700 83,000 1,700 -------------------------------------------------------------------------- -------------------------------------------------------------------------- TOTAL Indicated 2,076,200 5.07 136 6.81 338,200 9,077,300 454,900 Inferred 24,600 4.47 193 6.96 3,500 152,900 5,400 -------------------------------------------------------------------------- -------------------------------------------------------------------------- CASPOSO MINERAL RESERVES -------------------------------------------------------------------------- Gold Silver Gold Gold grade grade equivalent Gold Silver equivalent Tonnes (g/t) (g/t) grade (g/t) Ounces Ounces ounces -------------------------------------------------------------------------- Open pit Probable 1,399,000 5.44 96.05 6.80 244,600 4,320,300 305,900 -------------------------------------------------------------------------- Underground Probable 335,000 3.99 220.5 7.11 43,000 2,375,200 76,600 -------------------------------------------------------------------------- -------------------------------------------------------------------------- TOTAL Probable 1,734,000 5.16 120.1 6.86 287,600 6,695,500 382,500 -------------------------------------------------------------------------- Notes: 1. Mineral Resources are estimated using a US$760/oz gold price and US$13/oz silver price. An economic function that includes operating costs, metallurgical recoveries and royalty costs has been applied. 2. Rounding as required by reporting guidelines may result in apparent differences between tonnes, grade and contained metal content. 3. Tonnage and grade measurements are in metric units. Gold ounces are reported as troy ounces. 4. All Mineral Reserves are reported in the Probable category 5. Mineral Reserves are estimated using a gold price of US$690/oz and US$11.80/oz silver price and an economic function that includes operating costs, metallurgical recoveries and royalty costs. 6. Cut-off grades for Mineral Resources were 1.41g/t gold equivalent for open pit and 3.5g/t gold equivalent for underground. Gold equivalent grades for Mineral Resources were based on metal prices of US$760/oz gold and US$13/oz silver and processing recoveries of 93.7% for gold and 80.6% for silver. 7. Cut-off grades for Mineral Reserves were 1.56g/t gold equivalent for open pit and 3.5g/t gold equivalent for underground. Gold equivalent grades for Mineral Reserves were based on metal prices of US$690/oz gold and US$11.8/oz silver and processing recoveries of 93.7% for gold and 80.6% for silver. 8. The information regarding Mineral Resources and Mineral Reserves is drawn from the technical report entitled "NI 43-101 Technical Report, Intrepid Mines Limited, Casposo Project - July 2008" that was filed on September 16th 2008 by Intrepid under its profile on SEDAR at www.sedar.com. Information of a scientific or technical nature in this news release was prepared under the supervision of Peter J. Doyle, Vice President Exploration and Business Development of Troy, a "qualified person" under National Instrument 43-101 - "Standards of Disclosure for Mineral Projects", a member of the Australasian Institute of Mining and Metallurgy. Mr. Doyle has sufficient experience, which is relevant to the style of mineralization and type of deposit under consideration, and to the activity he is undertaking, to qualify as a "competent person" as defined in the 2004 edition of the "Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves". Mr. Doyle has reviewed and approved the information contained in this press release. For further information regarding the project, including a description of the quality assurance program, quality control measures, the geology, samples collected and testing procedures in respect of the project please refer to the technical report entitled "NI 43-101 Technical Report, Intrepid Mines Limited, Casposo Project - July 2008" that was filed on SEDAR on September 16th 2008 by Intrepid Mines Limited and which is available under Intrepid's profile at www.sedar.com. This news release contains forward-looking statements. These forward-looking statements reflect management's current beliefs based on information currently available to management and are based on what management believes to be reasonable assumptions. A number of factors could cause actual results, performance, or achievements to differ materially from the results expressed or implied in the forward looking statements. Such factors include, among others, future prices of gold, the actual results of current production, development and/or exploration activities, changes in project parameters as plans continue to be refined, variations in ore grade or recovery rates, plant and/or equipment failure and delays in obtaining governmental approvals or in the commencement of operations.

ATW Gold (ATW.V) Management Does Another Private Placement...

Quite a fuss on the stockhouse board as ATW, having hit new highs and gone into production where they are supposed to be cash-flow positive.

So, the private placement comes out and its 22% under yesterday's close and offers a half-warrant at yesterday's closing price.

Seems pretty unfair to the earlier holders.

Now, here's the part that rich. The buyer of this unfair bargain is Sprott Asset Management (a pretty successful group of hard-nosed deal makers). Some of the posters on the message board see this as a silver lining as having Sprott accept a gift like this is a win-win situation because SAM "gives us much needed publicity".

Yet another example of how having stockholder friendly management is moving higher and higher in my evaluation of Jr mining stocks. From now on I'm going back at least 2 years on any stock I consider buying and look at what kind of financing they had done and when and why and for how big a discount.

I think I'm getting to the point where I can predict this kind of thing. Whenever a company hits a significant milestone and achieves a 52 week high and has plans for growth that requires capital look for the private placement. This kind of management is not patient enough to grow the company through its own cash-flow. They want grow a big empire as fast as they can so that can "take something off the top".

Here's my list of companies that are on my own confirmed stock holder friendly list (in the order they come to mind):

• Gold Resource Corp (GORO.OB) - management owns 1/3 of the company, the strategy is clearly to make money without diluting the company and the company targets 1/3 of all cash flow to dividends.
• Capstone Mining (CS.TO) - has done stock buybacks in the past to support the price when inordinately driven down. Did the whole Silverstone Resources strategy to unlock extra value for their shareholders.
• Impact Silver (IPT.TO) - is small, making a profit and resisting the temptation to dilute or get into debt to fund growth.
• Troy Resources (TRY.TO) - has a history of paying dividends and maintains a good balance sheet and is growing / obtaining new mining resources organically.

Here's my list of companies that are on my tentatively stock holder friendly list:

• Castle Gold (CSG.V) - profitable, not in debt, growing on cash flow and has a committee established to determine explore selling the company.
• Semafo (SMF.TO) - seems to be growing well without a lot of dilution.
• CGA Mining (CGA.TO) - has an extremely high percentage of institutional investors who won't put up with mindless empire building.

What companies do you have on your confirmed shareholder friendly list?

MontyHigh

New Guinea Gold Soap Opera Takes A Political Risk Twist

Well, after announcing missed production guidance recently, New Guinea Gold's Sinivit start up problems take a new twist (click here).

Apparently all it takes to shutdown a mining operation is New Guinea is 12 guys on foot walking up to the gate and demanding that it be shut down. 

The same thing happened to New Guinea's largest gold miner, Lihir Gold on January 27, 2009 (click here). There were only shutdown for three days (click here).

Both of these are good examples of one category of political risks: Troubles with locals. The other big category is trouble with the national governments (in the form of tax increases, nationalization, etc.).

So, investing in mining companies in politically risky countries has risks. We'll see how this turns out.

MontyHigh

Best Of The Message Boards: Investor Village BRY Board On Russian Oil Production

I've been wondering when it would be the right time to shift some money out of the gold sector into the oil sector. The following message board thread pushed me over line. If Russian oil production follows the North Sea and Mexico into a significant decline, the world is in for a big hurt and the price of oil should jump hard.

I now have about 1.5% of my portfolio in Suncor (SU), the Canadian tar sands company. These tar sands (and Suncors plant to process it) are a genuine, valuable asset. If there was any stock I'd be content holding until I die it would be this one. However, if I shift more money into this sector I expect I will spin up on Jr oily and/or tar-sand stocks the way I have spun up on Jr gold mining stocks so I can get a bigger edge.

"WSJ Russian oil production
http://online.wsj.com/article/SB123792348879228771.html

MOSCOW – Oil markets may not be pricing in the extent of dwindling output in the world's biggest producer, Russia, a factor that could buoy prices later this year, traders and analysts said... "

Click here for the whole thread.

MontyHigh

Promoted: Comment On "Jr Mining Stock Investing Is A Snake Pit: GORO.OB, NGG.V and CGC.TO"

This comment left by someone who obviously knows what he's talking provides more value than the original piece:

"Personally, I don't invest unless I am an insider and or running the company.
IF you want to gamble, sorry invest then go with the underlying commodity . Like Jim Rogers said "there have been thousands of mining companies that have gone to zero but gold can never go to zero."

As for games, ya the CEO's have to "game" the system. But also remember there are not a lot of CEO's that want the stock to go to zero. For a ceo to know what actions will affect the stock price, that is taught in University, pick up the book "revolution in corporate finance" a highly rated finance book and see all of the mentions that financing/debt M&A will have on a share price.

Most or a majority of CEO's w. mkt caps under 250m will never sell a share. to put it another way, you really cannot sell a share because the price will dump. Only when you leave can you sell is the way I look at it. Some directors will sell, but they may have options exp. or are looking at leaving the board for a better one or the company may have fixed term limits.

The other way some CEO's and executives can buy and sell is through complicated offshore accounts. And I could name a couple of guys that made a good company that way and then stopped when there was enough volume to get attention. If you read the corp. finacing manual that the TSX has on the website, you will know that brokers have to provide liquidity when they underwrite an issue. They "trade it around" and basically pull a legal pump.

People also talk about shorting Venture stocks, my experience is that if they are it won't be at the retail level because the brokers don't carry or allow you to do it, even though it is allowed on the TSX to short any stock at any price. Try telling that to brokers like e-trade where they will tell you it's illegal. Call the TSX and ask them they will tell you, also call your broker and see if they have any inventory of any venture stock under 5 bucks to short, my guess is no.

If you are talking crooked, look at failed trades, look at how stocks are bought and sold thru the depository system. look at how no one in canada has ever looked at failed trades- and that we use an outdated T+3 system when in the age of computers we can clear a trade in 24h or less.
Look at the TSX charging for every trade, or a broker setting the haircut or lawyers charging public companies outrageously. Or that a good % of traders actually make money but because they are under capitalized and get killed by commission. Look at BNN when they interview those idiots who look like they know it all and lost 80% of their clients money or talk like they have billions under management and they are capped at 40m, Kevin O'l, is so guilty of this but I do like the greedy bastard.

Or brokers that bail on a PP at the last minute, and then short you and call you up and say " look, I really went to bat for you and the best I can do is shares at X amount and .02 cent warrants for 2 years. Now that they beat up your stock.

If you want some fun, look at novagold and see when the the VP of corp. d sold in 2008 then look at the news release dates and look at the stock.
I am not saying anything by this but see for yourself.

Or, to really rant, why does our gov't charge itself interest on our debt and then pay the interest out to someone else when they print the money?

You want un-crooked go into commodities or put some money on your nephews new biz or buy into a LP at a VC or PE firm or learn how to count cards.

Richard"

Jr Mining Stock Investing Is A Snake Pit: GORO.OB, NGG.V and CGC.TO

Today we see GORO.OB Up / NGG.V Down...

GORO.OB is up 5% on no news on a down day for gold and for gold mining stocks (GDX). I expect some good news has leaked. Permit or drill results?

New Guinea Gold (NGG.V) is down today on the public announcement of bad production results from Sinivit (as I expected, click here) that were known internally for over a month. It probably leaked and triggered the stock price fall from $.30 down to $.20. The fact that it is holding above $.20 sort of reinforces the fact that insiders knew what was going on and are buying back in.

Finally, we have this stockhouse bit about Capital Gold Corp's takeover by Gammon Gold:
"Lookin' Out For Number 1...

Well,the sentiment re the CGC Management team seems a bit sour.And rightly so,IMHO.
It was @ March 5 or 6 they granted themselves Options at $.44 when the stock price was at $.59.That I found pretty crass and sold out.That shows where Management's interests lie...and it isn't with the shareholders,whose money helped bring this Company to profitability.
March 12,Gammon announces the friendly takeover offer details.Now,I don't think this deal was negotiated in 1 week.So their $.44 Options gets even more smellier.
Knowing a deal is forthcoming,with a likely stock price jump,simply makes it almost criminal.And they announced the Options went mainly to workers.Not by the insider trading figures.
Any further comments would be superfluous.
Except,maybe,.......if part of the arrangement puts some of these miscreants on Gammon's Board or other cushy position,would you really want to hold onto those Gammon shares? 'Nuff said. "

Well, the point is, that everyone investing in these Jr Canadian stocks should fully understand what a snake pit it is with insiders and management taking advantage of passive investors like ourselves most of the the time.

I'm hoping this post kicks off a little discussion regarding how you personally deal with the fact that its a crooked game and how you detect/anticipate cheating and avoid getting unduly cheated yourself.

At this time, I'm handling it by looking more and more at management shareholder friendliness as a key criteria for buying a stock and dumping stocks where I see crooked things happen.

NOTE: Even though I've witnessed the recent NGG evidence, I have not dumped. There is just too much value there (click here).

MontyHigh

Quote Of The Week: Bill Bonner On The Recent Market Bounce

From his Mar 17th essay: "Gird up your loins, dear reader. Put wax in your ears and lash yourself to the mast. You are about to be tempted."

I'm getting tempted myself, but I think he's right. This is a depression, not a recession. The bottom is not in.

MontyHigh

Headline Of The Day: German economy to contract 7pc this year

Ambrose Evans Pritchard has the story (click here):

"Germany faces the sharpest economic downturn of any major country in the Western world as unemployment rockets to 5m.

The country may be on the cusp of a Japanese-style "Lost Decade", according to a clutch of grim forecasts by leading banks and economic institutes.

...The only other G10 country likely to face the same sort of destruction this year is Japan (-7pc), another industrial export power. The bank (Commerzbank) expects Italy to contract by 4.5pc this year, the US by 4pc, Britain by 3.9pc, and France by 3.5pc."

So, what do you think, is the bottom is in?

MontyHigh

FWIW, My Input To Toby Hansen's News Letter

Here's my input to Toby Hansen's widely admired, quarterly news letter. You can get a copy delayed by a week or so on this web site or directly by emailing a request to: tobinator00@yahoo.com.

There may not be a tonne of new information my inputs here (I'm sure Toby will have quite a lot of new material), but at least the tables here are up-to-date.

MontyHigh

 

Castle Gold (CSG.V): A WorldOfWallstreet.Us Top Pick

 

I maintain a universe of Jr gold producers (and near producers) that I follow. These companies appear to be the most undervalued companies I can find. You can find profiles of these companies and their comparative valuation at my web site, www.worldofwallstreet.us. This piece provides all comparisons based on 3/20/2009 closing prices.

 

The key metrics I use to compare these companies are, estimated for 2010:

    * Price to operating cash flow at $800 / oz gold.

    * Price to annual oz produced

    * Price to oz of gold in the ground (proven/probable, measured and indicated and measured, indicated and inferred).

 

First we consider a set of companies, that I consider to be useful for comparing my top-pick candidates against. Alamos Gold (AGI.TO) is a well-run, consistent performer held by an investor I highly admire. Minefinders (MFL.TO) is a recently in-production top-pick of Jim Puplava and John Goody (www.goldstockanalyst.com). Capital Gold (CGC.TO) and Western Goldfields (WGW) are probably the best references for comparison as they were recently acquired and are still trading (prior to their takeover closing). Their prices and resulting metrics thus provide a good reference for valuing a similar company. The table that follows provides my summary of the reference companies.

The next table provides my current top-picks (Castle Gold Corp, Gold Resource Corp, Semafo, Troy Resources). As you can see, they are all very undervalued in terms of estimated price-to-operating cash. As a top pick, each company has management I have confidence in.  It must also be able to stand a significant downturn in the price of gold (say $650 / oz) and not be in danger of “going to zero”.

Castle Gold (CSG.V) is one of my top picks at this time. It is a profitable, producer with a long-life, profitable and still ramping up heap-leach mine in one of the safer parts of Mexico. It also has a short mine life cash-flow generator in Guatemala that is scheduled to be closed in the second half of 2009. The path to ramping up to the estimated 2010 production of 50K oz / year probably consists of nothing more than letting out a contract to a higher-capacity mine subcontractor. Announcement of this deal is due any week now. There may be a small amount of financing needed as well.

 

As you can see, it is by far the most undervalued, in terms of estimated 2010 price to operating cash flow, of any of the miners appearing in this piece’s first tow tables.

 

Castle Gold has already begun to address its main weakness: Its production is too small for it to ever “grow up” to a mid-tier company. This is being addressed by forming a committee to consider mergers with larger companies.

 

Castle Gold is thus the most undervalued debt-free company I know of in terms of 2010 price to operating-cash flow and has the twin catalysts of announcements of increased production and being a takeover candidate in the very short-term. This is, overall, the best short-term play I know of.

 

Lookout though, because it is very illiquid. That is, any sudden increase in buying will push the stock price higher.

For what its worth, the table that follows provides the “speculative buy” companies I like and hold as of 3/22/2009. Each of these has more upside than my “top picks” but also higher risk.The companies are: Dynasty Metals And Mining, New Guinea Gold Corp, Oceana Gold Corp and La Mancha Resources.

Finally, here’s a table of Jr gold producer that I have held in the past but do not any longer either because they are not as undervalued as others or because I no longer have confidence in their management.The companies are CGA Mining Corp, Metanor Resources and B2Gold Corp.

Its Not Just Graphs And Numbers: Pictures Of The Recession

 

Homeless Tent City, Sacramento CA, USA

Click here for about 35 more from around the world.

MontyHigh

Translating Karl Denninger's: Caution On Quantitative Easing

Denninger wrote a piece today (click here) so short and important that I sent it out to a bunch of my non-investing oriented friends. On reflection, it appears to be too technical for the average reader. So, I'll try my hand at explaining in common English what he's talking about. I hope he doesn't mind my quoting his entire piece. Denninger will be blue large font. My explanation will be in [black normal sized in square brackets]. I hope I got it right. Leave me a comment to explain where I (or Denninger) got it wrong.

Caution On Quantitative Easing

[Caution On Central Bank Printing Of Lots Of New Money By Buying Long-Term Government Bonds. Note: central banks ordinarily print money by buying short-term government bonds giving their government money the central bank created "out of thin air" to spend on whatever their government chooses. This artificially increases demand for those bonds which lowers their price, that is, lower's their interest rates. The UK and the USA have been doing this so much that interest rates have fallen to zero. In order to create grossly more money the UK is adding the buying of long term (10 and 30 year) bonds. The FED announced today that they were also going to start doing that.]

Be warned Ben.... [Bernanke, chairman of the FED, the USA's central bank.]

The BOE executed their first "QE" operation today. [The UK's central bank did their first buy of long term UK bonds today.]

The "bid to cover" was an astonishing 7.35.

This means that for every bond purchased 7.35 were tendered, or made available by willing sellers. [Ok, if the central bank is going to buy long-term bonds they have to pay more than others would. That is, they have to pay more than it is worth. If an owner of something finds a sucker that is going to pay more for something than it is worth, they will sell that sucker all they have. That is what happened to the UK central bank today. There were bunches of sellers of UK long-term bonds.]

Back in January I posted a Ticker in which I made clear what was likely to happen if Bernanke actually attempted to do (as opposed to threatening) QE [again, creating money out of thing air by buying 10 and 30-year USA government bonds]:

Bernanke bluffed and the bond market called it[not sure what this means; long term interest rates went up].  He cannot monetize several trillion in new issue plus the entirety of the 10 and 30 year bonds out there to stop a bond market sell-off [NOTE: The USA has 11 trillion dollars in federal government bonds outstanding, several trillion of which are long-term bonds. To monetize them would be to buy all of these bonds by creating money out of thing air.].  In addition, the market no longer believes him, as evidenced by today's price action.  A serious bond-market sell-off will ramp the cost of all credit, including mortgages and commercial loans[If the owners of government bonds sell them to the USA central bank it will increase the amount of dollars in the world. An increased amount dollars means the preexisting dollars are worth less. This is inflation. When there is inflation an investor demands higher interest rates since the money he gets back at the end of the loan will be worth less. Thus buying several trillion dollars of US bonds would drive all other interest rates higher].  If he tries to monetize the result will be current bondholders tendering into his buying, forcing him to essentially "consume" the entire float [that is, print up trillions of dollars to buy trillions of bonds].  That stunt will cause the dollar to implode[fall rapidly] and we wind up exactly like Iceland [with inflation and interest rates at 17% driving an economic collapse with giant unemployment].  Overnight.  Ben knows this; ergo, he is screaming like a petulant child while the market laughs at him just like the market forced Paulson to do what he said he wouldn't with Fannie and Freddie [remember how Bush's treasury secretary Paulson told congress that if they gave him 100+ billion$ to rescue the semi-government Fannie and Freddie mortgage lenders he would need to use it. Well he did use it all].  Bernanke had better shut the hell up before he precipitates a bond market dislocation; traders can and will try to force him to make good on the threat.

Ding.  The BOE now has seen exactly what happens when you promise as a government to overpay for something - everyone hits your bid immediately![everyone sells all that they have when a sucker is overpaying]

This is a form of crack that the government cannot afford to loose into the market - as soon as the buying pressure is removed rates will start to rise again, forcing yet another purchase.[Once the government starts over paying for something, it can't stop because if it does, the price will fall. That is, interest rates will go up, higher than before because of the inflation expectations from all the money printing.]

Ultimately The Fed winds up owning all of its own government's bonds, having destroyed the private capital market for sovereign debt[us treasury bonds] (just as it has done for other securitized debt by threatening to overpay for those issues!)[Nobody will buy low-interest rate US treasury bonds with all the inflation coming from all that money printing and so the US treasury bond market will be destoryed.]

The difference is that if this happens for sovereign debt then deficit spending becomes impossible on an instant basis; this would in turn force a nearly 75% contraction of government spending.[If no one will buy treasury bonds then the government cannot have deficit spending and will have to cut its budget dramatically and immediately.]

The outcome of this event would be the immediate destruction of Social Security, Medicare, half the military budget and half of all other government programs.

PS: Bernanke knows this, which is why it hasn't happened yet.  Let's hope he continues to remember it, because the destruction of our government is very, very un-funny, and this would likely precipiate exactly that in a "vast and fast" form.

Turning Bullish On The Dollar Reprise: Oops

On March 7, I wrote a piece entitled "Turning Bullish On The Dollar" (click here). It explained how, despite the long-term bearish fundamentals, the US dollar had formed a bullish chart pattern and that I was turning short-term bullish on the dollar.

Well, all I can say is "oops", technical analysis doesn't work all the time. Here's the chart to prove it. All I can say in my own defense is that I didn't change my all gold Jr producer stock position, so this call didn't hurt me.

Today's dramatic down move blasted through the 50 day moving average and should, if it doesn't pop right back up, form a bearish engulfing pattern on the monthly chart. However, I don't see any important support levels being broken, so I'm not going out on a limb regarding what happens next.

MontyHigh

Valuing New Guinea Gold (NGG.V) From Its Imwauna Project

I recently interviewed New Guinea Gold (NGG.V) CEO, Bob McNeil (click here) about their Imwauna project. New Guinea Gold's strategy has been, for some time, to use cash flow from its smaller, short mine-life Sinivit low-cash cost open pit mine to provide the financing to complete their exploration of the larger Imwauna project. Getting Sinivit cash-flow positive has taken way longer than expected (major frustation and annoyance for investors). At the time of this writing it still may not be meeting guidance. It has been 2 1/2 months since the latest production was reported and the share price is not far from 52 week lows.

To make up for this lack of cash, New Guinea Gold had to resort to a pretty darn expensive (in terms of interest rate and terms) convertible debenture dilution. Although the terms were pretty harsh, only a 10% dilution of the company was required.

The Imwauna project seems like a dandy. It currently has an inferred resource of 700 K oz of gold at over 12 g/tonne at depths that are open-pittable. This is, for example, 24 times richer ore than one of my favorite Jr producers, Castle Gold (CSG.V). That kind of grade will clearly support a very low cash-cost mine. The project is still, after 180 drill holes, largely undrilled and open at depth and along the strike. McNeil expects Imwauna to be a 2 to 4 million oz project.

This article provides a tabular valuation of New Guinea Gold by assuming that Imwauna dominates the company's valuation and assuming a range of ounces are proved up and a range of dollar per oz valuations for those ounces. Two sets of tables are provided:

• One assuming New Guinea Gold proceeds according to plan and requires no further dilution prior to proving up Imwauna's resource.
• Another assuming that Sinivit continues to disappoint and that a further two dilutions (totaling 20%) are required along the way to proving up Imwauna's oz.

With these tables, the reader can then choose his own estimates of number of ounces, value of an ounce and whether further dilution will be needed to evaluate New Guinea Gold's outlook. 

On the issue of how much an Imwauna oz might be worth, McNeil offered the following: "in all the M&A activity of 2008, exploration ounces (depending on location and “quality”) were valued at between $35 and $125 per ounce and production ounces at between $150 and 300. On the basis of those stats, since the Imwauna ounces are high-grade, if there were a million exploration ounces next year at this time, the mine would be worth $80 to $120mm. After development, which might cost $40-50mm, a million ounce mine would be worth approximately another 50 to 100%.". So, his (biased, no doubt) view is that Imwauna is worth between $80 and $240 / oz.

A company with a similarly sized project, Orezone, was recently sold for 45$ /oz. I believe it offers a realistic lower bound for valuing Imwauna as its project was much lower grade and Orezone was desperate for either a financing or a takeover and the deal was done at the depths of last fall's credit freeze up. New Guinea Gold should be able to do better as it is higher grade and Sinivit cash-flow should keep them from becoming desperate for financing. 

The recent acquisitions of Western Goldfields and Capital Gold provide a possible independent upper bound on Imwauna's valuation as these companies are profitable producers with little exploration upside. They are (while awaiting their acquisitions to close) currently valued at 88$ and $160 per proven and proven oz respectively. 

The table below provides Imwauna's valuation (in millions of US dollars) for a range of total oz and value per oz. Bold print (in each of the tables) provides my own "conservative, most likely and better than expected" estimates of the results of Imwauna's exploration and valuation. The math in this table is pretty simple.

Given New Guinea Gold's current fully diluted market capitalization of 34 million US$ and assuming no further dilution, the table below gives the amount that New Guinea Gold's current stock price would have to increase (or decrease) to match Imwauna's valuation. As such the table provides the takeover premium for New Guinea Gold (relative to its current price) if it were acquired after Imwauna's exploration completes. 

The last table provides a similar valuation only assuming another 20% dilution prior to its being acquired. 

So, to summarize, if New Guinea Gold proceeds according to plan it looks like a 6-bagger (485% increase) in a couple of years when Imwauna is proved up. If they do better than expected and find 4 million oz and get $125  /oz New Guinea Gold is more than a 14-bagger. And, if things do not go well and they find only 1 million oz, have to dilute 20% and get only 50$/oz New Guinea Gold should still be able to sell itself for a 17% premium. There appears to be a lot of upside in these outcomes and a "go to zero" downside doesn't really look very likely.

Now, let's look a little more closely at the short-term situation. What can we make of the Sinivit situation? Here's some thoughts:

• Positive: Sinivit has very high-grade ore for an open pit mine and so should be generating a lot of cash. 
• Positive: Sinivit has been having problems, fixing problems and ramping up production for a year.
• Positive: Sinivit's latest reported production, at 2865 oz/in 2.5 months, was getting close to the upcoming guidance for Q1 of 4500 oz.
• Positive: The plan to ramp up Sinivit's production further is pretty simple: increase the amount of ore being heap leached and leach it longer. It seems like it should work.
• Positive: There are numerous recent cases of heap-leach miners having startup problems, but eventually getting it right (e.g. Gammon Gold).
• Positive: Management is confident enough in Sinivit's turn-around to restart and even ramp up the Imwauna exploration activity after shutting it down to conserve cash.
• Negative: There have been no production announcements so far this year. Given New Guinea Gold's track record of waiting as long as possible to release bad news, this bodes for yet another disappointment. 

Because of that last negative, I've been biting my nails quite a bit as far as my New Guinea Gold investment is concerned. This article analysis has clarified the situation and reduced my anxiety and whet my greed. New Guinea Gold was able to get financing and only had to dilute 10%. There is still margin for error if Sinivit continues to disappoint. Even with a 20% dilution, Imwauna is so good there is still a good likelihood of a 5-bagger if Imwauna achieves 2 million high-grade ounces.

As I say, this analysis leaves me feeling good about my investment in New Guinea Gold, feeling tempted to buy more but recognizing that it is still a real speculation.

Leave me a comment.

MontyHigh, www.worldofwallstreet.us

P.S. There is a significant short term issue I failed to address. MacMin Silver, a bankrupt sister company of New Guinea Gold, holds 10 million shares that it will have to somehow liquidate as part of settling with its creditors. Nobody knows how this will be done, but if it is done on the open market New Guinea Gold's share price will be pushed down hard.

Recent Takeover Data Points Allow Valuing Jr Gold Producers

The recent acquisition of Capital Gold Corporation by Gammon Gold and the recent merger of Western Goldfields with New Gold provides fresh reference data points for valuing Jr Gold producers. The results is that three very comparable producers (Capital Gold, Western Goldfields and Minefinders) now have very comparablel valuations based on estimated 2010 price to operating cash flow at $800 gold and price to Measured, Indicated and Inferred oz of gold. This makes these two metrics probably the best metrics for valuing Jr producing and near-production gold miners with decent mine life. 

Its fortunate that Capital Gold released its quarterly financials within a couple days of the takeover announcement as it allows us to get a clear look at what was bought and thus have a clear comparison with other Jr gold mining companies.Here's some of the things I just gathered from their financials:

• 53 K annual oz/year.
• $386 Operating Cost (Less Depreciation) Per Oz. This is from the Income statement. It includes $79/ oz G&A and $31 / oz Exploration.
• $251 Per Oz. This is what the earnings announcement for cash cost. I don't see how you cannot include G&A at least as a valid expense as you surely can't cut it to zero during hard times.
• 10.7 Fully Diluted P/E annualized from previous quarter at $856 gold.
• 5.4 Price / Operating Cash Flow (Not Including Depreciation) annualized from previous quarter at $856 gold.

The table that follows provides the four reference gold miners I use as a basis for comparison with other Jr gold producers and near producers. As you can see, the latter three are valued nearly identically when considering estimated 2010 price to operating cash flow at $800 gold and price to Measured, Indicated and Inferred oz in the ground. These two metrics thus provide a very good basis for evaluating other Jr producers and near producers.

The table below provides the Jr producer miners that I currently like enough to hold shares. They appear roughly in order beginning with the ones I would buy first if I had no previous holdings. As an example, Castle Gold would have to nearly triple to have the same price to operating cash flow as the three reference miners and would have to almost double to have the same price to M&I&I oz ratio. I think you'll see that all of the miners in the table below are very attractive compared to the reference stocks in terms or one or both of those metrics.

Castle Gold Corporation and Semafo are the most undervalued Jr producers I know of.

Gold Resource Corporation and Dynasty Metals And Mining are companies going into production in the new few months that I like. They both have significantly better rocks (higher grade) than just about all other Jr producing or near producing miners.

SanGold Corporation (not in table) is another Jr producer with superior rocks. I don't like SanGold because its a soap opera. It has continual basher and pumper posts on its Stockhouse board. The amount of great rocks has yet to be delineated. It is pumped by most of the gold stock picker news letters. It is called "the next red lake", that is, great Canadian gold mine. All of these leave me with the impression that it cannot be undervalued having gotten all that attention. I could be wrong, but that's my take right now.

Troy Resources is a mining company transitioning from one mine to another which is still ramping up. The competence and shareholder friendliness of its management (which awards stockholders decent dividends) makes up, in my mind, for the relatively high cost per oz of gold in the ground.

La Mancha Resources, Oceana Gold and B2Gold are three high-cash cost producers that I consider more risky than the rest but which have certain attributes which make them, in my mind, worth holding. They are first to be dropped should I get quesy about the outlook for the price of gold.

Finally, New Guinea Gold is basically a gold exploration company with what looks like a really superior exploration project that is supposed to be funding that project's exploration with a short mine life open pit heap leach operation. I have previously discussed New Guinea Gold multiple times and expect to discuss it again in an upcoming article.

The table below provides my profile of two Jr producers / near producers that I used to own but no longer do.

I liked CGA mining as a takeover target even though it is not as undervalued as the others. A big institution just sold its position. As a big insider, I think that stockholder understands what CGA mining's plans are and the stockholder's selling its position means that CGA Mining is not planning on being a takeover target (at a premium) any time soon. Metanor's latest private placement caused me to lose confidence in its management. I don't invest in stocks whose management I don't have confidence in. 

That's my current take on the stocks I know the best. Let me know what you think and whether there's some others that are worthy of due diligence.

MontyHigh, www.worldofwallstreet.us

P.S, This is not a recommendation to buy or sell any of the above stocks. It just provides one way of looking at the above stocks.

Precious Metal Stock Takeovers: What To Make Of These Puny Premiums

There have been three recent precious metal mining takeovers/mergers involving World Of Wallstreet covered stocks:

• New Gold Buys Western Goldfields - resulting in a 9% pop for Western Goldfields. New Gold, a bigger producer with growth opportunities but no cash, buys Western Goldfields, a cash-rich and cash generating producer with no growth prospects.
• Silver Wheaton Buys Silverstone Resources - resulting in a 16% pop for Silverstone. Silver Wheaton, the world's largest (and heavily in debt) silver stream (royalty) company buys its smaller and only competitor, Silver Stone resources. The buyout takes place at a price that values Silverstone's royalties at a much lower value than Silver Wheaton's to the point where John Doody classifies the deal as "Silver Wheaton stealing Silverstone".
• Gammon Gold Buys Capital Gold Corporation - resulting in a 7% pop for Capital Gold. Capital Gold is very much undervalued relative to Gammon Gold on the usual metrics: price to operating cash flow, price to annual oz and price to oz in the ground.

What are we to make of this? In all three cases we find smaller, illiquid companies which are profitable, with no financial troubles, accepting acquisitions at truly meager premiums from companies that could afford to pay a lot more and still have the acquisitions be accretive (that is, increase the value of the buying company). SilverStone, in particular, is controlled by the same extremely savvy management that controls the highly regarded copper miner, Capstone Mining (CS.TO). These guys are clearly not suckers.

It surely is an example of the managements and controlling shareholders of the smaller companies wanting to monetize their profits and get out. To "take the money and run". It is a serious vote of a lack of confidence in the outlook for precious metals in general and junior producing miners in particular. The managements and shareholders must have concluded there is serious risk of a downturn and decided it was time to turn their illiquid shares into shares that they can sell (en-mass) if need be. These guys are "smart money". These are guys who should have a better than amateur view of the precious metals outlook.

This could be because last year the top for precious metals came in around this time of year and managements and big shareholders fear a similar downturn. It could be because gold just attemped to push through to all time highs and fell back in a double-top formation. We don't know why the "smart money' sold. The "smart money" did not give their reasons. They just sold their big, illiquid positions when they had the chance, when they had a buyer ready to take their whole position for a minor premium.

So, again, what are we to make of this?

I consider this to be a significant data point. This piece may annoy "permabulls" which find the need to knock down any data which does not support their overall outlook. I am trying hard to look all the data in the eye and listen to it and form an outlook based on all the data, both bullish and bearish data. I respect the opinion of these "smart money" players, but form my own outlook based on more than just the opinions of these authorities. I consider these takeovers to be a significant data point, but not one that compels a reevaluation of my overall bullish outlook for undervalued Jr gold mining companies.

I do, however, consider this to be a signal that it is time to seriously start watching what is going on and be ready to reduce positions or exit the industry if a downturn in precious metals gathers strength. This despite what appears to me as the fundamentals for precious metals getting stronger and stronger. I intend to let any technical downturn confirm these guy's "smart money" outlook over my own outlook and trigger the selling my holdings, especially those with higher cash-costs. 

Leave me a comment on what you make of these takeovers and what they mean.

MontyHigh, www.worldofwallstreet.us

P.S. dear reader. You have to make your own exit decisions if you hold any of the stocks I discuss on this web site. They are so illiquid that I cannot give you a warning of my exit until after I have sold my own shares.

Imwauna High-Grade Gold Project: An Interview With New Guinea Gold CEO Bob McNeil

This is a first for WorldOfWallstreet: an interview with a mining CEO, Bob McNeilCEO of New Guinea Gold corporation (NGG.V). I'll be following up this interview shortly with an article giving my valuation of New Guinea Gold based on the Imwauna project discussed below as well as the outlook for the currently producing Sinivit gold mine.

Bob McNeil, BSc (Hons), MSc. F AustlMM, is Chairman and CEO of New Guinea Gold corporation, a Jr gold producer with significant exploration upside. He is also co-founder and Managing Director of MACMIN NL, Chairman of Frontier Resources Ltd (ASX), and non-executive Chairman and director of Coppermoly Ltd (ASX). He identified and applied for projects in PNG and Tasmania, then sought and obtained financial support to establish New Guine Gold. During 40 years industry experience Mr.McNeil has amassed extensive managerial exploration and mining expertise with multinational mining and oil companies, both in Australia, USA and the Asia Pacific region. Early in his career he was directly associated with the Juno and Warrego mine discoveries at Tennant Creek in Australia. He was Regional Exploration Manager for Unocal, based in Tucson, Arizona and gained specific expertise in the search for porphyry copper deposits. In 1980, Mr McNeil transfered to PNG to establish and manage Exxon's PNG mineral exploration group, where he held the position of General Manager from 1980 to 1986.

Monty High: Ok, let's get right into it. New Guinea Gold has had some distractions lately and the Imwauna Gold project hasn't gotten much attention. Could you explain how Imwauna fits into New Guinea Gold's future?

Boc McNeil: NGG anticipates that Imwauna will become its premier project. It occurs in the same geological zone and is along the same structural trend as Placer Dome’s 4mm oz Misima mine and NGG has a resource target of 2 to 4 mm ounces for the project.

At Imwauna, on Normanby Island, the Company plans to drill an additional 10,000 metres in 2009. There is currently one diamond core rig on site, a second will be added in April and a third in June. In June ‘08, New Guinea Gold announced an Inferred Mineral Resource of 1.8 million tonnes at 12.2 g/t gold and 20 g/t silver for contained metal of 706,000 ozs gold and 1,160,000 ozs silver has been estimated for the Imwauna Project.

New Guinea Gold is conducting a Preliminary Assessment and subject to a positive result from that study, mine construction could commence in late 2010 with a possible gold production of the order of 70,000 to 100,000 ozs/year in 2011. The resource is likely to be largely open pittable. The viability of this possible production including the capital cost of the project, will be indicated in the Preliminary Assessment.

MontyHigh: 12.2 g/t seems to be really high-grade ore for an open pittable resource. Has the metallurgy been done to characterize the kind of processing required for this ore? Is it an oxide ore that is heap leachable or will it require a mill?

Boc McNeil: Yes 12.2 g/t is quite high grade – for example we are profitable mining 5 to 6 g/t at Sinivit. Yes some preliminary metallurgy has been done. The scale of the operation will dictate having a mill – leaching that quantity of ore would take up too much surface area. The potential cost of the whole process – capital (including mill etc) will be part of the preliminary assessment (ie pre-feasibility) study.

MontyHigh: I don't get it. There are lots of heap leach operations in Mexico producing more than 100K oz / year. What's different about Imwauna?

Boc McNeil: The mineralization is low sufiphidation, epithermal style – more efficient to install a mill on this instance.

MontyHigh: Ok, let's get back to the 2009 drilling. For perspective, how does the 10k meters of drilling planned for 2009 compare to the 2008's drilling? Can you estimate the fraction of that drilling that will be focused on increasing the mineralized tonnes versus what will be focused on upgrading inferred oz to a measured and indicated status? Is there any kind of timetable for the next Imwauna NI43-101? Finally, the 12 g/t grade is good enough to support underground mining. Are there plans to drill deeper to determine how far the deposit extends depth-wise?

Boc McNeil: It’s approximately double the drilling done in 2008. About 75% will be focused on increasing the size of the resource, the balance on upgrading the existing resource.

If sufficient new ounces are discovered, the prelim assessment will contain an updated 43-101.

Even then, drilling will still need to go on for two to three years to determine the full lateral and depth extension. Surface work has discovered gold over about a 10 km area, and its possible the deposit may connect with the gold mineralization at Weioko (owned by NGG) which is about 12 km’s NE.

MontyHigh: So drilling to find how deep it goes is not a priority for 2009.

Boc McNeil: Yes – its’ a vein swarm system and tracing individual veins to depth is time consuming and expensive, and likely to produce fewer ounces short term than shallow drilling.

MontyHigh: Ok, lets summarize the drilling situation for Imwauna. In July of 2008 an NI43-101 technical report came out, based on 138 drill holes, putting the Imwauna Inferred Mineral Resource, at that time of 1,800,000 tonnes at 12.2g/t gold for contained metal 706,000 ozs gold. This is very high-grade ore. Since then drilling continued in 2008 and the drilling is planned to continue at an accelerated pace 2009 aimed at increasing the size of the resource and upgrading the existing resource. Fully drilling out the project will take two or three years, but mine construction could being earlier. The resource target is 2 to 4 million oz.

MontyHigh: Great, let's move onto valuing this project. Have you been comparing Imwauna to other projects of similar size? Can you name a few of those comparable projects?

Bob McNeil: The model for the mine Placer Dome’s Misima mine which produced 3.7 mm ounces of gold plus silver. Since it was owned first by PD and then Barrick, no independent valuations exist. There are no similar open-pit projects operating in PNG, and South American projects have a different risk profile.

The purpose of the pre-feas is to put a value on the deposit, considering mining and capital costs reserves and resources etc etc, so investors will need to wait for that for a more precise definition of value. In the meantime, in all the M&A activity of 2008, exploration ounces (depending on location and “quality”) were valued at between $35 and $125 per ounce and production ounces at between $150 and 300. On the basis of those stats, since the Imwauna ounces are high-grade, if there were a million exploration ounces next year at this time, the mine would be worth $80 to $120mm. After development, which might cost $40-50mm, a million ounce mine would be worth approximately another 50 to 100%.

MontyHigh: On that note, I was hoping you would comment on the fairly recent Orezone acquisition which took place in December. They had 3 million oz of reserves and were valued at 45$/reserve oz. It seems pretty comparable, based on size to what New Guinea Gold is shooting for with Imwauna. The main difference that I see is the grade. Orezone was heap-leachable but at 1.65 g/tonne. Imwauna is close to 8 times higher grade, but needing a mill. Can you comment on how valuable an Imwauna oz might be compared to an Orezone oz and have their been an open-pittable, million oz or more acquisitions recently with grades comparable to Imwauna? I'm not aware of any with grades higher than 3 g/tonne. If Imwauna is in a class of its own, might it command a premium to other lower-grade exploration projects?

Bob McNeil: Good question and the answer is grade makes a very big difference – higher grade means less ore to be processed and therefore lower cash costs and therefore potentially a “premium price” per exploration ounce.

Orezones assets are in West Africa which carries a different level of political risk than PNG. Fortunately, IAM Gold has assets in Africa and is familiar with the ground. Also look at the timing – the junior mining sector was cratering in December and getting new financing was/is very tough.

That’s why, while it’s interesting to look at other transactions – they are only a guideline. You need to look at the values generated by the preliminary assessment so reach a definitive conclusion.

MontyHigh: Ok, this may be the last question. Can you name two or three recent deals where an advanced development project was sold that are more comparable than the Orezone deal?

Bob McNeil: Don’t know of anything – remember you’re talking about 1+mm (up to possibly 5 mm) highgrade ounces, near the sea (no tailing issues) in PNG, low cost labour, stable democracy, resource based economy where the government is asking to speed up development and where barrack and RTZ are already successfully mining. The only other recent highgrade transaction that I’m aware of was Aurelian, (7.2 g/t) where Kinross paid $86 per ounce for a much larger 13mm oz deposit. But That was in Equador where the government has frozen development pending a review of the mining act. Will check and see. In the meantime, can you send me a complete version of what you have so Bob and I can check it today?

MontyHigh: So to summarize, Imwauna looks like a very valuable gold deposit, but at this time its hard to put a dollar value on what it is going to provide New Guinea Gold shareholders. This is because the number of oz and their overall grade are yet to be determined and more especially because the market price for this kind of deposit is not all that clear. It seems that the Orezone deal, assuming the price of gold holds up, provides a lower bound (on a price per oz basis), but the value could be as much as two or three times that. I would like to thank your help in providing World Of Wallstreet readers with a better understanding of this project.

China Watch: China Electricity Consumption Down 4.3% Year Over Year

http://news.alibaba.com/article/detail/energy/100064573-1-update-1-china-february-power-output.html

Chinese Electricity consumption is a good way of measuring the Chinese economy. Now that we have both January and February measures, the year-of-year measurements are not colored by the Chinese New Year holiday.

This data indicates that the Chinese economy is actually shrinking even though the Chinese government is calling for 8% growth in 2009.

This has enormous implications for investing that is based on industrial production (go short, not long) and is worth watching going forward (at least until the Chinese government starts "spinning" the electricity stats).

MontyHigh

 

Best Of The Boards: Who Really Runs The United States?

http://investorvillage.com/smbd.asp?mb=144&mn=19415&pt=msg&mid=6831768

Short and sweet:
"
Yesterday, in his appearance before Congress, Bernanke revealed with a single word who really runs the United States :
Senator Sanders: 'Will you tell the American people to whom you lent $2.2 trillion of their dollars?'

Bernanke: 'No'
"

MontyHigh

Good Piece On How Asians View Geithner

http://www.smh.com.au/opinion/obamas-economic-saviour-savaged-as-keating-lets-rip-20090306-8rk7.html

Talking about the 1997 Asian Crisis, "In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription."

How China reacted to that screw-up: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose.

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen."

The long-term results of this screwup: "by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy."

The next step: "Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis."

This is probably too abstruse for the average investor, but if you are trying hard to figure out what is going on globally and what is going to happen next reading the whole piece is probably worth your time.

MontyHigh, http://www.worldofwallstreet.us/

Turning Bullish On The US Dollar

This piece is an example of how technical analysis can help you see a problem in your big picture outlook and get you to dig deeper to find a fundamental explanation, in many cases before huges losses are experienced.

I've been bearish about the dollar for a long time based on the USA's debt ratios which have consistently been worsening. The official USA government debt to GDP ratio is already over 100% (including state and local debt) which puts the USA in the company of banana republics shortly before a currency crisis. If you include the unfunded liabilities (retirement and health care) the debt to GDP ratio is outrageously high.The Obama adminstration's increased throwing of money at things to fix them accelerates this worsening.

But, if you look at the long term chart, the dollar has been rising since last July.

Looking at the dollar chart today, I belatedly see a cup and handle formation with a breakout. It has all the characteristics that Bulkowski requires (going from memory):

• Price rise to left cup lip.
• Depth of the price fall in the cup.
• Duration of the cup.
• Right lip (and handle start) level with, or even better a little lower than the left hand lip.
• Handle duration.
• Price breakout above the right lip.

The cup and handle formation is among the most reliable chart patterns in existence. The typical rise, according to Bulkowski for stocks, is (from memory) around 30%.

So, this chart says the dollar is going to continue to rise. This despite my bearish fundamental outlook for the dollar. This is a case where the technicals can give one a signal that there's a problem with one's fundamental analysis.

Digging further into the fundamentals we run into a piece by Ambrose Evans Pritchard (click here) that explains the forces, despite the really scary long-term fundamentals for the dollar, that can be expected drive the dollar higher.

Here are the money quotes:

• "The BIS said European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets."

• "The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse. The data is collected with a lag but it appears that there are still huge dollar liabilities to be covered."

So, Pritchard's argument is:

• European banks have big investments going bad that are financed in US dollars.
• Since they are going bad, the banks will have to "buy" dollars to cover these losses.
• There are a lot more losses to be covered providing the demand for dollars which, even in the face of an increasing supply of US dollars, seems to be sufficient to keep the dollar rising. 

Ok, I'm hardly an expert on currency trading, but now we have a pretty plausible fundamental explanation for the dollar rising and the technicals (in the form of the cup and handle breakout formation and the trend since Jul 08) calling for a dollar rise. That is enough for a guy like me, who has to form his own opinion, to expect the dollar to continue rising for for the new few weeks or months. This despite the long-term bearish fundamentals for the dollar.

I guess I should try to conclude how this affects my overall macro outlook that gold fundamentals are strong and that Jr gold producers and near producers are the most undervalued financial assets I'm aware of. Gold has recently had periods of rising in conjunction with the US dollar (as a safe haven). This could continue, but I suspect the short term rise in the dollar may provide some downward pressure on the price of gold. Even  so I think the long-term bearish outlook for the dollar and other fiat currencies and the general threat of economic collapse is sufficient to keep the price of gold above $800 (where my Jr producers are marvelously undervalued). So, I am satisified sticking with my current investments in Jr gold producers and near producers. Of course, if gold stays in the 900s or breaks out to new highs (clearly possible), that is all the better for my Jr gold producers.

Leave me a comment. This is clearly a pretty fundamental call for investing and, while drawing conclusions as best I can, there's clearly more for me to learn.

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Taleb And Kahnemann

Really excellent dialog (brimming with genuine insights) between the Nobel prize winner for behavioral economics, probably the most important advance in investment theory in the last half century and my hero, Nassim Taleb, author of Fooled By Randomness and The Black Swan (both highly, highly recommended). Skip the first 5 minutes. Click here or on the photo below.

Hat Tip to the excellent blog, Jesse's Cafe Americain, for bringing this to my attention.

MontyHigh, www.worldofwallstreet.us

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

On February 22, I asked the above questions and gave some evidence that it would run into the 1200s (click here).

So, do we have answers to the above questions? Yes we do:

• Was Gold Overbought? ANSWER: YES
• How Far Will It Run From 2/22/2009? ANSWER: No where, that was an intermediate top.

Time for me to eat a little humble pie. But the article did begin with "I don't know how much credence what I'm about to present". I've been eating a lot of humble pie this week. On Monday I "called' (actually guessed) that the bottom was in. WRONG.

I guess one more thing. When I put the original 2/22/2009 post on a precious metals message board it got 30 "recommendations". This is a good gauge of how much people like to get information that confirms their biases even if it really doesn't have much to back it up.

MontyHigh

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

This post supplements the latest post in this series (click here) which 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've been spinning up more on Dynastry Metals (DMM.TO) and would like to provide some more information.

Stockhouse.com's Importent read my article and had this to say:

"MontyHigh,

Dynasty Metals and Mining's first two properties that will become active mining operations (Zaruma and Jerusalem) have grades over 10 times the average grade of current producing gold mines (over 13 g/t versus the average worldwide grade which has dropped from 1.65 g/t in 2005 to 1.25 g/t today despite the fact that exploration has increased from $1 billion in 2001 to $5 billion last year).  The capex required to get Zaruma and Jerusalem from the current annual production of 100,000 oz/year to 350,000 oz/year is under $50 million.  Production costs will be very low.  DMM's share structure is incredibly tight, suggesting that cash flow per share and earnings per share will be many dollars per share within about 3 years even if gold does not continue its impressive ride higher.  DMM's properties also have incredible exploration potential.  For example, 90% of the Zaruma property has yet to be even explored and its main ore body is over 13 g/t.  Compare that potential to other junior mining companies that will crow from the rooftops over hitting 10m of 2 g/t quasi-ore.  IMHO, if DMM's properties with their imminent production and exploration potential were located in Canada or the U.S., then institutions would be tripping over themselves to pay $25-30/share for this stock.

The only thing holding DMM back from a very dramatic rise in the shareprice is perceptions of political risk.  The reason I have heavily invested in DMM is that I believe the market is measuring the political risk of DMM completely incorrectly.  Why is the market wrong?  Lets start with a few facts.  First, there was strong executive and legislative support for the new mining law that promotes large scale mining in Ecuador.  In fact, President Correa has tossed far left radicals out of his government and waged an aggressive, public campaign against the small, crazy minority in Ecuador that seems to want the country to starve to death on a mountain of gold (to paraphrase Correa's colorful description of them). 

The need for a successful mining sector in Ecuador has increased dramatically over the last year as revenues from oil production have plummeted.  Therefore, it is very much in Correa's interest as well as the interest of Ecuador for the country to play nice when it comes to mining over the next few years.  Because of the need to nurse the nascent mining industry into something much more robust, DMM is in an ideal situation.  The reality is that DMM is going to be the only significant gold producer in Ecuador for years to come.  So, if DMM doesn't get a fair deal when it comes to royalties, taxes and general treatment then the whole mining sector in Ecuador will be stillborn.  The same reasoning applies to a potential Windfall Profits Tax.  When DMM is the only company that will be producing, it makes little sense for the government of Ecuador to get aggressive on this issue.  Yes, they would milk a few extra dollars off of DMM, but they would risk becoming a mining pariah state before Fruta Del Norte, Corriente's properties and many other early-stage properties can develop.

People who think DMM will get a raw deal must be of the opinion that President Correa is going to take a very self-defeating approach to the mining sector.  I believe, on the other hand, that despite Correa's socialist leanings that he is at least pragmatic.  Unlike Hugo Chavez and Evo Morales, Correa appears to be someone that is rational and who will take a much more moderate approach.

Of course, things might be different if there was a meaningful local opposition to Zaruma going into production; however, there is strong local support for DMM and there have been no protests, unlike elsewhere in Ecuador.  One of the reasons there has been no visible opposition to the construction of the Zaruma mine is the whole project has been built to the highest environmental standards.  Furthermore, being an underground mine, President Correa was extremely surprised at what a small environmental footprint the project has.  When Correa has made recent statements about how great and environmentally friendly Canadian mining companies were (the best in the world according to Correa) you can be assured that he was referring to DMM's Zaruma project.

You asked about the Dynasty Golfield's potential to be open pitted.  I can't answer that, since there is no feasibility study at the moment, but I can tell you this: there is some very high grade ore near the surface, and to exploit this potential DMM is currently building a road from Zaruma to the Dynasty Goldfield project.  I expect to see DMM trucking high grade ore from Dynasty Goldfield to Zaruma soon after the plant expansion is completed.  This will be a nice bonus that the market has yet to consider in its calculations about DMM.

You asked about Kinross takeover talk.  While anything is possible, I don't expect to see this happen.  The company is very tightly held, and Robert Washer is the man who controls the company's destiny.  I have spoken with Washer on a couple occasions, and he doesn't strike me as a guy that has any plans of bailing-out for a paltry profit of a few bucks per share on Dynasty.  He has a quiet, no BS confidence in the company.  He knows DMM's imminent potential for growth and cash flow, and he is prepared to build the company.  He is NOT a fly-by-night promoter looking for a quick score."

Being a little picky, I'd like to make the following comment on Omniportent's post:

• I grant you that DMM's Zaruma project's ore grade is way higher than average, but the average includes open pit miners. If you include just underground mines, I'd put Zaruma at between 2x and 3x average. Still that's very impressive.

Since I posted the story there have been a couple of other items:

• Dr. Jose Serrano Delgado, Sub-Secretary of Mines in the Ministry of Mines and Petroleum of Ecuador (the "MMP"), announced that the MMP has lifted all suspensions on mining activities in Ecuador, and that formal letters to this effect are in the process of being sent to mining companies. This confirms that the political risks are settling down.
• DMM's CEO was interviewed on BNN (click here). He reports DMM is on-track to commission the Zaruma mine's processing plant by the end of March. By the way, how long has it been since you've seen a mining CEO with this kind of giddy smile?

China Watch: China Electricity Consumption Down 12% Year Over Year

REVISION: It has been pointed out to me that Chinese New Year was in January this year (one week holiday) while it was in February last year. So, this whole story is really a non-story. Tune back into the Chinese electricity story when the march statistics come out. This is just another case where I wish I was a little bit smarter or did a little more fact checking.

China electricity consumption dropped 12% year over year in January (click here). This is the clearest indication we've had that China is not in an economic "slow down", but an actual economic downturn (recession at least or probably much worse).

Major hat-tip to Ninestreams for calling this way before anyone else.

Electricity consumption is a great way of measuring an economy when there are no official statistics or the official statistics are not reliable. I'd call that the case for China. Will be looking at the same for the USA and Mexico. If you have a link for either please leave me a comment.

Back to China and this news story: Of course, this is bad news if you are a Uranium miner (counting on continued Chinese electrical growth to increase uranium demand) or a coal exporter to China (which has a bunch of coal itself and will, no doubt, be cranking up internal coal production to provide increased employment). I would say the same thing goes for other materials China can mine internally (zinc, molybdenum and even copper).

MontyHigh, www.worldofwallstreet.us

Bottom In For The Gold Correction? This Is What I've Been Waiting For

Look at the light blue line. That is what has been happening in Asia for weeks. I think it means the Asians think gold is over priced. Now look at the red line. Nice pop for the Asian open. This change means, I think, that the bottom is in for the gold correction.

Just my best guess. No guarantee or anything. We'll see.

MontyHigh, www.worldofwallstreet.su