World Of Wallstreet

"Silver Resource Corp" (GORO) NI43-101 Report

Gold Resource Corp did a press release of their NI43-101 report yesterday. GORO is my single biggest stock holding. Its also my single biggest investment winner since I bought in big somewhere in the $4/share range (more than a six-bagger).

I would say the numbers came out about as expected. Here's a quick analysis of the numbers. Italicised numbers are straight from the press release. All other values are calculated from those numbers, current metals prices and a market cap of 1.46B$.

I looked at the 7% g/tonne cutoff grade numbers because they claim to be a high-grade gold miner. Here's my observations (based on numbers in the spreadsheet)

• Cell F7 - Silver Resource Corp - GORO is much more (roughly 2 to 1) of a Silver Miner than a gold miner at current prices. 
• Cells L6, M6 - Either GORO is going to actually mine a lot more metals than is in this report or GORO is quite overvalued. Maintaining and increasing market value depends on exploration results. The deposit is open along strike and at depth and they have been drilling for months and found a third vein which will, over time, increase the amount of metals to be mined. In addition, GORO has other prospective properties nearby. Still, with GORO doing quite well recently on increasing production my main concern has been the lack of specific, individual drill-hole type exploration results. I expect that there is more metal to be mined and I remain an admirer of GORO's stockholder friendliness, mining and exploration competency, and the rocks on their properties. I expect I'll hold my current out-sized position.

MontyHigh, www.worldofwallstreet.us

Life-Cycle Of A Junior Mining Explorer

Here's what google images brings up. Click thru to get to the original pages explain the graphs.  

 

In the past I have made quite good money in that startup phase, especially the one-year run up to production. Where do you like to get involved?

Also, I find that these graphs are way too smooth leaving out the following important common downward jags:

• Explorer/mine builder gets financing (usually below market price and with "warrants"): This drags the stock down to that price and holds it there will the buyers of the stock sell the stock off while keeping the "upside" in the form of the warrants. 
• Startup disappointments: Mines nearly always take longer than "expected" to actually get started and there are frequently several months of "unexpectedly" bad mining results. This can go on for years (e.g. Minefinders and Gammon Gold and Golden Start Resources). This is where miners without extra cash in the bank and especially those with marginal mining economics get hurt badly. You can make a good bit of coin if you are smart enough to guess when the kinks will get worked out for these situations. 

There's another point I'm quite interested in. What frequently happens in the weeks following the first really good hole announcement? I think there's a drop off in price until the next hole comes (which better be good). There are probably opportunities to buy in (with the right timing) after that first really good hole. 

I'd be glad to have a friendly discussion with you if you have thoughts (or mining stock names) you'd like to apply to these charts. 

MontyHigh, www.worldofwallstreet.us

Rubicon Minerals: Is There A Higher Quality Gold Explorer?

 
I don't have the time to go into all the details, but it seems to me that RBY is just about the highest-quality Junior Explorer out there. Watch this (click here) presentation for a 30 minute introduction. Key things about it are:

• Very high ore grade, 20.1 g/tonne.
• In very politically safe place, Ontario Canada.
• With excellent infrastructure.
• Lots of oz (4 million).
• Tremendous exploration upside.

Here's quick comparison with the most recent comparable gold explorer to have been bought out, Ventana Gold (VEN.TO):

Let me know what you think are the very highest quality gold explorers.

FWIW, I'm long and strong, relatively new to RBY and think you should do your own due diliegence.

MontyHigh, www.worldofwallstreet.us

 

Congratulations: Gold Resource Corp Trades On The AMEX As GORO This Monday

Congratulations are in order because, after more than two years, Gold Resource Corp has "grown up" and on Monday will be trading on the AMEX exchange where institutional investors are comfortable. When I'm investing in Jr miners I'm always looking for one which I can expect will "grow up". Growing up triggers, ordinarily, the revaluation of a miner to something closer to established mid-tier miners. 

This post will be a little be retrospective because GORO represents a significant investing success for me. This is partly due to luck but also due to a key lesson I've learned: Only invest in Jrs which can "grow up". Here's what I wrote about growing up in August 2008 (when everything was falling apart in the Jr miner world): "the main hope for a Jr ... is to either "grow up" to the point where institutional money would consider buying the individual stock for its worth (having achieved mid-tier production levels and having left the Venture exchange for the TSX or the AMEX exchanges) or to have a resource big enough and valuable enough to be a major's takeover target. For production I reckon this to be more than 100K oz gold / year or 5 million oz / silver per year. I reckon 2 million gold oz is a "big enough" resource to be a takeover target."

I believe GORO has either achieved or is on the verge of achieving all of those criteria:

• Left the .OB for the AMEX exchange - happens Monday.
• Big enough to interest institutional money - much more institutional interest should follow the AMEX listing.
• Big enough resource to be a major's (in GORO's case Hochschild's) takeover target - Hochschild is doing what it can to takeover GORO. This is great price support.
• 100 oz gold /year production - coming "soon". 
• 2 million gold oz resource - official proven / probable coming "soon".

Gold Resource Corp has been my biggest holding for quite some time. My earliest post referring to the company was Feb 24, 2008 and can be found here. It begins: "I consider Gold Resource Corp (GORO.OB) to be a hidden asset play. The hidden asset is high-grade gold-ore".

GORO.OB was trading at $4.17/share then and now, two and a half-years later, it closed Friday at $14.29. This is a roughly 240% gain. Wouldn't investing be boring if every stock you picked did that? You'd soon be spending more time deciding at which four-star restaurant to dine than analyzing the markets.

Here's a rich one from the 08 post: "GORO has targeted production at the El Aguila open pit mine to commencing before the end of 2008.". Actual commercial production was announced a year and a half behind schedule on July 1, 2010.

Here are my takeaways from the GORO experience:

• Great, undervalued rocks make up for missed schedules.
• Add in competent, stockholder friendly management and you've got a great combination.
• Being lucky or smart on the price of the underlying metal certainly helps. 

In October of 2009 when GORO was trading at 9$, a news letter writer who I really respect cautioned me: "40% of your retirement money is way way way too much to have in an OB. I don't care if it's the next MSFT, it's still too much.". I try to maintain a teachable spirit so I sold about 25% of my holdings. After it kept going up I decided I would just ride what remained until I found an investment I liked better. I'm still riding even though GORO is back up to 36% of my retirement savings.

At this point there is a nice set of catalysts shaping up for GORO:

• Trading on the AMEX making it available to a much wider set of investors (most sensible people wouldn't touch a .OB stock).
• Trading above $15.00 per share opens it up to a much wider set of institutional investors (who often have $15/share as a lower limit on what they can buy).
• Several months of drill results.
• Actual Proven / Probable Reserves instead of the rather dubious "Mineralized Material" they currently tout.
• Actual production results and progress towards their 200K oz/year 3-year production goals.
• Continued dividend payouts.
• Continued price of gold and silver rises.

I guess I'll keep holding until it stops rising on good news, hits serious bad news (or until I find something I really like better).

MontyHigh, www.worldofwallstreet.us

Chart Of The Day For Inca Kola's Otto Rock

With two questions for IKN's Sir Otto:

1. How long has it been since copper inventories were higher than they were 5 days earlier?
2. How long can the price of copper keep going up while copper inventories are rising?

MontyHigh, www.worldofwallstreet.us

Oceana Gold (OGC.TO) Drill Results...

Ok, I'm a little rusty on my Jr and Mid-Tier gold producers comparables, but...

Here's my read (tell me where I'm wrong) on today's Oceana Gold drill results (click here):

o Grade and thickness is similar to what they are already mining.
o This continues the progress in increasing mine-life (which had been OGC.TO's biggest weakness).
o No progress on their other weakness: Lack of a clear growth path. 

Still, very undervalued for a mid-tier, unhedged, in-production oz/year and cash-flow, especially when considering its very safe political situation.

I'm quite comfortable with my oversized position in this company.

Again, tell me where I have this wrong?

MontyHigh, www.worldofwallstreet.us

Silver Wheaton (SLW): Quick And Dirty Fundamental Analysis

Here's a quick and dirty fundamental analysis of Silver Wheaton (SLW).

Story: SLW is a silver royalty company providing pretty pure leverage to the price of silver without depending on the futures and options exchanges.

The business model is that they help finance mines (usually where silver is just a byproduct) with up front payments and in return SLW gets an option to buy all or a fixed fraction of the mine's silver production at $3.90 per oz. Once the deal is done, SLW is insulated from rising mining costs and non-silver falling metal prices up to the point where either or both cause a mine closing. Being diversied across more than a dozen mines and several mining friendly countries reduces company risk. SLW typically receives whatever brownfield exploration up-side associated with the finding and mining of more silver on the same basic property as the original mine. This is a non-trivial upside.

SLW has a nice Warren Buffet-style moat that protects it from direct competition. SLW receives a premium P/E valuation over all other metals (especially base metals). This allows SLW, as the only "silver streaming" business the ability use its own high valuation to more attractively provide financing to these other-metal mines than ordinary financial companies. Being the only (and quite sizable) "silver streaming" business they have the ability to use their size to compete against any "silver streaming" startups. In fact, they just acquired Silverstone (SST.V) which was their only (and much smaller) silver streaming competitor. This competitive "moat" is another significant upside to SLW valuation although this analysis does not factor it in.

Valuation Approach:

SLW is a "wealth in the ground" (James Dines) play.

The basic approach I'm going to take is a price to underlying value ratio valuation. We want this to be as low as possible and be under 1.00. To properly value SLW's assets we need assumptions about:

• What the price of silver will be over time - by making a convenient assumption about this I'll be avoiding having to estimate when silver is produced and discounting it to get an NPV.
• How much silver SLW will eventually extract. This will be based on SLW's proven/probable reserves for a conservative outlook (without any accommodation for brownfield exploration). Another view, which has an allowance for brownfield exploration, is provided by using SLW's NI43-101 Measured And Indicated resources (after estimated recovery) as an estimate of exploration upside. This may or may not be conservative. NOTE: I'm not including premature mine closures or the nationalization of mines. This is a real risk, but it is diversified across SLW's portfolio of mines which are located in multiple countries and is based on multiple different metals as the mine's primary product.

Price Of Silver Outlook

My outlook is pretty bullish. The sky-high (or negative) P/E ratios of virtually every primary silver producer is an indication that current prices are barely able to cover extraction costs. I expect extraction costs to increase as:

• Money-supply based inflation really kicks in. This inflation should raise the dollar price of silver but not raise SLW's $3.90/oz cash cost of silver.
• Peak-Oil kicks in increasing the cost of just about everything related to mining exploration, extraction and refining. 

Demand fundamentals for silver seem strong to me as:

• photographic demand has fallen about as far as it can,
• electronic and other industrial applications are growing faster than the world economy (and thus faster than the supply of metals that are the primary product of SLW's mines) and
• investment (monetary) demand rises as an inflation / currency hedge as sovereign (and other) debt triggers more central bank money-printing.
  

The existence of the Ted Butler uncovered big silver shorts provides a possible source of a spike in silver prices (if the big shorts ever have to cover). Silver Wheaton is immune to a potential COMEX default as its contracts are for silver delivery from the silver miners themselves and do not depend on indirect derivatives.

Valuation Basics (Price And Liabilities):

18$, Stock Price Per Share

355M, Fully Diluted Shares

6.390B$, Market Cap

426M$, Liabilities (Debt)

Valuing SLW Assets

For this analysis we assume that the price of silver grows from the base in the valuation table below at the same rate as a risk-free treasury-bond. Whether you accept this or not depends on your outlook for silver. This assumption eliminates the need to do a discounted cash flow analysis of SLW production over time.

With this simplifying assumption and the estimated silver price we can estimate the net present value of each silver oz that SLW will eventually receive at the silver price minus SLW's $3.90/oz cash cost.

Now, how many oz does SLW have? They claim they have 924.8 million (MM) oz of contained proven / probable silver. However, when you factor in the recovery rates its quite a bit smaller. This calculation requires about a half-an-hour of spreadsheet manipulation (not included in this post). The recovery rates can be kind of smallish because the silver is a byproduct and the focus of the mill is not on maximizing silver recovery. With this factored in the the proven-probable falls to 558 MM oz. The fact that a half-an-hour of spreadsheet manipulation is required to get the true facts about proven / probable oz gives you a little read (not very flattering) on the transparency and character of SLW management.

Using the same overall estimated recovery against the entirety of SLW's Measured and Indicated oz yields 793 million (MM) recoverable oz.

With all that in mind (and without including any additional accretive acquisitions, unexpected mine closures, etc.), here's the table that provides an estimated price to underlying value ratio for SLW. 

The $12.00 starting price of silver column shows that SLW can withstand a 33% reduction in the long-term price of silver and still be not too-bad off provided it can get enough brownfield exploration to turn the M&I oz into proven/probable oz. I consider this to be significant long-term down-side protection.

The $18.00 (current) starting price of silver column shows that SLW is reasonably undervalued on this post's price to value basis even with the conservative proven/probable oz based asset estimation and is significantly undervalued should brownfield exploration convert much of the M&I extra oz to proven / probable.

The $24.00 and $36.00 columns show that SLW is leveraged to nominal rises in the price of silver (its valuation rising faster than silver) and that multibagger potential exists should that happen.

Overall, I think the situation is attractive provided the price of silver holds up or increases and I'm reserving a bunch of shares at $15.00/sh having bought Jan 2011 call options.

What am I missing and how would you improve this analysis? Do you buy my "price of silver rises with the risk-free treasury bond" assumption? Leave me a comment.

MontyHigh, www.worldofwallstreet.us

P.S., SLW is a much larger-cap company than most that I cover. I'm such a small-fry that any kind of positive review I provide will do nothing to move the stock price. This post is just another case where I'm using this web site to get my own investment case clear for myself and anyone else (you dear reader) who might possibly benefit from my thinking.

What I'm Thinking About The General Markets, Gold, Copper

I hear the Jay Taylor, the news letter writer is all gloom and doom on all stocks (including gold miners). I presume he's calling for deflation.

I'm:
o Watching gold closely. If it goes below $1040 (what Indian govt paid) and stays there I'll start selling Jr miners hard.
o Bearish on copper - short something like 20% of my portfolio in the copper futures market. If support at $3.00/lb breaks down then look out below. Inventories are still ramping up at around 10000 tonnes/week. Yikes!
o Bearish on the general market - at least until the next round of quantitative easing is complete.

There's a lot of people using the financial trouble in Greece to their advantage:
o Germany - want the Euro to go down to boost their exports.
o USA (Bernanke) - wants the dollar to go up so that he can announce another round of QE.

o China - wants the dollar to go up (pulling the renimbi with it) to quench growing inflation.

The way I currently look at the inflation / deflation debate is as follows:

o Threatened or incipient Deflation promotes inflation - when deflation looms its ugly head then...

o The central bankers start printing money (via their governments going crazy with deficit spending and with the central bankers monetizing that debt by buying the government bonds)

o Resulting eventually in a reflation (inflation) trade.

Right now we are in a threated / incipient deflation wave.

I expect this trend (deflation) to continue for around another month at least. Will back out of the copper shorts if another round of QE is announced. Will continue to get shorter as long as inventories are rising the price of copper keeps falling. I think the price of copper has been trending strongly and will continue to do so.

I think there's a decent chance that the fundamentals for gold (central bank and investor buy, especially in China and India) will stop the gold price slide very soon. We'll see.

That's how I see it.

MontyHigh

Relative Importance Of Stock Picking Vs Being Right About Resource Prices

This chart shows the performance of gold itself (GLD) and my top holdings since the recent top in gold on 12/2/2009. I'm showing all my top holdings so as not to self-aggrandize any supposed great stock picking.

As you can see, only one of the above stocks has been positive, Gold Resource Corp (GORO.OB), even though it suffered a dilution during the period and is failing to get its mine going in 2009 as it "targeted". I believe that this is because Hochschild (mid-tier silver producer and investor in GORO.OB) is anxious to up its investment (because it deems it to be quite a good investment) and is thus supporting the price. 

What I see in the other stocks is that, even with my best stock picking, they have fallen roughly 50% more than gold itself (15% vs 10%). I take this to mean that even with my best stock picking, stocks fall significantly harder than gold and basically no amount of stock picking expertise can be expected to produce profits while the price of gold is falling.

In contrast, the same stocks during the dramatic bull run (from 9/1/2009 to 12/2/2009) are up around 50% compared to roughly 25% for gold itself. I take this to mean that my own stock picking (the best I can do) gives better leverage to gold during upswings (and smaller losses on downswings) and the overall leverage is some where around 2 to 1 on upswings.

I guess it means that being right on the price of gold (or any resource) is of foremost importance, while picking among stocks for a given resource adds leverage and value. Stock picking is good, but is not worth as much as being right about the basic resource. Is that how you see it?

Your mileage may vary. Hope this is useful and not self-aggrandizing. It is not meant to be.

MontyHigh, www.worldofwallstreet.us

My Stock Holdings...

Somebody asked me on a message board what I was holding. Here's my reply:

My Stock Holdings... In descending order of size in my portfolio. My retirement account is all-in these stocks (although I've got some diversification  with a lucrative, secure day job and paid off house).

I wish I had about four more names I really liked.

GORO.OB - excellent rocks, stock-holder friendly management, promising real dividends, reasonably politically secure (never meet their "targets", not enough NI43-101 resources).

OGC.TO - straight out undervalued on a price to annual oz basis. Didipio half-built mine is a hidden asset play.

TRY.TO - dividend paying gold miner with mines in Australia, Brazil and soon in Argentina. Very competent and stockholder friendly management, decent but not great rocks.

DMM.TO - great rocks, very undervalued in politically risky Ecuador (but rapidly trending less risky location). Seems to be having trouble getting the first mine working. The rocks are so great I'm willing to wait.

CGA.TO - straight-ahead, excellent sized (200K oz/year) gold mine starting up in the Phillipines. Little risk, very undervalued relative to peers, great institutional support, exploration upside in the Phillipines and an excellent 2nd mine candidate project growing in Nigeria. Quite a tasty morsel for a takeover.

SMF.TO - an undervalued mid-tier turn-around where they've been meeting guidance for about three quarters and are rapidly being revalued upwards.

FRG.TO - best Nevada advanced development project exploration company. Lots of good gold with more coming. Moving towards production. Very competent management.

MAI.TO - 49% owner of a producing gold/silver mine in Argentina. Very undervalued with great exploration upside and Rob McEwan as stockholder friendly CEO. Big downside is that the 51% owner (Hochschild) has ticked off the Argentine workers who are sporadically going on strike. I think it will turn around.

LMA.TO - has partial ownership of three marginal (IMHO) mines with Huge exploration upside at the Sudan (yuck) mine. Basically as self-funded exploration play in my view. Looks very undervalued as a producer, but I just don't like the quality of the producing mines.

XAU.TO - an explorer than owns half of one of FRG.TO's best projects.

That's it. Hope you find this helpful. At this point I'm pretty satisfied with each of my stocks, but wish I had more names as I remain overconcentrated in GORO.OB and OGC.TO. Do your own Due Diligence.

As time goes by I've been giving more weight to the stockholder friendliness of management (hard to judge, but important to get right) and having better than average rocks.

P.S., Having gold go up 2 days in a row while the dollar went up and the stock market went down with a option expiration day approaching is a pretty crazy-bullish divergence. Gold and my stocks are way overbought, but I think they are going to keep going nearly straight up for quite a while (say thru the end of the year). The fundamentals (supply vs demand) for physical gold seems really bullish. The indians were buying last night at $1145/oz. That means the price can't fall far as Indian buying will kick into high gear as soon as it starts falling.

MontyHigh, www.worldofwallstreet.us

Minera Andes (MAI.TO), Both Sides Of The Story

Here (click here) is a recent, tell-the-positives-only message board post telling the Minera Andes (MAI.TO) story:

"Mineas Andes-setting the table for big upside

Go to the website thru google finance and just enjoy reading all the positives with this company. It found a rich ag/au deposit now called the San Jose mine, which has 15 OUNCES per ton ag and 6.6 g/ton au; and is making money with it's 49% ownership of that mine. It discovered and has brought to a pre-feasibility study stage one of the world's richest cu deposits which has a NPV of $3 Bill with cu at 2.90/3.00 pound. The total deposit is expected to produce 11 billion pounds of cu, and may due so with open pit mining.

It has precious metal veins and seams that are undergoing, or are about to undergo, more definition drilling. All of which are 100% company owned.

Best of all it has a principle stockholder (33% of company bought at $1C price) who is CEO that has a GREAT business history as the founder of Goldcorp, and who is taking NO SALARY and he levels with his fellow stockholders. His name, you may recognize, is Rob McEwen. The Yahoo board is actively discussing this company; and you will be thrilled with the company website.

All of the assets are in Argentina which is now a stable, relatively fully predictable environment.

Straight lining the lastest qtrly earnings report and using a 20 multiple gives me a $1.6 price level for the shares. The sell today for 65 cents US. An amazing baseline and wonderful bargain."

Here's some negatives that aren't mentioned:

• The operator of their 49% owned mine (Hochschild) has managed to tick off the workers in Argentina where strikes are a respected and ongoing tradition. McEwan has already indicated that Q4 production / earnings will be down due to labor actions that have already occurred.
• The operator of their 49% owned mine (Hochschild) is operating the mine in strictly its own interest and it may be a long time before Minera Andes gets any actual cash-flow from the mine. It will be even furtherout, if ever, that stockholders get a slice of that cash-flow in stock-buybacks or dividends.
• XSTRATA, which knows more about mining copper in Argentina than anyone else, decided not to buy into that "3B$ NPV" copper project at triple the exploration cost to date. I'd call that an indication that the project isn't anywhere close to that 3B$ value. 

Still, the poster is right that the 49% owned mine is a great asset. I estimate a price to operating cash flow from that mine for 2010 at $1000 Au and $16 Ag at 2.1 making MAI.TO (leaving aside the copper project and other exploration project values) roughly undervalued relative to its peers (e.g. Minefinders [MFL.TO/MFN] by a factor of something like 3 to 1.

I bought back in yesterday at $C.67 (only 1% of my portfolio) because I'm a value investor at heart and it seems, even with the negatives above, way too undervalued.

MontyHigh, www.worldofwallstreet.us

Apollo Gold 10Q Review

Apollo Gold, one of my holdings, posted their quarterly results yesterday. I look at Apollo Gold as a value investment, specifically as a speculative turn-around play. The story is as follows:

• Apollo Gold was a reasonably successful mining company with a gold/zinc mine in Montana which became depleted.
• Apollo Gold has a nice property (Black Fox) in Canada with good, but not fantastic gold grades and they have opened a mine which starts as an open pit mine which is to be supplemented with underground production starting next year. By the way, they have excellent exploration upside (with some drill results that are comparable to Black Fox) immediately adjacent to Black Fox.
• Apollo Gold had to get financing for the new mine around this time last year at the heart of the credit lockup. The stock price fell to around 1/5th its current value. They managed to get financing without too much dilution, but with pretty hefty interest rate payments (around 8% interest) and hedging 1/4 of the next four year's production at $875 gold. CAD$ / USD$ currency risk is also hedged.

So, the key part about the turn-around play is, Apollo Gold must get Black Fox working well enough to pay off that debt or bad things happen (initially in the form of hefty dilution) to stockholders. The thing to watch, in my view, is the amount of gold being produced, the cost of production, the cost of gold (of course) and the balance sheet's current assets.

During Q3, there was a production hiccup, where the grade of ore run thru the mill did not match expectations. The reason why I'm an Apollo Gold investor is because I was very impressed by the way management handled the hiccup. They were very straight-forward about what happened, provided a tonne of technical detail in a way that showed that they loved mining and know it backwards and forwards and that they knew what the problem was and how to fix it. Quite a contrast to many other companies. New Guinea Gold (NGG.V) comes to mind as the exact opposite.

So, that brings us to the 10Q. I'm not a finance / accounting guy. I'm a software engineer who is trying hard to spin up on his investing skills. I realize that a major step forward in increasing my stock-picking skills is to be better able to interpret financial filings. Here's what I see.

Balance Sheet:

Total Current Assets: 22.6M$, Total Current Liabilities: 53.2M$... Yikes, that's why this is a speculative stock. But of the current liabilities, 8.6M$ is derivatives (gold hedges). That's not a problem. The big hitter is "Current portion of debt (25.8M$)". Leaving those aside, Apollo Gold is in reasonably good shape.

Digging into "Currrent portion of debt (25.8M$)" in note 8a, we see that the project facility (the debt) has to make monthly interest payments and "repayment of the principal amount in unqeual quarterly payments". Apollo Gold missed the first principal repayment (yes, this is a speculative investment). The banks have agreed to defer payments to allow the banks to "complete an ongoing technical review of the Black Fox project with the object of rescheduling quarterly repayment installments". The entire debt is to be repaid by Mar 2013.

So, as far as the balance sheet is concerned, I conclude that the banks are happy getting the Libor plus 7% payments on the debt (with decent principal repayment) and things will get the financing worked out provided the mine produces relatively ok.

The total debt is 67.65 and interest payments at 8% / year is 1.35M$/quarter.

Income Statement, Etc.:

Black fox produced 19,848 oz in Q3 and is guiding for 20K oz in Q4. With this in mind, let's look at the income statement. 

Revenue was 19.1M$ or 962$/oz. That sounds right. Summing Direct operating costs, General and administrative expenses, we get a "cash-cost, including G&A" of $630/oz.

This means that going forward into Q4 with gold averaging, say $1050/oz and 1/4 hedged at $875, Apollo Gold should have an average sales price of gold of $1,006 /oz. 

So, at 20K oz for Q4 with the above sales price and the same "cash cost", Apollo Gold should net 7.5M$ operating cash flow. This would allow them to easily make the 1.35M$ interest payment on the debt as well as make a substantial principal payment. Production is expected to increase by 11% in Q1 2010 (or more with increasing gold grade). Equal quarterly principal payments to complete principal paydown in Mar 2013 (14 payments) would be 4.83M$/quarter. Together with interest, debt repayment (with equal payments) for Q4 is = 6.19M$, leaving = 1.34M$ for exploration, misc and contingencies. 

Factoring in a falling cash-cost (as the mine is optimized) and increased production (with mill thruput increases and with higher-grade underground ore), Apollo Gold should be able to have greater margin against debt repayment going forward.

CONCLUSION: Apollo Gold should be able to make its rescheduled debt payments, but there is little margin for error for the next couple of quarters. Apollo Gold is a speculative investment that depends on management competence. It should be highly leveraged to the price of gold and to meeting (or missing) management guidance. I don't think that exploration success is that significant over the next two or three quarters.

I'm not really that expert at this kind of analysis, but I'm trying to improve. Tell me what I'm missing. There could be out and out mistakes. Do your own due-diligence.

MontyHigh, www.worldofwallstreet.us

Report: Mining Risk In Latin America

Inca Kola News provides a link (click here) to a really valuable report on mining risk in Latin America.

The report is a little hair-curling as it is provided by a company (Kroll) which "is the world's leading risk consulting company". Kroll is thus like anti-virus software providers. Every PC (when you load the free anti-virus diagnosis software) has multiple "infections" all of which are made to sound pretty scary. Kroll highlight's each country's risks in a way that certainly doesn't minimize them.

Still, getting a nice summary (with details) on what is happening in each country is pretty darn valuable. It also gives hints and tips regarding which provinces within a country are "safer" or "riskier" than others.

I'm planning on referring to this closely prior to buying any Latin America mining company.

One more thing, this report is the best reason to buy Metanor (MTO.V), which is in Quebec CA, that I've seen lately. Same thing goes for other Canadian producers, e.g. SanGold (SGR.V). I don't own either, but they are on my radar screen.

MontyHigh, www.worldofwallstreet.us

Going To Zero: BMO Capital Markets On Underwater Base Metal Miners

Nice piece from mineweb (I should spend more time on this web site), click here.

Here's a data point:
"BMO's research found the price of many base metals has fallen well below the marginal cost of production 'with more than an estimated 80% of nickel and zinc, 90% of aluminum and 40% of copper producers currently underwater.'"

If prices don't improve we'll be seeing these producers go to zero. If I had more time I'd be trying to find the high-cost producers with weak balance sheets to short. Can anyone give me some pointers.

MontyHigh

P.S., we are the interesting point in the cycle where metal prices are below the marginal cost of production. Earlier they were above the marginal cost. So, eventually we'll see metal prices rise. Here's BMO's comments on copper pricing:

"Potential reduced Chinese copper demand in the next several months has prompted BMO to project a 411-kt copper surplus and even lower prices this year. 'It would not be at all surprising to see the metal hit lows below the US$1.20/lb mark in the first quarter of this year. However, such prices would likely elicit additional supply cuts, setting the stage for a modest rebound once global growth turns.'"

This means that low cost producers that can keep going should, after a quarter or two, see their prospects rise. I'll be looking for that.

MontyHigh, www.worldofwallstreet.us

Best Of The Podcasts: John Doody On Puplava's Financial Sense

The best of the podcasts I've heard latest is John Doody (of http://www.gold-stock-analyst.com) on the first hour of FinancialSenseOnline (click here for the web page and here for the MP3). The part that got the Best Of The Podcasts award begins in bold-print underlined text below.

John Doody starts about 56 minutes into the MP3 and goes for about 10 minutes. Here's the quick summary and review:

1. 56:00 - Introduction - Puplava's sidekick says that high demand for physical gold shows that its not a bubble. Of course, if demand wanes the price of gold could completely collapse just as the price of nickel, zinc, lead, crude oil and copper did. This is not a strong argument to show that gold is not a bubble as demand for gold is pretty psychological and could shift substantially on the macroeconomic picture changing.
2. 56:40 - Inflation Is Coming - Jim and John discuss the amazing expansion of the Federal Reserve balance sheet and how low interest rates are. These guys have been calling for massive inflation for years and have been wrong all along, whether they'll end up being right remains to be seen (click here for a discussion of inflation vs deflation). I think they will be right next year (but am not sure). I think you can skip this as its the same old thing without much new information. It is clear that low interest rates are good for gold as gold has a zero interest rate and loses out to dollar based investments when real interest rates are high.

3. 59:00 - Gold Stocks ($XAU to $Gold Ratio) - discusses how the XAU gold stock ratio to gold price ratio is historically low. A reversion to the mean has begun which is very bullish for gold stocks as long as the price of gold holds up (which is not guaranteed but they and I think they outlook for gold itself is bullish). The mean reversion idea is a good one, but not guaranteed as the ratio was bullish months ago and yet gold stocks kept falling and falling moving the ratio even further from the mean.

4. 59:26 - Gold Mining Costs - Doody claims that the price of crude oil constitutes 25% of mining costs. This rule of thumb is worth the price of reading this article. Given that oil prices are down something like 75% that means gold miner's costs should be down 15 to 20% in Q4 just on the falling price of crude oil. Doody claims that currencies have been moving in a postive direction (down relative to the dollar). For example, the Brazilean Real is down 50%. Doody claims that one Brazilean gold miner, Yamana (AUY) should have its cash cost fall from $350/oz to under $200/ oz. Together this means that gold miner costs should be down, profits up for Q4 without any further climb in the price of gold. This sounds tradeable to me. By the way, another Brazilean gold miner that might benefit from this is Jaguar Mining (JAG), a stock recommended by Northbeach 2000.

5. 1:01:08 - More $XAU to $GOLD ratio - see (3) above.

So, let's take a closer look at the Gold Mining Costs and the benefits of the currency claims as far as Q4 profits go.

The above chart shows the inverse movement of the Mexican Peso, Canadian Dollar, Brazilean Real, Australian Dollar and price of Gold (DGZ) versus the dollar where +50% means the dollar went up 50% relative to the currency or price of gold.

The chart shows that, bearish for miner profit, the price of gold was lower for Q4 (more area under the brown line) than Q3.

Offsetting that, gold miner costs were lower in Q4 (more area under each of the other lines) that Q3 with Brazilean miners benefitting the most, followed by Mexian miners, Australian miners and then Canadian miners.

Whether falling costs outweigh the falling price of gold probably depends on whether the individual miner is a high-cost or low-cost producer. Ironically, high-cost producers should benefit more from falling costs than low-cost producers.

This may explain why Golden Star Resources (GSS, a high-cost miner in Ghana) has rebounded so significantly of late. As a high-cost, unprofitable producer it stands to move from threatened insolvency to profitability on both the collapse in oil prices, currency moves and the recent rise in the price of gold.

So, it appears that if you want to trade a pop in profitability for Q4, what you want is a high-cost gold miner in Brazil or Mexico that meets or exceeds its guided production for Q4. I would say that Jaguar Mining fits the bill and I'll be putting the company under the due diligence radar. Are there any other companies you might recommend?

MontyHigh

Using The Orezone (OZN.TO) Takeover To Value New Guinea Gold Corporation (NGG.V)

Iamgold recently announced the purchase of Orezone (OZN.TO) at a price of $26/ reserve, measured, indicated and inferred oz. I discussed earlier this week how this becomes a basis for evaluating some exploration gold mining Jrs (click here for more detail).

New Guinea Gold (NGG.V) is a gold exploration company with a short-mine life, high-grade, open pit mine (Sinivit) entering production which is intended to produce the cash flow necessary to allow New Guinea Gold to complete the exploration of its flagship property (Imwauna).

New Guinea Gold's story is cluttered by various other properties and holdings in spun off companies which, in my view, don't have much value at this point. If they were of significant value it would have made sense for New Guinea Gold to have monetized these assets rather than doing another dilutive financing. So, my valuation of New Guinea Gold is focused on the plan of using Sinivit to finance the advancement of Imwauna, the flagship property and I award zero valuation to the other properties and holdings.

Imwauna seems roughly comparable to Orezone's Essakane project only it is not as fully advanced. It is targeted to have between 3 and 5 million oz of high-grade (e.g. 12 g/tonne), open-pittable gold.

New Guinea Gold (NGG.V) will have, when its latest offering closes, 186 million shares outstanding fully diluted. If we assume Imwauna will achieve 4 million oz of reserve, measured, indicated and inferred oz of gold then New Guinea Gold is worth, using the Orezone valuation, $.56/share (or 0.70 CAD$ / share). That's more than a three bagger from its current 0.20 CAD$ price.

Here are a couple of reasons to think that Imwauna will, when further advanced, receive a higher valuation than Orezone:

• Orezone was a distress sale. Orezone did not have the assets to satisfy a short term bridge loan payable in full in less than a month. New Guinea Gold, flush with cash-flow from Sinivit, should not be in such a condition.
• Imwauna is 6 to 8 times higher-grade (and thus lower cash-cost) project than Orezone at 12 g/tonne compared to to roughly 1.6 g/tonne. I think this is somewhat offset by the fact that Orezone's deposit is heap-leachable, while I think Imwauna will require a mill.

Of course, Orezone's deposit is advanced enough to have actual, fully quantified reserves, measured and indicated and inferred resources, while Imwauna currently has roughly one quarter of its targeted ounces and then only in the inferred category. Historical drilling and drill results not included in the current NI43-101 is the basis for expecting the targeted 3 to 5 million oz being realized. There is significant price of gold risk as well as execution risk for Imwauna actually achieving its expected valuation in that the price of gold could fall between now and when Imwauna's drilling completes and its final NI43-101 report is issued. This gold price risk is somewhat limited by Imwauna's gold is high-grade ore which should leave it economical even at much lower than current gold prices. 

So, once again, it appears that New Guinea Gold is a multibagger if it can just execute its plan. Overall, I expect an Imwauna oz will be worth about twice an Orezone oz's when it has had more drilling and an NI43-101 report. This makes New Guinea Gold approximately a seven-bagger at current gold prices, IF THEY CAN execute their plan. New Guinea Gold expects to come out with one NI43-101 report doubling Imwauna's ounces in the next month or so. The drilling and NI43-101 for the full targeted gold may take another 18 to 24 months. 

About a month ago, at rather a low point, I wrote down my thoughts on New Guinea Gold's prospects for executing on their plan (click here). Since that article appeared, New Guinea Gold announced production of over 2,000 oz / month for November 2008. This is a very significant step forward. They will have lower production in December 2008 because their gold refiner is closed from mid December until after New Year's day and so they will not do any gold pours because of the security concerns about holding gold on premises. So, its not clear when the next production results will be announced. After the new year when the pending gold pours have completed would be a good time.

From a technical standpoint, New Guinea Gold seems to have bottomed and is about to break out of its downtrend trend. Not terrible, but not great either.

At this point I'm feeling a lot more confident about New Guinea Gold executing their plan and it being a good investment going forward. Its more risky than most of my holdings, but has more upside as well.

Of course, everyone should do their own due diligence and take responsibility for their own investing decisions.

MontyHigh

Gold And Silver Have Disconnected From Commodities

Admitted Gold and Silver are both down a little today, but crude oil and copper (the commodities I follow most closely) cratered by more than 5% to multiyear lows.

I'll leave it to gold-theoridy to explain this, but given the alternative (when gold was correlated closely with crude) what we have now is way better for gold miners than early summer.

The crude oil collapse (and even the base metal price collapse) should be very good for pure gold producers (e.g. open pit heap leach operations) as their costs should fall substantially. Crude helps with equipment fuel costs (including diesel-electric operated mills). Lower base metal prices helps with equipment costs (and maybe even labor costs) as the suppliers of mining equipment and services should be have an oversupply of capacity.

So, you might want to adjust your portfolio (if you haven't already) to weed out precious metal miners with significant base-metal byproduct credits and focus on pure producers. Here's some of the ones I like the most (and own) that fit this category:

• Capital Gold Corporation (CGC.TO) - profitable heap-leach producer in Mexico. Watch out as it is really illiquid.
• Semafo (SMF.TO) - growing, recently profitable mid-tier gold producers.
• Metanor (MTO.V) - recently in production Canadian gold miner.
• Minefinders (MFL.TO) - just entering production heap-leach producer in Mexico. Stock is in a strong downtrend, but has shown that when it pops it really pops (10%+ in a day).
• New Guinea Gold (NGG.V) - gold-production funded gold explorer with pure gold open-pit heap-leap production and open-pittable multi-million oz exploration project underway. I'll be posting an update on this tonight (I hope), but there are certainly some issues that need to be considered before diving into this one.

Any other good, pure-gold or silver plays you like (don't get me started on Silver Wheaton and Silverstone as I don't consider them pure-precious metal plays because of third-party base metal counter-party risk)? Can these miners go up, in your opinion, even if gold continues to range-trade?

Leave me a comment.

MontyHigh

What Takeover Talk Signals: Aurcana Message Board Update

There recently was a post on the stockhouse.com Aurcana message board that I think illustrates a point. I've not included a link and have edited out the author's name because I don't want to especially attack the writer. Its questionable whether I should publish this post as I don't really want to make fun of people in distress, but decided to proceed as the point to be made is worth hearing. Here's the message board post:

"What about the takeover offer ?

Do you think at some point there will be a takeover bid from Silver Standard ? Afterall AUN trades at only $0.10 holds 3 mines and over 70mil oz ag in resources. AUN looks very attractive right now as a takeover target. On top of that Silver Starndard owes 14% of (Aurcana ? Shafter ? Not sure what they own). If that hapened what would be their offer per share ? Any ideas ? So unles SP moves back up at least into mid 20's Aurcana will be EATEN at some point.

AUN's market cap as of today = $10,858,393
"

 

Having read message boards for a number of years, I've concluded that the beginning of any takeover discussion, when takeover was not previously integral to the business plan, marks investor disappointment and shear desperation.  It means the stock price has crashed and there really doesn't seem to be any fundamental reason for the stock to recover. This is clear example. 

 

I wonder if one could write a program and search message boards for the term "takeover" as a way of searching for stocks to short.

 

Shortly after this message appeared, Aurcana published their third quarter results. The results were that their one producing mine (silver, copper, zinc, lead) was losing money, that the rest of their business was spending significant money and that their cash reserves were limited. The producing mine results signal a desparate situation, as the price of its metals has fallen further since the end of the quarter.

 

It looks to me like Aurcana is going to zero, like Strategic Resource Acquision (SRA.TO), Blue Note Mining (BN.V), Centure Mining (CMM.V), GBS Gold (GBS.TO) and other Jr producing miners headed in that direction: Acadia Mining (ADA.TO), Liberty Mining (LBE.TO), First Nickel (FNI.TO) . Best case, apart from an explosion in the price of silver, I expect to see their one producing mine closed and some kind of dilution as they revert from a producer to an advanced development mining company.

 

MontyHigh

New Guinea Gold Update (NGG.V)

New Guinea Gold (NGG.V) released their quarterly earnings yesterday.

I own a bunch of this stock and am biting my fingernails about its prospects. All NGG.V has to do is execute its plan and it should be a ten-bagger, but its disappointed often enough to make this a speculation rather than an investment.

In contrast, I'm feeling very confident about my other Jr gold producers (and near producers): Gold Resource Corp (GORO.OB), Semafo (SMF.TO), Capital Gold Corporation (CGC.TO) and Metanor (MTO.V).

When I bought it, about a year ago, New Guinea Gold's outlook was very positive:

• Going into production with Sinivit almost immediately. Sinivit is a high-grade, 3 year mine life, open-pit gold-leach mine with a forecast production rate of 30K oz/year with a cash cost under $200/ oz. This was expected to give NGG a very low price to operating cash-flow ratio.
• The resulting cash flow was to be used to prove up another high-grade, open-pittable project (Imwauna) which, based on historical results, was expected to contain from 2 to 5 million oz of gold.
• Executing anything close to the plan should have created a multibagger based either on cash flow or on exploration results.

Since I bought in, Sinivit has been late to get into production and then failed the produce at anywhere near the forecast rates. On the plus side, exploration has produced better than expected results. This has failed to make up for the operational problems as far as share price is concerned.

A related company, MacMin Silver, having the same CEO as NGG, recently went bankrupt having failed to get its silver leach operation to produce to plan. This is eerily similar to NGG which is having trouble with a gold leach operation. MacMin Silver has something like 10 million shares of NGG that will be sold to someone as part of MacMin Silver's liquidation. These shares could hit the market at any time (or be sold into any share strength) eliminating upside momentum for some time.

All of this is pretty disappointing. It shows up in the chart (see below) which has that "going to zero" look about it.

The third quarter results (released yesterday) were not very good. This was expected. Production was affected by having the mine shutdown for a month due to equipment failure (that will impact production :) and by slower than expected leaching from the ore in the vats. The remaining cash on hand appears to be at a critical level.

The hopeful signs that I found in the report were as follows:

• Production in October was improving (although still under 1000 oz).
• Guidance for November production (as of November 26) was increased to 1500 oz. I'm a little leery of this as the number could conceivably have been spun to the high-side to help the just announced financing to proceed.
• Exploration has been suspended pending an improved financial situation.
• Steady 1500 oz / month production (what is forecast for November) should be adequate to allow exploration to resume.
• A 3 million $ financing of debentures has been announced (see below) for December which would allow exploration to resume at that time. Its not clear to me whether a buyer of these debentures has been lined up, which is yet another risk factor, but at least there is a plan for getting enough cash to tide New Guinea Gold thru a couple more production hiccups.
• Increasing the capacity of the crushers and increasing the leach capacity should allow production to grow well beyond the 1500 oz / month needed to support the original exploration plan.

Here's where NGG stands at this point, from my perspective:

• Looks like Sinivit production is finally ramping up with estimated production for November at 1500 oz. The forecast is to ramp up to 7000 oz in Q2 2009.
• NGG needs 1500 oz/month to continue its planned exploration and remain cash-flow neutral.
• NGG has little cash available and is raising 3 million$ of financing in the form of a debenture that converts into 15 million shares.
• The result is that NGG will have roughly 187 million shares outstanding, fully diluted, after this financing. At the roughly $C.20 share price that is a market cap of roughly 30 million US$.

It seems likely to me, but not certain, that New Guinea Gold will get Sinivit working well enough to avoid bankrupcy and even further dilution beyond this latest announced financing. Looking forward and assuming reasonable success, I see New Guinea Gold as an advanced project gold explorer. It should be able to prove up Imwauna having 3 million high-grade oz and Sinivit having 1 million high-grade oz  for a total of 4 million, high-grade, low-cash cost oz. The result is, given NGG market cap, is 7.5$/oz. With a target valuation of 75$ per high-grade oz, NGG is a potential 10-bagger. 

NGG has even further exploration upside from Imwauna, Sinivit and other projects (and from the substantial holdings it has in two spun-out exploration companies). I don't give this any valuation (nor does anyone else, I imagine), given the current market environment and NGG's sensitive financial situation.

I'm uncomfortable with NGG's risk profile, but like its upside and plan on holding. Once NGG becomes cash-flow positive, which is forecast to occur in January, I would consider NGG a very undervalued, reasonably low-risk (compared to the upside) investment opportunity. When you consider this you should also consider that I seem to have a very high risk tolerance compared to most investors.

I believe the chart will probably be key to telling the story. It could move up before an official announcement of improved production or it could, because of MacMin Silver owned share liquidation, could lag production improvement. Of course, the production could fail to improve which would result in the stock trending further towards zero.

The potential for a ten-bagger (or better) that should come from executing according to plan might be enough to keep this on your watch list.

MontyHigh

Why I Dumped My Aurcana (AUN.V)

As recently as last June, I published an article giving a way of valuing Aurcana that made it look attractive. Since then Aurcana's price collapsed, along with most other precious metal Juniors.

I held too long but dumped my shares about a month ago.

Here's why. Aurcana consists of a currently producing, mostly base metal mine in Mexico (La Negra) and a silver advanced exploration project in Texas (Shafter). It also has another, lower-quality advanced-exploration project in Mexico (Rosario) which, from a valuation standpoint, is not worth discussing. The outlook both for La Negra and Shafter have darkened substantially since last June.

La Negra was a mine reopening project that was a Zinc, Lead, Copper, Silver producer. The fact that it was a mine reopener means it was not a low-cost producer and could not survive the previous round of low metal prices. When I was trying to analyze La Negra in detail, they didn't seem to get the revenue from their metal that I would have suspected given the ore grades. I think this is because they have an unfavorable deal with their smelter, but I could never get the information I really needed to conclude this. Most of Aurcana's silver production has been sold to SLW at $3.90/oz as part of the deal which brought Aurcana the Shafter project.

Anyway, La Negra was barely making money early in 2008 and since then the price of zinc, lead and last copper collapsed. I finally bailed on Aurcana when copper collapsed. Anything can happen, but I fear that La Negra will have to be closed at anything near current metal prices.

So, with La Negra closed, what is Aurcana? Its an advanced development silver explorer with a property in Texas that needs funding. The property is not permitted. The property does not have a bankable feasibility study. The plan was to get funding from Silver Wheaton (SLW) and skip the full feasibility study, but just look at the SLW situation. Its pretty clear that SLW is having trouble just paying off their existing debt. So, where is Aurcana going to get that funding? Who is going to provide the funding in this environment and at what cost?

I dumped Aurcana in the $.15 to $.12 range Aurcana because there was, in my mind, a significant risk that it was going to zero and the upside depended on a reversal in base metal prices. It may not go to zero, but I didn't have the stomach for that kind of risk so I pulled as much out of the fire as I could.

MontyHigh

P.S., Why am I putting this kind of post on this web site and not the Aurcana Stockhouse board? I'm pretty much done with stockhouse.com as far as posting is concerned. Anything other than a pure pump is considered bashing, so you can't get any kind of reasonably objective analysis there. So, you may be seeing more "negative" material on this web site as I post things that are "unacceptable" on stockhouse.

Best Of The Web: Jay Taylor NGG.V and MTO.V Video

Starting around minute 17 (click here). Tells the basic story for New Guinea Gold corporation (NGG.V) and Metanor Mining corporation (MTO.V), two of my favorite Jr mining companies. There's a lot to like about each.

The Silver Wheaton Valuation Method (SWVM), Part 1: Valuing Impact Silver

Silver Wheaton(SLW)'s recent silver stream deal with Aurcana Corporation (AUN.V) provides a significant data point for valuing Jr silver producers or near producers. This article describes how to apply this data point in evaluating these Jrs. Its written at a level understandable even by "newbie" investors.

The "Value Investing" method of investing in stocks is to invest in companies that are "really" worth significantly more than the value assigned by the stock market. The idea is that eventually (hopefully soon) the market will come to its senses and raise its valuation to something closer to the company's real worth via a stock price rise. My favorite introduction to this style of investing is Pabrai's "The Dhando Investor". The value assigned by the stock market is the company's market capitalization. Market capitalization (market cap) is easily calculated by multiplying the company's current stock price times the fully diluted number of shares. The fully diluted number of shares can usually be found in the Investor's section of the company's web site.

While it is easy to calculate the market cap, it is not so straight-forward to calculate what the company is "really" worth. The parlance for this is, "valuing the company". There are many ways of valuing companies and these ways vary significantly in their complexity and ease of calculation. When a company is dramatically undervalued, the method of valuing the company need not be extremely accurate. It need only be accurate enough that its error is significantly less than the amount it indicates that the company is undervalued.

This article provides a quick and dirty way of valuing Jr silver mining companies. This valuation can be used to identify companies that are dramatically undervalued. It can also be used as an initial filter to determine which companies are worth the effort of a full, detailed examination.

Silver Wheaton is one of the most successful companies in the silver mining industry (see chart below). It doesn't actually mine silver. Instead it buys the silver byproduct from base metal (or sometimes gold) mines. It can do this with win-win deals because the market values silver mine production more highly than base metal mine production. Typically the deal is structured as an up-front payment for the right to buy a fraction of the silver output of a mine at a low cost, for example, $3.90 /oz. Silver Wheaton wins when it sells the silver at market price (currently around 17$/oz giving resulting roughly 13$/oz profit for Silver Wheaton). The actual mining company wins by getting an up front payment plus the $3.90 / oz when the silver byproduct is actually mined. The $3.90 / oz helps lower the cash cost for the mine's primary metal.

The market likes what Silver Wheaton has done and is doing (see chart).

Silver Wheaton's recent deal with Aurcana Corporation provides a way for valuing producing or near producing silver mining Jrs. The deal, in simple terms, is: Silver Wheaton gets 50% of the silver production from Aurcana's La Negra Silver-Copper-Zinc mine. Silver Wheaton pays 25 million$ up front and $3.90 for each such oz delivered. From Aurcana's web site we see that La Negra is expected to produce 820,000 oz/year with a nice long mine life.

So, here's the key data point: Silver Wheaton, who is about the best in the industry, thinks it is quite profitable over the long term to buy a silver mine's production at $61 / annual oz produced. We can use this data point to value Jr silver miners and it is very relevant as long as the Jr has a cash cost near $3.90 / oz.

Let's use this valuation method to value Silver Wheaton itself. Since Silver Wheaton thought it was a good deal, one would expect that Silver Wheaton is valued more highly than this.

From Silver Wheaton's June 2008 presentation we see:

• Silver Wheaton expect to receive (produce) via its silver stream deals 27 million oz.
• Silver Wheaton has fully diluted 266 million shares for a market cap of 3.862 billion $.

Thus Silver Wheaton is valued at 143$ / annual oz produced. Silver Wheaton (as a major with diversified risk and a low cash cost of $3.90 / oz) is valued quite highly compared to what it just paid for its recent incremental increase in production from the Aurcana deal.

Impact Silver is an nice little silver mining company with four little producing mines near a company owned mill on a large property in a historic silver mining district in Mexico. The company management seems to have the desirable properties of looking out for the stockholder's interest by avoiding dilution and meeting its commitment (although it doesn't give a lot of future guidance). Having management that looks out for the stock holder is what I find really attractive at first glance.

Impact Silver has 49.8 million fully diluted shares for a market cap of roughly 51 million $. It produced roughly 350 thousand oz of silver in 2007 and seems to have a good plan for doubling that. So, applying the Silver Wheaton Valuation Method, what Impact Silver is "really worth" is 700,000 oz * 61 $/oz or roughly 43 million dollars. CONCLUSION: The Silver Wheaton Valuation Method indicates that Impact Silver is fairly valued. This means its valued for about what Silver Wheaton has shown it would be willing to pay for its expected silver production. As such, it appears to not be a good value investing target.

Please check back into www.worldofwallstreet.us for more silver Jr evaluations using the Silver Wheaton Valuation Method. I can tell you in advance that Aurcana Corporation is significantly undervalued using this metric.

MontyHigh

AceOfKY: Valuing Mining Stocks - In Defense Of Net Asset Value

While browsing the various fundamental evaluations of mining companies made by investors on internet message boards, I have consistently seen two valuation methodologies - the in situ method and the cash flow method - used frequently, while the traditional net asset value (NAV) method used by professionals is neglected or not used at all. The NAV method, I believe, is superior to the other two, and the following is a defense of this valuation technique.

The in situ valuation is the easiest valuation methodology to use for a mining company. It consists of merely adding up a company's resources and dividing this into the market cap of the company. If this quantity is less than the industry average, the company is said to be "undervalued." This method is easy, and it allows quick comparisons of dozens of mining companies. Unfortunately, however, it has a vast multitude of weaknesses:
1. It does not take into account a company's other assets and liabilities, such as cash on hand or long term debt.
2. It does not take into account the capital cost (either initial or sustaining capital) necessary to extract the ounces from the ground.
3. It does not take into account the operational cost necessary to extract the ounces from the ground.
4. It does not take into account future rises or falls in the commodity price.
5. It does not take into account the mineability (or lack thereof) of the resource. A proven/probable ounce is valued no higher than an inferred ounce (unless, of course, one uses different $/oz figures for the different resource classifications.)
6. It does not take into account the time necessary to extract the resource, or the time value of money.
7. It does not take into account the capital structure of a company.
8. It does not take into account the recovery rate of the resource, which can vary widely.
9. It is a relative valuation; it relies on the whole sector being valued accurately.
10. Using "equivalent" in situ resources does not take into account differences in the underlying resource fundamentals. The silver in a silver-lead polymetallic deposit, for example, may be in contango, but the lead may be in backwardation.
11. It does not take risk into account.
12. Industry "average" $/oz figures are statistically suspect; the deviation from the average is very large for many companies.

The in situ valuation, therefore, is a very weak method to use when valuing a mining company. It is most useful when many of the above items aren't known or can't be estimated accurately (such as in the case of an exploration company that has established a resource but has not yet performed a feasibility study.)

The second popular valuation method is the cash flow per share method. This method takes a little more work than the in situ method. First, one must determine the number of shares outstanding and then divide this into the cash flow of the company. Cash flow, in this case, is usually taken in the simple manner (Revenue minus non-GAAP cash costs) rather than using GAAP operating cash flow. The resulting cash flow ratio is then compared to the industry average for the sector to determine whether the company is undervalued or overvalued. This method also has significant weaknesses, however:
1. It does not take into account the size of the company's resource. Mining companies have discrete resources; they can only produce cash flow until the deposit is mined out.
2. It does not take into account a company's other assets and liabilities.
3. It does not take into account the capital cost necessary to extract the resource.
4. It does not take into account the time necessary to extract the resource, or the time value of money.
5. It only partially takes into account the capital structure of a company.
6. It is still a relative valuation; i.e. it relies on multipliers derived from the valuations of its peers.
7. Definitions of cash costs (non-GAAP) vary notoriously amongst the different mining companies.
8. It does not take into account future expectations for the underlying commodity (i.e. - the futures curve.)
9. It does not take risk into account.

Thus the cash flow method of valuation, while somewhat more useful than the in situ method, still does not take into account many of the factors that need to be accounted for in a valuation.

The most accurate way to value a mining company, I believe, is to determine its net asset value (NAV) based on discounted cash flows. All of the above weaknesses in the in situ and cash flow methods are addressed in the NAV method:
1. A company's other assets and liabilities can be figured into the calculation of NAV.
2. Resource size, capital and operational costs, recoveries, taxes, etc. are all accounted for in the cash flow schedule.
3. Expectations for future commodity price increases/decreases can be accounted for in the cash flow schedule.
4. One is free to add some (or even all) of the M&I resource into a mine life schedule as one feels appropriate based upon other research. Even if this is done, however, it is still discounted by the method since it adds cash flow at the end of the mine life. In other words, proven resources still receive the highest value.
5. The capital structure of the company is fully taken into account, including cash flows from option and warrant expiry.
6. It is an absolute valuation; it does not rely upon empirical averages established by peer groups.
7. Time value of money and risk can be taken into account quantitatively via the discount rate.

 
The NAV method does have some disadvantages, of course. Many precious metals miners seem to continuously trade at a premium to NAV. This is certainly true if one uses constant metal price assumptions in the valuations (this is most simple and most common.) The reason that precious metals miners trade at a premium to NAV is that the underlying commodity is in contango (i.e. speculators expect the commodity price to rise in the future.) The solution, however, is pretty simple. Depending on the intention of the valuation (e.g. are we finding a buy point or a sell point?) one can use whatever commodity price schedule they like and calculate future revenues based upon this schedule. Some professional analysts use a version of the Black-Scholes equation to calculate the "optionality" of each of the company’s assets with respect to the variability of commodity prices. Either way, it is not difficult to modify a NAV valuation to account for future commodity price increases (or decreases), or to just accept that a producing gold/silver miner will trade at a premium to NAV when using constant current metals prices.

Another deficiency of the NAV method is that it does not account for reinvestment of future cash flows. This is certainly true, but it is also true of the other valuation methods. There are simply too many unknowns in the mining industry to be able to quantitatively account for future reinvestment with any degree of accuracy. The NAV method is most useful in finding a minimum value (i.e. - a buy point) of a company. When one is trying to determine a sell point, peer comparisons and technical analysis should be used to supplement the NAV method. None should be allowed to replace the NAV method, however, as it is the most comprehensive method for taking into account all of the factors that influence the value of a mining company. We are in the midst of a bull market in commodities, and the rising commodity prices have masked what I believe to be fundamentally flawed valuation methodologies. Investors would do well to recognize that there is much more to mining than just a resource in the ground, and that one year’s cash flow isn’t sufficient to value a company with discrete resources.

Leave us some thoughts on how you value mining companies and why.

AceOfKY

[Editor's Note: If you are investing in Jr mining stocks and don't take the time to value mining stocks by at least one of the above methods you probably are going to lose a tonne of money. MontyHigh]

Weekly Inventory Update, 5/16/2008

Zinc inventory levels are clearly falling. I don't think its a seasonal pattern. I'm starting to edge back into zinc-only (not zinc-lead) mining stocks. Copper looks hard to read at this point.

Leave me a comment with your thoughts on the outlook for copper and zinc prices at this point.

 

MontyHigh

Check It Out: GoldStockStrategist.Com

Here's a nice site (http://www.goldstockstrategist.com/ )that covers the same kind of stocks World Of WallStreet covers. I'm hoping to check out some of his picks myself and perhaps develop a closer relationship with the author of this site, Scott Nystrom.

MontyHigh

Firecracker Top Pick: First Metals (FMA.TO)

I've seen a lot of undervalued stocks in my day, but this one beats them all.

Thanks to a tip from someone on the Investor Village RNO board I just bought some First Metals(FMA.TO or FSTMF).

Yesterday they reported a $2.1M profit for their first month of operation after declaring commercial production. Production should be higher in April, May and June. I am expecting a second quarter profit of about $8m or about .19 per share.

I thought that EZM, RNO, Lionore, Quadra and Capstone were undervalued. Quadra should have revenues of $800M with a market cap of $1.5B. Capstone should have revenues of $150M with a market cap of $350M. FMA.TO should have revenues of $100M with a market cap of $50M.

This is probably the most undervalued stock I have ever seen. Whats unbelievable is that they have another mine on the way that is expected to produce copper, zinc, silver and gold.

The biggest negative is a $17M loan that has a 14% interest rate. That amounts to about $2.4M in interest per year. The good news is that they have a current cash flow of more than $3M per month and they should be able to pay this loan off in a year.

They should earn about .80 pretax over the next year.

I don't know when I've been this excited about a stock. For more information EMail me at firecracker7445@aol.com or check the FMA stockhouse message board. JMHO This stock is easy to buy in the U.S. using the symbol FSTMF

Firecracker

[Editor's Note: The stock has popped quite a bit lately and I'm looking for an entry point. I recommend you do your own due diligence (there is one issue worth considering which I won't mention here) and make your own decision. It has definite possibilities.]

The Good Stuff: Tobinator's May 2008 Update

It is my great honor and delight to make available on World Of Wallstreet the highly respected Toby Hansen's (Tobinator's) quarterly update, a review of general market conditions, the market outlook for each of the precious and base metals and a collection of recommended precious and base metal mining stocks. Toby is as good as I've found (subscription service or free) at precious metal stock investing and the technical analysis of mining stocks. He makes this available freely to all with the understanding that everyone must do their own due diligence.

I hope Toby will allow me to make available future editions, but if you'd like to go straight to the source and get on his email distribution, send an email request to tobinator00@yahoo.com. Getting on Toby's email list will also give you access to his newsletter about a week sooner than you'll get it from World Of Wallstreet.

Finally, Toby has started what looks like its going to be an excellent message board for precious metal investors. Please drop by if you can add some real value to the discussion (here's the link: http://www.investorvillage.com/smbd.asp?mb=144&pt=m).

MontyHigh

Firecracker: Capstone Mining And Quadra Mining Update

I've been too busy to pull this together, but Firecracker has recently changed his preference in mining stocks from Capstone Mining (which he still likes long-term) to Quadra Mining (from which he expects outsanding results in its 13-May-2008 Quarterly earnings announcement).

Here's what he has to say about Capstone Mining (CS.TO):
"I was going to buy some Capstone Monday (April 21), but I've changed my mind. Capstone had about 16M pounds of copper hedged on December 31 at about $3.20 per pound. This resulted in a $3M gain on the hedge during quarter 4 as copper was $3.02 on December 31. Copper was $3.82 on March 31. This will result in a $12M loss on the copper hedge for quarter 1. This is a non-cash item, but will likely wipe out most of the reported profit for the quarter. The good news is that Capstone sold $%.5M of a stock it owned for a profit of $359,257. Capstone's cash position likely increased by nearly $20M in quarter 1. From a cash side quarter 1 should be great, but from a non cash side it should be dismal. I expect a reported profit of around $2-3M for quarter 1 after the hedging loss."

Here's what he has to say about Quadra Mining (QUA.TO):
"Proud shareholder of more Quadra

I just picked up some more Quadra(QUA.TO or QADMF) at $23.45 U.S. It is now my number 1 holding. I can't resist a stock that is about to report $1.50 in earnings for $23.45. As a bonus you get another copper project later this year and a large molybdenum and huge South American copper project in the pipeline, not to mention $300M in cash and a $300M per year cash flow."

Firecracker correctly called QUA.TO's earnings disappointment last quarter (based on an in-depth understanding of QUA.TO's arcane accounting) and expects that those same arcane factors (plus the rising copper price) favor unexpectedly large earnings this quarter. His in-depth understanding of the accounting rules and the underlying fundamentals gives Firecracker a real edge and allows him to find situations where the next quarter's results are likely to give a stock a nice pop. I really admire this ability and his willingness to share it with World Of Wallstreet readers.

I've been holding QUA.TO long on a trade for a while now based on this insight. I myself am thinking about exiting right before earnings are announced to avoid a "sell the news" response as the word of QUA.TO's earnings is getting out. You'll have to do your own thinking on whether to take any action on this update.

Leave us a comment and let us know how, if at all, you are playing this quarter's earnings either in CS.TO, QUA.TO or some other mining stock.

 

MontyHigh for Firecracker

Best Of The Boards: Metanor Valuation

As you may recall, on Feb 3'ird I profiled PurePaloma's Metanor mining as a fat pitch. MTO's stock ran just as expected and is now consolidating around $1.00. There is still a lot to like about this stock and Monday may be a good entry point.

The following post provides a simple, straightforward valuation of MTO. Seems pretty attractive provided they execute their plan.
http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=23067685&l=0&r=0&s=MTO&t=LIST

By the way, here's (http://miningmarketwatch.net/flashmto400.htm )a really nice overview showing what they have in production step by step from blasting at the pit mine to pouring the gold dore.

I've got a tonne of things to write about, but am on vacation in Austin Tx and don't know how much I can post. I'll probably get a few things in later this afternoon.

MontyHigh

Codelco strike shuts Salvador, Andina... 2% Of Worldwide Supply

Check this story out: "Codelco strike shuts Salvador, Andina for second day

By Simon Gardner and Manuel Farias SANTIAGO, April 17 (Reuters) - Chilean subcontract miners clashed with police for a second day on Thursday, keeping world No. 1 copper producer Codelco's Salvador and Andina divisions paralyzed and helping drive the price of the metal to a record high..."

We learn from the Codelco web site that Salvador's annual production in 2006 was 80,615 tonnes and Andina's 2006 production was 236,356 tonnes per year. So a total of 313971 tonnes annualized production is being "paralyzed" by this strike. That's 2% of global production. A not insignificant amount considering what the loss of the Magellan lead mine (3% world production) did to the price of lead. Prices doubled following the April 2007 mine closure. Copper is already at near record high prices. This strike, if it persists, could clear cause the copper all time price record to be smashed.

That's also 872 tonnes of copper per day. This loss (by itself), if it were pulled from the existing total market inventories of 138K tonnes would use up all of LME, SHFE and COMEX warehouse inventories by the end of Q3 2008.

I don't think this strike has touched market inventories yet, so we have yet another fundamental reason to be bullish about copper.

PurePaloma: Sleeper Chilean Drill Play

[Editor's Note: With yesterday's announcement of TeckCominco's (TCK) acquisition of Global Copper, there's a renewed interest in exploration mining stocks.]

Thought I would mention Dorex Minerals as things may start heating up for the Drill companies & Chile in particular. (Global Copper (GLQ) just was bought out by Teck this week mainly for their property in Chile)
Dorex Minerals (DOX.V & DOXMF) has about 15M Shares F/D, w/ $2.0M Market Cap at current share price of 14 cents.

DOX has just started their first drill program at Carmelita in the Coastal Belt of the Andean Cordillera of Chile.

Notable properties in same belt:

Candelaria Mine, owned by Phelps Dodge & Sumitomo Corporation (470Mt @ 0.95% Cu)

Anglo American’s Manto Verde Mine (350Mt @ 0.75% Cu)

Far West Mining's Santo Domingo Project (Indicated Resources at the Santo Domingo Project combine for a total of 2.85 billion lbs of copper)

Investika's Puquios Copper Project (VERY CLOSE TO CARMELITA) (Resource at pre-feasibility study of 29.9Mt @ 0.59% Copper, Planned as a 15,000tpa open-cut heap leach operation, Bankable feasibility underway and scheduled for completion in September 08 Quarter, Copper production currently planned to commence in March 2010 Quarter )

These are in the IOCG belt (Iron-Oxide-Copper-Gold) of Chile that the majors have suddenly turned up the heat on --- but the investing public has yet to really sniff out this region.

Dorex Minerals Inc. has entered into an Option Agreement with Inversiones Minera Coyote Ltda., to acquire a 100% interest in the Carmelita claims by issuing 500,000 common shares and paying $440,000 over a period of two years. The property is also subject to a 2% NSR reserved to the underlying Option or, 1% of which can be bought out at anytime for up to five years for $1,000,000.

DOX's Carmelita is a 2400 hectare property that is underlain by lower Cretaceous volcanic and volcaniclastic rocks in contact with mid-Cretaceous granodiorites of the Coastal Batholith. Copper +/- gold mineralization is hosted in numerous shear zones within the Atacama Fault Zone. There is potential for widespread porphyry or IOCG (Iron Ore Copper Gold) style mineralization as well as a smaller, higher grade structurally controlled shear zone hosted copper oxide mineralization.

Previous sampling and assaying on the Carmelita Property taken from clean outcroppings, surface showings and old workings (open pit) has exposed mineralization up to 10 meters below the surface. The copper content of this sampling ranged from 0.5 % to 4.84% to copper.

Link to Geo Report: http://www.dorex.ca/pdf/Geo%20.....melita.pdf

The Carmelita Property has not been subjected to any modern systematic exploration programs. Just recently they completed a MAG survey which gave them some DRILL ready targets (Which they are now doing).

Jan 25th News Release:

The survey consisted of 64.5 linear km, focusing on 3 main mineralized zones that returned significant results of high grade copper.

Strong magnetic field variations were delineated over the two large NE and SW surveyed areas, with variations over 2000 nT (nanoteslas) recorded.

There are several northerly trending magnetic high anomalies within the SW survey area exhibiting the greatest magnitudes. As copper mineralization assayed on the property occurs with iron oxides (hematite, magnetite and siderite) these magnetic high anomalies present targets for follow-up drill hole exploration.

In the SW survey area there are three large main magnetic anomalies. The lengths of these anomalies are 2,500 meters and are open to the north & south, 2,300 meters and are open to the north, and 1,250 meters open to the north.

In the NE survey area the range of magnetic field values is somewhat lesser than to the SW, in the order of 1500 nT, however, this may reflect the general higher elevation of this surveyed area. As in the SW several magnetic high anomalies have been delineated which present follow-up drill hole exploration targets for copper mineralization associated with iron oxides.

The anomalous magnetic features exhibit a northerly trend, however with a more pronounced NNW trend as compared with the SW survey area. The most prominent anomalies are, in length of 1,300 meters, 1,250 meters and 1,150 meters, all of which remain open to north.

In conclusion the magnetic survey has delineated several moderate to high amplitude anomalies exhibiting a strong northerly trend. As iron oxides and associated copper mineralization have been discovered along north trending structures on the property, these anomalies present very good follow-up drill hole exploration targets.

Where they are today.......from what I've just heard is that the Drills are there and that they should be completed with the first 5 holes fairly shortly.

Additional Note: Rail lines, power lines, road access are all right there and in Chile it's fall season right now.

To sum it up....The historical results are positive: .8-4.8 % Cu, along with Au, Ag, Zn, Pb. There are 6 large anamolous zones to explore & the property is well situated around alot of Majors and Jr mining companies.

They IPO'd about a year ago and they are a 14 cent stock with a tiny $2 Million Dollar Market Cap. Very few people have heard of them and as the market wakes up to these Chilean Copper Plays ----- Dorex could see quite a pop if they can hit similar numbers to what the property has reported historically. (My guess for Lab Results is about late-May, early-June) Many drill plays are out there, but few have this small of a Market Cap with a property like Carmelita.

Like ALL mining stocks, risk abounds......and even more so for Drill plays...but I find that DOX has a nice fit in my portfolio with the big hit potential.

(Disclaimer: This is an opinion and not a recommendation to buy & like most of the stocks I talk about, I own shares)

PurePaloma

AceOfKY: Fronteer Development Group (FRG) - Gold Exploration for the Value Investor

[Editor's Note: World Of Wallstreet is delighted to add Ben Murphy, aka AceOfKY, to its staff of writers.]

[Editor's Note: With yesterday's announcement of TeckCominco's (TCK) acquisition of Global Copper, there's a renewed interest in exploration mining stocks.]

The recent 3 year moratorium on mining in Labrador’s Inuit lands has created an interesting opportunity for value investors seeking gold exposure. Fronteer Development Group (FRG on both the TSX and the AMEX) has been subjected to about a 45% haircut in the past couple of months due to its equity position in its spinoff uranium explorer Aurora Energy Resources. Aurora controls a large uranium deposit in Labrador - a project that will likely be delayed by the moratorium.

FRG's current market cap of approximately $400MM represents about $85 per measured and indicated gold equivalent ounce, not including inferred resources or any of the uranium resource, and at least two resource updates will be issued this year. FRG trades over $1.7MM/day (average) on the AMEX alone.

Let’s have a look at FRG’s assets:
1.      A top-notch exploration team that has discovered several million ounces of gold and over 130 million pounds of uranium.

2.      40% of Agi Dagi and Kirazli deposits in Turkey – A combined 3.5MM ounces of gold equivalent with plenty of exploration upside. The other 60% is owned by a subsidiary of Teck Cominco – one of Canada’s top mining companies.

3.      40% of Halilaga, a new discovery in Turkey that is generating drill results averaging around 250 meters from surface of 0.5% copper porphyry with 0.5 g/t gold. Teck is the partner on this discovery, also. Halilaga will easily exceed a 250MM tonne size, and could possibly reach the 500MM tonne size.

4.      Northumberland Deposit – A 2.5MM ounce gold/silver deposit in arguably the world’s best mining location – Nevada. A resource update is due within a month.

5.      Sandman, Nevada – One of the top exploration targets in Nevada, with an initial resource estimate of 300,000 ounces of gold. Newmont Mining (one of the world’s largest gold miners) is very interested in this property due to its location close to existing infrastructure, and Newmont recently negotiated an option to gain control of the project by advancing it through feasibility to a production decision within 3 years.

6.      Majority option on Long Canyon, Nevada – A new gold trend in Nevada. Resource estimate has not been prepared yet, but drill results are looking very good.

7.      Fronteer retains over 40% of Aurora’s equity, a position that is still worth about $122MM even after the steep drop in Aurora’s market cap due to the moratorium.

8.      Fronteer currently has about $98MM in cash.

With these assets, I believe Fronteer represents one of the best values in gold exploration available at the present time.

AceOfKY

Firecracker Stock Profile: Capstone Mining Looking Better Than Ever

[Editor's Note: World Of Wallstreet first profiled Capstone Mining October 21, 2007 (click here). Since then its stock price has advanced 17%. This article gives Firecracker's latest thoughts on the stock.]

Capstone Mining(CS.TO or CSFFF) is a sleeping giant. Rarely can you find a stock this undervalued.

Capstone Mining has many reasons that compel you to look at it as an investment opportunity.

• Capstone is one of those rare junior miners that does everything it says it will do when it says it will do it. They have actually run ahead of schedule on production capacity increases. Capstone Mining currently mines copper, zinc, lead and silver in Mexico. 2008 production is expected to be 30M pounds of copper and 2009 production is expected to be 40M pounds.
• Capstone is a very low cost producer because of the byproduct credits. Capstone's cash cost on copper is currently right at $1 per pound. With copper now at $4 per pound Capstone stands to make $3 per pound on its copper. That means pretax earnings of $90M in 2008 and $120M in 2009.
• Capstone is in excellent fiscal shape. Capstone currently has about 81M shares outstanding and has been buying back its own shares. When first quarter results are out in a few weeks Capstone should have working capital of close to $70M. Capstone also owns about 30M shares of Silverstone Resources(SST.V) which is worth about $75M. [Editor's Note: Silverstone is quite a nice asset and probably undervalued (click here for more).] Together the working capital and SST.V is $1.65 per fully diluted share. I am expecting first quarter revenues of about $32M and pretax profits of about $20M or about .24 per share. Capstone's latest mine expansion is due to be completed in quarter 4 of this year. Full year earnings should be more than $1 per share pretax if copper stays around $4. That's a pre-tax price to earnings ratio of 3.5 for 2008. 2009 pretax earnings should be about $120M or $1.50 per share. Capstone has no debt and IMHO will have $100M ($1.23 / share) in cash on hand by year end. Add in its SST.V's current value and that $2.15 /share of working capital and publicly traded assets.
  
• Capstone is looking for an acquisition that will provide a high cash flow. With $200M in cash available by the end of 2009 Capstone should be in a position to make an accretive acquisition by then.

There are many opportunities in the metals market right now. Capstone is one of the best opportunities I know of.

Firecracker

Weekly Inventory Update, 3/1/2008

This week we have the curious situation of rising inventory levels together with rising prices. The trend for rising zinc inventories is well established. I believe that this is a case where institutional money is flowing into commodity futures, en mass, as an inflation hedge and that is what is pushing up prices. Once this shift of funds subsides, Cu and Zn will return to ordinary supply and demand and the inventories will guide the price. For Zinc this is probably in the direction of falling prices. What the trend will be for Copper remains to be seen.

At this point, I'm entirely in gold and silver Jr miners (except for 8% of my portfolio which is trapped in the illiquid Nord Resources (NRD.TO) copper mine restart). Precious metals have been the place to be and I expect this will continue to be the case for a while.

Ranked Political Risk

This document (click here) provides the results of a quantitative attempt to rank, by country, friendliness to mining companies.

If you own shares of companies with mines outside of USA, Australia, Canada and Mexico, you might want to see how risky this report rates them.

For example, New Guinea Gold (NGG.V) fans, did you know that New Guinea is rated worst in the world for permitting delays? And New Guinea is in the lower half for overall ranking?

Ghana, home of my favorite gold turn-around pick, Golden Star Resources (GSS), is not bad at 8th.

To save you the trouble of skimming through the document, here's the final, overall, rankings:
Australia, Canada, USA, Chile, Mexico, Greece, Brazil, Ghana,
Argentina, China, Namibia, Mongolia, Peru, India,
South Africa, Zambia, Kazakhstan,
New Guinea, Bolivia, Russia, Indonesia,

And the worst three (no surprise):
D.R. Congo, Zimbabwe, Venezuela

Monty

ISM Contracts Completing Hussman's Criteria For Bullish Gold Stock Outlook

The NAPM ISM PMI fell under 50% to 47.7% for the first time in 10 months. This completes Hussman's four criteria for a historically bullish outlook for gold stocks.

Here's the quick review of where we stand:

• clearly, fully satisfies Hussman's interest rate (2) and XAU/Gold ratio (4) criteria,
• satisfies Hussman's inflation criteria (3), at least in spirit and probably according to the letter,
• has now met meeting Hussman's PMI criteria this morning. 
  

According to Hussman's in 1999 article, when this pattern held, gold stock rose over the next six months at the rate of 123% annualized.

Hussman Turns Bullish On Gold

I've reading (and admiring), John Hussman's weekly Weekly Market Comment (see http://www.hussmanfunds.com/weeklyMarketComment.html) for a couple years now. He seems to be among the most sophisticated, well-balanced, conservative and truly insightful money managers out there who publishes his thinking on a weekly basis. I've learned a lot from him.

Because he is so well-balanced, I was really surprised to see him in this week's commentary somewhat on the same wavelength as your author regarding precious metals:
"In precious metals, the Market Climate remains favorable, and the Strategic Total Return Fund currently has just under 20% of assets invested in precious metals shares. The U.S. dollar, having cleared its oversold condition, may be vulnerable particularly if employment figures are not particularly strong."

20% is a very large allocation for Hussman as he is such a believer in employing diversification to achieve safety and steady returns (unlike your author who is employing concentration to maximize gains despite increased volatility).

Digging through his archives reveals this article from 1999 (!!!): http://www.hussmanfunds.com/html/gold.htm. It gives his thinking on precious metal stock investing . This is the best treatment, from a moderate, non-conspiracy viewpoint, that I've ever seen on precious metal stock investing. Its pretty interesting to consider how timely it is and probably explains why Hussman is so bullish at this time.

Here's Hussman's money quote from that article:
"Not surprisingly, the combination of all of these is rare but extremely powerful. In the rare instances when 1) The rate of inflation has been higher than 6 months earlier, 2) Treasury bond yields have been lower than 6 months earlier, 3) the NAPM Purchasing Managers Index has been below 50, and 4) the Gold/XAU ratio has been above 4.0, the XAU has soared at an astounding rate of 123.63% annualized. In contrast, when none of these have been true, the XAU has plunged at -53.21% annualized. That's a gaping difference."

So, let's see where we stand against Hussman's four criteria right now, at the start of 2008:
(1) Rate of inflation is higher than 6 months earlier -- The year over year inflation has risen from 2.7% in May 2007 to 4.3% in November 2007 even though the month-over-month inflation is unchanged at .6% (see http://www.bls.gov/schedule/archives/cpi_nr.htm#2007). While this is not perfectly clear, I would presume that in spirit this matches Hussman's criteria of "rising inflation". Here's the November BLS CPI summary:
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in November before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  The November level of 210.177 (1982-84=100) was 4.3 percent higher than in November 2006."
Here's May's summary:
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in May, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  The May level of 207.949 (1982-84=100) was 2.7 percent higher than in May 2006."

(2) Treasury bond yields have been lower than 6 months earlier -- In the last 6 months the 30 year treasury yield has fallen from 5.12% to 4.45%, see http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical.shtml and http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml.

(3) NAPM PMI under 50 -- We haven't gotten here yet, but are getting close. The last four readings are: 53.8, 52.9, 52.0, 50.9 or steadily trending lower at roughly falling 1.0 per month (see http://research.stlouisfed.org/fred2/series/NAPM). These readings come out on the first business day of the month, and we'll get the next reading January 2 at 10AM which could meet Hussman's criteria.

(4) Gold/XAU ratio has been above 4.0 -- Here's the chart, currently at 4.83 which is well above Hussman's criteria. You can see from the chart that for almost the entire bullish period from 2001 onward this criteria was met and that when it was not met (Q2 02, Q4 03 and Q1 06) that the XAU index languished. This is really impressive given that Hussman's criteria was established in 1999 (before this entire period).

To summarize, the current situation:

• clearly, fully satisfies Hussman's interest rate (2) and XAU/Gold ratio (4) criteria,
• satisfies Hussman's inflation criteria (3), at least in spirit and probably according to the letter,
• is trending towards meeting Hussman's PMI criteria and may meet this criteria when it comes out January 2 at 10AM. 

In the past when this pattern held, gold stock rose over the next six months at the rate of 123% annualized. My own investments are highly concentrated in Jr precious metal mining stocks that have diverged from the advancing price of gold even more than XAU's large caps. The "reversion to the mean" principle suggests that these juniors that could advance even faster than Hussman's pattern for large caps suggests.

I've been and will be profiling my favorite junior precious metal mining stocks on my blog, http://montyhigh.typepad.com/world_of_wallstreet/.

About the author

MontyHigh is an individual investor who woke up one day and realized that a 10% swing on his retirement savings returns was roughly the same as his day-job's salary. Since then he's been learning all he can about investing and trading. His investments are currently concentrated in select Canadian junior precious-metal mining stocks. You can follow his learning experience on his blog, World of WallStreet, on which he frequently posts.

Gold: Currency Or Commodity?

You may be like me, moving from base metal mining stocks into precious metal mining stocks. I've been ignoring precious metals for years as being the domain of gold nuts. Now I'm trying to understand the fundamentals of the gold market. Redburn Partners "Gold War" (click here) is the best introduction I've found.

Like many free analyst reports its definitely "spinning". I find it comical that when touting gold for safety they pump a gold mining stock whose mines are in Russia!

But there is also a lot of really valuable analysis of why gold is moving and what's going on with gold. Here's a sample quote that I think is really valuable:

    "Precious metals have a slightly different character as an asset class. Gold has both a monetary (financial) nature and a commodity nature:

• During periods of fiscal and monetary responsibility in the world economy, gold acts in a similar fashion to other commodities: for example, prices are largely determined by industry cost curves.
• The monetary nature of gold increasingly exerts itself when governments abuse the issue of paper currency and financial assets and during periods of financial or economic stress – as is happening currently."

Its pretty clear from this what's driving the price of gold to record levels: We are in a time when "governments abuse the issue of paper currency and financial assets" and in a time "of financial or economic stress". Now the tricky part is going to be determining when this has peaked, because when the abuse and stress receded gold is going to have a big (and probably precipitous) fall back to the marginal cost of production. This will be just like we have seen this year with Nickel and Zinc.

So, I'm going long gold, but I'm playing it as a trade, not as something I'm getting married to.

Leave a comment if you find something valuable in the report.

Golden Star Resources Pops 8%

If you'll recall, I recently profiled Golden Star Resources (GSS) as a gold mining turn-around play (click here). It was in the doldrums until today when it popped 8%.  I found a recent blog post on GSS that pretty much matches my perspective. Here's the money quote:
"Other than Newmont Mining (NEM) (before the stock rocketed last month), I can't think of a gold miner that is more hated (and undeservedly so, much like NEM was, due to what are short-term problems that all miners go through) than GSS. That's the sort of situation that makes for dramatic upside moves, and I still believe that lies in GSS's future, much as we saw with NEM last month."

Here's the link to the whole post (click here for Minyanville's Minyan mail bag).

Roca Mining (ROK.V), The Color Of Money

The above picture is Moly concentrate floating to the surface of the flotation circuit of Roca Mining's now operational molybdenum mine. Quite a color, eh?

Roca Mining is now producing big bags of money (see below).

At the estimated 5 million lbs/year production with a sales price of 90% of the current moly price (33$/lb) and an operational cost of 7$/lb, ROK.V is set to produce 113M$ of operating cash flow / year. Given its current market cap that's a price to operating cash flow ratio of approximately 3.5. Very undervalued compared to Thompson Creek (TCM.TO), the only other primary Moly producer available on North American exchanges.

The kicker is that ROK'V announced last night (http://www.rocamines.com/s/NewsReleases.asp?ReportID=272033&_Type=News-Releases&_Title=ROCA-MAX-Exploration-Drilling-Update ) some very promising drill results. They aren't officially assayed yet, but that leaves another major catalyst for a price rise when the official results come out in about a month.

If I weren't heavily overweight in ROK.V, I'd be looking for an entry point. Come back tonight for an update on its bullish cup and handle chart formation.

The outlook for Moly is also very bullish right now. I hope to be posting my thoughts about this sometime soon as well.

Weekly Inventory Levels 11/09/2007

Here's the weekly inventory graph updates. Both Cu and Zn look bearish.

The Good Stuff: Toby Hansen's Quarterly Update

It is my great honor and delight to make available on World Of Wallstreet the highly respected Toby Hansen's (Tobinator's) quarterly update, a review of general market conditions, the market outlook for each of the precious and base metals and a collection of recommended precious and base metal mining stocks. Toby is as good as I've found (subscription service or free) at precious metal stock investing and the technical analysis of mining stocks. He makes this available freely to all with the understanding that everyone must do their own due diligence.

I hope Toby will allow me to make available future editions, but if you'd like to go straight to the source and get on his email distribution, send an email request to tobinator00@yahoo.com.

Reserves In Politically Unsafe Locations

The big mining story this weekend is the Congo's tearing up contracts with western large-cap miners. It sounds like they are just plain ripping off the miners in favor of the Chinese (probably in return for a big piece of the Chinese 5B$ investment). Here's a piece of a good article on the subject:
"DRC strips mining licences; gives China mineral rights

Four Chinese state enterprises will take a 68% stake in a joint -venture with Gecamines, DRC`s state-mining company, the government commission will recommend alterations to 38 contracts and say another 23 should be canceled... in return for a loan currently being negotiated."

For owners of Jr copper mining stocks (whose mines are not in the Congo), this sounds initially like a bullish thing in you'd think world copper supply would take a hit in that it will disrupt existing production and slow down production increases from projects whose contracts are being canceled or altered. This would drive up copper prices.

But from my perspective, this quote from the article tells a different story: "The Chinese want to go into production," Fortin said. "They`ll go very fast. They`re here to get the metal."

The Chinese, who don't dilly dally around with zoning regulations, input from indigenous people groups, environmental regulations, protracted feasibility studies and obtaining financing may be able to bring the copper online faster than the western companies they are displacing (leaving quite a mess behind in the process).

This story certainly highlights the "Politically Safe" part of the Don Coxe mantra: "Invest in companies with large reserves in politically safe locations". Those companies with projects in the Congo will take a hit in the markets on Monday. An investment in a jr miner (I'm not aware of any such jr miner) whose project was in the Congo would be a complete loss.

Weekly Inventory Levels 10/26/2008

Copper looks a little less bearish with Shanghai inventories dropping. Zinc looks a lot like it did this summer when is price started falling. Its inventory levels stopped falling and started rising and the metal price did the opposite.

Wave Of Supply: BHP Says Volumes Will Grow 9% In 2008

When supply exceeds demand, the price of a commodity generally falls to the marginal cost of production. For copper this seems to be around 2$. We saw that happen this year with Nickel where the marginal supplier is the Nickel Pig Iron suppliers (that have to send 1.5% grade Nickel Ore from places like the Phillipines to China). Nickel dropped from almost 25$ to its current 12 to 14$ range when supply exceeded demand. This 12 o 14$ range seems to be around the marginal cost of production of Nickel Pig Iron.

Needless to say, all my mining stocks (except my little bit of Nickel, CML.V) will get hammered if the prices of their metals fall to the marginal cost of production. So, I'm trying hard to understand the metals' global supply / demand balance.

Here we see that the world's largest mining company claims its going to increase its production by 9% next year. That seems to be higher than the world-wide growth of metal demand, but you'd think BHP would know and they don't seem concerned.

Overdue: Yet Another Major Copper Project

Lundin Mining announced that their major new copper mine, Tenke Fugurami, schedule has slipped. Here's the story and here's the wording: "Production start-up, however, will be slightly behind the initial schedule of 4th quarter 2008, due to delays in construction works. Construction and start-up of production will now extend into 2009."

I've worked on many a project and have seen many a manager announce a slip. The wording generally used is intended to make the slip seems as small and painless as possible even if it means less than complete candor. This wording is right up there with the best. "will now extend into 2009" sounds like a one to three month slip, but could be a one to twelve month slip. I'm guessing its more in the middle, say six months.

Now, how big is the project in the overall scheme of things? Again quoting: "the mine’s first phase will provide annual production of 115,000 tonnes of copper cathode". Worldwide production of copper is approximately (see my earlier post) 15 million tonnes/year. That means that somewhere are around .4% (at a six months slip) of world supply disappeared. Doesn't seem like much, but this kind of thing adds up and the price of Lead (Pb) went ballistic this year on just a 3% shortfall in mine output.

Most analysts seem to total up new projects (mines) scheduled to come online to come up with their supply growth estimates. They don't factor in late projects or older projects depleting or closing. One of the bullish analysts, Bloomsbury, did recently say, when predicting $4+ copper, their bullishness was based on such items as unforeseen production delays. This may account for why they have a reputation of both being more bullish and having had a better track record than their peers.

Tenke is a perfect example of an "unforseen production delay". Let me know if you hear of any others.

Weekly Inventory Levels 10/19/2007

Here's the weekly inventory levels for Cu and Zn. The copper looks pretty scary to me and I'm reducing my copper mining stock exposure. I can recall seeing a turn-around in inventories over the last year three times:

• Zinc - about a year ago.
• Nickel - late last spring.
• Zinc - last August.

All three times the metal prices followed suit and dropped pulling the mining stocks violently down with them. Despite all the bullish talk (or even because there is all this bullish talk along with bearish inventory movement), I'm reducing my copper exposure. At this point, I'm staying with, but not increasing my zinc exposure.

Lead (Pb) Like Moly Reprise... China Auto Sales Up 22.4% YoY

This news about Chinese auto sales came immediately following my post posted that the key to lead demand was Chinese auto sales.  Chinese auto sales are up, for september, 22.4% year over year and are running over half a million cars per month. That's a lot of lead-acid batteries.

Lead (Pb) Is Like Molybdenum

Lead has been in the news lately as its price has been making historic highs. Here's an example of such a story:

"China pushes lead higher and higher

Lead, usually one of the quietest of the base metals, is now one of the most publicized in the complex. With a price well above $3,000/mt, seemingly insatiable demand from China, and falling stock levels, Platts Edward Pearcey looks at what the future holds for this versatile commodity."

Lead is like Molybdenum in that the majority of mine production is as a byproduct of other metals. Lead is typically a byproduct of silver or zinc mines and Molybdenum is a byproduct of copper mines. In fact, the fraction of lead mined as a byproduct is significantly higher than the fraction (60%) of moly mined as a byproduct.

The supply of metals which are primarily produced as byproducts is very inelastic, that is, an increase in metal price does little to increase supply as the supply is driven by the demand for the primary metals. This means that the price of these byproduct metals is very volatile as the supply changes with the supply of the primary metals. The supply does not change as a result of changes in demand for the byproduct.

Now, lead is particularly interesting in that it is basically used for only one thing: lead/acid batteries. These batteries are used primarily in automobiles although they are increasingly used to power electric bicycles.

The price of a battery is a small contributor to the price of an automobile. Electric bicycles are significantly cheaper than their primary substitute, the motor scooter. Together this means that the demand for lead is also inelastic.

The basics of microeconomics inform us that when an inelastic supply curve meets an inelastic demand curve where the overall demand is increasing one can expect a volatile, rapidly rising price. That is what has been happening with lead (see the above graph).

This means that we can expect lead prices to stay high (and even rise rapidly) as long as the world-wide production of automobiles continues to increase faster than the worldwide production of lead primary metals (zinc and silver). The above price curve indicates that this has been the case for about a year and a half.

Because both curves are inelastic the price can be extremely volatile and there is no telling how high lead might go or how suddenly the price may collapse should the supply growth (driven by primary metal product mining increases) exceed demand growth.

If one is invested mining companies that produce lead as a byproduct (I'm in TAM.V, BN.V and ADA.V) one should be prepared for extreme volatility. The ride should be really something if demand continues to increase faster than supply as has been the trend. One should also be keeping an eye on auto sales and electric bicycle sales in China as this is where the primary demand growth is taking place.

Everyone Is Bullish About Copper... But Me

The buzz from all the news articles last week was about how all the analysts are bullish about the price of copper going forward. Here's a sample quote:

"Macquarie Bank analyst Adam Roley said copper prices could rise next year, with the market set to remain 'very tight' as growth in mine supply fails to keep up with ongoing demand growth from China."

But... I'm looking at the LME inventory numbers which are rising every day. Already this year, Nickel and Zinc have each gone through a spell where inventories stopped falling and started rising and it wasn't pretty for metal prices or for Nickel and Zinc mining stocks.

Until today, copper prices have been rising even while copper inventories have also been rising. That's unusual. Today prices fell, as you'd expect with rising inventories. So, I'm lightening up on my copper mining stocks, beginning with the more liquid of those stocks.

I expect that I'll continue to lighten up, day by day, as long as the copper inventories levels keep rising. That is what I did with Nickel earlier this year and it saved me much grief. I did some of the same with Zinc this summer, but not as much as I should have because I considered my Zinc mining stocks to be too illiquid to trade out of. To avoid this I'm trying keep my positions in microcap stocks small enough. By "small enough", I mean either so that I could afford to lose all the money in the stock or small enough that I could exit over the course of a few days.

This lightening up has resulted in me being completely invested, but completely off margin. So, I guess you could say I have some "dry powder" should we get hit with a significant correction. Here's my holdings now, by metal: