World Of Wallstreet

Metanor News Release: Drill Results For Hewfran

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

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

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

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

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

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

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

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

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

MontyHigh (www.worldofwallstreet.us)

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

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

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

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

The things that I don't like are:

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

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

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

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

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

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

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

MontyHigh, www.worldofwallstreet.us

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

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

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

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

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

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

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

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

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

MontyHigh, www.worldofwallstreet.us

Valuing Open Pit Gold Miners, Part 6: CGA Mining

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

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

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

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

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

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

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

The bearish qualities I see include:

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

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

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

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

MontyHigh

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

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

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

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

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

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

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

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

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

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

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

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

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

MontyHigh

Denali Guide: Gold Stock Hopes And Fears

Editor's Note: World Of Wallstreet gives a warm welcome to Denali Guide, who'll be contributing a piece here every couple of weeks. Denali Guide is a professional trader who follows both precious metals and individual mining stocks in greater detail on his own web site, DenaliGuide's Summit, which I have been following closely. I believe I have a lot to learn from Denali Guide and am looking forward to what comes from his contributions. When his posts leave me with questions, I'll be adding comments at the end. MontyHigh

Hopes & Fears

Well if we are going to discuss timing, we need to look at the graphic record.

Us gold enthusiasts tend to get carried away and the FORCE [ green & brown, behind price ], shows how wound up we get. I guess we can let go here, until we get down to a corrected level. You can see the MACD is wandering, but in DownTrend. Williams % of RANGE, is a measurement of where the stock is, within its Range of the last 2 weeks.
Essentially it has entered an OVERBOUGHT position and is gonna work it off [ IMO ]
as it 'eases on down the road'. The Indicators can be interpreted but they arent rocket science.
Let me know if you'd like Educational Consulting, and Good Luck,

DG

FWIW: Silver Chart Breaks Two Important Fibonacci Numbers

Using the standard fibonacci-based technical analysis, silver turned bearish last night as it broke the last two fibonacci numbers targeting a retest of $8.34. Silver is a heavily manipulated market IMHO, so I don't know if standard technical analysis applies, but I am now more cautious about silver than previously.

MontyHigh, www.worldofwallstreet.us

Free Market Prevailing Over High Silver Premiums

As you know, I've been tracking the "retail" price of silver in the form of 100 oz bars and their premium over the "wholesale" price as given by the kitcosilver.com closing price. I update this most days at this link, http://www.worldofwallstreet.us/gold-and-silver-ebay-vs-nymex-spot-price.html, which all gives my method.

Up until recently there has been no trend in the premiums. Now I see a clear trend of a falling trend from the 30% range to the low twenties, high teens. The premium has dropped roughly 50%.

What is the source of this falling premium? I think the source can be clearly seen in the figure below which shows a group of recent completed Ebay 100 oz silver bar sales.

As you can clearly see, Ohio Precious Metals is cranking out new 100 oz bars and these bars a selling at a lower price than the more established Johnson Matthey brand name bars. This is not a one-day event. I've noticed that most days, the new Ohio Precious Metals bars come in as the low-priced bar of the day. When it comes to silver, you really don't want to be paying a premium for the brand name, provided the alternative is well enough known to be considered legitimate.

So, free market capitalism is prevailing over high retail silver premiums. I expect the same kind of thing to happen with 1 oz gold and silver coins. The only question in my mind is what upstart "brand" will come along to fill this market niche.

I think that anyone buying retail-sized physical gold and silver at high-premiums at this point should consider themselves to be buyers of immediate catastrophe insurance rather than investors. Would anyone pay an up-front commission of 10 to 20% for a mutual fund. Why pay it for this other form of investment when you can get the same thing at a lower premium by buying at the wholesale sized bars?

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

Ebay Vs Kitco Silver And Gold Price Premiums Revisited

I've been updating this graph just about daily at the following link: http://www.worldofwallstreet.us/gold-and-silver-ebay-vs-nymex-spot-price.html

As you recall, the method is to compare the minimum price sold on Ebay for a particular day for 1 oz gold coins and 100 oz silver bars with the www.kitco.com 24-hour closing prices.

 

Having done this for more than a month, here are my conclusions:

1. There's a lot of noise in the data, but the premiums are not incredibly large compared to an ordinary retail vs wholesale type business.  
2. The premium for silver is higher than for gold and high enough that a decent work-from-home business could be carried if a supply of 100 oz silver bars could be obtained near spot price. I'm looking into this as a background exercise.
3. I'm told the premiums for 1 oz silver coins are even higher.
4. Anyone purchasing bullion in these sized units (or smaller) is basically buying insurance against a complete financial breakdown (and/or government tyranny) and not making an ordinary investment where he expects to make a profit. The transaction cost of entering and exiting a trade far exceed the many alternatives (ETFs, closed end funds like CEF, gold storage services like goldmoney.com, etc.). I'm not purchasing that kind of insurance. If I were buying that kind of insurance, I'd be buying the big bars with the low premiums.

Here's a link to a recent article that shares my view of purchasing with these kind of premiums: http://www.321gold.com/editorials/watson/watson120208.html.

Here's the money quote: "The answer is the retail silver price doesn't reflect the true spot price of silver - not the other way round. The market for retail silver is squeezed because refiners are not upping production of these relatively unimportant rounds or bars."

Eventually capitalism will kick in and reduce the premiums for bullion in precious metals. What you are paying for with the premium is a brand-name premium. Is the brand name premium for current brands (Eagle, Maple Leaf, Kruggerand) really going to maintain its value relative to whatever bargain-brand names rise to up to supply gold and silver closer to the wholesale price?

MontyHigh 

What Do You Make Of The Dollar Chart?

The key to the whole commodities (and especially precious metals) downthrust since July has been the unexpected rise of the dollar. The thinking is that this was a flight to safety and a move caused by "deleveraging", converting assets back into US dollars.

It looks like this may be changing. If you remember my recent Argentina / USA comparison, the key things to watch are the dollar and long-term treasury interest rates (which continues to fall). How long can the long-term treasury rates stay low if the dollar starts falling?

What do you make of these two charts?

MontyHigh

Is see from the monthly chart that this 85 area is the closest thing to long-term support that the dollar has. If it breaks that and 80, look out below.

href="http://www.worldofwallstreet.us/files200811/20081125dollarmonthly.PNG">

MontyHigh: Trading With The Gold Cartel

As you may know, there are a significant number of traders who are convinced that the price is being manipulated by a gold Cartel (see www.gata.org). This Cartel is thought to be led by the US Treasury and US Federal reserve and its purpose is claimed to be holding the price of gold down to make the US economy look bad. The action in the gold market that I watch is evidence enough for me to treat this theory as a working hyposthesis.

Here's one trading setup that these traders claim to see. Wait until about 5 minutes before the close and look for:

(1) Golding mining stocks are down AND

(2) Price of gold is up AND

(3) General market is doing better than gold mining stocks AND

(4) Possible negative news for the US dollar or economy due tomorrow.

From my watching things for a few months, I'd say this happens between once and twice a month, but I haven't formally back-tested it. For this week, Wednesday was the day (see chart below):

(1) Gold mining stocks were down around 3% as measured by the GDX ETF.

(2) Price of gold was up around 1/2% as measured by the GLD ETF.

(3) The general market was down around 1.7% as measured by the SPY ETF, better than the GDX.

(4) The possible negative news was the EU interest rate decision and the non-farms payroll employment numbers.

Per the theory, the price of gold opened around 1% lower the next morning (GLD) and gold mining stocks (GDX), at their low early that morning were down around 3 1/2%. My watching the price of gold closely since last November indicates that, at least from recollection, this is a tradeable pattern. I expect I may attempt to start trading it, going forward.

So, what vehicles are there for trading this using an ordinary stock market account? One could use gold futures, but that seems to open a whole new can of worms for the investor. The table that follows lists some ETFs that might be used for this.

 

Liquidity is critical when looking at a short-term trading vehicle. I want to be able to get in and out without significantly affecting the price. I'd like my price impact to be under .1%. When I'm experimenting, my trades are under 50K$. When I'm serious I aim for a trade size between 100K$ and 200K$. The way I measure liquidity is the vehicle's daily dollar volume, that is, the number of shares traded times the share price. For trading, I like my trades to be under 1% of the daily volume. Of course, the more liquid, the better. So, for a trading vehicle, I'm looking for something with a daily dollar volume of at least 10 million $. From the above table, GLD, SLV and GDX are clearly plenty liquid. DGL and DGZ are clearly not liquid enough. The rest are marginally liquid.

Sticking with the actual metal ETFs, here's a look at the performance of the various choices:

 

GLD (single-long gold) is extravagantly liquid, but, being unleveraged, provides only a 1% gain from the overnight trade. It would be nice to get more of a pop from this kind of trade. I would have to go short for this particular trade, which I don't like to do because of the possibility of unlimited loss. This is a real possibility with gold. Imagine a terrorist attack or some other Black Swan event where the markets are closed for days or weeks while the price of gold sky rockets. The loss with a short position could be unlimited. I don't want to have a Black Swan event cause me to "blow up" (see The Black Swan or Fooled By Randomness by Nassim Taleb).

SLV (single-long silver) is also extravagantly liquid and provides around a 1.75% gain from the overnight trade. SLV tracks silver which typcally tracks gold reasonably closely with more volatility, so it seems like a possible trading vehicle. I would have to go short for this particular trade, which I don't like because of the possibility of unlimited loss.

DGP (double-long gold) is marginally liquid and provides around a 2.5% gain from the overnight trade. Again, I would have to go short.

DGZ (double-short gold) is less marginally liquid and provides around a 2.5% gain where you don't have to go short. In the absolute worst-case, with this vehicle the most I can lose is the amount invested. If I attempt this kind of trade in the future, this is my preferred metal ETF.

CEF (single-long gold and silver) is marginally liquid and doesn't seem to provide any particular advantages over GLD for this kind of trade.

Moving to the miner ETFs, here's a look at the choices:

Apart from the holidays (July 1 for Canadian ETFs, early close July 3 for American), the first thing that hits one is that the HGU.TO and HGD.TO ETFs are the most volatile of any of the vehicles discussed. The second thing to notice is that it took a while after the opening for all of the miner's to adjust to the step-function change in gold price. This has two implications:

(1) Its harder to judge the exit point from such an overnight trade.

(2) It may be possible to do an arbitrage day-trade where one enters at or near the open rather than risking the overnight trade. This depends a lot on the liquidity / stability of the vehicles and is for further study.

So, here's an overview of how each miner ETF would have worked if you could get out near the optimum point early on Friday:

HGD.TO (double-short gold miners) - could have yielded approximately 5.5% with marginal at best liquidity. This is my overall preferred vehicle for this kind of trade should I make it in the future, although the limited liquidity is an issue.

HGU.TO (double-long gold miners) - could have yielded an approximately 5.5%, with almost decent liquidity, butone would have to enter short.

GDX (single-long gold miners) - could have yielded 3.5% with excellent liquidity, but one would have to go short.

Of course, actually trading gold futures is another option that probably would have even better leverage with quite good liquidity. This is for future study.

Let me know what you think about this, whether you have successfully short term traded gold and what vehicles and setups you like.

Monty

New Guinea Gold Presentation And Video

New Guinea Gold (NGG.V), an emerging Jr gold producer, has a quite nice video and presentation telling their story.I recommend watching the video with the presentation open. Presentation: click here. Video: click here.  

I'd say the basics of the story are something like this:

• Ramping up production to 3000 oz per month with 3000 oz / month in August 2008. Cash flow neutral (including all company costs) at 1000 oz per month, so they are going to start producing significant positive cash flow. Three year mine life with more gold after that at the site, but requiring the capex for a mill.
• The next project is a high-grade (12 grams/tonne), open pit-able, accessible resource with 700K oz of gold now. Expecting (but they can't say openly) at least a double of that resource by next year. Good indications it will grow to 5 million oz with even more drilling.

So, we are talking a market cap of around $60 million for, around a year from now, a 1.5 million oz high grade resource. That's $40 / accessible, high grade, open pit-able oz of gold in the ground with lots of exploration upside from there. All funded without further dilution with significant positive cash flow from the first project.

I've got a good sized position that I intend to hold as long as the price of gold doesn't break down and as long as they reasonably track their plans. The stock price, like that of many Jrs, has been lagging. This is partly due to delays with the ramping up of production at the first project.

Leave a comment with a quick profile of one of your favorite Jr mining companies.

Monty

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.

Best Of The Boards: The FED, Gold, Inflation, The Economy, The Banks - Give Me a Break!

Here's a message board post (click here for original) by InvestorVillage's Northbeachfl2000 that summarizes things well (my clarifications are enclosed in italicized [square brackets], MontyHigh):
I'm so tired of all the current talking head BS that I could scream.  As someone who is about to turn 65 knows, this potential childish conduct does appear untoward and definitely not flattering, but I'm at a point now where I really don't give a d#mn.  Enough is enough.  When are these people going to wake up and and come to grips with what is really going on?

Following the concept of KISS (keep it simple, stupid), let's have a brief history lesson and then take a hard look at where we are right now.

We are in the current mess because of at least three main factors:

(1)  The FED, the SEC and the other regulators have failed (yet again) in their responsibilities to effectively monitor/regulate the activities of the IBs[Investment Banks] and the major banks.  They allowed the immense excess in leverage to occur on the balance sheets of these entities and they also tacitly condoned, thru their inaction, the complete breakdown in underwriting standards for residential mortgages and other debt products to occur as well as sitting idly by while trillions of dollars of level 3 assets and toxic waste bond/debt products were introduced to an unsuspecting world.  They have proved to be nothing more than willing WS' shills as greed broke out among these WS[Wall Street] players on an unprecedented level.  As a group, I have nothing but contempt for all of them.  [As an aside - If the government wants to introduce a windfall profits tax, it's WS they should go after - not Big Oil.]

(2)  The U.S. government has turned into be a complete disaster.  In these most perilous of times, we have no fiscal policy, no trade policy, no immigration policy, no foreign policy, no sustainable medicare/social security policy, etc., etc., etc.  What makes this even worse is that we don't appear to be making any strides to correct any of these failures.

(3)  The World has fundamentally changed during this new century, and the U.S. leadership, on all levels,  just doesn't seem to get it.  The biggest changes? 

• The world doesn't exclusively revolve around NYC and Washington, D.C. anymore. 

• The internet has opened up the opportunity to attain knowledge to virtually anyone, anywhere in the world, who has access to a cheap computer and an electric socket.

• Everyone outside the developed world has always aspired to our standard of living.  The problem now is that more and more of them are now attaining it, and there just aren't enough resources to go around.  As a result, the price of basic resources (that we always assumed would remain "cheap" as our birthright) have no where to go but higher in price (on both an absolute and relative basis) over time. 

So where are we now?  First of all, let's get real.  The inflation rate is not 2% or 3% or 4%.  IMO it is somewhere north of 5% - despite what our esteemed government says.  What's worse, it is going higher.  As for these #ssholes who are gloating about the fact that we haven't seen wage increase pressure yet (and therefore "sustained" inflation won't be a problem), I wouldn't take too much comfort in that.  What happens to the average American who is already over leveraged and whose costs associated with his non discretionary spending keep rising (at the same time that the value of his most valuable asset (his house) keeps declining)?  Following the concept of KISS, one of  two things will happen - he either gets a pay raise or he goes broke.  You think the credit picture looks bad now? Just imagine what it will look like two years from now if inflation doesn't abate and the average American working for a paycheck doesn't get a pay raise.

So now we get to the FED's meeting today and tomorrow.  Here's the contest.  In one corner you have the banks.  In the other you have inflation.  

Note - It should be understood by all that the economy, per se, is secondary in their thought process since the FED knows that without functioning, healthy banks, there is no economy since our economy depends on financial credit creation (i.e. new lending) to grow.

The FED understands that the best way to cure the financial system's woes is to create a very positively sloped yield curve.  Even a dummy like Citibank can make money borrowing at a 2% fed funds rate and then lending it out at much higher rates further out on the yield curve.  A flatter yield curve would make this bank "healing process" that much more difficult.  The FED also knows that the longer that they maintain negative real interest rates, the greater the chance that higher inflationary expectations will become imbedded.  If this happens, the long end of the yield curve will keep going higher in yield as the bond vigilantes awake from their long, post late 1970's, early 1980's slumber.  

So what is the FED to do?  In short, they're screwed.  Raising the fed funds rate in small 25 basis point increments over time may look good and smell good to some, but at the end of the day it won't accomplish much if the REAL rate of inflation remains north of 5%.  Since our financial system and our trade and fiscal policies are in such bad shape, the Paul Volcker approach of taking the fed funds rate dramatically above the real rate of inflation over a very short period of time doesn't appear to be much of an option either (not many of us are willing or prepared to endure that level of economic pain).  

So what will the FED do?  My guess?  They will do nothing.  They should be totally into prayer right now.  They truly need a miracle to help them get us out of the fix that we are now in - a fix, by the way, that they were instrumental in putting us in (Thanks again Greenspan - you ugly, arrogant s#mbich).  In addition, they should continue to try and keep the price of Gold under control.  After all, the POG[Price Of Gold] (if under control) can be used as part of the pablum they continue to try and feed to us that contends that they have things under control.

I think this current policy of trying to contain the POG will ultimately fail.  As we continue to face increasing credit woes and as our economy continues to deteriorate further, the demand for the only form of money that can't be printed and that is no one else's liability will only increase.  If you don't own any physical Gold or Gold stocks, I'd seriously consider buying some.

JMO

Disclosure - Gold stocks now make up over 35% of my portfolio - GRS, JAG, GSS, AUY, AGI (TSE)

Northbeachfl2000

Silver Wheaton Valuation Method (SWVM) Part 4: Valuing First Majestic Silver (FR.TO)

In a recent article (click here), I introduced the Silver Wheaton Valuation Method (SWVM) which provides a convenient way of valuing producing and near producing Jr silver mining companies. The method takes the data point of Silver Wheaton's recent purchase of the silver stream from Aurcana's La Negra mine to produce a valuation of roughly $30.5 / annual produced oz of silver. This is the amount that  Silver Wheaton, a quite successful company in the silver miner space, thought was a good deal for its purchase of annual silver production.

SWVM provides a quick and dirty and conservative way of valuing Jr producing and near producing silver miners while the price of silver remains near its current level and especially when the cash cost of the silver is around the deal's $3.90/oz. Follow up articles (click here and here) applied SWVM to Aurcana Corporation and Silverstone Resources (SST.V).

This article applies SWVM to First Majestic Silver (FR.TO) to an emerging mid-tier silver producer. Click here for a profile of First Majestic I authored in early January 2008. Not much has changed in terms of the relative valuation of First Majestic to a mainstream mid-tier silver producer Hecla mining. Both have declined in stock price by a few percent while the price of silver has gone up 20%. First Majestic has increased its guidance for 2009 production from 6.5 to 7.1 million oz of silver (9%) and is tracking its plan to increase production. So, overall I would rate First Majestic as even more undervalued now than it was in January when I rated it undervalued by 166% relative to Hecla Mining.

This is interesting when one considers that First Majestic is over valued by 44% by the Silver Wheaton Valuation Method (that is, its price would have to fall 44% to match its SWVM valuation). I believe this over valuation is justified because SWVM is such a conservative valuation method and because First Majestic is so close to no longer being considered a Junior silver miner and because of its admirable growth record and guidance.

The following chart gives the results of the Silver Wheaton Valuation Method (SWVM) results for the stocks I have analyzed.

Here's my subjective evaluation of the results so far:

• Aurcana Corporation - is clearly undervalued assuming it can come reasonably close to executing on its strategy. It is the only Jr silver mining producer I have found so far that is considered undervalued by SWVM.
  
• I have yet to find another Jr silver producer that is undervalued based on SWVM. Silver Wheaton got a good deal when it did its silver stream purchase from Aurcana that is the basis for the Silver Wheaton Valuation Method.
• Silverstone Resources (SST.V) is undervalued relative to Silver Wheaton, but is in direct competition with Silver Wheaton. The Aurcana silver stream deal was about the right size for Silverstone and yet it lost out to Silver Wheaton. This does not bode well for Silverstone's ability to match Silver Wheaton's growth. I'm no longer bullish about Silverstone.
• Impact Silver, given my discovery of how hard it is to be considered undervalued by SWVM, is now looking more desirable being only SWVM overvalued by 8%. This seems to be more than offset by its admirable management, lack of warrant overhang, increasing production and exploration upside. I'll be considering reentering if it continues to look this desirable after I analyze more silver junior producers.
  
• First Majestic Silver illustrates again how high the SWVM bar is in that it is significantly SWVM overvalued even though by the more appropriate Hecla Mining comparitive valuation is it very undervalued. I really like First Majestic and have been increasing the size of my position.

Overall, I continue to really like (and hold) Aurcana and First Majestic and like and may soon buy Impact Silver. The SWVM method illustrates the premium one is paying for Silver Wheaton and I decline to own it except perhaps for a leveraged, short-term trading proxy for silver.

The backlog of Jr near producers to look at next are Great Panther (GPR.TO), Endeavor Silver (EKT, END.TO) and USA Silver (USA.V). Let me know if there are some others worth looking at.

Leave me some comments. How do you like to value this kind of stock? Are there any other junior silver miners you think I should look at?

MontyHigh

The Silver Wheaton Valuation Method (SWVM), Part 3: Valuing Silverstone Resources (SST.V)

In a recent article (click here), I introduced the Silver Wheaton Valuation Method (SWVM) which provides a convenient way of valuing producing and near producing Jr silver mining companies. The method takes the data point of Silver Wheaton's recent purchase of the silver stream from Aurcana's La Negra mine to produce a valuation of roughly $30.5 / annual produced oz of silver. This the valuation Silver Wheaton, a quite successful company in the silver miner space, thought was a good deal for its purchase of annual silver production. This valuation method provides a quick and dirty and conservative way of valuing Jr producing and near producing silver miners while the price of silver remains near its current level and especially when the cash cost of the silver is around the deal's $3.90/oz. A follow up article (click here) applied SWVM to Aurcana Corporation.

This article applies SWVM to Silverstone Resources (SST.V) a direct competitor (although much smaller) than Silver Wheaton. SST.V, like Silver Wheaton, is not an actual silver miner, but instead "produces" silver by purchasing the silver production, referred to as silver streams, from other mines. SST.V currently has three such mines under contract and a rather flexible deal for a preproduction property (click here for Silverstone's corporate presentation).

The presentation indicates that by 2011, Silverstone can expect a production of 4.5 million oz / year from its three silver streams. Silverstone will have to ramp up if it is to achieve this production as, annualizing its Q1 2008 production, it is currently producing 1.6 million oz / year. The preproduction property is expected to produce at least 1 million oz per year, although when this occurs is still TBD.

The presentation indicates that Silverstone has 141 million shares, fully diluted yielding a market cap (at June 16th's closing price of $C2.40) of 339 million $. So, giving Silverstone the benefit of the doubt and an annual production of 5.5 million oz yields a SWVM of 168 million $. So, SWVM says Silverstone is overvalued by 50%, that is, its stock price would have to fall by 50% to have its market cap match its SWVM valuation.

In contrast, Silver Wheaton is even more overvalued by SWVM. Silver Wheaton's stock price would have to fall by 79% to have its market cap match its SWVM valuation.

The conclusions from this series (Parts 1, 2 and 3) are:

• Silverstone is undervalued relative to Silver Wheaton, but is overvalued using SWVM. The market gives silver stream producers, with their multi-mine production and fixed cost per oz a good premium.
• Silverstone, according to SWVM, is overvalued relative Impact Silver which is overvalued relative to Aurcana corporation.
• Silver Wheaton got a very nice deal in the Aurcana corporation silver stream purchase. How good a deal Aurcana got depends on what the alternatives were. The deal did, if Aurcana executes its plans, increase Aurcana share holder value.

This table summarizes the findings so far:

The backlog of Jr near producers to look at next are First Majestic (FR.TO), Great Panther (GPR.TO), Endeavor Silver (EKT,END.TO) and USA Silver (USA.V). Let me know if there are some others worth looking at.

Leave me some comments. How do you like to value this kind of stock?

MontyHigh

The Silver Wheaton Valuation Method (SWVM), Part 2: Valuing Aurcana Corporation (AUN.V)

In a recent article (click here), I introduced the Silver Wheaton Valuation Method (SWVM) which provides a convenient way of valuing producing and near producing Jr silver mining companies. The method takes the data point of Silver Wheaton's recent purchase of the silver stream from Aurcana's La Negra mine to produce a valuation of roughly $30.5 / annual produced oz of silver. This the valuation Silver Wheaton, a quite successful company in the silver miner space, thought was a good deal for its purchase of annual silver production. This valuation method provides a quick and dirty way of valuing Jr producing and near producing silver miners while the price of silver remains near its current level and especially when the cash cost of the silver is around the deal's $3.90/oz.

The article went on to show that Silver Wheaton itself was significantly overvalued using this valuation method. This makes sense. Otherwise why would Silver Wheaton consider the deal attractive? The method finds Impact Silver (IPT.V) fairly valued. The response to this valuation on the stockhouse.com Impact Silver message board was that this valuation does not adequately value Impact Silver's exploration upside. I agree it does not put any value on that upside.

This article goes on to value Aurcana corporation itself. In fact, it values Aurcana before the Silver Wheaton deal and after the Silver Wheaton deal to determine both whether Aurcana is undervalued and whether the deal increased Aurcana's valuation.

As was profiled in a much earlier article (click here), Aurcana, prior to the Shafter project acquisition and Silver Wheaton deal, was a silver mine reopener with 80% of the La Negra Silver/Copper/Zinc mine and with a second Silver/Lead mine, Rosario, set to open towards the end of 2008. Without the Shafter acquisition, Aurcana expected to increase La Negra's production to 2000 tonnes / day and Rosario to 1200 tonnes /day for an annual silver production of approximately 2.9 million oz / year. This yields a SWVM valuation of 88 million $. Given the current stock price of $C.56 and the reasonably diluted number of shares (prior to the Shafter acquisition and Silver Wheaton deal) of 95.7 million shares yields a reasonably diluted market cap of 54 million dollars. The reasonably diluted number of shares does not include warrants and options with a strike price of $1.50 or higher. 

So, without the Shafter acquisition and Silver Wheaton deal, the SWVM method indicates that AUN is undervalued by 65% (that is, AUN's stock price would have to rise 65% to have a market cap that matches the SWVM valuation).

Aurcana expects to finance bringing Shafter to production by selling another silver stream to Silver Wheaton. The amount to be financed and the terms of that financing have not be announced. I estimate this as another 25M$ deal for 500,000 annual oz / year. I assume that La Negra's production is left at 1000 tonnes / day (and, of course, 50% of its silver production is delivered to Silver Wheaton). The result is that I estimate Aurcana's annual production to be roughly 4 million oz / year (after giving Silver Wheaton its due). Aurcana project this rate being achieved Q3 2009. I expect it will occur about 6 months after that.

With these assumptions, the SWVM valuation of Aurcana is $124 million. This indicates that the Shafter acquisition (if execution proceeds as plan) increases Aurcana's valuation by 40% (at the cost of 15 million additional reasonably diluted shares).

As a result, after the Shafter acquisition (if execution proceeds as expected) leaves Aurcana with a reasonably diluted share count of 111 million shares and a market cap of $62 million. Aurcana is undervalued by 100% (that is, AUN's stock price would have to rise 100% to have a market cap that matches the SWVM valuation).

I believe Aurcana can do a reasonable job of executing and so I am comfortable having a large Aurcana position in my portfolio. It is actually my second largest holding (after Gold Resource Corp, GORO.OB). I would consider the current price to be a good entry price if I did not already have a full position.

Next, I expect I will turn the Silver Wheaton Valuation Method on two other silver Jrs I admire: First Majestic Silver (FR.TO) and Silverstone Resources (SST.V). Like Impact Silver and Aurcana, I admire the management and prospects of these companies. I'm hoping that SWVM will provide some objectivity to compare these admirable company's stock price prospects.

Are there any other Jrs that you recommend I analyze? Leave me some comments. How do you like to value this kind of stock?

MontyHigh

The Meteoric Kodiak Exploration (KXL.V) Compared To Douglas Lake Minerals

This article is the third and last in a series about Douglas Lake Minerals and its Mbwemkuru property in Tanzania. The first article (click here), by Toby Hansen, introduced the company and the property and concluded that Mbwemkuru may be the largest alluvial gold project in the world with a wild guesstimate of perhaps 5 million oz of very-low operating cost, very-low capital gold. The valuation estimate based on 1 million oz of gold indicates an easy ten-bagger. The second article (click here) points out that all of the world's historic gold rushes (including the California, Klondike and South Africa gold rushes) began with alluvial deposits with very fast production of low cost gold followed by larger, even more prolific hard-rock mining of the source of the alluvial gold. So it seems that Douglas Lake Minerals may have something pretty exciting on its hands.

This third article compares Douglas to the most recent "to the moon" gold exploration company, Kodiak Exploration (KXL.V), which had a major find in Canada that was announced last fall.

The graph that follows compares the rises of each of the two exploration companies from their stock price low immediately preceeding the excitement. The X-Axis gives the number of trading days relative to that stock price low. The Y-Axis gives the relative stock price to that stock price low. For example, a four on the Y axis indicates that you would have a "four-bagger" (or the price would have quadrupled) on that date if you had been fortunate enough to buy on the low.

The first observation to make is that the trajectories of Kodiak Exploration and Douglas seem to be similar. We'll see in a few moments that Douglas is skyrocketing even faster than Kodiak given where it is in terms of news announcements and actual exploration results.

The second observation is obvious: unless you are already in, you did not get in at the bottom. Douglas Lake is almost an eight-bagger in less than two months. So, one needs to be careful with this one. Is there good reason to think it can continue to rise? The comparison to Kodiak may shed light on this question.

A brief history of the news announcements surrounding Kodiak's launch is as follows:

(1)  9/17/2007 - Kodiak announces expanded drilling and a purchase of more land at its Hercules project. You could say this is a hint that something good was found on the property, but the stock price does not noticeably react.

(2) 9/27/2007 - Kodiak purchases more property (after management awards itself stock options a few days earlier). In retrospect, something is happening, but the stock price does not react.

(3) 10/1/2007 - Stock price hops as Kodiak announces outstanding drill results of over one oz gold / tonne at the surface with 11 meters thickness. The grade is very good, but the combination of the high-grade and 11 meter thickness is truly outstanding.

(4) 10/22/2007 - Stock price jumps as Kodiak announces yet more outstanding drill results.

(5) 10/30/2007 - Stock price hits all time high shortly after Kodiak announces the finding of more ore-bearing veins.

(6) 11/6/2007 - The party is over as Kodiak announces a private placement. It seems that when the insiders sell part of the company that means the top is in.

Now let's look at the Douglas Lake timeline and see how it compares:

(1) May 8, 2008, A conference call with gold expert Bob Moriarty is announced (but does not take place) to discuss Douglas Lake's new alluvial property (even before a press release about the property is made). The stock price jumps.

(2) May 9, 2008, A press release announcing Douglas Lake has gotten the mineral rights for a large  alluvial property is published. The stock price has already jumped. The very compelling Bob Moriarty conference call (including a back of the envelope estimate of 5 million oz) takes place this day.

(3) June 2, 2008, The Chinese invest in Douglas Lake and get 20% for 6 million dollars (valuing the company at 30 million dollars). The stock price jumps as this is seen as an indication that the alluvial deposit is for real.

(4) June 11, 2008, Douglas Lake announces first quantitative exploration results for the alluvial project. Out of six "random" samples an average of 95 grams gold / tonne are announced. These are stunningly good results.

So, Douglas Lake, right now (at step (4)) has made its first quantitative exploration results. That puts it at the same point in exploration development as Kodiak was with its first quantitative results (at step 3).  Its hard to know where Douglas Lake will go from here, but Kodiak had more than a triple to go from when its first quantitative results were announced.

One big difference between Douglas Lake and Kodiak is the level of press coverage. I don't ordinarily pay attention to explorers but I couldn't miss hearing about Kodiak on the various mining web sites and message boards. I haven't seen anything like this for Douglas Lake. This lack of press coverage is one of the reasons I think Douglas Lake may still have a ways to run.

Learning from the Kodiak experience, I'm currently planning on holding onto my position until either a private placement with someone other than the Chinese (or the Tanzanian government or Tanzanian influential individuals) takes place or until disappointing exploration results are announced. The Kodiak experience indicates that there is plenty of upside that an explorer like Douglas Lake can experience if it continues to produce good exploration results. The fact that Douglas Lake's alluvial deposit can be brought into production without further financing leaves it in a position where it could go much, much farther without any dilution.

This will be my last post on Douglas Lake for a while, I think. The stock is so illiquid that, as with other juniors, you cannot expect me to preannounce my exit. For me this kind of exploration stock is something I intend to trade and hope to exit around the time of maximum excitement. We all have to take responsibility for our own trading.

Leave a comment and let me know what you think.

Monty High

DISCLOSURE: The author owns Douglas Lake stock and stands to benefit from a stock price advance. Douglas Lake is obviously a quite risky Jr exploration mining company and everyone must do their own due diligence and bear the responsibility of their investing decisions.

Douglas Lake Minerals Mbwemkuru: An Historic Deposit?

Yesterday, Toby Hansen authored an overview of Douglas Lake Mineral's Mbwemkuru (pronounced Bwam-koo-roo) property (click here).

Here's a brief recap: "Mbwemkuru has the potential of being the largest alluvial gold deposit in the world.  An alluvial deposit is one in which the gold is located in loose sand and gravel.  Essentially gold is deposited over time as sediment in a lake or river bed.  Douglas has identified an area of high grade gold measuring 22 km by 2 km described as beach sand.  Local artisans are producing up to 200 ounces of gold per month using burlap sacks, picks, shovels and pans.  Douglas says that the area has gold grades near the surface of 1 – 5 grams per ton.  Going deeper, the grades go up to as high as 50 grams per ton.  One huge plus of alluvial deposits is the gold is loose so grinding, milling and heach leap pads typical of hard rock operations are not required.  You can be in production with a front end loader and a sluice box virtually over night."

I was unacquainted with alluvial deposits when I first heard about Douglas Lake Minerals. Doing a little research (on Wikipedia) I found that every historic Gold Rush started with an alluvial deposit! This article summarizes my findings. 

As far as this article is concerned, placer mining and the mining of alluvial deposits are identical: "Placer mining (pronounced "plass-er") refers to the mining of alluvial deposits for minerals." [http://en.wikipedia.org/wiki/Placer_gold]

Wikipedia lists the following as History's major gold rushes:

• Roman (Spain) Gold Rush - "They used hydraulic mining methods on a very large scale to extract gold from extensive alluvial deposits".
  
• Georgia Gold Rush - "...the placer deposits found in Georgia almost literally meant that gold was just lying on the ground, waiting to be collected."
  
• California Gold Rush - "The first people to rush to the gold fields, beginning in the spring of 1848, were the residents of California themselves—primarily agriculturally oriented Americans and Europeans living in Northern California, along with Native Americans and some Californios (Spanish-speaking Californians). These first miners tended to be families in which everyone helped in the effort. Women and children of all races were often found panning next to the men". The use of panning indicates alluvial deposits.
  
• Victorian (Australia) Gold Rush - "On 20 July 1851 Thomas Peters, a hut-keeper on William Barker’s Mount Alexander station, found specks of gold at what is now known as Specimen Gully... leading to a rush to the Mount Alexander or Forest Creek diggings, centred on present-day Castlemaine, claimed as the richest shallow alluvial goldfield in the world."
  
• Transvaal (South African) Gold Rush - "...gold miners that had come from all over the world to seek out their fortunes on the alluvial mines of Barberton and Pilgrim's Rest... Scientific studies have pointed to the fact that the 'Golden Arc' which stretches from Johannesburg to Welkom was once a massive inland lake, and that silt and gold deposits from alluvial gold settled in the area to form the gold-rich deposits that South Africa is famous for."
  
• Klondike (Yukon) Gold Rush - "On August 21, 1896, the Skookum party discovered rich placer gold deposits in Bonanza (Rabbit) Creek which is located in the Yukon, northwest Canada."

As you can see, each of these major gold rushes began with an alluvial deposit like that of Douglas Lake Mineral's Mbwemkuru. Alluvial deposits are quickly mined at minimal cost and minimal capital expense. This means that Douglas Lake may be able to get into production very quickly and produce very low cost, very profitable gold. The exciting thing about each of these gold rushes is that eventually much more gold was mined from the nearby, hard rock source of the alluvial deposit's gold. This means that there is upside for Douglas Lake Minerals beyond what's in the alluvial deposit. The alluvial deposit was back-of-the-envelope guesstimated by Toby Hansen at 5 million oz of gold.

I'm pretty jazzed about Douglas Lake and think that it may very well be the most spectacular exploration play since Kodiak Exploration (KXL.V). KXL.V was more than a 10 bagger from its low to its high. I expect I'll follow up on this story with a look at the history of KXL's dramatic move and look at where Douglas Lake is in comparison to Kodiak Exploration metoric rise.

DISCLOSURE: I increased the size of my position yesterday. Although I'm optimistic about the upside for Douglas Lake, it is definitely risky. In my estimation its the riskiest postion in my portfolio. 

NOTE: The photos are from the Wikipedia articles illustrating alluvial gold deposit mining (aka placer gold mining).

Scoop: Douglas Lake Minerals – A Rare Opportunity?

[Editor MontyHigh's Note: Here's an exclusive early post of an article that will be on several gold mining web sites today. This Douglas Lake stock is one of those exploration plays that had been launching like a rocket without any significant news. This morning some significant news came out that is summarized near the end of this article. Please note that the author is Toby Hansen, click here for his most recent World Of Wallstreet contributions. The editor also has a position in Douglas Lake Minerals and will benefit from a stock price rise.]

Introduction

Douglas Lake Minerals (DLKM.OB) has been in operation for about three years.  Their primary focus is obtaining and exploring mineral rich properties in Tanzania. They have been very successful at obtaining licenses for over 50 properties.  A few years ago they partnered up with Canaco (CAN.v) to explore some properties.  Canaco began drilling on one property and didn’t find economical gold.  At the end of February of this year, Douglas Lake was on their last sandwich having very little cash and income.

Management made a potentially company saving deal recently.  Douglas negotiated and secured the rights to a property (Mbwemkuru) from a former intelligence director of the Tanzanian government.  The director worked 30 years for Tanzania and was given a choice for a retirement gift choosing Mbwemkuru.  As part of the new deal, the intelligence director gets an undisclosed sum of money and 3% royalty.  Tanzania gets a royalty of 5%.

Opportunity?

Mbwemkuru has the potential of being the largest alluvial gold deposit in the world.  An alluvial deposit is one in which the gold is located in loose sand and gravel.  Essentially gold is deposited over time as sediment in a lake or river bed.  Douglas has identified an area of high grade gold measuring 22 km by 2 km described as beach sand.  Local artisans are producing up to 200 ounces of gold per month using burlap sacks, picks, shovels and pans.  Douglas says that the area has gold grades near the surface of 1 – 5 grams per ton.  Going deeper, the grades go up to as high as 50 grams per ton.  One huge plus of alluvial deposits is the gold is loose so grinding, milling and heach leap pads typical of hard rock operations are not required.  You can be in production with a front end loader and a sluice box virtually over night.

Here’s their press release on the property:

http://www.douglaslakeminerals.com/news/2008-may20.html

Bob Moriarty, Douglas share holder and 321gold.com founder, spent three days at Mbwemkuru.  He was able to easily pan gold himself from the sand.  Bob travels all over the world visiting different types of mines and mineral properties.  He said in a conference call (see below) that he believes that being extremely conservative there’s 5 million ounces of gold at Mbwemkuru.  I highly encourage anyone interested in Douglas to listen to Bob’s conference call lasting a little over 10 minutes. 

Bob Moriarty conference call about the Mbwemkuru property: 

Dial toll free 1-877-289-8525, Code 21271884#

Having a property with huge potential is one thing but having the money is another.  Douglas Lake executed a memorandum of understanding with a prestigious Chinese Mining Institute (TIGMR) last fall and invited them to Mbwemkuru.  They stayed longer than planned coming away very impressed.  In less than two months TIGMR is taking a $6 million equity position in Douglas Lake, sending two core drills and the man power to explore the property.  The Chinese money is going to be used to quickly get Mbwemkuru producing gold by the end of this year.  

Douglas technical consultants say achieving 100,000 ounces production per year would be fairly easy to do.  I am not holding my breath for that level but if they simply achieved 25,000 ounces early on, it would bring in over $20 million revenue and enough cash flow to support active drilling of the property.  It should be noted that the sand/gravel gold rich zone is likely 10-20 meters deep as no one has hit bedrock yet.  The Chinese drills likely don’t have to go to the depths of traditional exploration plays such as several hundred meters through very hard rock.  This means Douglas could prove up reserves and resources much more quickly than is industry standard.

Valuation

Douglas Lake Minerals trades on the OTCBB under the symbol of DLKM.  The stock surged after Bob Moriarty’s conference call May 9th.  Presently it has found new multi-month highs trading and breaking side ways trading ranges.  There are 40.4 million shares outstanding, which should increase to approximately 47 million after the Chinese TIGMR equity position is completed.  Douglas Lake offers huge blue sky potential.  Gold exploration companies in general fetch a market valuation of $50 - $100 per ounce gold resources in the ground.  Producers get a much higher premium of $150-$250 per ounce.  Although it is very difficult to calculate a value on a company just entering formal exploration activities; we can try for an educated guess.

Assume mineralization is 1 gram/ton over the area of 22 km x 2 km and 2 meters deep.  The volume is 88 million cubic meters.  Sand has an approximate density of 1.8 tons/cubic meter.  The mineralization zone is 158 million tons.  Multiply this by 1 gram/ton results in 158 million grams.  A troy ounce is 31.1 grams so Mbwemkuru can have roughly 5.1 million ounces of gold.  The gold grades used are much more conservative than those reported thus far but it yields a quasi-conservative estimate on how much potential gold is there.  As a pure exploration play applying $50-$100/ounce market cap, Douglas could have a market cap of of $255 to $510 million.  Assume 50 million shares outstanding gives an upside potential of $5 to $10/share, which is quite impressive considering the stock trades under $0.75.

Sample Results

Just prior to going to press with this article, Douglas released the following news:

http://biz.yahoo.com/prnews/080611/to466.html?.v=36

“SAMPLE GRADE RESULTS

These samples were prepared and reported by Echo Tec Laboratories Limited - ICP certificate of analysis AK 2008-0657.

               -   MAH 1:             79.60 g/t (grams per tonne)

               -   MAH 2:            408.30 g/t

               -   MAH 3:             32.65 g/t

               -   MAH 4:              3.90 g/t

               -   MAH 5:              0.70 g/t

               -   MAH 6:             43.50 g/t

               -   Overall Average:   94.77 g/t”

Some grades of the samples reported are enormous as the vast majority of exploration projects rarely exceed 50 grams/ton.  Exploration is in the very early stages on the property but it would appear from their press release Douglas may have landed a world class deposit.

Near Term Stock Price Drivers

The huge potential in exploration stocks are the uncertainties surrounding them and the potential short, medium and long term completion of exploration goals.  On the horizon for Douglas are the following events that can cause the stock to move:

1)     Receiving the first payment by the Chinese TIGMR of $1.5 million.  This should give investors more confidence as to their commitment to the project/company.

2)     Bob Moriarty publishing his report about Mbwemkuru and the company on his often visited website 321gold.com.  His unique position of holding an equity position in the company, being on the property and extensive knowledge of the Douglas history and management team, should stimulate a great many investors interest in the stock. 

3)     Closing the $6 million equity investment by the Chinese.  This is expected to close on or before June 30^th.

4)     Intermittent drill result reports through the year at Mbwemkuru.

5)     Beginning limited gold production from the property by year’s end.

 Disclosure:  

The author has not been paid to write this article, nor received any other incentive to do so. The author holds a position in Douglas Lake and  will benefit from its increase in stock price.

Disclaimer:

The author's objective in writing this article is to promote potential investor interest in this stock to the point where they are encouraged to conduct their own research and verify facts. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell stocks. Investors are recommended to obtain the advice of a qualified investment advisor before entering into a position.

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