When you come to a fork in the road take it
I'd love to say I made that up but I didn't. Yogi Berra came up with it.
I've read financial analysis from others for years. One technique that is pretty common and I resent a lot is the writer's tendency to talk out of both sides of his mouth. A report will say that something will go up unless it goes down. That's simply brilliant but there really is no other alternative. Everything goes up, stays the same or goes down. Most of the time it's pretty useless to say it's going up unless it goes down.
So I'll say it. We are at a fork in the road. My call for a top in gold and a bottom in the dollar back in November was pretty close. I missed the top in gold by three days but hit the bottom in the dollar. My gut feeling is that the gold decline is pretty much over and it may be safe to go back in the water. Gold shares are still at record lows in historical perspective.
But the dollar is going to continue to go up. Unless of course it goes down. 78.50 on the dollar index is the fork in the road. Readers of 321gold are quite familiar with the anti-dollar logic. It's all valid and it's all true. But as bad as the future of the dollar is, the future of the Euro may be much shorter. So the dollar is going into the toilet but the Euro and the Yen may arrive first.
I think we are about to see a decoupling between the dollar and gold. I suspect we could see both gold and the dollar going up as sovereign nations start a wave of defaults on their debt.
The stock market has begun its collapse. I think this year is going to be called the year of The Default. Greece is on the verge of collapse financially; possibly taking the Euro down with them.
The good people of Iceland are about to vote on a referendum in February or March on whether or not they should tell the IMF to take their $5 billion in loans and shove them. Japan is in deep trouble and Britain is on the ropes. The readers of 321gold have long since been aware of the $120 trillion plus in debt of the United States that can never be repaid.
I suspect the chickens have come home to roost and the horizon a year out is going to look a whole lot different than it does today.
My advice remains the same. You want to be invested in production stories of precious metals. There is a real good chance of growth slowing in China and that could pull the rug out from underneath the base metals markets.
Last year was a very busy year for me. I was gone about 60% of the time visiting projects. I left right after Christmas and didn't finish the trip until this last week. There are far more juniors out there than anyone can cover.
Between Christmas and New Year's I flew out to Spokane for a visit to Revett Minerals (RVM-V). Doug Ward Vice President of Revett met me in Spokane and we drove across Idaho to Montana to visit the project.
Revett has an operating silver and copper mine named the Troy Mine in western Montana and an advanced silver and copper project called Rock Creek, located nearby.
The Troy Mine was put into production by Asarco in 1980 and shut down due to low prices in 1993. Asarco invested about $99 million dollars in the mine and mill. While in operation by Asarco, the mine produced about 44 million ounces of silver and 390 million pounds of copper. In addition, Asarco and Kennecott spent almost $17 million advancing the 229 million ounce silver and 2 billion pounds copper, Rock Creek project.
Revett purchased the Troy mill and mine in 1999 for $15 million dollars. Rock Creek came with it. They began the restart procedures in 2003. The mill began production in late 2004 with the first shipment of ore to the refinery in January of 2005. Revett's current production costs are about $20 a ton for mining and milling. Their cost of production for silver is about $12.40 and $1.90 a pound for copper, on a byproduct basis, $12.10 silver and $1.84 copper.
It's an interesting deposit that I have never seen elsewhere. The ore deposit is located within a package of sedimentary rock sequences. You have layers of slate and shale above and below ordinary beach sand. The beach sand was mineralized when silver and copper bearing fluid seeped through the sand. Carbon in the sand caused the minerals to precipitate out. Time has caused the beach sand to metamorphose into quartzite. That's an important distinction that I want you to remember. The deposit is nothing more than ordinary beach sand turned into hard rock over millions of years.
One issue I have with juniors is their propensity to act like the Federal Reserve by using their printing presses 24/7. After all, shares are money and out of control printing of shares is no different from out of control printing of money. Revett has 129 million shares outstanding with 149 million fully diluted. That's a fair bit and I would be a lot happier if the number was lower.
Doug's response to the issue of shares was interesting. When they ship concentrate to their refinery, they get a check for 90% of the estimated value of the metal. When refining is complete 4 months later, they get another check for the exact correct value. But they shipped a big shipment of ore in 2008 and by the time they got payment, the value of the copper and silver had dropped by more than 50%. They literally had to refund most of the money they had gotten at the time of shipment. So overnight they went from being cash rich to being cash poor.
The company almost went into bankruptcy. They were forced to lower wages and go into almost a holding pattern. From having $13 million in cash reserves, they went into no cash reserves and were forced into doing a 10 million share financing at $.06 and issuing tens of millions of shares for debt just to survive.
This is the kind of stuff I haul companies over the coals for again and again. But in 2008-2009, it merely comes under the "Stuff Happens" rule. Revett may have been dancing on the very edge of bankruptcy but so were dozens of other companies as well known as NovaGold.
While the number of shares outstanding makes me a little unhappy, I fully understand the reason it happened. Actually what doesn't kill you does make you stronger. Revett came out of the chaos as a leaner and meaner company.
If you remember, a few paragraphs back I talked about the nature of the deposit and what they are mining in 13-meter high stopes is basically beach sands. Their tailings are nothing more than quartz sand. That's about as environmentally safe as it gets in mining.
Not to be bothered by inconvenient facts such as the output of a mining operation to be nothing more than beach sand, the tree huggers have maintained a 30-year attack on Troy and on the similar deposit known as Rock Creek. Rock Creek has actually been permitted but the tree huggers begin one suit after another after another and no matter how many times they have lost, they never give up.
With Revett it has gotten to the point of absurdity. Revett has already agreed to remediation that amounts to a cost of $1 million dollars per grizzly bear that they may inconvenience in exchange for the creation of hundreds of the best paying jobs in Montana. Rock Creek contains about $10 billion dollars worth of copper and silver. Six years after being permitted, the tree huggers still have the company tied up in knots.
Regular readers of 321gold know that I speak my mind and it really doesn't matter if you agree or disagree with me, you leave here understanding how I feel about an issue.
All wealth comes from one of three sources. You can grow it. If you shove a single kernel of corn into the ground at the right time and under the right conditions, you can come back 110 days later and find a corn plant containing hundreds of kernels of corn. You have created wealth.
Likewise, you can take $10 worth of some plastic and copper and quartz, squeeze them together in exactly the right way and call it an iPhone worth $200. You have created wealth. And you can dig a hole in the ground, bring up some minerals from the right formation, heat them and make silver bars or copper cathodes. You have created wealth.
Everything else, including the actions of lawyers and politicians, is wealth distribution. You cannot have lawyers or politicians or tree huggers unless and until someone has created enough wealth to support the bloodsuckers.
The United States is bankrupt. We have $120 trillion dollars of debt obligations and only $53 trillion dollars of wealth. The government could tax us for every cent we have twice over and we still can't pay our debts. We are going to default. I know it, you know it and worst of all, the Chinese know it. We can forget making it through, it ain't gonna happen. We are going to go into hyperinflation or a simple default and in either case; we are going to have a lot less government on the other side. We simply cannot afford the level of government we have.
To survive, not to thrive, but just basic survival, the US is going to have to produce something. We can't grow more; we are now a net importer of food. We have exported our manufacturing industry in exchange for the production of hamburgers now called manufacturing. But we can mine mineral deposits we know exist; mines such as Rock Creek with $10 billion dollars worth of minerals that has already been permitted.
This case should have been ended with victory for the workers in Montana years ago and the mill should have been in the process of construction. One major change we need in our legal system is to force those who engage in meaningless suits to pay the legal expenses of the winner. Our courts are jammed with cases that should have never been brought.
The same idiots who are whining about environmental damage from beach sands have learned nothing from the safe operation now 30 years old at the Troy mine. Rock Creek is the same style of mineralization and the end product is beach sand. But you would never know it from the whiners.
The people of Montana have a simple choice. They can have a few more million-dollar grizzly bears or a lot more high paying mining jobs and the creation of billions of dollars of new wealth. With a US unemployment rate now running at 22%, I suspect I know what at least 22% of Montana residents would vote.
If the Troy mine was all Revett had in their stable, the stock would be fully priced today at about $.40 with a $50 million dollar market cap. The company has the best management team and I want to emphasize the term team, the best team I've seen this year. I was very impressed with the caliber and attitude of everyone I met on my admittedly short visit.
But Revett has the Rock Creek project ready to move forward if a judge remembers his oath of office and finally does his job after 6 years of delays. Revett will be worth a lot more when sanity has returned to Montana.
Revett expects to produce about 1.45 million ounces of silver this year at Troy and 10.7 million pounds of copper. About half the copper is hedged at $2.94 to guarantee operating costs and I fully agree with them.
We don't own Revett shares, the stock climbed 33% just after I made my visit and I never got a chance to buy cheap shares but I'd be a buyer at a lower price. Revett hasn't discussed advertising, they may or may not and I have not been compensated for this article. I really like the Troy mine, I really like the Rock Creek project and management is as good as it gets. It's a well-run operation with 180 good people and they have a lot of blue sky potential at Rock Creek.