Is this what a bottom looks like?
Markets are more contrary than an ex-wife. Just as soon as you think you understand them (either of them, they will do their very best to prove you wrong (both of them.) You will never beat the market (or the ex), sometimes survival is a giant victory.
But like an ex-wife, markets are fairly predictable. A top is when everyone wants to buy and a bottom is when no one wants to buy. At bottoms, eventually even the sellers dry up and all you have left is buyers. Go look at Stockwatch and tell me we don't have a dearth of sellers. Volume has dried up to next to nothing and guys, that's what is the definition of a bottom. You simply run out of sellers. In the end all you have left are buyers and the markets move up altogether independent of the mass of "Gurus."
On Thursday the 14th of April, we had what appears to be a fairly classic case of capitulation. DROOPY plummeted from $.80 to an intraday low of $.30 before closing at $.66, down $.14 for the day. When shareholders get fed up and throw in the towel, that's a bottom.
Overall, we have an interesting situation developing in the regular stock market. GM, Ford, AIG, Wal-Mart, eBay, and Fannie Mae all show the same sort of chart patterns as in early 2000 just before the market carnage. GM and Ford are on the verge of going teats up. I fully expect a waterfall type decline between now and this October. It could come at any time and when it does, the general market is going down hard. And gold shares will be dragged down with it. I expect the precious metals shares to recover quickly ala 1929. Homestake tumbled but immediately recovered. But you mustn't panic in a general market panic. When it's over, investors are going to be looking for a safe haven and there is but one.
Commodities in general have been correcting and have a lot further to go. This includes oil as well as base metals. Moly is down from $35.50 to $32.45, oil from about $58 to $52 and I expect them to continue to correct. This does not mean it's a good time to sell, on the contrary, it's a good time to buy. Jim Rogers makes the most valid of points about where we stand in a commodities bull market. He points out that there are 40,000 stock mutual funds and 6 commodity funds. That's not a top. That's actually pretty close to a bottom, it doesn't get much worse.
Baby Bush and
the Beltway Bandits continue to rape American taxpayers as they
press on with their cornucopia of corruption and deceit. Congress
abdicated their role as the institution responsible for declaring
war when they passed a resolution allowing Baby Bush to invade
Iraq pending two conditions, (1) Certification that Iraq possessed
Weapons of Mass Destruction and (2) Certification that Iraq was
connected to 9/11.
After some 150,000 Iraqi deaths and 1600 American lives thrown away, Bush and crew seem tempted to try it again since they did such a wonderful job in Iraq. Our new target is Iran which Bush believes is on the verge of gaining nuclear weapons even though he can't figure out Israel posses a far great arsenal of WMD. If we attack Iran it will be obvious in the first week that we have bitten off far more than we can chew. For the first time since I have been alive, I firmly believe we are on the verge of a global nuclear war which we will lose. You can forget an Israeli attack in Iran, their aircraft lack the range and Israel has no friends anywhere in the region. If there is an attack on Iran, it will come from us and a short time later oil will be $100 a barrel. You won't be able to give dollars away.
There are some really valid reasons to invest in gold and precious metals, both in the physical and the shares. The dollar may be in a short term correction higher but like a row boat 500 meters upstream from Niagara Falls, the future is predictable and it's not a pretty picture. The dollar and our republic are toast. We are in a slow motion crash but make no mistake, Rome burns as Nero fiddles.
I wrote a piece in January, suggesting we were at a bottom. I was about half right. Silver hit the basement in January but gold and precious metals shares continued down until a temporary bottom in February. We have tested that bottom with a slightly lower XAU and HUI. Both of them seem to be discounting $350 gold which isn't in the cards. We had a hard crash in the metals shares on Friday and that's a good time to be buying. We have been in a 17 month correction since the beginning of December of 2003 and that's long enough for me. I believe if you invest now you will be soon rewarded.
The easiest money to be made investing in metals shares is to buy just before a mine goes into production. It's the most predictable move in mining. I mentioned Desert Sun (DSM-T $1.66) and Endeavour Silver (EDR-V $2.13) in January and both of them had nice (and predictable) moves higher. But the stock which is just screaming BUY-ME, BUY-ME has to be Excellon. (EXN-V $.20 Canadian 150 million shares fully diluted)
I was on the mine site last August just before Excellon blasted the portal to their new underground mine at Platosa, in northeast Durango State, in Mexico. Since that time they have been creating an adit to their proven 65,000 ton high grade silver/lead/zinc deposit. A few weeks ago they actually hit the ore zone 25 meters ahead of where they thought they would pick it up. While they have proven 65,000 tons of ore, they have always believed they would discover far more ore as they drift underground. In Mexico, it's often the case that it's cheaper to mine than to drill. Excellon is proving the case.
So underground they are ready to produce. But their discovery created a bit of a time problem above ground where their crushing facility wasn't scheduled to be completed until the end of April. They have tried to speed it up and within days, will actually begin mining and production. Go to their website, figure out how many ounces of silver, tons of lead and tons of zinc they are going to produce and come up with your own numbers as to how much they will net this year. My figures showed about $54 million gross and by wetting my index figure and holding it in the air, I figure something along the lines of $40 million US net in the next 14 months. And should the deposit double, which is doable, you are probably looking at $30 million a year for two years on a company which worth maybe $20 million total now.
Remember when you are dealing with any of the penny dreadfuls, you are buying lottery tickets, many of which are going to be worthless. It makes all the sense in the world to be buying lottery tickets with lots and lots of numbers. If you can fall off a bike, you should be able to figure out the future price of Excellon shares in comparison to today.
If you like iron, and who wouldn't after the 71.5% increase in price announced six weeks ago, you have to love Palladon (PLL-V $.75 Canadian 26.8 million shares) Palladon announced the deal to buy 65% of the Comstock/Mountain Lion iron project in SW Utah in February. Last Thursday they announced the final purchase from the Bankruptcy Court. The deal has gotten more convoluted over time, now they will own 100% of the project but paid for it with a 6 month short term loan from a major shareholder. I like the new deal because it gives them all the incentive in the world to actually get to work. Most mining companies are geared to taking their time and that's a bad way to do business. All managements should run their companies as if they have a fire lit under them but they don't. Palladon has 6 months to get up to snuff.
I believe that in six months they will be up and cranking and any financing done to finalize the purchase of the iron mine will be done at a far higher stock price. They have $250 million dollars worth of lower grade iron sitting in a stockpile already mined. If they can't figure out how to make money off that after a 71.5% price rise in iron, they won't deserve the deposit. Palladon is a possible ten bagger or more depending on just how soon CEO George Young can get his team motivated.
My favorite iron/gold/copper company in the universe is Cardero. (CDU-V $3.25 41 million shares outstanding) Cardero is partners with Anglo American in the Alisitos Belt IOCG discovered by Jim Dawson. I wrote up the belt last March when it was believed Anglo would be drilling by July. After a nuisance law suit and silly delays on the part of Anglo American, they still haven't started drilling on what is Anglo's most important project in the world.
Cardero's stock has rocketed all the way from $3.05 a year ago to $3.25 today. (yawn) I'm told there was a meeting with the Mexican mining authorities last week and drilling should be starting within a couple of weeks. I hope it does, else I hop on a plane to Vancouver where I jump up and down on Henk Van Alphen's desk screaming at the top of my lungs until they start. Cardero shareholders are getting antsy. No news almost always turns into bad news. In actuality, Cardero's biggest problem is they have too many major projects and no one, including me, actually understands all of what they have.
For starters, they have the 70% Anglo 30% Cardero JV in the Baja with estimates of multi-billion tons of iron copper and gold ore. If and when they ever get around to drilling, we will know just how rich it is. But Cardero also has half a dozen smaller project in Mexico which most Vancouver mining companies would kill to get their hands on. But Mexico is not the end of the story, hardly the beginning.
In Argentina Cardero has a major copper deposit located at Cerro Atajo located only 10 km east of Alumbrera (600Mt @.53% copper and .61 g/t gold) and 25 km west of Agua Rica owned by Northern Orion (700Mt @.66 copper and .23 g/t gold) In addition, they have five other major silver and copper projects in Argentina.
In Peru, Cardero has another major Iron project at Pampa de Pongo in the Marcona IOCG district. Numbers from Rio Tinto show 1 billion tons of 75% magnetite in the Pampa de Pongo deposit. If Cardero went into iron production and made but $1 profit per ton, that would value Cardero at $25 per share. In addition, Cardero holds five other major projects in Peru.
Clearly it isn't a lack of assets holding Cardero shares down. It's a lack of clear understanding on the part of just about all Cardero investors as to just how many major projects they hold. No one understands the company so they fear owning the shares. But if you start putting a value on just a few of the pieces at today's prices, it's clear that Cardero is undervalued.
For platinum and PGM investors, you have another company selling for a tiny fraction of what it's really worth in Elgin Resources. Elgin (ELR-T $1.27 58 million shares fully diluted) is in the process of merging with Jonpol which should be completed shortly.
The stock has been hammered from $1.90 to $1.27 because investors don't understand the amalgamation. It's pretty simple. The combined company will be in production in 18 months, is fully funded and you are buying ounces of PGMs for $6 an ounce. When gold ounces in the ground cost $58 and a silver ounce is worth $1 in the ground, $6 platinum/palladium is damned cheap. And they are going into production. It always makes sense to pluck the low hanging fruit and Elgin is low hanging.
It's pretty obvious to everyone by now who is paying attention the energy problem is real. And while oil may have hit a temporary top at $58, it's still nowhere near it's record of $80 in constant dollar terms. Peak oil is real and it's here. Hopefully most of our regular readers are familiar with our new energy site. We have two interesting companies who have made major changes in their business model over the last six months and shareholders will soon be reaping the benefits.
Admiral Bay Resources has come to life over the past year going from $.86 to $2.30 before settling down. (ADB-V $1.61 43 million shares) They currently have over 50 gas wells in production and plan an aggressive $24 million dollar drill program for 2005 with an additional 150+ wells drilled for 2006. Using a figure of $5 per mcf, they are targeting a cash flow of $7.6 million US for 2005 and $25.2 for 2006. Gas is currently $7.21 so any correction is fairly meaningless to their long term schedule.
It seems to me to be pretty obvious that they are setting themselves up for a buyout in the next 18-24 months. With $1 million a month in cash flow within 18 months, they will be very attractive to a major energy company.
Another interesting energy play is Vangold Resources. (VAN-V $.35 41 million shares outstanding) Vangold has had an interesting history. Two years or so ago when I first wrote about them, they had a piece of nine gas wells bringing in a fair bit of cash. They partnered with New Guinea Gold in a number of interesting gold and copper properties in PNG which look very good to me. But several of their directors were against any more investment in energy and CEO Dal Brynelsen took their advice. After a good but not exciting drill program in PNG last year, Dal watched as his share price went off a cliff into free fall as a result of bored shareholders dumping their stock.
He decided that Vangold should have ignored the advice of the directors who were against further investment in gas/oil and starting last November, Vangold bought a piece of a bunch of oil properties in the process of drilling. And hit on every one of them. Dal now believes he has $12 million dollar cash flow potential for 2005 and rather than diluting the shares for raising money for more gold drilling, he plans on using the cash flow from oil/gas operations.
It's hard for a company to continue down two paths and when Admiral Bay asked me two years ago if they should, I said, "no, no, hell, no." Most companies cannot run an energy side and a metals side and keep them under any real control. But Vangold appears to have done it successfully and you can't argue with success. The shares are up almost 100% in six months and as a shareholder, I like that.
Moly is an interesting metal with a variety of opinions as to its economic potential. Certainly moly projects have been coming out of the woodwork over the last year as prices rocketed from $16.50 a year ago to $32.45 today. My favorite moly play is Adanac Moly. (AUA-V $.64 31 million shares outstanding) Adanac just announced their 43-101 estimate and it came in at just short of 400 million pounds of moly at their Ruby Creek deposit in Northern BC. Since I first wrote them up last summer, they have added a couple of major moly properties in Nevada and drilling will begin when the snows melt.
Moly is an interesting metal. There is no long term shortage. But short and medium tern there are shortages. Moly was $6 a pound not long ago and it might return. The Chinese are talking $15 moly this year as an estimate but you have to take into account they want to talk it down. But we know where a lot of moly is and finding a giant deposit today is almost certainly a losers game since it takes so long to get permitting and into production. Of all the major moly plays, Adanac leads by probably a year and a half. Let me make my opinion clear, most moly projects will never go into production. But Adanac's time line calls for production in July of 2007 and that works.
When you look at possible moly projects, time is more important than grade or size. Those early to the table get fed, those late ,will go to bed without dinner at all.
The best gold/copper play on the board has to be NovaGold. (NG $9.22 66 million shares outstanding) These young guys have been leading the juniors for three years now. It's a great stock to own, it goes up, sets a new high, comes back down 30% allowing investors back in and then it repeats. They will own 30% of Donlin Creek with 26 million ounces of gold and are carried to production. Their share will be in the 300,000 ounces per year range. They have a giant copper/gold play at Galore Creek/Copper Canyon in northern BC, with mind boggling assays and more to come and are in the late stages of preproduction at Rock Creek in Alaska.
NovaGold will be one of the top mining companies in the world in five years. Not just juniors, tops in the world. They have management that is that good.
If you like the NovaGold story, you have to love Eagle Plains Resources. (EPL-V $.75 41 million shares outstanding) This young management team has 35 different projects working. They have a variety of JV partners who earn into the property through work commitments allowing Eagle Plains the opportunity to profit without cash outlays. Their Copper Canyon JV with NovaGold is probably worth more than the entire market cap and one day they will either spin it off or NovaGold will simply buy it from them.
The company is a very high potential, low risk play on zinc or copper or gold, take your pick.
These are not all the companies I like. I personally own about 25 stocks, I am a firm believer in not putting all your eggs in one basket. But these are companies I know and are run by people I can and do pick up the phone and talk to all the time. With 850 different mining juniors in Canada, no one can cover them all. There are dozens and dozens of good, solid companies out there with hard working management which I can't cover, I can't know them all.
I will say that I suspect Mexico is about to explode, Mexico didn't participate in the 1995-1996 mining boom but has had hundreds of millions of dollars put into exploration this go round. Somebody in Mexico is going to win the brass ring any day now. It could be Cardero, it could be Excellon, or Endeavour Silver or Starcore or Continuum, or Great Panther, or any of two dozen different companies. When one hits the jackpot and does it in plain view, investors are going to start throwing money at Mexican mining shares. When that happens, you will want to be holding some of the lottery tickets.
We are biased, I own shares
in most of the companies mentioned. I write about them because
I like the projects and the management. That's why I own them.
Most of the companies are advertisers. That just shows good sense
on their part.