A little over a week ago, an obscure Chinese Government agency threatened to allow Chinese companies to default on their derivatives losses. As regular readers well understand, I have been warning about the dangers of a massive derivatives induced financial collapse for 8 years. It may be here. It may be now.
Derivatives are about $600 trillion now, down from $700 trillion a year ago; up from $100 trillion eight years ago and totally out of control. Every fool in the world is making giant bets with monopoly money borrowed from other people. A year ago, with oil prices north of $140 a barrel, a number of Chinese companies bought futures contracts on energy. Those are way underwater and those companies don't much feel like paying.
The Chinese government knows that at some point in the future the US Government is going to default. We owe $100 trillion on a $14 trillion dollar economy. There is no way that debt is ever going to be paid off in real dollars. So the Chinese may preempt the US in default. If they do, every other fool playing with derivatives and hiding losses is going to default as well in a series of cascading defaults.
Call it The End Of The World As We Know It. 'Cause it is.
It won't be a week later before the entire world's financially system grinds to a halt. Lots of people believe the financial system is going to collapse. I am one of the very few who believe it will be an overnight catastrophic collapse. I have gotten permission to use this quote from Steve Saville at his excellent site Speculative-Investor.
Steve has it exactly right. It will take a total monetary collapse for anyone to wake up to even discuss the very real benefits of a using gold as money. We are not going to go to gold because it makes sense. No government ever does something because it makes sense. That's how you continue to fight wars when you have absolutely nothing to gain for 8 years and still claim victory. We are going to go to gold because we simply have no other alternative. I really like Speculative Investor but he thinks the crash will take years, I think it will take days.
You want to own some gold, physical gold in your hands, as an insurance policy and you need to be investing in wealth. That's in productive companies that produce things of value. The best thing of value is going to be gold and the best companies to invest in will be those producing gold.
Lucky for you, I just came back from visiting one of those companies.
I first wrote about Little Squaw Mining Company two years ago after a visit. I said they needed to get into production right away. I make lots of suggestions to mining companies. Most of them get ignored and lots of times people come back to me years later and admit they wished they had listened to what was good advice.
Little Squaw changed their name in response to the God of Political Correctness and that was a shame, Little Squaw is 100 times more memorable than Goldrich (GRMC-OTCBB). They ignored me there, too.
Goldrich was as high as $1.60 a share as recently as 2007 and tumbled on the lack of news to a miniscule $.06 a share in December of 2008. You can safely presume the weak hands are gone. Recently on news of production the stock has climbed to a high of $.44.
Based on 4700 meters of drilling in 2007, Goldrich announced a resource of 258,000 ounces of gold. That's placer gold, not hardrock and in Canada placer is a four-letter word. That's silly. It's a lot cheaper to produce than hard rock gold.
Richard Walters, President and CEO of Goldrich, was a founder of Yamana Gold and he thinks hard rock and big company. He had a study prepared showing production of about 20,000 ounces a year for 13 years with a capex of $23 million and a total mine life capital of $33 million.
That's all rubbish of course. You can get started in production of placer a whole lot cheaper than that. I am a partner in a project in Northern BC near Dease Lake. We have about $1.5 million invested and should be producing about 9,000 ounces a year. Our season is about a month longer but the fact remains that placer mining doesn't cost as much as hard rock mining to get started.
So my suggestion to Dick two years ago was to shelve all the $23-million-dollar 3-years-to-get-started plans and for him to get cranking. He ignored me. It wasn't the first time, it won't be the last.
Dick's heart is still in hard rock and he really wants to develop the giant hard rock potential he has at Little Squaw Creek. Nothing much happened during the 2008 season except the stock fell off a cliff and got everyone's attention. By early this year Dick and his team had a major interested in doing a JV and a major drill program in the hills overlooking the Little Squaw Creek. The JV partner was going to put $2.5 million into the program. At the last moment the partner bailed out, leaving Dick and his team at the altar looking forlorn.
Someone mentioned the unmentionable, "Why don't we just use the equipment we have and put it into production?" With a shudder of disdain, the rest of the team agreed and off they went.
I must say they did exactly the right thing for exactly the wrong reason but who is counting? Production is production and contrary to the Gnomes of Vancouver and Trolls of Toronto, a gold bar made from placer gold looks just like a gold bar from a hard rock mine.
I think they started planning in May and by July had a 6-foot Trommel on the way to Chandalar for assembly. They hoped the machine would be assembled and production started by August 10th but they ran into the usual delays. We were there the last week of August and the Goldrich team really got cranking.
This year is just a test to get all their systems working. While we were there, they were doing as high as 4 ounces an hour. A couple of days after we left, they did as much as 5 ounces an hour. A double shift working 20 hours a day could produce 100 ounces a day next year and you start getting into some serious numbers at that point.
Mining placer gold is little more than moving dirt. You need to move it as few times as possible since that all costs money. You need some sort of plant that is geared to the type of gold you are trying to recover. Goldrich spent about $250,000 on their plant and our tests showed that it recovered the large gold; some nuggets were almost 10 grams, and the fine gold that is so important to profitability.
Now that they have jumped into the water, I'd like to see them do more and do it faster. Dick Walters wrote me at the end of last week and said they had recovered over 200 ounces, including 55 ounces in one 10.5-hour day. While we were there in late August, the nights were starting to freeze. They probably can work until about the 10th of September but by the 15th, winter will have set in. They may have somewhere between 500 and 600 ounces this year.
That's all cash flow and very important. Goldrich sold up to 1500 ounces forward and will repay the investors out of the actual gold produced to finance this year's operation. I'd like to see them double or triple the amount of heavy equipment they have on hand. In theory, if they can put their hands on some plants at the right price, they could set up as many as three operations, all aimed at doing 50+ ounces a day. It's possible to run a plant, two dozers or excavators and a loader and dump truck with 6-7 people per shift. You need to be running two shifts because you only have a 120-130 day season and the more you run, the lower your costs.
Goldrich will need to raise a couple of million dollars. Dick Walters has done a great job of keeping a tight share structure and if the shares respond as I believe they will, he can do the financing at a higher price to reduce dilution. It's a low risk investment because all of the money is going into plant and equipment, not overhead.
I like the company and the fact they are finally in production, no matter what the incentive. They won't make costs this year but it's been a very valuable learning experience and they know what they need to do next year. With some capital, they could be a serious producer of placer gold and be self-financing from here on.
The company not only has 258,000 ounces of easy-to-access placer gold, there is a giant hard rock potential that has been barely scratched. If they can finance that exploration out of production, they have a lot more potential than a $16 million dollar market cap would suggest.
We participated in a PP at a much higher price. Goldrich is not an advertiser because they don't really have the cash to spare and I understand that. I really like management and the team that Dick Walters has put together. He needs to double or triple the number of people working at Little Squaw Creek for next year and he needs to raise some money and they will be off and running.
Obviously the shares should respond to positive news about production from the test mining and then there will be an absence of news except about financing until next year. Don't be tempted to chase the stock, the shares are tightly held and the market makers play a lot of games. Put in a bid and wait patiently. This is a stock that could get a lot of traction out of higher prices for gold.
Obviously as a shareholder I am biased and anything I write should be considered before you do your own due diligence.
I took some very nice photos, you can view them - in 'gallery' form - by clicking here.
Goldrich Mining Company