New York Institutional
Gold Conference Sep 2002
There are gurus in the gold industry who read tea leaves and create voodoo numbers. Instead, I watch people. The latest New York gold show was a mind opener. Both voodoo numbers and interesting behavior were to be found in profusion.
I make no secret of the fact I don't understand TA and find fundamentals interesting and handy to value an individual gold company but the real key to investing overall is to watch the behavior of people. Lots of gurus pretend to have called tops and bottoms but proof of their wisdom is seldom found.
I called the bottom in gold stocks in the May of 2001 when I said, "we know of no class of investment which appears to offer such a marvelous risk/reward ratio as do the small gold stocks at this time. Don't worry about them crashing, they have already crashed."
And I called the bottom of silver in December, "The bottom of silver just passed at $4."
Calling markets is easy. All you have to do is watch people. Calling individual stocks is harder. But at times picking stocks is about as difficult as throwing darts. You could find stocks 18 months ago selling at a 30% discount to the cash they had on hand. Remember when Durban Deep was $.65 a share? I was a buyer. You could have bought back then and made money.
It's still just as easy and the rewards will be just as great. The only problem now is that there are three times as many companies to choose from. But the math is as easy as it was 18 months ago. You just have to do the math. The gems are there but now you have to shove the coal out of your way.
The New York gold show was canceled last year due to a last of interest. That's an important message. And the planned show in Miami Beach organized by the same company was canceled for April of this year. No interest. Boy, was I surprised to find over 100 companies with booths in New York on Monday and Tuesday of this week.
All the gurus were there. Sinclair is still waving his magic wand and inventing numbers which are dead wrong. But the sheep were lapping it up. He is the only person in the world who says gold hit $248 in August of 1999. Everyone else knows it was $252 and change. But when you herd sheep, they want magic numbers and voodoo. It tells me the market is going to go up a lot more for a lot longer than anyone actually believes.
But best of all, the companies who have a story to tell and have been conserving cash signed up for the show in droves. There are some really wonderful investment opportunities. But don't touch the seniors. South Africa has turned into a mine field and with the possible exception of Harmony and Durban, the stocks are to be avoided.
The largest gainer on Canadian stock exchanges last year was NovaGold, still one of my favorite juniors (soon to be a senior). Last year they were the top gainer, this year they are in the top 10 in percentage gains. Jim Sinclair gave his talk and was followed by the President of NovaGold, Rick Van Nieuwenhuyse. It was an experience in contrasts. Van Nieuwenhayse took a 3 million dollar company and turned it into a 180 million dollar company in 18 months while gold advanced 20%. Sinclair took a figure of 231 billion dollars in total gold derivatives both long and short which came from the BIS and turned it into a 300 billion dollar short position. Magic. Or voodoo.
When Rick finished his talk, he had to squeeze past Sinclair and his mob because about 25 people were crowding around, dying to hear more words of wisdom from Sinclair. Rick created almost 180 million dollars of real wealth for his investors but he was ignored. Go figure.
As a matter of interest, Rick Van Nieuwenhuyse owns 2 million shares of NovaGold. The company has more than its share of nay-sayers mostly among other mining people green with jealousy. The stock only has about 7 million shares in float but a oversize short position of over 2.1 million shares. As daft as it is to be short gold shares today, anyone short NovaGold is going to get burned severely. The company reports a new resource in about a month and it will be a barn burner. Also, they will present to Placer Dome the bills for the $10 million they have spent at Donlin Creek in the last 15 months and Placer has 90 days to either back-in or not.
It doesn't make any difference to the shareholders of NovaGold if Placer backs-in or not but it adds stability to the stock for investors to know how Donlin Creek will be developed and by whom. I suspect Placer Dome will not back-in which will surprise everyone. Frankly Placer Dome cannot afford to add so many ounces of gold to their resources or they will become a takeover candidate at once. The next 3 1/2 months will be very interesting for both Placer Dome and NovaGold. If you don't own the stock, consider buying some, they take very good care of investors. But in any case, when the short squeeze takes place and NovaGold doubles in a couple of days, you were warned.
I'm always looking for the next NovaGold and I think I found a couple of them. Not carbon copies, companies that successful come along rarely. But when I asked the president of Desert Sun, Stan Bharti, how many shares he owned, he answered, "2 million." I knew I was onto a winner.
Desert Sun, DSM on the TSX, 17 million shares outstanding and is going for about $.32 US and Canadian $.50, has between 3.6 million to 4 million ounces of gold at their Jacobina property in business-friendly Brazil. With 15% of the property explored, they have identified 3.6 million ounces of gold. You could extrapolate the other 85% in all fairness and come up with another 20 million ounces if they find gold at the same rate. Is that reasonable? Sure, the gold is found in a rare conglomerate rock which is both very rare and tends to be found in very large deposits. The Witwatersrand in South Africa is the best known example. You might want to look them up on Google to see how much gold was found there. Sit down first.
Stan Bharti, with 20 years in the business, has assembled the strongest mining team I have ever seen. I said it with NovaGold a year ago, I'll repeat it for those who failed to memorize it. Good management will always do well. Poor management can take the best deposit and run it into the ground. Anyone who has ever talked to the management at NovaGold knows what I am talking about. You are not buying deposits, you are buying management.
Well, the management here is as strong or stronger. They are just as dedicated and they have ground with the same potential as Donlin Creek. Dr Bill Pearson runs Desert Sun's exploration and he has 27 years experience as a economic geologist.
Desert Sun is a gimmie. You are buying gold for $1.50 an ounce and the best company to compare them with is GoldCorp and they get $385 an ounce for their gold in the ground. I'll say it now, listen up. Desert Sun knows what they are doing. They are going to locate 10 million ounces of gold and then they will shop the company. If they don't have buyers lined up by then, (which they will) they will produce gold in the mill which exists on the property right now. They are going to find a lot more gold and they are going to get a lot more money for the gold. You do the math. It's the second most undervalued stock I have ever seen.
I love the juniors, anyone who knows me, knows that. The ones I love the best are often the ones just going into production. We wrote about Golden Eagle when the shares were $.05, they even went lower. They just began production in Bolivia and the stock hit $.31 for a 500% gain in a year. Or you can take Silverado. Garry Anselmo did the very best job I know of using his advertising money to hit the market all at once. The stock was selling at $.13 when we put up Silverado's first advertising banner at 321gold. They are going into production now and the stock hit $.60, six weeks after the advertising began.
Are those kinds of returns possible to duplicate on a regular basis? I think yes. The stocks aren't moving because of gold, they are moving because a company is switching models from a cash burn to a cash printing press. Gains of 200-500% are common and going to get more common. But the biggest gains will still come when the herd discovers gold. (and from the crowd around Jim Sinclair, I suspect that's about to happen).
I really like American Bonanza and their Copperstone property. They will be going into production soon and have yet to be valued on that basis. But lots has been written about ABZ.
Royal Standard is another American Bonanza with 700,000 ounces of resource at their Manhattan property in Nevada. They are getting permits as we speak and intend to begin a bulk sample program with construction of a 20% decline at Manhattan early in 2003. They have a high grade deposit located and will mine that to produce cash flow as they continue to drill and expand the known resources. The stock sells for Canadian $.20 under the symbol RSM. It's a gimmie.
McWatters is going into production very soon with Canada's newest gold mine in the Abitibi mining camp. The mine is called the Sigma-Lamaque (kinda rolls off your tongue, doesn't it?) and they estimate yearly production of 150,000 ounces. They own 60% of the mine so the one mine will be producing revenue from 90,000 ounces a year.
As a comparison, Richmont Mines produces in the neighborhood of 100,000 ounces, the management at RIC wouldn't buy their shares when they could be purchased for about $.20 over the cash on hand. The CEO has searched the industry high and low for a replacement only to discover that the most qualified person in the entire mining industry to replace him just happens to be his son. The management at Richmont destroyed millions of dollars worth of specimen gold because they couldn't figure out how to market gold worth 20-30 times its gold value and as a result lost money for three years running.
Richmont has a market cap of about $75 million and McWatters has a market cap of about $30 million. That's not hard to figure out. McWatters is a buy and if you like a good short, Richmont fills the bill. McWatters is selling gold resources for about $6 an ounce. With about the same total resources, GoldCorp is selling for $1.7 billion dollars in market cap. The leverage to the price of gold is stunning and with a new property coming on line in 2003, McWatters is extremely undervalued.
In conclusion, the gold and silver mining industry dragon has woken up and begun to stir. The change in six months is nothing short of remarkable. The willingness of mining companies to actually promote their products speaks well of the future for the near term, intermediate and long term. We are going to be in for an interesting ride.
That said, the talking heads of the gold industry have also begun to stir. The sharks sense blood in the water and will be doing everything in their power to shake money from the pockets of new and unsophisticated investors. If someone tells you something which doesn't make sense or their numbers don't add up, ignore them.
Mark Twain once said, "A gold mine is a hole in the ground with a liar standing next to it." He wasn't far wrong.
The number of mining companies is small and we are investors for our own benefit. At any one time we may own 25-30 different mining stocks. It follows that often we will own stocks which we have written about.