Like me, you probably have been patiently sitting around waiting for gold to hit $3000 and silver to hit $100 an ounce. Maybe we have focused on the wrong precious metal. With a 25% increase in the price of iron in 2004, 71.5% in 2005 and a projected price increase of 40% in 2006, iron is already the equivalent of $750 gold and $12 silver. That's precious enough for me.
One thing I've noticed over the past couple of years is that advisors tend to fall into one of two categories. They either listen to the market as do Richard Russell and Harry Schultz, or they know better than the market. They know what prices "should" be.
That's why we hear so much talk about conspiracies and manipulation. I don't have time for it, no one has ever made a dime betting on a conspiracy and if you aren't in the market to make money, you must be in it to lose money.
The market is saying iron is a good investment. With a 200% increase in three years, there isn't a single iron company not minting money. Actually they are producing full steam ahead, making money hand over fist and can't produce enough iron for the markets.
Mining companies also tend to fall into one of two categories. There are what I think of as the "garimpeiro" school of mining. Garimpeiro miners all make money. No garimpeiro ever mines at a loss. That isn't to say deposits don't become uneconomic, they do. But when a garimpeiro can't make money mining a deposit, he stops mining. That may not be such a bad thing. They never mine at a loss.
On the other hand, you have the, I'll call it the, "Silverado" school of mining where you damn the torpedoes and continue full speed ahead regardless of grade or cost. Silverado made it to the top of my list a couple of years ago when they spent roughly $5 million dollars mining 500 ounces of gold. That isn't a gold mine, that's a hobby.
So regardless of price, the "garimpeiro" school of mining always lets demand determine supply. And those in the "Silverado" school of thinking know that when gold finally hits $10,000 an ounce, their shareholders will be rewarded.
One group mines minerals and the other group mines investors. Mining isn't rocket science. It's actually one of the easiest businesses to understand I have ever seen. It's the art and science of digging rocks out of the the ground at a profit. Because at the end of the day, if mining companies don't reward their investors with a real rate of return, there won't be any investors.
Garimpeiro mines make money for investors or they stop mining. The Silverado school of mines has never made a cent in profit in the last 20 years. Let me wet my finger and hold it up into the breeze and I'll tell you just how much profit they will make in the next 20 years.
Iron mines and other industrial minerals companies either make money or they shut deposits down. There isn't a lick of sense in overproducing iron or any other mineral. Supply and demand really do work.
Over the last year I've visited some brilliant properties. But from a profit point of view, and what other point of view makes any sense, the guys who are going to be raking in the big bucks are those who intend to mine iron.
After 18 months of delay, Cardero is finally drilling in the Baja. But the market is totally ignoring billions of tonnes of magnetite sands in Peru. And a major copper deposit in Argentina at Cerro Atajo. One of these days soon, the market will come to its senses and Cardero will rocket higher like a cat going up a tree with its tail on fire.
After six months of chaos, Palladon has finally sorted out their financing deal with Luxor Capital. Palladon expects to begin production of iron this month.
I talked to Buck Morrow of North American Gold back in May at the New York Gold show. To the best of my knowledge, Cardero, Palladon and North American are the only juniors with a focus on iron, while the rest of the market totally ignores a 200% increase in the base price for the metal. My first comment to Buck, President of North American Gold, was that the name was probably the worst name I knew of in the juniors. The company wasn't doing anything in North America and wasn't focused on gold.
He listened, which is always a good start, and a month ago the company changed its name to Northland Resources to better reflect their focus. Northland, one of the Simon Ridgway stable of companies along with Fortuna Silver, began as a gold company with a property in Sweden where they entered into a JV with MinMet of Dublin Ireland. Northland agreed to spend $3.5 million in exploration and to issue 400,000 shares to MinMet to earn a 60% interest in the Barsele and the Norra gold properties. While I did just come back from a weeklong trip to visit Northland's Scandinavian properties, we didn't have time to visit their gold properties.
Exploration does continue on the two properties which already have a 43-101 resource of over 600,000 ounces of gold. Northland expects to be releasing a new and expanded 43-101 in January of 2006. Northland just released drill results on the latest drilling which shows encouraging gold grades and widths.
When I visit properties, one of the things I look for is an ability to change with the market as circumstances change. Once started in Sweden, Northland looked around for other opportunities. They found one in a deal done with Anglo American just last December.
Those who read my article about Cardero in the Baja may well remember my comments about IOCG targets. (Iron Oxide, Copper and Gold) Basically, iron oxide has an affinity for copper and gold. If you leave an iron pick in an underground copper mine, it will copper-plate overnight. So when you are looking for big copper and gold deposits, it may be easier to search for giant iron indications in the hope of there being some copper and gold associated with the system. Iron oxide is both dense and magnetic so it's easier to locate.
Northland became aware of a giant 50 KM long fault zone reaching from eastern Sweden into Finland called the Pajala Shear Zone. Anglo had conducted a exploration program targeting IOCG indications in the hopes of finding a large copper deposit on the Swedish side. Anglo didn't find anything they felt worth their time so they optioned the property off to Northland under exceptionally favorable terms. Northland must spend $1 million in exploration over two years and hand over 276,000 shares of stock to get 100% of an 18,000 hectares district. Anglo does have a back-in right to regain 70% of the property if Northland defines a 3 million tonne contained copper resource by repaying 3 times Northland's exploration expenses. Since Northland would be thrilled to own 30% of 3 million tonnes of copper, Northland agreed to the terms and they signed a deal last December.
When Anglo and Northland did their deal, iron hadn't had the 71.5% price increase and if you had predicted such a jump, you probably would have been tossed into a padded cell. But such an increase did take place early this year and Buck and his crew began thinking that as nice as copper was, iron was looking pretty golden. So they literally began prospecting online.
Finland just happens to have the most sophisticated data base of mining information in the world, all online and available to anyone connected to the internet. Would you like to go gold panning online? Go here.
Buck and his people got in touch with the GTK, the Finnish Geological Survey, to compile information about all IOCG targets on the Finnish side of the border including their portion of the Pajala Shear zone. The GTK showed a monster 200 million metric tonnes of magnetite on trend with the properties optioned from Anglo in Sweden. Northland immediately filed claims on the deposits. This Kolari District deposit is not a 43-101 quality resource but the Finnish data included drill results, drill core and all the records of prior mining from two open pits where almost 10 million tonnes of iron were mined in the past.
So as time and prices have changed, so has the direction of Northland. I like that. I like that a lot. On the Swedish side of the zone they have a prior estimated 100 million tonnes of 45% magnetite which they are working to bring up to 43-101 standards. And on the Finnish side they have the benefit of millions of dollars worth of drilling, samples and prestripping.
Northland has identified at least 18 major magnetite/IOCG targets including two deposits with prior mining. The Swedish Geological survey (SGU) reports 90 million tonnes of magnetite adjacent to and part of the Stora Sahavaara ore body. Again, its not a 43-101 resource but Northland is conducting infill drilling and retesting core to bring the resource up to 43-101 standards. Northland released encouraging results three weeks ago from their 2005 drill program at Stora Sahavaara.
Northland invited me and two other mining analysts to visit their Pajala Shear Zone properties. I just got back a couple of weeks ago. The trip was both an eye opener and a wonderful experience. The mob of us including Simon Ridgway, President of Radius, VP of Corporate Development Ralph Rushton and Buck Morrow, President of Northland met up in Helsinki airport and flew on to our first stop, Rovaniemi, Finland, right on the Arctic Circle. And of course, Rovaniemi is where Santa Claus lives. We stayed at the (you've guessed) Hotel Santa Claus and Barb asked if there was reindeer on the menu and was extra-horrified because reindeer was on the menu. (Grilled reindeer liver, Traditional sautéed reindeer, Grilled fillet of reindeer with ribs) But there wasn't any elf pie for desert. The hotel was superb, beautifully furnished, and remember, they are north of the Arctic Circle.
Northland maintains their Finland office in Rovaniemi, in Santa's Technology Park, and gave us a full briefing there on the Pajala Shear Zone properties. To succeed in any business you need some sort of competitive advantage. Since Northern Europe is in such a supply deficit for raw iron, pig iron and iron pellets, any supply from nearby has an incredible advantage. Energy and transportation costs are a large part of the cost of iron ore feed and the closer a mine is to its market, the larger the competitive advantage is over more distant operations.
To give you an idea of how important that is, Europe now consumes 177 million tonnes of iron ore yearly. European production of iron ore feed and pellets (most of which comes from the Swedish iron company LKAB) only amounts to 26.1 million tonnes. Europe has to import an additional 150 million tonnes of iron ore feed over their production.
Northland's iron projects in Finland and Sweden are eight times closer to their markets than Australia and five times closer than Brazil. They can compete in Europe without displacing any European production.
I am a believer in Peak Oil. It's real and it's here. Transportation costs for everything are going up. And when transportation plays such a large part of the cost of the product as it does with iron ore, Northland has an incredible competitive advantage in Europe just as Palladon does in Utah.
In addition, the GTK has a certified lab in Rovaniemi and Northland can have assays back in about two weeks. Finland requires all mining companies to store their core at a central government location. Since Northland has access to all the core and surface samples from prior exploration and mining, they have an advantage worth millions of dollars in savings to them.
Prior to this trip, I had never met Simon Ridgway and I was looking forward to talking to him. I know that he has an excellent reputation in the mining business for forward thinking. In the case of Fortuna which I wrote about last month, he had loaded the company with mining engineers. In the case of Northland, he has loaded the company with exploration geos, including two PhDs. I don't doubt that Buck Morrow and Simon are anxious to get into production but they are spending a lot of money on Sweden and Finland in exploration in order to better define those 18 IOCG targets.
Buck Morrow may be the perfect manager to bring these projects into production. With a graduate degree in Mining Engineering from the Mackay School of Mines in Reno, Buck participated in the boom years in Nevada and brought into production many of Nevada's leading gold mines including Goldstrike.
When we had completed our briefing in Rovaniemi and our visit to the GTK facility to inspect core we continued on to our overnight stay in Levi. I don't know what comes to mind when you think North of the Artic Circle but I think primative. Actually everywhere we visited in both Sweden and Finland could have been 20 miles outside of Stockholm or Helsinki. The roads are good, the food is excellent and the women beautiful. If you like that sort of thing.
When we left Levi the next day, we visited the newest properties of Northland within the Kolari Magnetite Belt including about 1100 ha of newly claimed ground. Within this area are two existing open pit mines. They need dewatering but contain about 66 million tonnes of magnetite according to the GTK and could easily be put back into production. I got the feeling from talking to Northland management that their focus was on the larger known deposits they had included in the Anglo deal in Sweden but how can you argue with a mine that needs little more than pumping out water? I suspect they will shift direction and begin mining in Finland first and add the Swedish properties later.
click on image for large photo
There isn't much to see in inspecting an open pit and we were soon on our way to Sweden. The border consists of some vacant customs shacks and a bridge over a swiftly flowing river. As soon as you drive into Sweden you begin to notice the beautiful red painted houses. I made the comment to one of the group that it looked as if Home Depot had been having a sale on red paint for the last 100 years because most of the houses were red. I wasn't far wrong.
Sweden has a copper mine which was in production from before the year 1000 until the last blast in 1992, called Falun. It's world famous and provided Sweden with much of its trade for centuries. In about 1764 the Swedes began to produce a red ochre from the material ruddle from the copper tailings. In effect, red paint was on sale. The Swedes had the world's largest supply of inexpensive red paint and as a result, most of the houses in Sweden are painted red.
Once in Sweden we traveled to the Stora Sahavaara property where Northland is conducting a program of infill drilling. The extent of the ore body is fairly well defined. Please look at the pictures on their website showing the orientation of the ore body. It is remarkably similar to what we would see when we visited the Malmberget mine as the guests of the Swedish State mining company LKAB, owner and operator of both Malmberget and the world famous Kiruna Iron mine in Northern Sweden.
The iron deposit at Stora Sahavaara not only equals the grades at Kiruna, it even resembles the dip and width of the deposit at the Sweden's largest iron mine. While in Sweden, we did a tour of LKAB's Malmberget iron mine and mill. It was an incredible tour. At one location, a solitary worker managed four separate drill rigs, all fully automated from a control shack hundreds of meters away. The drill rigs cost $1 million a piece but in a country with very high wages rates, it makes workers far more valuable because of the work they could accomplish.
There are those who believe I can't stand the US government, and those who even believe I can't stand the Canadian government either. Actually, neither is totally true. I am an equal opportunity government despiser. I despise all governments, some more than others but despise them all. In Sweden you have a case of the world's most advanced mining company (LKAB) actually being owned by the government. It sticks in the craw to say it but everyone we met knew their job and more, they were remarkably knowledgeable and helpful and they knew what everything cost.
We were driving down to the lower reaches of the mine at Malmberget with one of the geos and someone asked what the cost of maintenance was for their ground vehicles per ton of iron. Without hesitation, the geo answered that it cost about 1 Kronor per ton of ore. I was amazed, first that he knew it but second, it just popped out, he didn't have to think about it or ask anyone else. I visited a rich gold mine in Nevada a couple of years ago and after coming out of the adit, I asked the chief geologist how they processed the ore. He was the senior worker at the mine in terms of years of employment and he didn't have any idea of how they processed the ore. It simply went into a building and came out as a dore bar and if it took 100 elves to do it, he didn't care.
If the US wants to compete in world markets, we had best wake up. The Swedes, even in state owned mines, are good at what they do. And in some cases are damned good looking. If you like that kind of stuff. And the Finns are brilliant at organizing mining data. I have seen nothing like the data base online provided by the GTK anywhere in the world. This trip represented the third visit I have made to a country in Scandinavia and like Greenland before, both Sweden and Finland appreciate mining, do everything in their power to provide mining companies with government support and value the investment juniors represent.
It's said there are three and only three ways to create real wealth. You can manufacture it, you can grow it or you can mine it. The US has exported its manufacturing base. We no longer make much of anything. The automobile industry is about to follow the airline industry into the crapper and when it does, we may regret all the power we gave the government to destroy industry. We can't grow any more. Actually with the advent of peak oil, we will produce less. The cost of raising food is linear to the cost of energy. Literally, food is energy. And as energy costs go up, food costs will go up and the farmers will actually make less.
That leaves mining and it's going to be a long time, if ever, before the US catches up to Scandinavia.
During our tour at Malmberget we asked what the cost of underground mining was and we were told about $5 per ton of raw material. That compares favorably to mining underground anywhere in the world for any mineral. Northland is especially strong right now in exploration but with Buck Morrow's background in putting mines into production, I have no doubt Simon Ridgway is planning on production just as soon as possible. The company has a competitive advantage both in location because of the quality of the data being provided to them at a low cost, they literally are picking up the benefits of millions of dollars of exploration data for pennies but also because of the shortage of both pellets and magnetite ore in the Northern Europe markets.
I like the company, I wish I could have spent more time talking with Simon Ridgway, I have heard a lot about him but he had an emergency which required him to be in Vancouver and he had to leave after the first night. According to the nice people at LKAB, both Kiruna and Malmberget began mining with no more than 100 million tonnes in resources. I'd guess that when Northland has that much on both the Swedish side of the Pajala Shear Zone and the Finnish side they could go into production with a mill in Finland and maybe deliver the Swedish ore to the mill via a conveyor belt. Time will tell but I'd suggest Northland make hay while the sun still shines.
Northland is not an advertiser and has in no way paid for this report. We own shares purchased on the open market. This is not a recommendation to buy or to sell any stock and since you get the profits and losses from your investments, you should take the responsibility for your own due diligence.
By the time you read this I will be off again. This time south, to Mexico, followed immediately by a wedding in Vancouver on the 15th, and then an exciting Canadian excursion into the cold wilds of The Yukon. The latter will be my first '321energy' Uranium trip.