Desert Sun
Mining
Bob Moriarty
October 25, 2002
One secret
to success in any endeavor is to mimic the behavior of those
who have been successful in the past. Two of the very most respected
minds in the metals markets belong to David Tice of Prudent Bear
fame and Ian Gordon of Canaccord who does such a wonderful job
of educating people about the K-Wave and where we stand economically.
With the junior
gold stocks, those investors who have sufficient resources to
be investing early in the game in big numbers are the guys who
make the big bucks. It's participation in the private placements
where the leverage takes place since not only are the placements
often priced below the market - guaranteeing an immediate profit
- but almost always the placements allow for warrants. Warrants
provide a way of betting on the future movement of a stock with
limited risk. And since most often each share purchased has a
certain value of warrants attached, the warrents give the large
investor far greater leverage than for individual investors.
However, there
are times when small investors have a real advantage over the
large investors. The big boys can buy in cheap but when it comes
time to sell, the small investors have a very real advantage.
Almost all gold stocks have a liquidity issue. Trading can be
so slow that a large position simply will not trade.
I have a rule
that I don't ever place market orders. If you enter a market
order, you are telling the market maker it's OK for him to steal
from you. And they will on a regular basis. If you have a large
position, you may well be stuck with it until liquidity improves
and this happens to institutional investors all the time. At
least small investors can exit a position without making a big
move in the stock.
You can copy
the behavior of those who do get in on the ground floor, they
do have the best information and get it the soonest. David Tice
and Ian Gordon recently took good sized positions in Canadian
Junior gold mining stock Desert Sun Mining. I personally followed
in their footsteps after spending a couple of hours with the
President and CEO of Desert Sun at the New York Gold Conference.
I have been
saying the same thing for years about the junior gold stocks.
The companies who are investing now are the companies who will
benefit from the coming gold share explosion. And I expect an
explosion which will make the dot-com boom look like a picnic.
The total value of all the gold mines in the world is about $60
billion dollars. That's chump change and when the public, the
mob, tries to get through the door at the same time, gold stocks
are going to explode.
But the shares
you want to own are those of the companies working now. As gold
goes up and more interest is generated in precious metals, new
fast buck companies are going to be popping up out of nowhere
like mushrooms in manure. Buy the companies with management and
properties.
Desert Sun
has one of the strongest management teams I have seen in the
small gold companies. Don't believe a word I say, pick up the
phone and talk to them yourself, they are accessible. If you
don't take the opportunity to go to any of the gold "dog
and pony" shows or won't call and talk to management, you
are missing a great opportunity.
One of my favorite
questions is to ask the president of the company how many shares
he owns. If management doesn't control a lot of the shares, walk
away. They know far more about what is actually going on in their
company than you or I ever can. If they won't buy their own shares,
why should you and I?
Stan Bharti
of Desert Sun controls about 2 million shares, he owns 1.6 million
and has options. That's a serious number in a company with only
24 million shares on a fully diluted basis. In effect, he stands
to make a lot of money if he makes Desert Sun successful or will
lose a lot of money if he fails.
Desert Sun's
primary asset other than a superb management team is the Jacobina
Mine in Brazil. This is an actual gold producing mine in operation
until 1998 capable of processing 4000 tons of ore a day. When
gold plunged below $275 in 1998, the owners put the mill into
care and maintenance mode until the price of gold justifies opening
again.
Early in 2002,
Desert Sun took up an option on the Jacobina mining district.
The option provides for Desert Sun to earn a 51% share in Jacobina
by spending US $2 million before the end of 2004. And in September
of this year, Desert Sun announced a purchase agreement whereby
they have agreed to purchase the remaining 49% of Jacobina for
Canadian $5 million.
The Jacobina
district consists of a gold bearing conglomerate covering a strike
length of 57 kilometers some 2.5 to 4 kilometers wide. The property
is similar in nature to the Witswatersrand Basin in South Africa
which has produced 40% of the gold ever produced from its 300
mile length. Jacobina resource calculations from 1998 show 3.67
million ounces of resources grading 3.01 grams per tonne and
a proven and probable reserve of 964,000 ounces.
At this point,
Stan Bharti and his team have determined two possible choices
of action. They can earn their interest by spending money for
exploration or they can explore and go into production at the
same time. Naturally it would cost millions of dollars to go
back into production but they would increase shareholder value
considerably. Of all the companies I have covered in the past,
Desert Sun has done one of the best jobs of using their web site
to communicate with shareholders.
Desert Sun
did a "what if" model to show how going into production
would place them in comparison to other small gold companies.
Naturally the "what if" is based on spending millions
of dollars and they make it clear that these are only projections
not a production plan. But the study does give some interesting
numbers and any investor should look
at it.
Desert Sun
has the capacity to produce 73,000 ounces of gold a year at a
cash cost of $188 yet is valued at a very low percentage of what
other similar producing companies are valued. For example, Bema
Gold is valued at $50 per ounce P&P while Desert Sun is valued
at only $17.50 per ounce P&P.
But Desert
Sun will hold plans for production in abeyance until gold goes
higher. They commissioned a study by T. S. Ortslan & Associates
in July to review the Jacobina property and their options. The
report concluded Desert Sun should pursue an aggressive exploration
strategy to bring the property to a critical mass of at least
6 million ounces. At today's price, Desert Sun has a market cap
of US $6 million. According to Ortslan & Associates, the
cap would increase to $10 per ounce or $60 million if Desert
Sun can prove 6 million ounces, thus becoming a takeover target
for the major gold companies.
Just as an
aside, for those investors fairly new to the gold stocks, something
missing from today's markets which was always present before,
is constant wheeling and dealing by the majors. In the past,
the giants were taking over exploration companies on a regular
basis or buying out properties.
That is one
important function of the exploration companies, to funnel mining
properties to the majors. Each day that goes by, the majors consume
more reserves. And those reserves are not being replaced. It's
as predictable as saying that night will follow the day, that
at some price of gold a little higher than now, the majors are
going to set off on a feeding frenzy to lock up new properties.
This activity
is at a near zero basis right now. Indeed, you only need to look
at Placer Dome and their activity of the past couple of years.
They not only have not been buying new properties, they were
shedding existing properties as fast as they could. One day soon
the pendulum will reverse and a real gold rush will take place.
That's when you will want to be an owner of many of these small
juniors.
Stan Bharti
isn't going to be satisfied with only 6 million ounces. Even
though only 15% of the Jacobina property has been explored, he
believes the potential for expanding the resources is much higher.
His immediate goal is to locate and prove 10 million ounces at
which point he believes the market will value Desert Sun far
closer to the industry average of $10 per ounce or $100 million.
Originally,
Stan Bharti and his team planned a 2,000 meter phase 1 drilling
program to expand the resource base higher from 3.6 million ounces.
Cost savings have allowed them to increase the drill program
to 2,800 meters. So instead of two drills working, they now will
have three drills on the property churning away. The phase 1
drill program will consist of at least 18 holes and will be completed
by mid-December. Drill results will be released on a regular
basis as work progresses.
One aspect
of working in Brazil which might concern a potential investor
would be possible government problems in the event of a debt
problem. As we all should know, Brazil is going to hold a Presidential
election this coming Sunday and there has been some concern about
the possibility of a debt default by the new government.
Regardless
of the debt issue or government in power, Brazil needs jobs.
Desert Sun's project at Jacobina is providing jobs and outside
investment in the country when Brazil needs it most. I personally
feel that any government in Brazil will look at foreign investment
in a highly favorable light.
I am a paid
consultant to Desert Sun and they pay us for advertising. Of
course I am biased about the company but I wouldn't write about
a company where I didn't feel a bias. Investing in gold shares
has been the safest sector of investing for the last 18 months.
I see a bright bull market continuing for some time and after
the latest correction gold and gold shares have again come down
to fire sale prices. When the mob wakes to the potential of Desert
Sun and all the other Desert Suns out there, you want to be fully
invested.
Nothing we
say is designed in any way other than to educate potential investors.
You are responsible for your own due diligence and I would highly
suggest you call the company yourself. I like this company and
this management team. In my view they have an excellent chance
of meeting their goals. At a higher price of gold, I like the
idea they might open the mill again.
But don't just
listen to me, call them and talk to them yourselves. When gold
companies get too busy to talk to ordinary investors, sell.
-Bob Moriarty
October 25, 2002
Desert Sun
Mining DSM (on TSX-V)
Desert Sun Mining chart
Desert Sun Mining website
Desert
Sun Mining news
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 321gold Inc Miami USA
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