So the good news is that mining companies believe we ride a wild gold bull but the public doesn't have clue one. I'm not sure how to take that.
Just before the show we posted a piece where I suggested we might be due a correction in the dollar and gold. Well, I'm about 1/3 right. Gold is up $5, the dollar is down a point or so and gold shares are clearly in a correction. But now gold has gone up 12 weeks out of 13 and the higher that number goes, the longer and more severe a correction will be. (We got our correction Wednesday).
If you will remember back all the way to the first of December last year, gold shares peaked on the first of December while gold continued up for another eight weeks. We can indeed be correcting in one without correcting in the other. It's like dancing, sometimes you lead, sometimes you follow.
We are in a gold bull market. Corrections are part and parcel of any bull market so saying a correction is due is hardly heresy. When a trade gets entirely one-sided such as is true with the dollar, Mr Market likes to suck people into the market at the very bottom and very top and then rip their wallets out of their pockets through their windpipes. The day any trade becomes a lead pipe cinch, it becomes too dangerous to touch.
A six-twelve month correction in either gold or the dollar would be enough to convince most participants that there is no future for gold and that's where I would be once again a buyer filled with mad passion. I said from May 12th that you could throw money at gold stocks and I was pretty much right. But the time to take great care in your investments has come.
Don't for a minute believe I am suggesting mass sales. I am not. For most investors, holding is less risky than trying to time the market. This market is going to regions not even dreamed of before it finishes. For example if at the last San Francisco show you went around suggesting the Canadian Caspurki would be $.85 by this year, they would have dragged you off the floor in one of those funny looking shirts with the sleeves that tie in the back and tossed you so deep into a padded cell that they would have to feed you with a slingshot. Who would even have dreamed the Caspurki would go to $.85 by this time?
While I am nervous about the markets in general, I did find some great treasures at this show, some companies with stories so compelling they deserve their tales told.
Governments are filled with people too lazy to work and too nervous to steal. They work for the government for no other reason that no business could possibly hire them for any productive purpose. Basically government employees are pretty close to useless. And that's been true in every country and in every age back to the caveman era.
So the action of the current South African government to create a "use it or lose it" situation is another opportunity created for those who understand what it actually means.
A wise mining company stores up good mining properties. There is no wisdom in producing all that can be produced. Mining is a business and it's one in which you consume your raw material. All of which must be replaced on a regular basis. You can produce at full volume but it creates problems for the future. In the same way a wise squirrel will save acorns in the fall for consumption in the winter when ice and snow cover the ground and the 7/11 is out of nuts.
What the ruling means is that there will be a lot of chaos. Properties which had been drilled out and had feasibility studies done are being forced into a "use it or lose it" basis. And since the major platinum producers are pretty much producing at capacity, a lot of ground is being made available on pretty incredible terms.
Ian Rozier and David Cohen have joined together, supported by Endeavour Mining Capital to create the leading PGM mining company on the TSX. Elgin Resources Inc (ELR-V, $1.25 Canadian 90 million shares, post merger, website) They have $20 million in cash and since most of the warrants are priced higher than the stock, the company stands to add an additional $20 million or so in cash when the warrants get exercised.
All of the numbers I will quote and most of the numbers on their site are pretty confusing. They have picked up two giant PGM properties and are in the midst of a merger. Basically they have between 10-14 million ounces of PGM in two primary near-surface deposits in South Africa. Ian was wise enough to find properties tending to a greater percentage of platinum which also lend themselves to open pit mining.
The primary project, Spitzkop is 6.5 g/t PGM, shallow dipping and near surface. It contains 8 million ounces of PGM measured resources (43-101) and 4.2 million ounces PGM in indicated resources. Based strictly on this one deposit which can be put into production in less than two years for a capital cost of about $15 million, you are buying PGMs for about $6.50 an ounce. An average of 30 gold juniors show about $58 an ounce for similar gold properties. So basically, there is a giant upside potential and not a lot of downside. I'd guess anywhere in the $30 to $90 range would be about right. $6.50 an ounce is pretty close to stealing on the part of investors. Mareesburg will cost between $7-$10 million to get into production.
If all of the warrants outstanding are exercised, that brings in an additional $40 million in cash. So the company is well cashed up and positioned both for more acquisitions and for funding production.
It's important to remember that most of the opportunity here was created as a result of a change of government rules in South Africa. Ian saw opportunity and stepped in to fill the vacuum. I am dead certain there are other properties on the horizon and as time goes short before the "use it or lose it" deadline, there will be other deals done which he cannot disclose at this time.
Of all of the writers out there, I probably put more emphasis on management than the others do. While many of the mining writers have a technical background in mining and often multiple degrees, I don't. But I can measure management. The first company I wrote about was NovaGold over three years ago and it's been a winner all along the way. I said their management (all five of them) possessed "vision" and that it was pretty rare in the mining business.
Well, Ian Rozier and David Cohen have vision in spades and spurred along by more government foolishness, they are creating a platinum giant. It's a low risk and high potential company now and I fully expect more announcements in the not too distant future.
Of course, the real measure of how you feel about a company is what you would do with your own money. Their story was enough to convince me to buy up some shares on the open market as soon as I got back from San Francisco. I don't recommend stocks per se, but if you like the prospects of platinum, are willing to put up with the political risks of South Africa, and would like to consider a low risk, high potential junior, you could do no wrong by looking at Elgin very closely.
Another company that was pointed out to me by one of the most astute private investors I know is called CGX Energy, Inc. (OYL.U-V $.60 US 80 million shares, website). CGX Energy has a giant land position, 7.7 million acres in an area, the Guyana and Suriname Basin, with one of the highest resource potential for oil and gas in the world. Please go to their web site for the entire story because it simply cannot be told in a dozen short paragraphs.
Oil and gas drilling is simple. Energy is in short supply and getting shorter. Drilling for oil and gas costs a bomb but pays for on a 100-1 basis now and again. Deep drilling, over 10,000 deep can cost $8-$10 million a hole for a dry hole, 50% higher if you complete and case the well. More shallow offshore drilling can be $4-$8 million.
So CGX Energy, under the leadership of Kerry Sully as president and CEO, is going to drill a similar risk/reward series of wells, onshore in Guyana. These are shallow wells, in the 3,000 to 6,000 range, at a cost of around $1 million. They plan on a series of three wells with drilling to begin in January, 2005. Kerry comes to the company with 33 years experience in the oil/gas business.
It's a simple equation. The wells onshore are very high risk, there have been no hydrocarbon reservoirs discovered in Guyana. The risk is high. But the company is OK for cash, at least for the three well program starting in January. Oil and natural gas drilling consumes capital. If CGX hits on one of the first three wells, it will generate so much cash flow, most of the next drilling gets paid for. If they don't hit, they issue stock until they do hit. If the first couple of wells hit, the stock has $50 potential. If it takes 25 wells before they find hydrocarbons, it's a $.50 stock.
So it's high risk and even higher reward. And since all juniors are at best either lottery tickets or permanent calls on commodities, I was a buyer when I came back and it's worth pointing out to my readers.
One of my favorite people in the business is Bob Dickinson of Hunter Dickinson. I met him just short of two years ago at the Vancouver Gold show. He pitched me on Northern Dynasty and I wrote about the stock when it was in the $.65 range on the way to over $11.
I learned my lesson. When Bob Dickinson speaks, you need to listen. He cornered me in San Francisco and this time I listened carefully.
Hunter Dickinson has a separate company for each major project. You almost cannot go wrong by investing in any of them, HDI is nothing short of superb. By having an individual company for each major project, an investor can pick and chose just which business model to invest in.
Their latest baby is Continental Minerals Corp. (KMK-V $1.50 Canadian 37 million shares outstanding, website).
Continental signed a deal on the property in February and the stock was at $2 a share. The Chinese insisted wording be changed in the agreement and the stock got cut in half. And last month the agreement was again agreed to and the stock jumped 50%. It's still 33% below where it was in February with the project at the same exact point.
It's a pure copper/gold exploration play. The primary asset is the Xietongmen property located 240 kilometers southwest of Lhasa in Tibet, People's Republic of China (PRC). It has a total of two drill holes. Both of them hit ore grade intercepts of over 200 meters from near surface.
According to Bob Dickinson, the alteration is very big and he grins with excitement when he talks about it. The last time I saw him this excited was when he was talking about Northern Dynasty and they were giving the stock away at $.65. Very big doesn't qualify as a 43-101 resource, but when it comes from Bob Dickinson, it means very big.
The company has Northern Dynasty potential, almost $9 million in the bank and is reasonably priced. The project shows remarkable mineralization for only two drill holes and has road and rail access. They have a large drill program scheduled for the spring. If you like copper/gold exploration plays with giant potential and brilliant management, look at it closely.
I had rather an unusual experience the day before the San Francisco show opened. As I was coming back into the hotel lobby on Friday night (The show ran Sunday and Monday) I heard a lovely soft voice from behind me. "Bob, is that you?"
I turned to look at this tall drink of water. Drop dead gorgeous would pretty well describe her. And she knew me! The only problem was that I didn't know her. But I certainly wanted to. As it turns out, it was the lovely -- perhaps beautiful -- Susie Bell of New Sleeper Gold. [Editor, Barb's, comment: er 'scuse me (click)] She had been told to look for someone with a grey-haired ponytail and flight jacket. And I reckon there weren't all that many folks fitting that description at the show.
We started talking since New Sleeper are advertisers. (Not that I have any problem talking to drop dead beautiful women). She was with Robert Eadie Executive VP of Klondex Mines Ltd as well as CEO of Starcore. Robert casually asked me if I wanted to go look at some 25 feet of 2.5 ounce gold drill core on Saturday. I agreed and the next day we set out on what turned out to be quite an adventure.
Klondex Mines Limited (KDX-V $2.15 Canadian 15 million shares $6.2 million in the bank; website) has held onto a project in Nevada called the Fire Creek deposit for 25 years. The company was pretty quite for the last fifteen years, having farmed out the property to a JV partner who dropped their option in 1999 after having paid $1.2 million over a 11 year period in lease payments.
Earlier this year the company did a financing and began a major drill program. Klondex did something I really approve of, rather than waiting for years to drill some good results, they charged out of the chute and reported results of 25 feet of 2.59 ounce gold in October.
So I was interested. On Saturday, nine of us (minus Susie Bell, rats) [!!!] met in the lobby to go over to Nevada. I had visions of getting on a chartered Greyhound but Robert Eadie and Bill Solloway (see photo, left), President of Klondex had other plans. We took a hotel van over to Oakland airport and got ready to jump over to Reno in a shiny beautiful G-2 jet.
But the Trim Gods weren't cooperating. The pilot came in and told us that Reno was socked in. We figured that we would wait for 2-3 hours to see if conditions would change or until it was too late in the day to make it over and back.
I guess we got over to Oakland
airport about 10 in the morning and about noon I called Barbara
in Miami to report in. She got on the web and said it was looking
grim but conditions were supposed to improve in the early afternoon.
She could actually read the forecast for Reno to me from the
National Weather Service and Reno was looking at 5-10
inches of snow before clearing.
The Weather Gods smiled on us and we left about 1:30 PM. A short
45 minutes later we landed in a white winter land of snow in
the Reno basin. Again we jumped into vans and headed over to
area nearby where Klondex stores core (core1
- core2 - core3).
Desert Sun has a major project at Jacobina in Brazil coming on line in Q1, 2005. (DSM-T $1.70 Canadian 73 million shares, website) $33 million in the bank, they estimate production of 102,000 ounces a year of gold at a cost of $189 per ounce cash costs. Their plant and equipment has a $150 million dollar replacement cost. Expect production and resources to continue to increase.
Excellon Resources (EXN-V $.175 Canadian 111 million shares outstanding, website), has been a favorite investment of mine for the past 3-4 months. The stock remains a buy below $.20 and would be a screaming buy if the boneheads running the company would bite the bullet and do a rollback. At this stage of the market, a stock priced below $.25 is absurd. But try getting management of any mining company to deal in a proactive way with a rollback. Good luck.
Excellon is in the process of driving a decline as I write into a 65,000 ton ultra high grade silver (3000 gram) lead/zinc (30%) deposit called Platosa in Mexico. I wrote about it months ago and nothing at all has changed including the price of the stock. Except that lead, silver and zinc are all far higher and the economics are better now than before.
I tried hitting management over the head with a 2x4 in Las Vegas and again in San Francisco. Investors simply will not take a $.17 share seriously even though the numbers on the project are incredible. Oh, well, in February they will be producing and maybe after months and months of positive cash flow, maybe the stock will arise from the dead. They have all the cash they need to proceed and with the exception of the number of shares outstanding, it's an incredible play.
Admiral Bay ought to change their name to Admiral Buy and perhaps they could attract some attention. (ADB-V, $1.02 Canadian 29 million shares outstanding, website). Management made the mistake of confusing investors a couple of years back and have been paying for it ever since.
Admiral Bay has a giant coal bed methane property at Moose River in Canada. The project has been quiet for 18 months but they are in the midst of a winter drill program. They got diverted into a gold/silver play in Mexico and I suspect investors couldn't figure out if they were investing in an energy company or a gold/silver company. And then they set off to do another oil and gas play in Kansas.
I've talked to top management and I think I know what they are doing. You can't get a clue from their website or printed material. It's filled with factual information all of which is both interesting and meaningless at the same time. They generate great heat but little illumination.
Admiral Bay is now officially an energy company. They have completed 39 gas wells in the Shiloh and Devon projects in the Cherokee basin in eastern Kansas. All are commercial and are in the process of being brought on line. They also have a coal bed methane project in Pennsylvania and in Utah. They look to drill an additional 52 wells before the end of the year.
As much as I like Admiral Bay and all their people, they aren't all that great at communication. They are an energy company going into production on a large scale. Their website doesn't actually communicate that and you pretty much have to beat the information out of them. It will be months before investors realize the change has been taken place. Until then the stock will offer way above average potential for appreciation. If you like energy, you should look at Admiral Bay.
I really hope they take a bull dozer and bury the Mexican gold/silver play. It has consumed both their money and energy for two years and done nothing more than confuse investors.
Endeavour Silver (EDR-V $1.55 Canadian 18 million shares, website), $7.7 million cash on hand, is in production now. I have covered the company on a variety of occasions and nothing has changed except they are doing exactly what they said they would be doing.
The company is a sleeper for a bunch of reasons, all of which scream, "Buy me, buy me." In a year they will be regarded by all as the best-managed and most-profitable of the silver juniors. I think of them in that way already.
When I went to China in September, one of the companies I wanted to visit and missed was Pinnacle Mines Ltd. I'm sorry I missed them and I have them on my schedule for early next year. (Pinnacle Mines PNL-V $.94 Canadian 10 million shares outstanding, website), $2.2 million cash
Pinnacle has not one, but two company making projects in the works. One, near Eskay Creek in Northern British Columbia, the Silver Coin project, continues to show mine making potential intercepts. 24 Meters of over 5 gram gold and 42 gram silver on top of a lot of other great intercepts reported lately.
The project in China which I haven't gotten to is called the Yang Wen Chong gold project in Southern Yunnan Province. (Sorta rolls off your tongue, doesn't it?) They reported very favorable 43-101 results in August of 2004.
I like the management of Pinnacle. We own shares and have for a year now. They are making great strides in both China and BC and are well-positioned with cash. With a market cap under $10 mln Canadian, it isn't a hard decision to make to own some shares in them.
I reported on Adanac Moly in August. (AUA-V $.51 Canadian 23 million shares outstanding, about $8 million market cap ANCGF-OTCBB, website). There is little more to say about them except for the minor fact that when I wrote about them, the stock was $.54 and moly was half of what it is now and by the way, they just added another great moly project in Nevada. Sometimes you have to wonder what it would take to wake investors from their stupor. My SWAG estimate for the moly resource at Atlin Lake is in the neighborhood of 500 million pounds of moly which is currently going for $28.75 a pound. (Updated-STOP PRESS: As at Friday Dec 10th MOLY is $32.00 a pound!)
That same moly was selling for $14 and change in August and with no money in the bank, Adanac was at a higher price. Since then they have added a Nevada moly property at incredible terms, moly has doubled and in the last week, the total value of the moly at Atlin increased $1 billion dollars and the stock is asleep.
It won't be asleep forever. Moly is a commodity in the shortest of short supply and should a major or the Chinese decide they need moly, Adanac could soar.
Some of the companies written about above are advertisers, and we own shares in many of them and as such have all the reason to be biased. We are biased. We write about them because we like them. We own them for the same reason. Your investments are your responsibility, not ours.
Depending on when you read
this I may be gone. I am going up once again to the cold wilds
of Canada. I will be gone from Sunday Dec 12th until Sat. 18th.
So try not to email me between those dates because I won't be
looking at email.