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Hmmm Mabel... it seems kind of risky to meBob Moriarty Investors know only two speeds, irrational exuberance and stark terror. They shift from one mode to the other in the blink of an eye. The gold shares began riding a runaway train in mid-year and by the 1st of December convinced everyone there is but one direction for gold to go. Up. That probably means gold and gold shares won't go up. At least this week. A substantial gold shares correction began around the beginning of December and probably will continue for the next month. The COT numbers for both gold and silver are at near-record commercial shorts. But there is an interesting divergence between the COT numbers and bullish consensus on gold shares. The consensus on the shares is actually lower than when gold was $375. Either the COTs are right and are screaming correction of some duration or gold shares have some more climbing to do. I suspect we will have a minor correction and then it's off to the races once more. The forces of inflation and deflation are waging a mighty battle over the fate of the world's economy. As Richard Russell points out so very well, the US Dollar is doomed as reserve currency for the world, and our manufacturing base is gone forever. There will be more changes in the next five years for Americans than there has been in the last hundred. Since we are in uncharted waters, our best prognosticators are only guessing what the future will bring. It's obvious to anyone who cares to look that the Dollar is no better than confetti and if you extend the thought only a bit further, the Euro only looks good in comparison to the dollar. But the Euro is just as much confetti and one day very soon, the world will wake up to that fact. Meanwhile,
back at the ranch, Greenspan's unprecedented liquidity has poured
straight back into stocks and by every measure stocks are more
overbought than in March of 2000. On that basis, the Inflation
Shock Troops seen to be winning. But when you look at insider
selling, PE ratios and the level of business, it seems pretty
obvious common stocks are on the verge of a plunge off a cliff.
In any case, the world will be looking for a convenient and proven cure for the ills of fiat currency. I happen to know of one. Nobody is going to go to a gold standard because they want to, Big Government will be just as anxious as Big Banking to come up with yet another paper solution. The only problem is that with a world economy of $45 trillion dollars and derivatives of nearly $200 trillion, the time for paper solutions is past. Gold is not in any way the problem our financial system faces, it is the only solution. At that point you will want to be fully invested in gold and gold shares. And silver. But we aren't at that point and unless you are quite willing to watch your stocks go down, keeping some powder dry for purchasing gold shares at better prices makes all the sense in the world. This last gold
show, the San Francisco Gold Show, a month ago was especially
productive. On the plane to San Francisco I read a fascinating
book from Bill Bonner and Addison Wiggin called Financial
Reckoning Day. They did a brilliant job of explaining how
we got here and where we are headed. I did a
review.
One of the companies which had a booth at the show was a company I was familiar with from a year ago, called True North Gems (TGX-V $.87 Canadian TNGMF-OTCBB). The company has about 20 million shares outstanding for a market cap of about $13 million US. They mine emeralds in the Yukon and have just come up with a sapphire deposit on Baffin Island. The stock seems to be remarkably underpriced and after talking to them several times, I began to figure out why. In the name of protecting investors, the exchanges forbid companies saying anything which can't be verified. But how do you measure the value of emeralds when there are no other listed companies producing colored gemstones you can use as examples? So basically the exchange pretty much forbids True North from saying much of anything about anything. This much we do know, in the 2003 working season, True North Gems mined and processed 465 tons of ore recovering about 29,000 carats of emeralds. (One gram is equal to 5 carats). According to their numbers, they are recovering 1 gram or 5 carats of gem grade emerald from each ton of ore. Since there is no standard price list for emeralds, the exchange refuses to allow them to put a value on their emeralds until a correct price is determined. They have set up an auction process and during January/February of 2004, will be able to come up with a price. But the prices of gem grade emeralds in the sizes they are finding isn't crypto secret, you can easily justify $200 a carat, making each ton of ore worth $1000 in mineral value. For the 2004 season, they expect to mine 4,000 to 5,000 tons in a bulk sample, more in 2005 and 2006. They will complete a scoping study after the 2004 season and a feasibility study in 2005. Mining emeralds in the Yukon, 100 miles east of Whitehorse, isn't the easiest job in the world. In all the other locations in the world for emeralds, cheap labor is available. So they must set up a process for sorting the stones from the waste rock and having it as mechanized as possible. They envision a year round operation once they go into commercial production but for now must cope with a 5 month season from May to late October. They have to fly everything in, they have no road access. Marketing is an issue. Gold and silver are easy to market, far too easy, all you have to do is ship the concentrate or dore to a smelter. Debeers and the CSO has done a remarkable job of convincing people that diamonds are not only rare but also valuable. While I will commend them on a brilliant job of marketing, (one the precious metals miners would do well to learn from), diamonds now face the issue of there being two different processes for the manufacturer of diamonds from carbon which cannot be determined to be man made. So while TGX tends to look at marketing as a problem, I suspect it will be more of an opportunity as gem purchasers begin to abandon diamonds. I really like the company and the management. If anything, they tend to be too negative, $1000 a ton ore solves a whole world of problems. They understand the issues they face and are addressing them. I can easily see this stock up several hundred percent from today's prices. Just how difficult is it today
to find superb precious metals companies selling for peanuts?
How about a PE of 2 and dropping?
And they sell at a PE of two. How much risk do you think there is to this stock at a price of $3.60? I like companies with excellent management and a high chance of going into production. At the SanFran show, I kept hearing the same company mentioned and their brilliant drill results. Midway Gold Corp. (MDW-V $2.14 Canadian MDWGF-OTCBB). Even though they are an advertiser, I hadn't really looked into them. I should have, they have not one but two later stage projects in Nevada both with excellent drill results. The buzz I kept hearing was that both projects will be mines. One, the Midway project, is a joint venture with Newmont. They had excellent results last year, have another major drill program scheduled for the 1st quarter of 2004 and should have a scoping study soon after they compile the results. Drill results from the wholly owned Spring Valley project have also been blistering, with 70 feet of 12 gram per ton and 20 feet of 22 gram per ton gold. Midway has about 18 million shares outstanding for a market cap of about $29 million US. Given the late stage of both projects and the probability of several million ounces of gold (Newmont will probably walk if Midway comes in under 3 million ounces), Midway is certainly cheap in comparison to its peers. I'm always looking for value,
those companies so cheap in comparison to their peers yet still
with elephant potential. Another junior I really like is Sur American Gold (SUR-V $.56
Canadian SURBF-PK) There are about 53 million shares on a fully
diluted basis for a market cap of about $22.5 million US. This
is a company where you have to keep following their press releases
and website. On one major project in the Philippines, the Compostela
Valley (Comval) Project, Sur has already discovered 18 gold veins
and one major bulk mineable deposit. Given this stage of the
gold bull market, the stock is still cheap and has ginormous
potential. Spectrum is a subsidiary of
NovaGold. NovaGold holds all the US properties, Spectrum holds
the Canadian properties. That's only part of the reason you can buy and sleep on the stock. A tiny portion. You have to go to one of the mining shows to see this, it's based on physical observation. The gold bugs themselves are ancient, I'm 58 and I've been in halls filled with gold bugs and I was about the youngest person there, but also the gold company management is approaching the creeping senility stage. Not all of the senility in the business is creeping, some is galloping senility. But in any case, all of the guys at NovaGold that I know are in their 30s and 40s. They are going to be the leaders of the industry in 20 years if they just last that long, the rest of us bugs will probably be pushin' up daisies. I think the whole company is
charged up on Cuban coffee. When I was first writing about them,
Rick VanAlphabet
owned a home in Silicon Valley and
lived out of a suitcase when he wasn't on airplanes out trying
to scare up money for drilling. Remember this was 2001, you couldn't
give gold away. At one point, they were earning $.13 a share
and selling for $.13 a share. Greg Johnson was operating out of Seattle and their chief geologist was punching holes into the ground up in Alaska. Their investor relations guy was in Toronto or Quebec or somewhere equally faraway. Yet this tiny team was actually accomplishing more than the next five companies in the industry combined. After all is said and done today, after half a dozen financings, you still are getting 1/3 of an ounce per share. That's buying gold at $15 an ounce. But even those figures are misleading. All their numbers were predicated on $325 gold. And gold isn't $325 an ounce. Donlin Creek has a lot of gold at $325 an ounce and twice that at say, $425 an ounce or so. But they didn't sit back to collect dividend checks after Placer came back into Donlin Creek. They simply switched over to continue advancing other projects. NovaGold has five projects with over 1 million ounces of gold. And the most interesting today isn't even in NovaGold, it's in Spectrum, their Canadian subsiduary. The primary deposit for Spectrum is Galore Creek and to put it in a simple, non-technical way, (sorry, Greg) the results are barn burning. When Northern Dynasty began promoting their Pebble project, they called it "Another NovaGold." Well, when you want to think about Spectrum and Galore Creek, think "Another Pebble." Albeit with better grades. If you buy a share of Spectrum Gold at $2.50 US, you are getting 1/4 of an ounce of gold. That makes gold $10 an ounce and seems about right. Actually it seems damned cheap. But the figure isn't correct because you are getting 3 ounces of silver, too. Which makes the silver worth about $.80 which seems about right. And you get the gold for free. But not really because you are also getting 175 pounds of copper which makes the copper worth about $.015 per pound. So one share of Spectrum has $100 worth of gold in the ground, $17.50 in silver and $180 in copper. All for $2.50. ("Hmmm Mabel, that's only $300 worth of metal for $2.50. Seems pretty expensive to me. The dollar might go up.") And all of those figures are based on the current resource. They are in the midst of a drill program with extraordinary results. They will be coming out with an updated 43-101 in the 2nd quarter '04, based on the current drill program. It will be higher. A lot higher. And people are complaining about not finding good stocks to buy. Not from my vantage point. I see a whole bunch of them. Bob Moriarty Websites: |
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