KIM Report

Commodity Recovery or Death-Rattle?

Posted by David

A Possibly Bumpy Road Ahead

The past month or so has seen a huge rise in the TSX and Venture indexes as all sectors slowly pull themselves out of the economic hole that was 2008. What may give investors some pause is the question as to whether this is a true recovery, or is this just the seasonal rise most commodities see each spring? What about the doldrums of the summer holidays and the lows of tax loss selling in December?

The TSX Composite Index has risen from a low of ~7500 at the start of 2009 to over 10000 this week. Is it possible that the seasonal spring rise in commodities has been the catalyst for this long-awaited and hoped-for recovery? Or will these gains evaporate with the spring rains as more inevitable bad news comes out of the (primarily U.S.) financial sector this summer?

Being an Eternal Optimist

I would like to think otherwise, and that some of these recent gains may be long-term. As someone heavily invested (relatively speaking) in the resources sector, I have no real choice other than to be optimistic as psychiatrists are expensive. This was the first month in about half a year that I started looking at my portfolio and searching for opportunities to start mitigating some of my losses. Some I managed to catch, others I wish I did.

Hit

I have had a little luck with two small companies that readers will know are favourites of mine. The first is Great Panther Resources which has managed to keep their metal production (primarily silver) costs well below market, allowing them to be profitable. They have very recently announced that this last quarter was the first in which a positive cash flow ($0.7 million) was attained and that earnings are up by 75%. The discovery of gold rich zones at their Topia mine does not hurt either. Stornoway Diamond Corp. has also seen a climb in share price from recent lows at nine cents a share to what is now strong support above sixteen cents a share. This is accompanied by fairly recent news of flow-through share investment and government support for a road to their Renard mine in Quebec. The latter discussed in an earlier article.

And Miss

An opportunity I did miss was with Teck (formerly Teck Cominco) when I could have picked up shares for less than $5. They now stand at ~$15. Teck is currently in the process of selling of some of its assets (e.g. its share in the Pogo gold mine in Alaska) and issuing more paper in order to pay off debt incurred when if bought out Fording Coal Trust near the peak of the commodity market about a year ago. Hopefully this will teach management to buy low and sell high and not the other way around as they have been doing. Yamana has also started to rise up and even led the pack for a little while, helped by high gold prices and the increase in copper prices. However it has stagnated around $10-11/share lately.

The Caveat

As mentioned at the top of this post, the individual investor must consider that we have negligible impact on the share price behaviour of publicly traded companies. Institutional investors going out or moving in will cause the share price to drop or climb respectively, regardless of the fundamentals. The funny thing is that sometimes, for all their trained staff, these big guys are often the first to disregard fundamentals and give in to psychology, following a pack mentality. With a little due diligence, patience, and discipline, the average guy can come out ahead.

Disclaimer: The author holds 4000 shares of SWY, 200 shares of YRI, 100 Shares of TCK, and 1000 shares of GPR. This article is based on the personal opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2009 www.kimreport.com

Stayin’ Alive: Canadian junior keeps Argentine operations afloat.

Posted by David

The current lack of credit in today’s world markets has left companies scrambling for cash. Mineral mining and exploration companies in particular are finding it hard to keep liquid and to have enough cash on hand to continue operations. As these companies have no income they were previously reliant on raising funds through private placements. This is no longer practical as the vast majority of juniors have extremely depressed share prices and severe dilution becomes a concern. Financing through credit institutions is also a no-go as many of these have become insolvent themselves and those that remain in business have become rather tight-fisted.

Juniors have had to resort to less common methods to raise cash. These include selling shares in assets that they have developed. Bringing in another junior or even senior partner to carry some or all of the costs of exploration for a project is a common tactic. Marifil Mines Ltd. is one such junior with these cash woes.

Marifil’s current cash position is just less than C$100,000, although a rapid reduction in expenses has reduced the burn rate to below $50,000/month. Management has voluntarily reduced salaries by 50%, staff involved with secondary projects have been cut, and the Argentina office is moving to a cheaper location. John Hite, president of the company, has commented that more than $200,000 is due within the next few months in property payments from other projects such as the spin-off of the K-2 potash property to Oxbow Holdings Corp. A $500,000 private placement is also in progress. What is of primary interest is the announcement of a letter of intent (LOI) between Marifil and Yamana Gold Inc (TSX-YRI, NYSE-AUY) that states Yamana’s intention to acquire 51% of Marifil’s Pedernal gold property in San Juan province, Argentina. This is on the condition that Yamana invest at least $2,490,000 into exploration on the property over five years and pay Marifil $510,000. The agreement would also allow Yamana to increase its share to 70% if a pre-feasibility study were provided within thirty months after the five-year period. Yamana now has less than ninety days to complete its due diligence with regards to the property and the agreement.

Pedernal is a “sediment-hosted Carlin-type gold deposit” and shares geological similarities with Yamana’s Gualcamayo property, 250 km to the north in the same rock group. There is a strong silica and barite association with the gold. San Juan is one of the more mining-friendly provinces in Argentina (think of it as Argentina’s Quebec in this regard) and is host to the 13 million oz. Veladero and 18 million oz. Pascua Llama deposits (Barrick). Marifil’s Amarillo is the other project located in San Juan, and was a joint venture with ATW Venture Corp. until this year when ATW decided to forfeit their share in order to focus on their Australian property.

Marifil’s business model of selling or joint venturing all their properties is similar to that of Franco-Nevada. They have numerous precious metals, base metals, exotic metals, limestone, petroleum, and potash projects, and they would rather allow diversity to be their strength, rather than focussing on a single project. The LOI is reflective of this strategy. However, lack of funds has meant that the company has had to restrict its operations to its most promising properties: K-2 (potash) and San Roque (Au-Ag-Pb-Zn-In).

Cost-cutting and actively seeking partners will allow Marifil to continue to operate for the next few quarters, and longer if this LOI goes through. Hopefully by then markets will be giving juniors a break.

Disclaimer: The author holds 1000 shares of MFM and 200 shares of YRI. This article is based on the opinions and experience of the author. Please do your own due diligence when investing.