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2010 Toronto Resource Investment Conference

Posted by David

Sorry, for the lack of recent posts, it’s paper-writing season again.

Mining and exploration investors may be interested in attending this year’s Toronto Resource Investment Conference at the Metro Toronto Convention Centre this weekend (Sept. 25-26). Register now with Cambridge House International Inc., the organizers, to get in for free and avoid paying about $20 at the door.

Publicly-traded mining and exploration companies will have booths on the floor. Commodities present at the show are varied and range from silver (e.g. Great Panther, Soltoro), to diamonds (e.g. Stornoway, Shear), to REEs (Avalon, Quest). There are also fairly well-known speakers in the sector that are giving talks: Kevin O’Leary, John Kaiser, the Coffins, Mickey Fulp, etc.

While not as grand as the PDAC and with less plentiful freebies, the Toronto Resource Investment Conference is a nice way to spend the weekend for the individual investor.


Resurgent Commodity Sector for 2010

Posted by David

The 2010 annual PDAC convention this week was resoundingly more vibrant and bustling than last year’s. The nice thing about commodity downturns is that they are often self-correcting given time. The excess of supply that leads to commodity price drops and mine closures also ceases mine development. With no new resources coming onto the pipeline, supply drops as existing deposits are tapped out. This drop in supply leads to an increase in the commodity price, beginning the cycle all over again.

This current resurgence is much to early to be mainly due to this process, lack of exploration typically takes years to manifest into resource shortages. Whatever the cause, the mood of exhibitors, investors, and geologists was significantly improved over 2009′s show. Though there are still many companies out there just hanging on, both those with quality and questionable properties.

Gold was still king of the commodities this year, unsurprising considering it has remained at ~$1100 for some time in spite of the predictions of certain pundits. Though keep in mind that price is in American dollars. Well-run gold producers such as Barrick, Goldcorp, and Wesdome, have been reporting steady and strong profits. The Wesdome booth at PDAC had some impressive display samples of quartz-vein ore containing visible gold mineralization from their Kiena mine. Although some producers are still struggling, e.g. Yamana.

The buzz about exotic metals such as yttrium, niobium, and the rare earth elements has died down a little since the excitement of last fall. Leading juniors in that field, such as Avalon and Matamec, were still well represented at the show. In terms of fundamentals, however, nothing has changed, our increased dependence on technologies is leading to a demand that will continue to ramp up with each passing year and the Chinese control virtually all production. Not a pretty picture from either an economic, strategic, or political view (for everyone but the Chinese that is).

Copper, nickel, and other base and ferrous metal prices have all climbed back up significantly. The earthquake in Chile barely caused a blip in copper prices (Chile produces about one third of the world’s copper), and metal producers like Amerigo and Lundin are starting to see their first real profits in over a year. Speaking with Amerigo reps at the PDAC, they predict a return of their one-vaunted dividend should copper prices hold close to their current levels.

The investment talks for the junior diamond sector saw increased attendance this year. The best was saved for the last for talks by Peregrine, Shear Minerals, Shore Gold, and Stornoway, discussing the most promising Canadian diamond projects and their various stages of development. Peregrine’s Chidliak project on Baffin Island continues to steal the spotlight with preliminary results from CH-6 that indicate the potential for the highest grade diamond find since A-154 South at Diavik in the 1990′s.

Chidliak is still many years from and possible mine. The Renard and Fort a la Corne deposits of Stornoway and Shore Gold, respectively, are each within five years of a potential mine.  Last fall’s announcement by Stornoway regarding the expanded resource at Renard-2 is putting the company at odds with Shore Gold for the title of owner of Canada’s (and for that matter, the world) largest undeveloped diamond deposit (video interview with SWY founder Eira Thomas HERE). Shear Minerals, though somewhat stagnated by lack of funds, had returned a promising grade of 0.862 c/t from the Notch kimberlite in the Churchill property.

The repeated message from all diamond companies is that world diamond prices have recovered, and possibly then some. Unlike metals, getting firm numbers on world diamond demand and pricing is difficult, but some estimates put current diamond prices as high as 25% over those of pre-crash 2008. With the recovery as of yet incomplete, this could spell a significant jump in share prices for quality diamond stocks over the next 12 months.

Disclaimer: The author holds shares of SWY, YRI, SRM, ARG, and LUN. This article is based on the personal opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2010 www.kimreport.com


Great Expectations for Great Panther Silver

Posted by David

Some investors seem to have had a bit of premonition as Great Panther Silver Limited (formerly Great Panther Resources: TSX-GPR) finally closed above the $1 mark this week on another record 4th quarter report that was 6% higher than the targeted amount and a 22% increase over Q4 2008 in terms of silver equivalent ounces produced (2.203 Moz.). Both mines at Topia and Guanajuato reported excellent recoveries and increases in production of Ag, Au, Pb, and Zn.

GPR is not the only small-cap precious metals producer on a strong rise, Wesdome Gold Mines Ltd (TSX-WDO) has been a steady gainer moving from $1.00/share in March to well above $2.50. As the new CEO, Donovan Pollitt told me at the last PDAC (also in March 2009, when he was VP corporate development): “We manage to get more money out of the ground than we put in. It’s a rare thing.” Indeed, back in March that was an exceptional achievement amongst is peers (and even larger companies) and WDO is continuing to build upon their now 20+ year history of turning good properties into mines. A big factor with WDO’s apparent business model is the old adage “The best place to look for a new mine is within sight of a headframe.” In WDO’s case one of their new Au discoveries: Dubuisson, is right next door to Agnico Eagle’s Goldex mine.

The high price of gold has also re-invigorated juniors exploring in Canada’s traditional gold-producing regions: Ontario-Quebec, and British Columbia. Both new properties and old mines/projects are being looked at closely now with Au appearing to have some permanence at above US $1000/oz. Companies such as Hawthorne Gold Corp. (TSX.V-HGC), PC Gold Inc. (TSX-PKL), and Alto Ventures Ltd (TSX.V-ATV) have reported promising gold-related finds in the Cassiar Gold Belt, Pickle Lake, and Abitibi Greenstone Belt regions, respectively.

Regardless of the size of the company, these regions (and others), so historically tied to the country, will continue to produce viable Au prospects for many years to come. The scope of the geologic processes that create such deposits is typically so large that it takes more that a just few mines to fully exploit them. Furthermore, previously uneconomic deposits became attractive again as new technologies develop. This was the case when the heap-leaching method of gold extraction came to mainstream use.

This history of the exploration, development, and production cycle with gold (and other types of deposits) plays a major part in the economic well-being of Canada. Also its continued existence is a far greater certainty than some other supposed “backbones” of the Canadian economy. While it is easy to move an automobile plant to a country where workers are paid less than $20/hr for semi-skilled labour, it is quite impossible to move a mineral deposit.

Disclaimer: The author owns shares of HGC, ATV, and GPR. This article is based on the personal opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2010 www.kimreport.com


Base Metals, Precious Metals Comments(0) January 16, 2010 9:23 pm

A REEally Interesting Commodity Market

Posted by David

As the commodity markets shyly improve, one sector (aside from gold of course) is giving a strong showing. It is not one metal, but rather a collection of metals (and metalloids) that has experienced a strong increase in investor and consumer demand. Exotic metals: lithium (Li), tantalum (Ta), beryllium (Be), gallium (Ga), germanium (Ge), niobium (Nb), indium (In), and of course the rare earth elements (REEs), are all experiencing their increased demand. Many of these exotic metals are found in relatively rare geologic occurrences such as carbonatites or pegmatites. This is particularly due to their use in electronics. As more of these devices -typically hand-held or personal, make their way into our lives, the demand for these elements increases.

In the recent commodity rebound, many exploration and mining companies focusing on these exotic metals have been riding the crest of the wave. Companies such as Avalon Rare Metals Inc. (TSX-AVL) and Rare Element Resources (TSX.V-RES) have been stand-outs in this group with a 3-5x increase in share prices since April of this year. AVL has been focused on developing the Thor Lake pegmatite deposit (NWT) and has been refining the process by which to extract the REEs from the rock to an experimental yield of 80%. RES is lot only looking to produce REEs from its Bear Lodge deposit in Wyoming, but gold and uranium as well partially with the help of Newmont Mining Corp. Marifil Mines Ltd. in Argentina is still sitting on its indium (plus gold and silver) property at San Roque, waiting for a JV partner to come through.

Other juniors with more subdued share behaviour are Hudson Resources and Commerce Resources Corp. (TSX.V-CCE). Hudson is gearing up on their Sarfartoq carbonatite REE deposit in Greenland as their other main play: diamonds at Garnet Lake, has lost market attention. Surface sample results from Sarfartoq deposit have given promising numbers in the range of ~1-9% TREO (total rare earth oxides) with a strong weighting to neodymium, one of the more valuable REEs.

Commerce Resources has been busy with their Ta-Nb-REE carbonatite project near Blue River, British Columbia. They have recently announced a $5 million private placement to fund the further evaluation of the Blue River project, particularly the Upper Fir portion. Though not a REE-focused company as most of those mentioned above, CCE is looking at tapping into the increasing demand for exotic metals though its Ta-Nb properties

The carbonatite bodies at Blue River are rather coarse-grained (see picture). This makes liberation of the ore mineral grains (such as Nb-bearing pyrochlore) more efficient and points to a high recovery for these exotic metals.

Fresh Carbonatite from Upper Fir

Tantalum in particular is poised for an increase in demand as personal electronics use increases. It is often a crucial component in microelectronic circuitry. Niobium’s main use is as an alloy with iron to produce high-strength steel. As demand increases, the supply side has to potential to contract significantly. A major source of Nb and Ta, African coltan ore, is being slowly cut off. This is because much of the coltan mined in Africa is done under inhumane conditions to finance local conflict, much in the same way as “blood diamonds”.

As with any commodity market, China is another factor. It is the largest producer of REEs though its vast clay or carbonatite mines, over 95% of world production. There are major worries by the rest of the developed world that China’s control of these strategic metals may have major geopolitical consequences, meaning that alternative deposits in the free world may become attractive not only to investors, but to governments as well.

Disclaimer: The author holds 1000 shares of MFM. This article is based on the opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2009 www.kimreport.com


Whose Land is it Anyways?

Posted by David

New Government in Greenland

The Greenlandic people recently applied the results of a 2008 referendum where they voted to gain further autonomy from Denmark that has held sovereignty over the world’s largest island for about 300 years. Greenland now has an increased share of future oil revenues, decreased Danish subsidies, made Greenlandic the sole official language, and has control over areas concerning police, coastguard, and the courts.

Greenland has recently elected a new government as well. The new government is dominated by the Inuit Ataqatugiit (Community of the People) party that has a decidedly socialist and pro-independence platform. However, it has yet to show to the world how it will deal with outside companies in the exploitation of the island’s natural resources: gems, gold, base metals, and petroleum to name a few. Will it take the approach of Alberta (at least until a year ago) with low royalties and taxes to attract foreign investment? Will they go to the other extreme such as the case with Mongolia (see Ivanhoe Mines) where government protectionism and incompetence has paralysed mining in the country? Or will they seek a middle ground as given by the case of Norway, which has exacted generous royalties, but at the same time sustaining corporate interest in exploiting the offshore oil fields there.

Only ~15% of the land area is not covered by glacier, but that number is increasing due to a current global warming cycle. With the lowest population density in the world of 0.03 persons/km2 (Canada is 3); the world’s largest island has to balance its need for funds to better the life of its residents with the desires of some conservative residents to limit exploitation of the land and foreign influence.

Foreign Investment

Natural Resources are the only realistic draw for investment in Greenland. Population and infrastructure levels are too low for things to be otherwise. Although mines have operated on the island in the past (including the famous cryolite mine that allowed for relative fiscal autonomy after Denmark was occupied during World War 2), no mineral production is presently occurring.

The resources Greenland has to offer the mining industry is varied and a number of companies have exploration programs in the region. Hudson Resources Inc. (TSX.V-HUD) is looking at diamonds in its Garnet Lake property and rare earth metals, uranium, tantalum, and niobium in the Sarfartoq carbonatite nearby. Quadra Mining Ltd. (TSX-QUA) hopes to produce molybdenum concentrate from the Malmbjerg project (although with the collapse of Mo prices, we will have to see how that goes). Even the Greenlandic government is looking to directly profit from mineral exploration through its 37.1% share in Nunaminerals A/S (OMX Copehagen-NUNA) a company with nickel, tungsten, platinum, copper, gold, and iron exploration projects scattered throughout the island.

The Natives are Restless

The mineral exploration project that has attracted the most media attention as of recent is True North Gems’ (TSX.V-TGX) Fiskenaesset Ruby play in southwest Greenland. The company is arranging a private placement to pay for some of the final costs in obtaining a long-awaited mining permit by spring 2010 in order to start selling the large amount of rough gem corundum (ruby and pink sapphire) they have accumulated. In terms of the economic geology, deposit is exceptional in both grade and value of the gems present, rivalling the famed Burmese deposits while existing in a country that does not have the habit of imprisoning duly elected politicians or murdering peaceful protestors. The main focus TGX has now is on whether it can get one of the final permits it needs in order to begin selling the rubies and sapphires it has mined during its evaluation of its property and hopes to mine in the future. TGX has encountered a problem familiar to many companies operating in Canada with resistance from some local aboriginals to the project. This group claims right to traditional mining rights over all of Greenland including TGX’s staked claims. A fairly recent confrontation two summers ago between TGX employees and a group of locals who were collecting gems on a TGX claim resulted in police intervention and catalyzed the formation of the group of locals who accuse the Greenland Bureau of Minerals and Petroleum (BMP) of unfairly siding with TGX and denying their right to conduct traditional activities. A number of articles supporting the local group of aboriginals, calling themselves the August 16th Union can be found HERE.

Playing Hot Potato

For TGX’s part, they appear to (wisely) want to distance themselves from any conflict with locals. They state that the August 16th Union’s complaint lies with the BMP and that the incident just happened to occur on a TGX clam. Andrew Lee Smith, CEO of TGX, when directly questioned on the matter by the KIM Report replied:

As a foreign company investing in Greenland, we feel this is an issue for the people of Greenland and their government to deal with. We have respected the laws of Greenland in acquiring our mineral rights and conducting exploration and will continue to do so. The company would be happy to support any process that would improve the Greenland mining act if requested to do so.”

A transcript of an interview with Mr. Smith can be found HERE and gives a similar, but more detailed message.

A Great Canadian Pastime, Now a Greenlandic One

Given that one bias of opinion on this issue was given by the blog articles linked above, I will play devil’s advocate. Though I am a geologist by training and admittedly know little about Greenlandic law, I think this issue is a major concern for any company looking to do exploration in Greenland. The election of a socialist, pro-Inuit government does not bode well for companies involved in land-use disputes with aboriginal groups. However, the desire for more financial independence from Denmark and thus the need for more foreign investment may temper the government’s approach to this matter.

As a TGX shareholder, I am of course concerned by any possible interruption of development at Fiskanaesset, but as a Canadian, I am all too aware of the ability for corporations and government to push aside aboriginal groups in the name of “progress”. However, I also know that often the best way to find “traditional aboriginal lands” is to stake a development claim (e.g. Caledonia, Ontario). This unfortunate stereotype is can be encountered when utilizing land in Canada and sometimes is all too accurate in the most cynical sense.

This dispute raises a number of questions by outsiders unfamiliar with Greenlandic law and custom. It can be argued that what has to be established here is: (1) Is gem corundum collecting a traditional Inuit activity and does solid historic evidence exist for it? (2) If the former holds true, what degree of mining is considered traditional? (3) If aboriginal mining is legitimate, is there evidence for past mining in the region claimed by TGX? (4) Is it reasonable to allow traditional miners to benefit from the exploration activity conducted by TGX (ore discovery, exposure at surface, etc.)? (5) Is selling gemstones collected by aboriginal collectors to the world market also a traditional pastime? (6) If the former is all or partly true, did TGX know of this and did the government inform them when they applied for their exploration permit?

Final Cynical Thoughts

While I understand the desire first nations have to preserve their traditional, pre-colonial practices, to demand special status can in certain cases be construed as hypocrisy. Much like the Inuit hunter using rifle and snowmobile to achieve their specially-sanctioned hunting quota in the Canadian Arctic, or the Atlantic Mik’mak Indian lobster fisherman using powered boats, radio, and sonar to bring in their catch, sometimes these “traditional methods” are none too traditional. Likewise, is mining – even on a small scale, of deposits found and exposed at surface using modern technology and knowledge really “traditional”? Going further, is selling those gemstones to offshore consumers “traditional” as well?

Disclaimer: The author holds 1000 shares of TGX. This article is based on the opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2009 www.kimreport.com


Selling Diamonds at the PDAC

Posted by David

Diamonds were the focus of two sets of talks at the PDAC. The first was a more general discussion that dealt with varied topics such as threats to producers in the form of treated and synthetic stones, science in diamond exploration, the new Chidliak (Peregrine & BHP) discovery, and the diamond industry and its relation the to market in general. The second was a series of presentations by various diamond juniors and their properties.

Turnout for the first talk was surprisingly low, considering the reputation of the speakers, less surprisingly was the even lower turnout to the second series. However, some very good presentations were given and some interesting trends began to appear in the nature of the industry:

1. The diamond industry IS hurting. That is a no-brainer considering how every other mining sector is doing (with the possible exception of gold right now). Currently there is a glut of diamonds in the possession of the cutters right now and the consumer, -you, are not buying. Yes people continue to get married even in tough economic times, but that diamond on the engagement ring will be smaller. Less disposable income = lower consumer spending.

2. The aforementioned hurt has led to a serious slowdown in the discovery and development of diamond deposits. The collapsed diamond prices have led to a short term situation where long term supply will be affected.

3. In regards to that long term view, diamond mines are painstaking to develop. They require more proving-work than any metal commodity and have a discovery to production timeline of at least ten years.

4. This slowdown in the development process is coupled with the lack of world-class discoveries/openings since Diavik (Rio Tinto & Harry Winston) in 2001. The two biggest resources in terms of report value in the pipeline now are Grib (Lukoil & Archangel: TSX.V-AAD), Russia, and Fort a la Corne (Shore Gold & Newmont), Canada. Other developments include the reopening of the Letseng (Gem Diamonds: LSE-GMD) diamond mine, and the sampling of the Mothae kimberlite (Motapa: TSX.V-MTP), both in Lesotho, and the continuing development of the Renard project in Quebec into a mine (Stornoway & SOQUEM).

5. These projects are still 2-8 years before any chance of production, but that may be a good thing as it will be at least 3 years until diamond prices recover from their recent 40% drop. Imagine what would happen if gold went below $600/oz. in a few months.

6. These low diamond prices also mean that companies are holding off on having their projects evaluated in terms of US$/carat.

7. Two types of deposits that did see some focus at the conference are deposits with low grade, but very high diamond value, and those with very low production costs. Diamonds from Letseng are quite rare, but typically high quality. Values can reach up to $2000/c. Motapa and Shore Gold are hoping to enter this low grade – high value club as well. An interesting thing about these rare diamonds is that they appeal to the extremely wealthy, who are more insulated from economic cycles. Companies with low-mining cost projects include Dianor (TSX.V-DOR), who are developing their paleoplacer (old river deposit) Leadbetter diamond resource near Wawa, Ontario, and Mexivada (TSX.V-MNV, Frankfurt-M2Q) with younger placer projects in Sierra Leone. Placer deposits are usually alluvial (river-related) and can concentrate other heavy minerals, such as gold. Placer diamonds are typically higher in value than ones from kimberlites because transport tends to destroy brittle/cracked/included ones.

The key thing now is that companies are balancing keeping in the black with continuing to add value to their projects. The long development time for diamond deposits means that these companies cannot afford to waste 1-2 years due to market conditions. Smart companies are focusing their resources for their most promising resources. Ones that will ensure cash flow as soon as possible.

The lack of attention given to the diamond industry by institutional investors has led to extreme undervaluation in some cases, even at current diamond prices. This represents an opportunity for the individual investor with a 2-4 year outlook to make some serious coin. However, there are a number of diamond juniors out there that have extremely speculative projects and consumers must carefully weigh their expected returns with the risk they are undertaking. More advanced projects carry less risk, but also less expected return. Investors have to take advantage of mispricing by the market due to short term concerns and engage in due diligence to maximize their profits

Disclaimer: The author holds 4000 shares of SWY and 20 shares of HW. He wishes he bought some PGD shares a few months back, but life is far from perfect. This article is based on the opinions and experience of the author. Please conduct due diligence when investing.


Hoping for a Copper Comeback

Posted by David

Background

Chile is probably the world’s #1 supplier of copper (~35%) through the state-owned entity Codelco and various foreign producers. The geology of the Andes lends itself to large-scale porphyry deposits rich in copper as well as gold, molybdenum, silver, rhenium and other metals. Such a huge drop in the prices of these commodities (with the possible exception of gold) has done serious damage to the Chilean economy. With copper exports representing such a huge portion of its GDP (US$37.6 billion, or 56% of total exports in 2007), Chile’s trade surplus for 2008 will appear puny indeed.

Gold vs. Copper

As with most base metals the price of copper has experienced a huge drop from about US$4.00/lb. in July to $1.29/lb. this Monday. This drop has caused any company that has copper as a significant component of its production to suffer serious revenue decreases. Good examples of these are VALE-INCO (NYSE-RIO) (although nickel and iron are to blame here as well) and Yamana Gold Inc. (TSX-YRI, NYSE-AUY, LSE-YAU). Yamana itself is an interesting case as although it is touted as a gold producer, a significant source of its revenue is from copper (e.g. Chapada, Brazil). This has caused Yamana to see a slower rise in share price than other more gold-oriented companies, such as Kinross (TSX-K).

Challenges for a Small-Cap Company

However, large companies have the obvious ability to weather these low metal prices and Yamana stock has still seen a rise from ~CA$5/share to just below $10/share in the past month, mainly due to interest in gold. It is the small-cap companies that have the most to worry about in the short term when metal prices slide. One such company in Chile that is feeling the pressure is Cu-Mo tailings processor Amerigo Resources. Things have changed for Amerigo since the last KIM Report article in April 2008, copper and molybdenum prices have tanked and most producers are happy if they are currently breaking even. At the time of that article, Amerigo was struggling with high energy costs due to a very dry season at the time as most electricity in Chile is hydroelectric in nature combined with high fuel costs. Now fuel costs are down, Chilean electricity is cheaper due to more precipitation, and electric generators running on cheap bunker oil have been installed at their facility near the Codelco-run El Teniente mine (from which they obtain the tailings for processing). Unfortunately, the timing of these energy-savings coincides with the drop in metal prices. Amerigo recently released news that it had incurred negative price settlements for sales of copper and molybdenum to smelter companies Enami and Molymet, respectively.

The Upside

The good news is that Amerigo believes it can reduce its production costs before royalties (which are tied to copper price) to $1.20-1.25/lb. The company has recently managed to partially defer energy, royalty (paid to Codelco), and negative copper price settlements. It is in the process of negotiating deferral for the negative molybdenum payments as well. Enami, a state owned entity, has an established mandate to support small to medium copper producers through price protection. How this will affect Amerigo has not been determined. Amerigo has also extended its banking line to US$5.6 million and has opened a new line with a second bank for $5 million. Negotiations are also occurring to open new long-term credit facilities of $10-20 million. On the shareholder end, management has enacted a shareholder rights plan – in essence a poison pill to dissuade any opportunistic takeovers.

Caveat Emptor

The real issue here is if Amerigo will maintain its CA$0.065 semi-annual dividend due this spring. Many shareholders considered a ~6% return to be excellent last spring when the price was around CA$2.25/share. Now with the share price at ~$0.35/share, this ~20% dividend is either an amazing opportunity, or indicative of extreme risk. Given the unclear forecast for metal prices, it appears to be anybody’s game. Amerigo’s future good financial health depends on its continuing good relations with its creditors and smelters.

Disclaimer: The author holds 500 shares of ARG and 200 shares of YRI. This article is based on the experience and opinions of the author. Please do your own due diligence when investing.


Silver Linings

Posted by David

During this seemingly never-ending drop in equity prices, many analysts are recommending that now is the time to buy stocks as so many solid companies are trading at deep discounts. But what companies does one invest in currently? In terms of resource stocks, most are trading at 70-90% below their stock price last winter. Metal prices have yet to properly recover and most producers have either gone to great lengths in cutting production costs or have shut down their operations. Explorers have also strongly cut back on projects for 2009 or have gone into “hibernation mode” in an effort to preserve their remaining cash until this crisis abates and future private placements can be made.

There are some case examples for optimism however: Harry Winston recently reported net earnings of $1.17/share for Q3 compared to loss of $0.13/share in the previous year’s quarter. Retail jewellery sales offset decreased earnings from sales of rough diamonds due to decreased production resulting from grade variation in the main kimberlite pipe at the Diavik mine: A-154 South. Another case is the small-cap silver producer Great Panther Resources, mentioned in an earlier case study article, that has managed to reduce their operating costs from about $11/oz. to $7.40/oz. in the face of <$10/oz. silver (although we have seen a bit of recovery in the metals over the course of the week). However, news of this was later added to by the announcement of dilution in the form of a $2.7 million private placement. On the exploration end, Shear Minerals continues to discover more kimberlites with high diamond counts on its Churchill property. But, as with Great Panther, this was also followed by the announcement by Shear of a $1.18 million private placement and thus shareholders would see further dilution. In the meantime, Shear’s JV partner at Churchill, Stornoway Diamond Corp. has decided to focus the bulk of its resources into developing its Renard property into a mine. Although its Aviat project on the Melville Peninsula is a definite target for further exploration in 2009. True North Gems is preparing its Aappaluttoq ruby project in Greenland for mine permitting. This will allow them to sell the large stockpile of gems they have acquired from sampling over the past few years. Diamonds North, buoyed by high diamond counts from some of their kimberlites this year, is planning for a modest exploration program in 2009 and is currently working on finishing this year’s mini-bulk sampling program. There are many other companies like those aforementioned that are meeting or exceeding their stated goals. Positive news releases (e.g. this one), however, are promptly ignored by the market -or at least the retail investors.

An unavoidable fact is that the manufacturing and housing sectors are in a tight retraction worldwide. Commodities used in these fields: base metals, iron, aluminum, petroleum, and even some precious metals (silver, PGEs) will continue to see lessened demand as consumers disappear. Many analysts suggest that the US dollar is due for a significant collapse due to the variety of debts piled on America by the Bush government. Traditionally, this would cause investors to flock to precious metals (primarily gold) and other forms of solid investments (diamonds, other rare gemstones, etc.) in order to preserve their capital until the malaise has passed. This bodes well for companies mining and exploring for these commodities. Another silver lining to this recession is that low oil prices have given miners and explorers a break in operating costs via cheaper fuel.

The real challenge is in determining which of these companies will survive the downturn until they can start to benefit from increased demand. Factors to look for are a strong treasury, a demonstrated history of cutting costs, a willingness to open new revenue streams, and management ownership. Management must make serious decisions on whether to conserve cash and limit exploration activities or to spend to continue adding value to their properties. Often the latter involves offering new shares at the currently extremely low market prices in order to raise that cash as banks loans are not forthcoming.

Currently, there are excellent opportunities for investment in mining and exploration stocks. In particular, there is potential in the diamonds sector as it was already undervalued prior to the current crisis and diamond prices are more firm than that of other commodities. A final factor to consider is that tax-loss selling at the end of this year will result in further devaluation of many companies, adding to the allure for bargain hunters. For those who actually have cash left to invest at this point, a long term (3-5 yrs) outlook is mandatory. Those who do their homework and invest in a non-reactionary fashion will definitely benefit when this bear turns into a bull.

Disclaimer: The author holds 20 shares of HW, 4000 of SWY, 500 of SRM, 500 of GPR, and 1000 of TGX., most of which were bought at much higher prices than current. This article is based on the opinion and experience of the author. Please do your own due diligence when investing.


Canaries in the coal mine: resource juniors first to feel effects of slowdown.

Posted by David

As the American market for consumer goods contracts and the greenback devalues, the level of imports to the U.S. greatly reduces. Countries that have economies strongly dependent on manufactured goods to the U.S. (and other troubled countries such as Britain) are affected by this loss of consumer base and start to experience recessions of their own. As the U.S. imports less melamine-enhanced milk and children’s toys with Pb-bearing paint, the world’s most vibrant manufacturer – China, loses jobs. The next dominoes to fall in this depressing little game are the countries with resource-based economies: Canada, Australia, Brazil, South Africa, Chile, etc. With reduced manufacturing, there is less need for raw materials used therein. Also, as the manufacturing countries lose jobs, their own consumer base contracts. Construction in countries like China is reduced as there may not be a demand for homes or office space due to closed wallets.

 

The first sign of dire economic consequences experienced here in Canada is how producing juniors are affected by lower commodity prices. These juniors often have much smaller profit margins than do the seniors and feel the pinch much harder. The most common route of action for these companies when the price for their commodity (metal, potash, oil, gas, etc.) unexpectedly drops is to cease production and put the mine(s) into caretaking mode.

 

This occurred with Blue Note Mining (TSX-BN) when they recently announced they were temporarily halting production at their Pb-Zn-Ag Caribou and Restigouche mines at Bathurst, New Brunswick. This is a far cry from when initial commercial production was achieved last January and its grand opening in June. BN has had excellent technical success in streamlining production at their mines. An example of this was when Caribou exceeded the specifications for maximum tonnage per day milled by 0.2% for August. The have also vastly improved recovery since the start up. The company has also had success in expanding the deposit and thus mine life by further drilling on site.

 

A second example, First Nickel Inc. (TSX-FNI), a Sudbury Ni producer, has also put their Lockerby Ni mine into mothballs as of this week. Acquired from Falconbridge in 2005, this is FNI’s only producing mine. Although they do possess numerous exploration properties in the Sudbury and Timmins areas.

 

So why, in the face of this success, have BN and FNI put their mines on “temporary care and maintenance”? Although it leaves the company in life-support mode and hoping they can remain solvent until metal prices recover, it was the most logical course. Zn has fallen from highs in 2006 at $4000/t back to levels from 2004 at $1100/t. Pb has fallen in a similar fashion from ~$3500/t last autumn to $1300/t levels. Ag is also down from $19/oz to about $10.50/oz in mere months. Ni prices have been reduced from about $8.00/kg to $4.50/kg in just over a month. Price drops of such magnitude will quickly transform a rich deposit into one that is entirely uneconomic. This happened to the deposits at Bathurst and Sudbury and will continue to occur with numerous junior/small-cap producers until people are willing to pay reasonable prices for metals.

 

A company with the potential to go the direction that BN and FNI have gone is Great Panther Resources (TSX-GPR), a silver producer in Mexico. This company has two mines: Topia (Ag-Pb-Zn) and Guanajuato (Ag-Au), and two exploration projects: Mapimi (Ag-Pb-Zn-Au) and San Antonio (Au-Cu). The company has found numerous rich ore zones across their properties and has had success in fine tuning their mining operations to achieve high recoveries. However, GPR has had to cut back on exploration expenditures and had to focus on efforts to reduce cost per ton to process their ore. Their current cost to produce Ag is between $10/oz and $12/oz. As Ag prices flirt with $10/oz, these mines may no longer be profitable to operate in the short term.

 

The individual junior can do nothing to affect world commodity prices. Some may have been lucky or wise enough to hedge a portion of their production at prices from six months ago. However, even those contracts will run out. There may be a slight recovery in metal prices in the short term, but it will take a number of months to years to return to prices seen a short while ago. When metal prices are such that it is economic to return these mines to production, metals like Pb can once again flow from Canada to China and be used in manufactured goods such as children’s toys to be sent back to Canada. Until then, these companies and their investors will have to sit tight and hope that unlike the canary, they can withstand the toxic fumes emanating from the credit market that started this whole mess.

 

Disclaimer: The author holds 1000 shares of BN, 500 shares of FNI, and 500 shares of GPR. This article is in based on the opinion and experience of the author. Please do your own due diligence when investing. To the author’s knowledge, BN ships all of its metal concentrate to Europe.


Base Metals, Precious Metals Comments(1) October 18, 2008 1:24 pm