KIM Report

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

New Developments and Talking Heads in the Resurgent Commodity Boom

Posted by David

This weekend I stopped by the 2009 Toronto Resource Investment Conference held by Cambridge House International Inc. I sort of treat these conferences as a useful mini-PDAC: 100-200 juniors and some talks by analysts, but less free booze and conference swag.

Before getting onto the discussions I had at the booths, a short note on the talks given at the workshops. I attended two very different types of talks at the conference. The first was by Thom Calandra of Ticker Trax fame titled Guanajuato Silver (e.g. Great Panther Resources), Canadian Moly (e.g. Avanti Mining Corporation, TSX.V-AVT), Ghana Gold, and Global H1N1. The talk covered his past experiences, the millions he made selling companies he helped found, his run-ins with the S.E.C., his recent fishing trip with other colleagues, how accurate his past stock predictions have been, past anecdotes, and basically very little to do with the topics covered by the title. No information on how to pick a good stock was given, nor were his strategies discussed in any useful detail. Although in his defense, his presentation was accompanied by many pictures of his visits to sites in those regions.

In contrast to this drivel I was forced to sit through until the main booths opened, Mr. John Kaiser (The Bottom Fishing Report) gave a later talk that Sunday titled Understanding the Rare Earth Metals. This talk was much more useful (even though I found it a little distracting that he looks a little like the PC guy from the “I’m a Mac and I’m a PC” commercials). Although he and his colleagues take a much looser stance on what constitutes a Rare Earth Metal than do us scientists –he includes metals like Y, In, Sc, Ga, Ge, etc. along with the lanthanides, he presented a compelling argument for the future’s demand for these metals. He discussed the increasing need for most rare/exotic metals in new consumer products such as LCD screens, hybrid and electric cars, cellphones, etc. He made an interesting point that the world market for lanthanides was ~$1 billion (USD) in 2005. This has obviously changed to a much higher number. Actual recent pricing for all exotic metals is very hard to find as there is no centralized commodities exchange for these metal oxides (pricing is done in oxides of these metals). A “journalistic approach” is required to obtain much of the current pricing market data, to quote Mr. Kaiser.

One gripe I have is mostly due to my own fault not closely following Mr. Kaiser’s advice earlier. Many of the juniors exploring for exotic metals that have earned a recommendation by him back as recently as the beginning of the summer have shot up significantly. Some include Avalon Rare Metals Inc. (TSX-AVL) (up 386% since May 1, 2009) and Quest Uranium (TSX.V-QUC) (up 2325% since May 1, 2009). I was not able to get around the crowd at the Avalon booth during my time at the conference, but they seem to be making good headway with their Thor Lake peralkaline pegmatite in the Northwest Territories. I did get a chance to speak to some QUC employees though, including one of their field geologists. Their Strange Lake project straddles the Quebec-Labrador border and is an altered (secondary hematite, specularite, fluorite, etc.) alkali granite. Recent drilling confirmed zones of REEs+Y of 1.11-3.47% over 1-14 m. There is also a weighting towards the more valuable heavy REEs. Although this is not unusual for pegmatite REE deposits when compared to their carbonatite counterparts. Though it has pegmatitic zones similar to Thor Lake, the mineralogy, particularly the ore minerals, are very different. Strange Lake has zircon, gittinsite, pyrochlore, gadolinite, and allanite, whereas Thor Lake possesses bastnaesite, monazite, synchesite, allanite, zircon, columbite-tantalite, and fergusonite. In some cases, these ore minerals are quite coarse grained (>1 cm), leading to easy liberation from the rock during processing.

This means that should both projects make it to production, very different metal processing methods with have to be employed for each to obtain marketable metal oxides. One thing that did concern me is that QUC has basically no idea how to process this amazing deposit. (Nor does the literature given out by AVL give a clear image of how to process theirs either). These metals, especially the REEs, are very similar chemically and difficult to separate. Then again, this may not be a problem as most companies this size will, at a certain point, bring in a senior partner with better technical know-how to worry about this.

Other exotic metals companies at the conference that were worth notice were Matamec Exploration Inc. (TSX.V-MAT, light-heavy REEs, Y, Zr), Hudson Resources (light REEs, Ta, Zr, Nb), Rare Element Resources (Au, U, REEs) and Commerce Resources (Ta, Nb).

Needless to say, there is a lot of investor appetite for these types of companies with promising properties. Though I am not a fan of buzzwords such as the “Green Economy” and so on, there is definitely some substance to the developing markets for these metals that new technologies cannot do without.

As a final, but somewhat unrelated note, fans of Stornoway Diamond Corp. will be happy to know that drilling results will be out soon and an update of the 43-101 report on Renard will be due in this upcoming quarter. The preliminary assessment will be out no more than 6 months after that. As for their Avait play on the Melville Peninsula, progress was mostly relegated to desktop work this year as the unexpected extension of the Renard-2 pipe has kept their resources tied up. The company did make it to $0.30/share (down to ~$0.20 now), but that has mostly been due to the success of Peregrine Diamonds’ progress at their Chidliak property, proving to the “sheeple” in the investment sectors that yes, you can still make money holding diamond stocks post-2007.

More news on the diamond sector to come in the next article. Thanks for reading and it looks like a bit of good luck is returning.

Disclaimer: The author owns 4000 shares of SWY and 1000 shares of GPR. Although he wishes he had bought some PGD back in March when he recommended it. 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

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

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.