KIM Report

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.

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

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.

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

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.