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Please take a moment to browse through Lawrence's answers to important subscriber questions
 
Aurcana and accelerated warrants - May 29, 2006
Question:
I am looking at an entry point for purchasing Aurcana. I noticed that today, the company issued an announcement that the company is accelerating the expiry of the warrants, which means that the warrants have to be exercised by June 23rd. I am not sophisticated in these matters, but my understanding is that when people start exercising their warrants (and presumably cashing out), the price of the stock starts falling. Is this correct? If so, then it would seem advisable to wait until after June 23rd in order to pick up some stock.
Answer:
Normally, the exercise of warrants would generate some selling. Therefore, the period leading up to the expiry date would be a buying period.
However, the private placement that created the Aurcana warrants was done only recently. The PP shares and the shares from exercise of the warrants can not be sold untul August 18. There may be some short-selling, but stock can only be shorted on an uptick. (That means a short sale can only be sold when the bid is higher than the last sale price.)
I expect the price to remain near the current level until further news pushes the price higher. As other investors become aware of this company, the buying should overwhelm the impact of the warrants.
Is Bioleaching profitable? - May 29, 2006
Question:
Took a look at BacTech's latest press releases regarding their bioleaching technology. The releases suggest it could be used for base metals as well. In your opinion, how feasable is this process, and would it be profitable?
Answer:
Bioleaching is actually a fairly common process. There are various bacteria that break down metal sulphides. The resulting oxides are then soluble in weak acids, allowing the base metals to be leached. Or, in the case of gold, once the sulphide mineral is broken down, the gold can be recovered by cyanide leaching. Bactech has expertise in which ores are amenable to bioleaching and in the technology of getting the right bugs and getting all the conditions right to optimize the process.
Like most service companies, it is hard to make big money selling a service. The big gains come from owning companies where value is unlocked by applying the appropriate technolgy, whether bioleaching or another recovery process. For example, Regalito Copper gained in value in part because the use of bioleaching helped to make that copper deposit viable as a heap leach project, resulting in a takeover of the company.
Rhodium at $6200! - May 22, 2006
Question:
Rhodium seems to be the most valuable, and
least talked about of the PGM metals these days. It closed over $6200 today!
Wow! Are there any companies that Resource Opportunities follow that may
give good exposure to, or act as a hedge to the Rhodium price. I
guess another question would be whether or not the current price of
Rhodium reflects the real suppy/demand fundamentals or is simply the
product of speculation, (similar to what we've seen in the other
commodities)?
Answer:
Rhodium is a very small market, roughly 600,000 ounces a year, all of which
comes as a by-product of platinum and palladium production. Much of the annual
production is sold by way of long term contracts. Clearly, the present market
is being influenced by speculaors. However, rhodium is one of those metals
that is absolutely essential in its applications and for which there is no
short-term alternatives, and for which the value of rhodium is inconsequential
to the value of the finished product.
There are no primary suppliers. Platinum and palladium producers that produce
some rhodium and are able to sell on the spot market would benefit. All of the
PGM prices are strong and likely to stay strong, as the growth in production
is lagging growth in demand. Any of the PGM exploration/development companies
that we are following would benefit: Eastern Platinum has the best prospects
for benefiting in the near term.
Consulting for private investor - April 4, 2006
Question:
Does Mr. Roulston do hourly consulting work for private individuals? I am a happy subscriber but realize how uninformed I am about the workings of these markets and wish to have a discussion in more detail.
Answer:
I I appreciate the offer but it just isn't practical to do any kind of one-off thing. (I work about as close to 24/7 as I can.) It wouldn't be fair to other subscribers if I took time away from the newsletter to deal with one subscriber.
Impact of options/warrants on share price - April 4, 2006
Question:
I wonder how to apply conventional financial analysis to a company property to include effects of options, warrants, etc. I want to avoid investing in an excellent property only to have the gain in value captured by insiders.
Answer:
In general: I am looking for companies with potential to generate big increases in value. If things go as hoped, then options, warrants, etc will be less of a factor than the impact of the value creation.
To me the most important ingredient is finding people with the necessary skills and a hunger for success. There are some people who are satisfied with modest success and would sell their shares into a modest gain in price. Those aren't the people that I favor.
Among the companies that I follow, the biggest risk comes from geologically-oriented management teams that are in too much of a hurry to raise money and do it at too low of a price. There has to be a balance of just the right amount of promotion to ensure that they get adequate values in the market.
In a way, a competent geological team paired with a promotional group can become a self-fulfilling prophesy. If they can raise enough money, at adequate share prices, then that group should be able to consistently add value for shareholders.
The people who are really exciting to invest with are the ones who have already made a fortune and are committed to building a legacy. Robert Friedland, Bob Dickinson, Ross Beaty all fit that description.
You have to watch the warrants and the private placement stock coming free trading. Those things can sometimes depress stocks. That is often a buying opportunity as it was with a couple of the companies that were recently presented in the newsletter.
Financing for small companies - March 16, 2006
Question:
In reading your descriptions for the "20 Under 40" stocks, I want to be as sure as we can, that they either have sufficient funds, or will likely be able to arrange for them. Is the reader to assume that you have considered this?
Answer:
The short answer is: Yes, I've considered it.
Financing is a very real concern and one that I consider carefully in analyzing companies.
One of the key considerations in selecting these 20 companies (and the others I follow) is that the company has strong management. There is a lot of money available now looking for opportunities in this industry. Companies with strong management and good projects are having no trouble finding money.
An important theme in my due diligence meetings with management is to ensure that they have a plan to increase the share price. It is not enough to add value if the number of shares increases faster than the value of the company.
There are many good companies that raise money over and over at the same share price. I look for a plan to ensure that each round of financing has the potential to increase the value of the company at a faster rate than the increase in the number of shares outstanding.
Remember, if these companies had fabulous management, great projects, lots of money in the bank and great promotion, they wouldn't be trading at less than 40 cents.
Titanium - January 9, 2006
Question:
Was wondering if there were any good titanium stocks. Seems like the aero and car industries are into titanium more and more all the time. The only company I could locate that seemed promising was Tiomin Resources with mines in Kenya and Peru holding titanium and zirconium. What's your take on the titanium mining sector?
Answer:
I don't really follow titanium. I agree it has a good outlook, but as you noted, there aren't many companies primarily devoted to it. Most of the titanium comes from big companies for which titanium is a small part of the business. Titanium is largely a materials handling and processing exercise. I looked at Tiomin when they first got involved in the Kenya project, in the 1990's. I liked it and the people, but stayed away as I thought it would be a long, drawn out process to develop anything in Kenya. I haven't looked at it recently.
The impact of hedging on juniors - December 28, 2005
Question:
A recent article by Jim Sinclair sounds scary for those of us with lots
of money in junior gold mining stocks.
Answer:
Mr. Sinclair is referring to the case of Ashanti Goldfields, a former mid-tier
producer that was based in Ghana and operated a big mine in that country.
Early in the gold bull market, Ahsanti had a lot of badly constructed gold "hedges"that left them with an obligation to deliver gold to satisfy the
hedges when the gold price went beyond a certain level.
The gold price had one of its big runs, and the banks called Ashanti
on the hedges. They were unable to deliver, and faced a serious obligation.
As a result, they sold a piece of their business, a development project in
Tanzania, to settle their obligations. Later, faced with the need for additional capital to upgrade and deeped their Obuasi mine in Ghana, Ashanti was acquired by Anglo Gold.
To the extent that other gold producers have hedges that create a liability at
a higher gold price, they may face the kind of risk described by Mr. Sinclair.
The reality is that there is a great deal less hedging now than at the time
of the Ashanti debacle. More to the point, hedges that create the sort of obligations incurred by Ashanti are not present in well-managed companies.
The Ashanti example has led all gold producers to carefully examine the
structure of their hedges.
If a small producer has no hedges, than a rise in the gold price goes straight
to the bottom line as increased profit. Furthermore, the value of its reserves
and resources will increase with the gold price.
To the extent that Mr. Sinclair's scenario unfolds, that is - a big rise in
the gold price, the unhedged and the well-hedged of the small producers will see enormous gains in value.
Furthermore, in a scenario of rising gold prices, there would be a feeding frenzy of producers looking for additional deposits. The successful exploration companies would also see big increases in value.
In short, only to the extent that a company has a badly-constructed hedge
position as existed at Ashanti would a rising gold price be anything but good
news.
Rest assured that none of the companies covered in Resource Opportunities, nor
most of the other junior gold companies, is in a situation where they would
be negatively affected by a rising gold price.
Pacific Ridge abandoned - November 24, 2005
Question:
Is anything happening on the PEX properties? They announced the start
of a drill program back in May.
Answer:
Those guys haven't even bothered to issue a news release since last May.
They have several interesting projects, but nobody pays any attention.
They are totally focused on Western Prospector. I will find out from
management what is going on (and will be telling them what I think of apparently abandoning the company) when I get back to Vancouver. (I'm in London for the next few days.)
Running out of patience with Axmin - November 24, 2005
Question:
Does Axmin really have the goods, and if so, why does the market
doggedly refuse to recognize it?
Answer:
I agree that Axmin has been frustrating. The people running it had a
great success with Samex several years ago, following a similar plan in
Tanzania.The backers of Samex have put up much of the money for Axmin, and they
don't seem to put much value on investor relations. The projects are
advancing,and they are steadily building ounces. At some time, there will likely be a takeover, as with Samex. In the meantime, few investors notice the
company and they don't have much of a following.They may not get much
recognition until a takeover comes, and it is hard to determine when that might be.
Northern Dynasty's financing
Question:
What do you make of Northern Dynasty's financing?
Answer:
The financing came from several large investors, mostly in the Middle East. It was disappointing to see it done at a discount to the market price, but unfortunately, that is normal for private placements that have hold periods.
They just announced the Teck Cominco side of the deal, which as I suspected, sees Teck taking shares for the interest in the exploration land. In essence, they are converting their interest in the exploration side of the project into a bigger interest in the resource by building their shareholding in Northern Dynasty. That deal may be seen by some investors as Teck giving up something they didn't see much value in.
The conversion of the HD interest has been deferred pending completion of the resource estimate in order to provide a basis on which to determine a value. Let's hope that the number of shares issued to HD is fair to the Northern Dynasty shareholders.
Northgate warrants versus shares
Question:
I have a question about NGX-T/NXG-A: Are the warrants a more prudent investment, as one would have less capital at risk?
Answer:
Northgate plans to develop Kemess North to stay in production. The grade of the North deposit isn't that great and the economics are less than stellar. Investors were less than impressed with the feasibility study completed last October, judging by the action in the market. They are now in the process of raising US$190 million to fund the development. If it comes as equity, it means a lot of dilution at this share price. If it comes in the form of debt, it will add a level of risk and likely require some hedging. In short, to maintain the current level of income will require a further US$190 million of financing, equivalent to 65% of the current market value.
Revolutionary new technology - too good to be true?
Question:
I received an email from a company call Ekwan-X, Inc. which trades as "EKWX" on the Pink Sheet market. They have a new mineral exploration technology that claims to be able to make a map in one hour that would normally take 3 years. Have you heard of this technology? The stock is trading at $0.01. It seems too good to be true. What do you think?
Answer:
The email actually comes from someone who received "10 million gratis trading shares" to do a promotion.
Spectral technology picks up subtle color changes of rocks on the surface. The technique has been around for decades. It can be used in conjunction with other exploration approaches to detect surface expressions of certain geological features. Ekwan-X appears to be working with an enhanced version of the technology.
The claims made in the email, for example that it could prepare a "mineral map" of a zone 100 miles long in an hour, is ludicrous. It is worth noting that Dr. Stewart Jackson, Vice President Explorations and Director, has been disciplined by the B.C. Securities Commission. The company of which he was a director "made false and misleading statements in records filed with the BCSC" . The company "did this despite warnings from BCSC staff and despite telling staff it would correct its disclosure during a previous disclosure review. Jackson admits he was the key person responsible for drafting and reviewing the company's mining technical disclosure" during that period. Other claims in the email, and on the company's website, are just plain non-sense.
It is also worth noting that the company has 619.5 million shares outstanding, according to an undated "Fact Sheet" on the website.
This could turn into a big promotion, but it is hard to see the company actually achieving anything like what it is claiming.
Inca Pacific
Question:
You haven't said anything concerning IP in quite a while. Is it worth holding? Great newsletter.
Answer:
IP has received shareholder approval to consolidate its shares on a ten-for-one basis. Regulatory (exchange) approval, which should be a routine matter, is all that is left. The company has two good assets that merit a much higher valuation. It is suffering from having such a large number of shares out and from the "old story" syndrome. I think that once the shares are consolidated, investors and analysts will take a fresh look at the company and recognize the merits of the properties.
Is CanAlaska Speculative?
Question:
I would like to have your opinion on CanAlaska(CVV-TSXV): How speculative do you feel the stock is? What would your target price be in the next twelve months?
Answer:
I liked CanAlaska several months ago because of its various projects in Canada and especially its more recent projects in New Zealand. The company is now one of the largest holders of exploration property rights in New Zealand, and that country has excellent geological potential which was overlooked for many years.
Recently, CanAlaska embarked on a program of uranium exploration in the Athabasca Basin of northern Saskatchewan, which is one of the most important uranium areas in the world. It is very early stage yet, but has potential. If nothing else, it should attract investor interest, as uranium is currently very popular.
Somewhere among all of its projects it has good potential to come up with a discovery. There is no way to provide a meaningful target price, but from the current price level, there is a lot of upside potential. Like all exploration companies, it is very speculative.
Bringing a Small Mine To Production
Question:
I have been enjoying the newsletter and would like to know if you have ever researched Dynacor Mines, or if you could share your thoughts on this company.
Answer:
I haven't looked at Dynacor in any detail. Some general comments:
The plan to "bootstrap" the mine into production by scaling up the current small-scale production might work out. However, there are challenges. Vein-type deposits are difficult to mine. The reason that most companies carry out a drill program is to delineate the deposit in order to design a long term mine plan. Without that plan, companies tend to kind of stumble around and it is hard to ramp up production. I get the sense that these guys are dedicated and capable. Getting from here to a large-scale profitable mining operation will take time and carries substantial risk. Without a near term financing, the time frame will be longer. With a big financing at this price level, there will be lot of shares out.
The Challenge Of Small Mines
Question:
What do you think of Azure Resources and their management and mining oportunities in Nova Scotia?
Answer:
I don't follow Azure closely, but can offer the following general comments:
The management team seems capable and committed.
The projects have merit.
The projects are fairly small, and that implies that chances are limited that a larger company will want to acquire the projects and/or the company. Consequently, a return to shareholders must come through operating the mines. Small mines are notoriously difficult to make money on. Typically, any cash that can be earned goes back to finding and developing next year's production.
So, while the company has reasonable prospects of a technical success on the projects, its hard to see a really big payoff for shareholders in the near term.
Thistle May Not Be Out Of The Woods Yet
Question:
The question I have relates to Thistle Mining (THT-TSX): Can you give me some idea as to whether there is some upside potential with this company or not?
Answer:
The new financing and the sale of the Earasia shares has given the company some cash and some breathing room. Restructuring the hedge book means that Thistle will now receive the market price for gold. The revised mining plan should se some higher grade ore going through the mill, and therefore, if all goes well, the company should show a positive operating margin. Note that the cash operating cost in the 2nd quarter was US$570 per ounce.
Getting rid of the hedge has resulted in the company now carrying a US$45 million loan. Few of the South African gold miners are generating much cash flow now. If Thistle is able to sueenly vault to the top ranks, it will generate some cash, but at least a portion of that will go toward the debt. Any left over will likely go toward on-going development costs.
If the gold price goes up massively in the near term, then this company could appreciate. At the current gold price, it will likely be a long struggle.
Upside Potential Of Northern Orion
Question:
You mentioned Northern Orion on the ROBtv program. I was wondering if you had a target price on that stock?
Answer:
It's really hard to put a meaningful target price on a company like Northern Orion.
My sense is that the company is trading at a fair value based on the earnings potential of its 12.5% interest in Alumbrera. It also holds 100% of Agua Rica, an undeveloped deposit that is similar to Alumbrera. A move toward development of that deposit would have a big impact on the value of NNO. I know that management is working toward development of that deposit. I am monitoring it closely and expect to have some news shortly.
Anooraq and Impatient Investors
Question:
Do you still like Anooraq? It goes nowhere-----any hope?
Answer:
I still believe that Anooraq has big upside potential over time. However, like you and some other investors, I am also beginning to get frustrated with how long it is taking. I will report a more definitive update in the next week or so.
CMKM and its 780 BILLION shares
Question:
How do you feel about diamond mining in Saskatchewan and in
particular CMKM Diamonds (CMKX.PK)?
Answer:
Saskatchewan has serious diamond potential, with De Beers, Kensington and
Shore Gold demonstrating the presence of huge volumes of diamondiferous
kimberlite.
I don't know CMKM Diamonds specifically. Here are some general comments: The
company trades on an unregulated market, so there is very little official
information available. It appears that there are about 780 BILLION shares
outstanding. Even at a mere 2/100's of a penny a share, the company has an
imputed market value of US$150 million. In view of what I can learn about
the status of their project, that seems extremely expensive, on a
fundamentals basis. Pink Sheet stocks are amenable to promotions, so the
value could increase from here, but I would treat it with extreme caution.
Exploration in Northern B.C.
Question:
A question as to the risk/reward of owning a flow through offering from Bishop Gold Inc. (BSG-TSXV)?
Answer:
I don't know Bishop specifically. On a quick glance, the company has some
highly prospective (but early stage) exploration land in northern BC. If
they hit, there is lots of upside. Note that the season will soon wind down
and they may have a challenge maintaining investor interest over the winter.
As you know, there are tax advantages in acquiring flow through shares. The
flip side of that is that some people buy them primarily for the tax
write-offs. If they get two thirds of their investment back on selling the
shares, they still make a profit, on an after tax basis. In other words,
there could be some stock being sold from this financing. It's a bet on an
exploration play, all considered, a reasonable speculation
Independence
Question:
After recieving your update on Knight Resources I decided to check out some of the gossip on the stock house bull boards. One of the posters referred to your update as a bullish case for the stock. In rebuttal another poster insinuated you may be biased as your firm is retained by Knight. Is this this true?
Answer:
My firm is in no way, shape or form retained by any mining company nor do I have any connection in any way with any mining company, other than owning stock in some of the companies. In all cases, I paid for whatever shares I own on the same basis as other investors. My holdings are very diversified, with no one company representing a significant holding. I will disclose if I talk about a company that represents a significant position. After my update on Knight was distributed, I added a small amount to my holdings of Knight.
Refiners' shares of precious metals revenue
Question:
What is the percentage below spot price of a precious metal that a mining company settles with a refiner for the processing of their metals? How is that price locked in and what happens if the price of a particular metal or all metals being refined drastically increases once it's been shipped to the refiner?
Answer:
Normally, a refiner charges a fixed amount per ounce, and its only a few dollars. Refiners usually charge a fee for service. The mining company owns the material all the way through. The fee is usually independent of the metal price.
But, be careful. A lot of mined material requires smelting as well as refining. The smelting charges can be much more than refining. Often, smelter charges include price participation.
For example, in a heap leaching operation, or where there is a gravity or cyanide circuit, the mine will produce dore, an impure mixture of gold, silver and other metals. The dore bars are delivered directly to the refinery.In that case, the miner carries all of the risks/rewards of a price movement while the material is in the refinery.
In other cases, gold is produced along with a base metal concentrate. The concentrate is smelted and then refined. Silver is most commonly produced in a concentrate, usually with lead or copper.
Questions on Anooraq.
Question:
Regarding Anooraq, I now hear people talking about 100 millions ounces of PGM?? Where does that rumor come from as I only see 20 million for the Ga Phasha and then another 2 and 4 for drenthe?
Reports on Anooraq seem to be dismissing the importance of the inferred resources as "not to be relied on"? Are they close to having a defined ore body?
Answer:
On closing of the merger, Anooraq will have about 36 million ounces. They have 4 at Drenthe: They are pooling the property with Anglo's adjacent property, but in the end, the ownership will be determined by how much is found on Anglo's property. If none, then Anooraq will retain 100% of Drenthe. If, for example, 4 million ounces is found on the Anglo property, Anooraq woule have half of 8 million ounces.
The GaPhasha deposit has 65 million ounces and is half owned by Anglo. On cmpletion of the merger, Anooraq will have a half interest in the 65 million ounces.
In this setting, you can have some confidence in the inferred resources. The calculations are backed by some reputable companies. More drilling will likely elevate at least a portion of the inferred resource to measured and indicated status.
GaPhasha is adjacent to another Anglo project close to going into development. Anooraq is working with Anglo to try to integrate the two projects and see it all move ahead as one large project.
Anglo wants more production. Drenthe and GaPhasha are both attractive projects.
There is some uncertainty in anticipation of the merger closing. I believe that it will go through and put Anooraq into a very strong position to move its projects forward, and to acquire others.
Silver: We Got Lots?
Question:
According to this article, there is an abundance of silver mined each year as a by-product of mining operations mining other metals. It also mentions that China may soon start producing a large amount of silver in the near term. (no facts to back this up however)
What do you think of the points made in this article?
Answer:
I believe that the reality is somewhere between the two extreme positions. The author is as bad as the people he dumps on: He tells half the story to make his point but ignores the other side of the story. About two-thirds of the silver produced is mined as a by-product of other metals.
However, he avoids the simple statistic that for the past 13 years the amount of silver consumed is much greater than the total amount of silver mined. Above ground stocks have been steadily eroded. Governments have been small players, at best, for years. The U.S. no longer holds any silver and is buying silver on the market to manufacture the silver eagle.
There will be little increase in production at the $5/oz level. At the current price, there is new silver production in the planning stage, and we will see an increase in production.
China will probably increase production, but not enough to have a big impact on the market.
Most of the silver is consumed in products for which the silver content is nearly inconsequential in relation to the value of the finished product. At the of $7 to $8 an ounce price level, there will be some reduction in demand, some increase in recycled silver and some increase in production.
That will likely keep the amrket in balance in the near term.
Something in the order of a couple of hundred million ounces a year has been coming from above ground stocks. It will take a massive increase in mine production to offset that amount of silver, and that increase will require a higher metal price.
Grade of the Pebble Deposit: -
Question:
With regards to the grade level of the Pebble deposit: Much has been said about how it is uneconomical and could never be mined. Bloomberg came out with a report blasting NDM on the grade levels and John Embry went on ROBTV yesterday and said that while he is impressed with Hunter Dickinson and Mr. Thiessen, he believes the Pebble Project is nothing more than dirt. Just wondering what your opinion is on this.
Answer:
I stand by the analysis and the opinion in the February Special Issue of Resource Opportunities.
The Bloomberg article was based on extremely irresponsible investigation: For example, one of the "sources" quoted in that article stated later that he was asked for his opinion about the gold grade, with no indication of the nature of the project or the presence of substantial copper values.
With all due respect to Mr. Embry, I haven't seen the basis for his judgement. People with detailed information with regard to the project and with considerable experience at conducting evaluations of mining projects have very different opinions.
Valuation methods -
Question:
I decided to investigate your website after hearing you on the Korelin Business report recently. I was impressed with your special report on Northern Dynasty Minerals and the way your analyzed the company, coming up with a mcap/ou valuation metric.
Do you perform such valuation on a regular basis?
Answer:
I provide that sort of valuation when its appropriate. Much of the coverage in the regular twice-monthly issues is update commentary. I don't re-do the valuations each time.
As you point out, its only one measure of the potential value of a company, and can be mis-leading in some cases. Not all of the companies I cover have ounces in the ground that can be quantified. I cover some exploration companies, but never as a bet on a drill play. I have been in the business too long to bet that any particular drill program will make a big discovery. The exploration companies that I like are what I call "prospect generators". These companies originate exploration programs and then bring in partners to fund the on-going work, retaining an interest without taking on the risk. In essence, they become "perpetual lottery tickets". I believe the best risk/reward tradeoff comes with companies that have early stage deposits: enough work has been done to outline a deposit, but more work is required to formally quantify the deposit. In those cases (like Northern Dynasty) the value of the deposit, and therefore the company, increases as the project advances.
There aren't too many around. I've covered several over the past few years, all of which have worked out very well. I will be presenting at least 2 more in the next couple of issues.
The cost of mining silver -
Question:
If gold costs from $150-$250 an ounce to mine, how can a profit be made from mining silver that sells for $6 an ounce? Is it that much cheaper to mine silver?
Answer:
The short answer is: Yes, it is that much cheaper to mine silver.
You see, the cost is in processing rock. Silver deposits are typically much higher grade that gold deposits. A low-cost open-pit silver mine could operate on a deposit of, say, 3 ounces or about 100 grams per tonne. A gold deposit could operate at one gram. In that example, for each tonne of rock processed, nearly 100 times as much silver is recovered.
Even more significant is the fact that the majority of silver is recovered as a by-product of mining other metals. In many cases, the silver is actually produced almost for free, as the mines operate primarily to produce the other metals. However, the important factor is that roughly 30% of the total supply of silver comes from above-ground stocks. As stocks are depleted, the silver price will have to rise significantly to justify new mine development to provide enough metal to satisfy the industrial demand for the metal.
Nevada Pacific's silver project -
Question:
In regard to Nevada Pacific, you did not mention the potential of the Amador Canyon project in your last update, which by itself, IMHO, is reason enough to consider purchase.
Answer:
The last NPG update was directed to the recent gold mine acquisitions. I've discussed the Amador project in some detail in previous updates. It has huge potential, but it is very early stage. In fact, it hasn't been drilled at all yet. If drilling demonstrates a third dimension to the vast silver occurrence found on surface, it could be be very big. Let's hope for good drill results.
Where to be in 2004 -
Question:
I have spoken with several managers specializing in commodities. The view seems to be that 2003 was the year of the exploration companies but that in 2004 investors will favor companies in production. Would be interested in your thoughts and analysis on this.
Answer:
Fair enough, in 2003 a certain amount of money went into explorartion companies as a sort of investment trend, in the same way that money went into dot.coms. There may be less of a general lift of the sector this year.
I am less interested in broad investor trends than with individual companies. Exploration companies that generate results will be rewarded by investors. My focus has been and will remain on companies most likely to deliver results.
The companies producing commodities absolutely must replace reserves in order to simply stay flat, much less grow. Those new reserves will come from exploration companies. Even though the overall sector may not rise, individual companies will deliver big returns. I intend to maintain my track record of picking winning exploration and development companies.
The major producing companies are being valued in the context of current outlooks for commodity prices. As an investor, you can win in that game only to the extend that your prediction on the commodity price is better than the "market" outlook. I favor the small companies that have not yet been discovered and still offer potential upside apart from moves in the commodity price.
China's role in the gold market -
Question:
I just received a solicitation for a financial newsletter that said that China will soon allow their citizens to buy gold. Is this correct?
Answer:
It is shocking to hear such an ill-informed pronouncement from someone supposedly holding himself out as an authority. The reality is that the Chinese government did not deny their citizens the right to buy gold.
For many years, it was difficult for many people, especially in rural areas, to buy gold, as there wasn't an efficient gold market. The government controlled the sale of gold and set the price. As a result, gold wasn't readily available. A couple of years ago, the government encouraged the private sector to set up a gold market. I have a picture of myself taken over a year ago, standing in front of the headquarters of the Shanghai Gold Exchange. At that time, I also saw gold markets, in the form of jewellery stores, in every part of the country, including even very small towns. They sell high carat gold jewellery, which is worn as ornaments, as well as being a store of wealth. Anyone that wants to can also buy bullion, which may not be readily available in rural areas, but in the cities is as easy to buy as it is here.
China will play an increasingly important role in the gold market going forward. The country now has a middle class larger than in North America, with a quarter of a billion people now enjoying a level of wealth equivalent to the middle class of North America. Another billion are working hard to reach that level. Many of these people enjoy owning gold, just like in all parts of the world.
Selling Pressure -
Question:
Your recent article indicated the potential for selling pressure on "some companies" early in the New Year, in part due to profit-taking four months after private placements close, when the stock becomes free-trading. Two other newsletters clearly emphasize the warning of the selling pressure coming soon. Should people be selling now?
Answer:
As long as the market for gold stocks remains generally positive, there shouldn't be too much of a problem. I am monitoring the companies that I cover and will try to provide a warning of any concerns. Companies with tangible assets and lots of liquidity will not be greatly affected. My concern is more aimed at companies that are more speculative. In aprticular, companies that may only have a single project. If those companies fail to deliver results, then investors could grow impatient very quickly. All of these small companies are fairly volatile. The best approach is diversification and to lock in some profits when the prices rise.
Reserves vs. Resources:
Question:
I enjoyed reading very much in your recent newsletter about the development of a property from resources to reserves. An IR person at one of the companies said that it is often at the point that a feasbility study is conducted that a major will buy out the junior? Is this true? Where can I read more about how a property moves from inferred resources to proven reserves?
Answer:
I'm working on a more comprehensive description of the resource to reserves process which will be published in an up-coming issue. I'm not aware of any other description. Normally the majors don't start bidding on a junior until there is a feasibility study underway. It always seems to make sense that a major would want to buy the junior when it is cheap. However, if one company bids, others may join in the bidding. That is, it is unlikely that one company could simply steal the junior at the cheap price. In order to know how much to pay, the majors need tangible information. The level of detail that they need only comes at the level of a feasibility study, or in some cases through a comprehensive pre-feasibility study.
China's foreign joint ventures.
Question:
What puzzles me a bit with these China plays is that the Chinese have soo much cash on hand, especially US$'s, why don't they themselves create gold exploration companies and hire foreign geologists, and explore the projects themselves?
Answer:
There is a lot of cash going into China, but an even larger need for cash. The country is growing remarkably quickly in every way: freeways, bridges, factories, whole modern cities. Much of the development is funded in the same way as the mining industry: For example, a city government will put up a piece of land and a private developer will build on it, with part of the ownership of the project going to the city. The geological bureaus have very little cash flow. The mines are very small and poorly capitalized. In most cases, any profit goes back into the operation. That means there is little or no money generated for new projects. Most importantly, they are smart enough to know that it doesn't make a lot of sense to keep building these tiny little mines. They want to move up to the next level, and that means big new money.
They have lots of geological talent, smart guys, with good experience in China, but with little exposure to other places. It is useful to combine a foreign geologist who has broader experience with the local geologists.
I have met face to face with the heads of some of these bureaus and discussed with them their dilemmas: Grow slowly with internal cash, or go looking for new money. They want their businesses to grow as fast as the other industries around them.
Value of Reserves
Question:
I was watching Market Call Tonight on Wed Dec17 guest Brendan Kyne in responce to a call on St Jude Resources he talked aabout valuing their reserves at $25 an ounce, later in talking about Nevsun he talked about putting a value on reserves between $25 & $75 per ounce on their reserves. In your Dec letter you talk about a value in the order of $100 per ounce. Is their a different value per ounce applied depending on the country where the deposit is located.
Answer:
There is a huge variation in the value of "reserves". First, there is an important distinction between "reserves" and "resources". I am working on an update to an article detailing the distinction. My value of $100 relates to "reserves". St. Jude and Nevsun have "resources", which have considerably lower values. There are a lot of individual factors related to the value of any deposit, whether it is at the "resource" or "reserves" status. It is unfortunate that some commentators blur the distinction between "reserves" and "resources", because the differences are extremely important.
Caution?
Question:
It has nothing to do with jewellery and everything to do with investment demand. You just don't get it.
Answer:
Nearly 100 million ounces a year of jewellery / electronics / dentistry demand every year seems a little more than "nothing".
I would be interested to see the basis for your comments that investment demand is "everything".
I believe that both facets of the market are important and will continue to push the gold price higher over time, as I explained in that article.
What's going on at Sultan?
Question:
I have chunk of Sultan Minerals (SUL-TSXV) shares that I've been holding for over two years, in spite of them going nowhere. I recently called and spoke to their IR person, Malcolm Powell. He was extremely evasive, even rude. Would not let me ask questions. I got the impression that things had gone seriously wrong and that he was trying to cover up.
Any idea what's going on?
Answer:
I spoke with Art Troupe, president, who just returned from the property. You probably saw their news release that announced they can now get back on the property after the ban due to the forest fire risk.
Art said they expect to be drilling again soon, subject to finding some water, as it has been extremely dry this summer.
The earlier work oulined a large, but sub-economic grade resource. That work identified several structural corridors with higher grades. They are now getting a better sense of the orientation of the structures, with a structural specialist now doing further detailed work.
The plan now is to drill for higher grade zones along the structural trends.
There seems to be a lot of gold in the system. The challenge now is to figure out where to find the combination of grade and size.
On the downside, as you noted, the stock has drifted sideways for a long while, and there are likely to be other investors who are growing impatient and looking for a chance to get out. I expect a bit of a rally in anticipation of the start of drilling, with the price dependent on the results that come from the drilling.
Northern Dynasty Drill Results
Question:
What is your interpretation of NDM's latest drill results? Do you know or has HD indicated a rough idea of what percentage of the gold and copper can be recovered? In the news release, it indicated a 60% recovery for the moly. I am
wondering why they didn't mention the recovery percentage of the copper and gold.
Answer:
An Interim Update is on its way to subscribers with regard to the drill results.
Regarding your other questions: Cominco did some metallurgical testing. I can't recall the specific numbers, but they were in line with other big porphyry deposits. Its very simple metallurgy, with no deleterious elements.
The recovery mentioned in the news release is with regard to the conversion to copper equivalent. It doesn't consider recoveries of gold and copper in the conversion formula, because they are roughly equivalent. The moly is scaled back in the conversion because the recovery is a lot lower than for the other metals.
Sky High Value For Rare Rare Metals
Question:
What do you think of Solid Resources (SRW-TSXV), which has a rare metal project.
Answer:
I had a look at this, and then asked a rare metals specialist for some input. Following are his comments:
Further to our conversation yesterday, I did some reading of Solid Resources' public disclosure. I have never heard of any of the people and was unfamiliar with the project.
The stock does seem to have got ahead of itself!
As you have noticed, Solid's technical disclosure is very poor, if not outright misleading. As is so often the case with these rare metals projects, newcomers just report assays and fail to provide any of the critical info on mineralogy.
The recent release touting high rubidium values is classic. These values represent normal background concentrations in a pegmatite, where it is usually locked up in feldspar and not recoverable in the metallic form for which they report price information. Likewise, the lithium values are pretty typical of a spodumene pegmatite.
Their website talks about past tantalum production on the property and the presence of gravity concentrator. Evidently, some of the pegmatites are at least partially kaolinized, which would simplify processing and perhaps make 100-200ppm material economic. The question is how deep does the kaolinization extend?
There is no disclosure on this important fact. However they are doing shallow core drilling which suggests to me they are drilling unweathered bedrock and that the weathering does not extend too deep. Chances are the previous operators already mined all the easily recoverable weathered material.
Speculating on diamond exploration
Question:
Kensington (KRT) share price has been volatile, moving up to C$1.70 after release of bulk sample results and then dropped almost immediately back down. What are your thoughts about the short and long term of Kensington?
Answer:
I stopped following diamonds for the very reason that you allude to. The values go all over the place based on surprise news and rumours, making it almost pure speculation. I still like the project in the long term. The Shore Gold program will have a big impact on the value of Kensington. Apparently, the contractor for Shore Gold, who is taking an equity position, has some connection with De Beers. The whole thing just might all get thrown together at some time in the future, if the results are any good. KRT now has the financing in place for this years program. It looks OK at the current price. You have to really play the swings in the diamond stocks.
A new face at Red Lake
Question:
What is your outlook on Red Lake (RL) with the change in management?
Answer:
Red lake has some good early stage projects in the Red lake camp, but investors generally aren't interested in early strage stuff now. Fronteer's C$3 million financing shows that some serious players with a longer term view like the area. I don't know Chris England, the new prez, but I understand he is more of a promoter. Hopefully, he will be able to stir things up a bit.
McWatters and Flow-Through Financings
Question:
Lawrence, I've thoroughly enjoyed my subscription to Resource Opportunities since I began receiving it a few months back. Thanks for the helpful insight. I'd like to know if you have any information or insight concerning Mcwatters Mining. I don't fully understand all the implications of the "Private Placement" they just completed, but I have noticed that close to a million shares of their stock has traded each day for the last few sessions.
Compared to the other 15 to 20 companies that I track each day, this seems to be a very actively traded stock with very little price change. Any info would be appreciated.
Answer:
I don't follow McWatters closely, but here are some general comments.
- The large trading volume is due in part to the huge number of shares outstanding. After the recent private placement, I estimate there are 303 million shares outstanding, 433 million fully diluted. (Fully diluted shares is the outstanding shares plus the warrants and options that can be exercised to acquire additional shares from the company.)
- The recent private placement involved "flow-through" shares. That means that the tax writeoffs normally available to the company are transferred to the investor. A Quebec investor would get a 100% tax write-off plus a 15% federal tax credit and a 15% provincial tax credit. In other words, the shares cost less than 40% of the amount paid on an after-tax basis. The implication is that many investors in flow-through deals are mostly interested in the tax write-offs, and tend to sell the shares fairly quickly.
- The company has C$25 million of debt.
- They are just beginning production at Sigma-Lamaque, so that should help results in subsequent quarters, but so far their mining operation has lost money.
- The share price appears to have bottomed, but its hard to see anything in the near term that will produce much upside.
Further details on Northern Dynasty.
Question:
Hi Lawrence:
I continue to be very pleased with your Resource Opportunities and always look forward to receiving each new issue. I also value and appreciate your insight to my email questions.
I've read your recent issue regarding NDM and have studied it in detail. I do have a few questions which I hope you can shed some light on.
Has the HD group given any indication of possible native issues? I read a report a while ago written by Raymond James which suggested concerns over possible native reserve/land issues for mine development.
In your report you said NDM have been invited to discuss the terms of a joint venture on the project. Are they acutally considering a jv at this time?
It seems logical to maintain full ownership of Pebble and the surrounding exploration land given the fact they expect to do the next financing on much better terms.
Do you expect an announcement regarding financing before the first set of drill results or after?
Answer:
Hi Clayton:
I appreciate your comments.
I discussed the native issue with management while researching the report. First, in Alaska, there are no unresolved treaty issues, or any messy issues like that. Alaska was carved into about 23 areas, with the natives in each area becoming shareholders of a corporation. Land titles were resolved at that time, with clearly defined boundaries between land controlled by the native corporations, the state and the federal government. The Pebble project is on state lands. There is no interest held by the native corporation. That corporation is intensely interested in seeing the project move ahead, and is working in a very cooperative way.
I met face to face with senior execs of another of the native groups and with a state-wide native group (with respect to Donlin Creek). I'm impressed with the level of entrepreneurialism of the Alaska native corporations. They just want these project to move ahead, and provide direct jobs, and also spin-offs to companies involved in transport, etc. For example, they want to build and operate a power plant, that would feed into the local grid and would supply a mine.
Bob D. met with the CEO of a major mining company on a courtesy basis, and was invited to discuss a jv. Bob said empahatically NO to any present deal. Several other big companies are looking very closely.
On one hand, it seems silly that a big company doesn't just offer $10 million or $20 million, and buy the company at this time. First, Bob D. and his buddies simply would not sell. Secondly, if one company bid, others would jump in, and it would become an auction, at a time when there isn't enough info to base a precise valuation. Also, they need the HD team at this time.
Bob and other insiders, plus Teck Cominco, have already exercised about C$1 million of warrants. With cash on hand, that will do for the first phase of drilling. They may do a small private placement at this time, but would like to see a price in excess of C$1/share.
Be careful with China diamond play.
Question:
A friend recommended that I should look into buying Pan Asia Mining (PAR) and said that it could go to $1.00.
Answer:
I don't know this company, but some quick digging shows the following:
There is not much reliable information on which to base even a crude valuation. The material that was filed by the company was found by the BC Securities Commission to be full of errors, inaccuracies and exagerations. They claim they can't file corrected documents (including financials) to get fully re-instated by the BCSC because of SARS. There is a chance the BCSC will not extend the period to file, and the stock could again be halted at June 30.
There are 114 million shares outstanding. At $1, it would have a market value of $114 million dollars. That is way out of line with what the company appears to have.
For example, Trivalence (TMI) has two on-going diamond mines, and a market value of less than C$10 million.
At best, its an extremely risky speculation.
Future for North American Mining
Question:
After reading about your trips to China, I wonder if the best place to invest in mining stocks might be in China. If China and other new mining areas come on line, the future for North American mining seems dim. Will you be covering Chinese mining companies?
Answer:
China looks very exciting for many reasons, and I will continue to cover several mining companies active in China. There will not be a big change in the balance between China and the rest of the world in the next few years. The first reason is that it takes massive amounts of capital to develop new mining operations. China is attracting a lot of money, but not nearly enough to develop enough new mining capacity to impact on the world situation.
Also, China's own use of metals is increasing rapidly. For example, Chinese exports of copper hurt the world market a few years back, but the country has now become a net importer of copper. China clobbered the zinc market with exports a few years ago, and has recently crossed into being a net importer. China is the world's largest user of platinum, all of which is imported. It is also expected to greatly increase its consumption of gold, which is also largely imported.
Replacement of ore bodies has fallen far short of the amount mined for several years now, for nearly every metal. It will take all that the industry can do to simply replace production in the next few years. China will play a role in that process, with the country being a net importer of some metals, and an exporter of others. There is no concern over North American mining industry, at least for the next few years.
Wayside Update
Question:
What's your current opinion of International Wayside (IWA)?
Answer:
It's a good group of people working hard to define a gold project. I haven't followed it closely, but my sense is that the project is real, and has further potential. My concern is that it is extremely difficult to add value for shareholders when they have to raise money at around 10 cents a share to drill holes. In essence, their share base is expanding at the same rate as the deposit. There is not a lot of downside risk from this level, and it could move up with a good news surprise in the drilling, and with a move in the gold price.
Gold Equivalent
Question:
Can you explain the concept of a gold equivalent ounce?
Answer:
Ore deposits freqently contain more than one metal. For example, gold deposits often contain some silver. There are two ways of simplifying the explanation of multi-metallic deposits. One way is to net the silver revenue off against operating cost, and just report the gold production, with a lower net operating cost.
The second way to treat multi-metal deposits is to convert the silver to "gold equivalent". That is, the silver ounces would be converted, at say 70 ounces of silver to one ounce of gold. Operating costs would then be spread across the total "gold equivalent" ounces.
It makes sense to convert to equivalents when the secondary metal is only a small part of the total, and where the metals are compatible, such as gold and silver. In my opinion, it is inappropriate to convert base metals to gold equivalent, even though some companies do that.
Pacific Minerals update
Question:
Do you still like PMZ at it's current level, or is there a reason for the selloff besides the drop in the price of gold bullion?
Answer:
PMZ looks extremely attractive at this level. The selloff comes in part from the drop in the gold price and also from the appointment of a new president - Daniel Kunz, the president of Ivanhoe. Some people think that this move signals that PMZ may not be acquiring any further projects, with Rui Feng no longer serving as president. The reality is, Rui is staying with Pacific Minerals as a director, and Pacific Minerals and Ivanhoe have built up a staff in China that can continue to do deals. In fact, this move may signal that PMZ will be evaluating projects that are further advanced. Most importantly, PMZ already holds four projects with world-class potential. Putting Ivanhoe's president in charge of PMZ is a strong signal as to the direction of the company. All 4 projects are now at a stage where they can move forward quickly into development.
Caledonia Mining
Question:
What do you think of Caledonia Mining?
Answer:
Caledonia has numerous interesting exploration projects, involving gold, diamonds, platinum, copper, cobalt. It also has a gold mine in South Africa headed back into production and recently optioned the Mogales project, which is re-treating "slimes" and "sand dumps" (tailings). The Barbrook Mine will initially produce about 1,000 ounces per month, if all goes according to plan. The Mogales project is projected to produce about 1,500 to 2,000 ounces per month.
The company now has 217 million shares outstanding. At September 30, the latest reported fiancials showed a working capital deficit. It will likely need to raise further financing to keep its projects moving forward.
Its hard to see much upside potential from the current C$90 million valuation, unless of course the company has exceptional success in one or more of its exploration projects. I don't see good chances of that happening, given the financial situation and lack of a cohesive drive in corporate direction.
Its not a company that I plan to follow.
RSM trading halt
Question:
The CDNX in Vancouver [actually, it is now the TSX Venture Exchange] said RSM was halted due to not filing year end financial reports. They said the BCSC would be able to provide more info. They informed me the Cease Trade Order was issued only because of the press release pertaining to the Gold Wedge production and had nothing to do with financial reports. He added that the Cease Trade Order statement was lengthy and detailed and it could take a while to resolve. It appears to me that RSM have a history of not providing proper details in their press releases. Do you have any further insights?
Answer:
My feeling is that Roland Larsen was simply naïve in his filings and reporting, based on a review of the documentation in this case, my recent discussions with Roland and my general understanding of the people and the company. The securities rules have changed a lot over the past couple of years, and the Canadian regulators are taking a really hard stance on compliance, as they should. The central issue here is that Royal Standard reported production plans and resource estimates that were not properly supported by independent reports with the required level of detail and disclosure. I believe the deposit is real, but it may take some time before the company can complete the appropriate reports, which will be reviewed in considerable detail by the regulatory people. Delays are likely in that the review process will almost certainly generate "comments", which will require a further round of reports and re-filings to clear up the details.
Too good to be true???
Question:
A company is looking for investors over here in Europe. It is: I C M International Capital and Metals Corp., 76 N. Maine Street, Fallon, NV 89406 USA, (775) 428-1225, Fax.: (775) 428-1223, Prof. Schroeder. He covers himself with secrecy, and claims that his properties have only one of a kind in the whole world anomalities which also has been proven by one of the five best geo-experts in the whole world. Am I right in thinking this sounds too good to be true?
Answer:
You're right, it sounds too good to be true. I was not able to find any information on the company or on Mr. Schroeder. He returned my phone call and we had a nice chat, and he gave me some insights into the process. He claims that samples from his property that reveal only trace gold values with standard assay procedures actually have gold locked up that is not detected by the standard assay techniques. After a pre-treatment using his secret process, the standard assay techniques reveal substantial gold values. He can not reveal any details of his process, as he is concerned about confidentiality. Mr. Schroeder agreed to meet with me in late February, and to share some information about his process at that time. I know nothing about Mr. Schroeder's process. I do know that there have been many schemes involving secret processes that reveal gold values that no one else could detect. Not one of those scheme's ever amounted to anything, in spite of millions of dollars of investor money being contributed to the cause of perfecting the processes.
Another issue to consider is that even if the gold is there, can it ever be recovered economically. I doubt that the secret process would work in a large scale mining operation, even if it works on a laboratory sample. If you have any specific information about Mr. Schroeder or his process, please pass it on to me and I will follow up. I will learn what I can at the February meeting. In the meantime, keep a tight grip on your money. There is absolutely no reason to rush into an investment in this project. If it is real, the opportunity will not go away quickly.
Two interesting resource companies
Question:
Please have a look at Etruscan Resources (T.EET) and Mountain Lake (V.MOA), two associated companies in diamond and gold exploration and production.
Answer:
Thanks for passing that on. I actually toured their diamond project in South Africa 2 years ago. I had some concerns with it at that time, but obviously I should have come back to it. I'm nervous about alluvial diamond mines. The stock price are up now based on some nice stones, but it's a bit of a gamble if they will continue to produce stones like that consistently. Trivalence (TMI) is another alluvial diamond producer that vividly demonstrates the ups and downs of that business.
Freewest update:
Question:
Freewest keeps coming up with good news. Why doesn't the share price move?
Answer:
Freewest is a good exploration company, with a first rate management and geological team and some good projects. Unfortunately, the Clarence Stream project is a bit of a teaser, with spotty gold values. This project demonstrates the downside of a junior company raising money to drill a project. In essence, the deposit is expanding at about the same rate as the shares outstanding, making it difficult for investors to get ahead. The problem is worsened when flow-trough shares are involved, as many investors are more concerned with getting the tax benefits than owning the company for the long term. I like the fact that Freewest now has a partner on the Golden Ridge project, and the Hemlo area project looks encouraging. Good results from that project could get the price moving in the right direction again.
Is the Farallon lawsuit finally cleared up?
Question:
I've been doing alot of dd on various companies lately and from all the ones I've looked at, Farallon FAN looks real good at these levels. Considering it went to 26.00 when gold was last at 400 in the mid 90's The lawsuit looks to be all cleared up, but I'm wondering if these past issues will scare off potential investors.
What are your thoughts on FAN at this time Lawrence?
Answer:
The lawsuit has been "almost cleared up" for several years. If they finally get some sort of official and final clearance from the Mexican court system, the stock could have a bit of a run. There are many tired investors in this one, so there will be some selling. The deposit looks good, except that the metallurgy is complicated. Not difficult, but it will take some time to fine-tune an effective process. It's a real deposit, with significant size potential, and a good team behind it.
Royal Standard trading halt:
Question:
Just wondering if you had a chance to check into the RSM halt? Have been calling the company and always get the answering mach. Left message last week and they have not returned the call. This is frustrating to say the least.
Answer:
I spoke with Roland Larsen today. The halt was due to filing a deficient report on the Gold Wedge project. I don't think its sustantive, but the venture exchange people have basically adopted a zero-tolerance approach. They are particularly concerned that resource definitions meet the new guidelines. The amended report is now with the exchange, and should be cleared in the next few days. The company is making good progress on securing permits and financing, and it looks like the project should move ahead quickly toward production.
Pacific Minerals, Southwestern Resources, Ivanhoe and China
Question:
I read your article on Pacific Minerals and all the hype vs its counterpart Southwestern. Would it be correct to say that Ivanhoe has a lot more to gain than Pacific Minerals in China and that it is probably a better stock to buy?
Answer:
They are both very good companies, and both offer exposure to China. However, IVN is a much larger company, with other operations outside of China, in particular, Myanmar and Australia, and only a portion of the value is related to its China projects. PMZ is completely focused on China, and is therefore a more direct play on China.
Canyon's Montana Legal Issues
Question:
Canyon Resources (CAU-Amex) has a huge mine in Montana and a government license to go ahead. The environmentalists have stopped the project. Is there a good chance that they will win and can go ahead with production ?
Answer:
Canyon doesn't actually have a mine in Montana. They have a large, low grade gold deposit, that only makes sense if it is mined by open pit, with recovery by cyanide heap leaching. Unfortunately, Montana has passed a law that prohibits heap leaching using cyanide. The company has a lot of good arguments that the law is unfair, unconstitutional, etc. They may be right, but it might take a long time to prove it. Its not just a legal argument. It would require changing a law. I don't like speculating on legal issues. I haven't looked closely enough at the rest of the company to comment beyond that.
Anooraq Metallurgy
Question:
I agree with your analysis of Anooraq, but wonder if some investors may be concerned about potential PGM recoveries in such low grade mineralization. What do we know about the metallurgy of this mineralization?
Answer:
African Minerals has already spent a lot of money on this project, including metallurgy. Some very astute investors keep writing checks to fund the work being conducted by African Minerals. Metallurgy is not a problem.
That 5,700% gain is not a gain at all. 08/23/02
Question:
I just checked the YTD stock performance of Vista Gold and nearly had a coronary.
Up 5,700 %! I dont recall ever reading about this company in the newsletter. Do you know what is going on with this company and what caused this runup?
Answer:
There is a little more to the story than appears on the surface and a good reason that I did not recommend it. At the start of the year, the company was losing money on a small gold mining operation, it had an uncertain future and was trading at a dime. In May, it was selected to be part of a larger restructuring deal, resulting in the price jumping to 50 cents. Since then, the shares were consolidated on a 20 for one basis. If you had bought shares at the start of the year, it would have been a pure speculation on something happening to give the company a future, and you would have enjoyed a 150% gain. That gain is in line with my other picks, but with a higher risk at that time. If you had bought after the restructuring announcement, when it traded at 50 cents, you would have lost half of your investment at today's price, considering the 20 for one rollback. (Note: I measure gains as the addition to the original investment. That is, if you invest $1,000 and it goes to $2,500, I consider that to be a 150% gain in calculating the track record for Resource Opportunities. Some others would call that a 250% return.)
Stockscape
Question:
I've been unable to access my portfolios on Stockscape.com. Do you know if the web site is gone?
Answer:
Stockscape went through a management / ownership change about a year ago. Since then, it has been an investor relations firm with limited value for objective information. The best site for objective information is www.stockwatch.com They charge a small monthly fee, but it is very good value. Other sites are: http://www.stockhouse.com/ and http://www.smallcapcenter.com/ The 2 firms behind those sites are merging, which should result in a stronger entity.
Apollo Gold (APG.u-T)
Question:
Enjoyed talking with you this morning. Look forward to hearing back from you about Apollo Gold.
Answer:
Apollo Gold (APG.u-T) looks like a good long term play on gold. It will have 3, and perhaps 4 mines when the latest deal closes. It has some very capable and very powerful people involved. They have already demonstrated their clout by raising some serious money to acquire the 2 US mines. Some cautions: all of the mines are high cost. They depend on a gold price at this level or higher to be viable. Also, the Florida Canyon mine will finish mining the current reserves next year. There is potential for additional reserves, but that depends on future drill results. A program of 420 drill holes is about to get underway to test the potential for new reserves. The Montana Tunnels mine is shutting down while pre-stripping continues for a new open pit operation. Production should resume this October. The Glimmer mine in Ontario needs further drilling and then underground rehab, which will take 18 months. In short, it is unlikely that Apollo which actually produce 200,000 ounces this year. The stock price is likely to bounce around a lot with the gold price. Over time, with a decent move in gold, it should provide a good return.
Northgate Exploration
Question:
Do you have an opinion on Northgate Exploration (NGX:TSX)?
Answer:
Northgate bought the Kemess mine after the previous operator (Royal Oak) went bankrupt. They have recapitalized it, reducing the debt load, but they still carry a lot of debt. They have also improved the operating efficiency. The operation is cash flow positive, but the company still loses money, after interest, depreciation, etc. One can argue that the cash flow is more important, but the operation still requires on-going capital, including exploration, of about the same amount as the depreciation.
In short, the company getting by at the current metal prices, but will improve substantially with higher metal prices. Bear in mind that about 40% of the revenue is derived from copper. Their calculation of cost per ounce for gold is net of the copper revenue.
The share price will likely improve from this level (C$1.40) as the gold price moves up.
Update on Minera Andes Inc.(MAI:CDNX)
Question:
What is your opinion about MAI?
Answer:
MAI really upset investors a couple of years ago, and hurt their
credibility, so its been out of favor. That's about to change. Alan Ambrose, president, and Brian Gavin, VP, were in my office a week or so ago, just before going to Argentina. The projects have merit. Hochschild is a big company with aggressive plans. It looks quite good at this time.
National Gold Update? (NGT-CDNX)
Question:
What's the story with National Gold? The stock seems to be capped at the $0.40 mark? Is there still upside potential from this level?
Answer:
The joint venture partner on the Mulatos gold project, Alamos (AAS-CDNX), is proceeding with development of this 2.2 million ounce deposit, but on a bootstrap basis. They should be in small-scale production later this year, and then ramp up to full production next year. This deposit gives National Gold a solid base of value, with potential for gains as the gold price moves up. With Alamos running Mulatos, the National Gold management and technical team are now dedicated to putting together the next deal or deals. I have a lot of confidence in their ability to secure another project like Mulatos, which is where the near-term upside is. The stock has had a nice run from the C$0.15 level when it was first recommended, but there is still a long ways to go from here.
Queenstake's Warrants.(QRL-TSE)
Question:
Regarding Queenstake: Who has the right to exercise the 5 million warrants at $0.185? What is your take on the statement made by Doris Meyer of Queenstake in regards to CIBC being "very supportive"?
Answer:
The warrants are held by CIBC and I believe that they are non-transferable. CIBC could exercise the warrants and then sell the shares.CIBC may be "supportive", but I doubt that extends to putting a million dollars into the company and holding on for the long term. There have been some expressions of interest from institutions in picking up the block of stock that could come from that transaction.
Update on Conquest (YQR)
Question:
After a gain of 82% from your recent Instant Alert, Conquest has come back down. How do you feel about YQR now?
Answer:
The company now has two very significant exploration projects in hot gold camps in Ontario. They simply haven't done a good job of communicating with investors. I still believe that one day soon they will get their investor relations program functioning properly and this could be a big winner.
NEM Hedge Strategy and the Price of Gold.
Q: I read that Newmont (NEM-NYSE) announced today that they changed their mind in buying back the Normandy hedge position and will let the hedges expire naturally. I can't see this as being positive for the price of gold. What are your thoughts on this change of heart by NEM and the affect on the gold price?
A: I don't think that NEM's hedging strategy, in itself, is going to have a big impact on the gold market, except perhaps psychologically in the very short term. I believe its just one of those things where someone made a philosophical comment about clearing out the hedges, and then the finance people pointed out that there may be a big cost in actually implementing that philosophy.
The key point is that gold mine production is 80 million ounce per year, while gold demand is 120 million ounces. The 40 million ounces has been supplied, to a large extent, through hedging, with the gold originating with central bank leases. Even if the pace of new hedging simply slows down a bit, the gold market will face a deficit. That process has been underway for several months, which is why the price is up $40 over the past year, and will certainly continue to ratchet upwards.
How much higher for NGT?
Q: I'm extremely pleased with my return on NGT. Bought at .15 and still holding. It has since pulled back and appears to be consolidating in the .38-40 range. Do you have any insight as to what was driving the stock up other than the recent financing?
A: They are making good progress at Mulatos, with drill results expected soon; they have a good investor awareness campaign underway; and, there is a chance of another deal.
The capital cost for NDM
Q: As you mentioned in the February issue, the only real impediment to mine development for is the capital cost of $906 million. When comparing NDM with Gabriel, I don't understand why two similar resources would have extremely different capital requirements. Can you offer some insight into this?
A: The gold in the NDM deposit represents about a third of the value of the deposit, and of annual revenues from a mine. The capital cost is in line with other big copper-gold projects. The whole point, though, is that this company is not about the Pebble deposit. It is about the potential to find another big deposit with a better grade. They have excellent prospects for doing that on the huge property, which already has been shown to carry a massive mineralized system. Its just a matter of finding some higher grade material somewhere within the huge system.
The first phase of drilling will consist of holes into 40 different targets. Any one of those holes could be a winner.
Tan Range merger
Q: I was wondering if you have any good information on Tan Range (tnx-t). Recently the fellow that was involved with Sutton Resources sold his company to Tan Range.
A: Tan Range announced its intention to merge with Tanzam, a private company that holds 51 gold exploration projects in Tanzania. Barrick Gold, which is now mining the 12 million ounce Bulyanhulu project in Tanzania, has already farmed into 13 of the projects being acquired by Tan Range. Tanzam is headed by James Sinclair, the former chairman of Sutton Gold Corp., which soared as high as C$60 per share on the basis of its Bulyanhulu project, before it was taken over by Barrick. Sinclair will join the Tan Range board, now consisting of the team that formerly headed Pangea Goldfields, another successful Tanzania explorer that was also taken over by Barrick. Tan Range will have an unwieldy 80 million shares outstanding after this merger, but will have an experienced and high-powered management team and the largest exploration property position of any company in gold-rich Tanzania.
Farallon fell flat
Q: I was really disappointed that Farallon's share price didn't do better after the lawsuit ended. Should I sell?
A: I am also disappointed that it sort of fell flat, after one little spark. I will try to get a better sense from the Hunter-Dickinson group as to what their plans are when I get back to Vancouver. They are having trouble getting attention for any of their deals.
Harmony
Q: What is causing the weakness in Harmony's share price?
A: Investors were disappointed a while back when a bid by Harmony for the Free State assets of AngloGold was rejected by AngloGold. The negotiations are still going on, and there is a chance that could be revived. I like Harmony in part because it offers outstanding leverage to gold, more than any other major producer. Harmony is currently working on a deal with Goldfields to acquire their mines in the Freestate. Adding more production to Harmony's existing operations in the Freestate would help lower the unit costs, and could add a lot of value.
Newmont / Franco / Normandy merger
Q: What is your opinion of the proposal to merge Newmont , Franco and Normandy.
A: I think this is a tremendous deal. There are a lot of synergies that will add value. It will create the world's largest gold mining company, with nearly all of its assets in first world countries, making it very attractive to institutions. Franco has no hedging, Newmont has little, but Normandy has a 10 million ounces sold forward. The Franco / Newmont team has indicated that they will unwind the Normandy hedge, mostly by delivering into it. The market has punished Newmont, perhaps because of the premium offered to FN and Normandy. To me, that creates a buying opportunity. One of the sleepers in this deal is the fact that the combined company will have $700 million of cash and little debt. It is very significant that Pierre Lassonde, the consumate deal maker that built Franco-Nevada, will be president of the company. There are lots of other good assets that can be bought cheaply and add further value to this group. The combined company will be profitable at the curent gold price, and will offer high leverage to a rising gold price.
PFN: Anglo's budget
Q: How significant is the budget just announced for PFN's project?
A: It is very significant. Anglo is well ahead of their committment on the project. A firm budget of this size is a huge endorsement of the potential of this project. Anglo is only interested to the extent that they see a multi-million ounce deposit here.
Corner Bay
Q: What do you think of Corner Bay?
A: Corner Bay (BAY-T) has a good silver project in Mexico. Its important to realize that the project has value only to the extent that the silver price reaches a higher level. In essence, a higher silver price is already built into the share price. However, that price will move higher as the silver price moves up.
Sultan latest results
Q: Are you still optimistic about Sultan?
A: In a huge system like this, not all of the holes are going to hit. This drill program is really a sout program, to put a few holes over a large area. When I was there, the 2 rigs were 1.5 kilometers apart. They intend to follow up with more drilling around the holes with the best results.
Quaterra's drilling a fallback
Q: Is Quaterra's drilling on Duke Island a fallback after the miss?
A: Quaterra (QTA-CDNX) will soon be drilling a big geophysical target on Duke Island. The Union Bay project was drilled first, as a previous operator had already done a lot of work, and it was ready for drilling sooner. They have been doing geophysics and other work on Duke Island for the past few weeks, after staking the project. There was no previous work looking for this type of target. It is a very significant target in its own right. BTW, the Union Bay project is also still alive.
Freewest's bonanza gold grades
Q: What do you think about the bonanza gold grades reported by Freewest?
A: Freewest (FWR-CDNX) reported some impressive gold grades from their Clarence Stream project in New Brunswick. It is important to remember that these values come from grab samples collected on the surface. The geologist or prospector at this stage is looking for the most favorable rocks, to get an indication of whether or not there is gold in the system. The fact that they found such high values is extremely encouraging, and confirms that there is a very large mineralized system. However, there is a lot of work yet to do before the real significance of the system is understood. The company has money in the bank, and work should be on-going.
Getting Tax Benefits For Investing in Flow-Through Shares
Q: How can I buy flow-through shares?
A: The flow-through share concept allows exploration companies that don't have income to flow the tax write-offs generated from exploration spending to investors. In essence, investors get a 100% tax write-off, plus other tax benefits, for investing in exploration companies. However, it only applies to shares issued directly from the company, or through a limited partnership, and when the company files the appropriate forms. Therefore, you have to do a private placement with a mining company (typically about $100,000 minimum) or invest through a fund. The funds are generally not advertised, as they are usually for qualified investors only. If you have an interest, I can put you in touch with some funds.
Drilling Underway Now
Q: What do you think of the drill results announced by Odyssey today?
A: Today's announcement included a recap of drilling that was done last year by Odyssey (YOD-CDNX). The current program has just gotten started. The president told me that drilling is going very slowly, so that it will likely be at least a couple of weeks before there are assays to report. I am optimistic about this drilling, as they got good results in the previous drilling, and they now have the geophysics which led them to an area that looks even more promising.
Drill Results Coming Soon
Q: When can we expect results from the drilling on Nevada Pacific's project?
A: Newmont is the operator for the drill program on the Limousine Butte project, just south of the Carlin Trend, in Nevada. Newmont will be giving all of the results at one time to Nevada Pacific (NPG-CDNX). I expect to see the results very soon.
Idaho Drill Schedule
Q: Is Idaho going to be drilling again this year?
A: It looks pretty dicey. Idaho Consolidated (IDO-CDNX) still hasn't closed the financing. They have an obligation to drill on a part of the property that they optioned. I suspect that they will try to get a couple of holes in to satisfy that requirement. There isn't a lot of snow, but drilling becomes very difficult in the winter because of the need to supply water for the drill. It can sometimes be difficult to keep the water lines from freezing. The holes that are planned are near a road, and low down, so if the financing closes they might be able to drill those holes.
Investment Conferences
Q: Is it worth going to investment conferences? I heard that its mostly just hype.
A: Investment conferences are definitely worthwhile. Obviously, there will be some selling going on. Most investors can tell the difference between the sales pitches and the useful information. There are some very knowledgeable speakers at the better conferences. Investors get a chance to hear a range of opinions from some leading authorities. Also, many investors can get a tax writeoff for the travel costs.
Assay results a bust?
Q: Quatterra assay results from Union Bay look like pretty disappointing. Do you see any joy?
A: Yes, it is a definitely a disappointment after the good results on surface. However, it is only 2 holes into each of 2 areas. The zone extends for kilometers. There is always a danger in doing a small program like this: This type of system is not continuous, and a couple of holes might or might not hit it. The fact that an 11 gram intersection was hit 19 meters away from the surface showing demonstrates that the zone is real. It definitely deserves more drilling, which is the plan. These results will likely depress the share price. If so, treat it as a buying opportunity, because the next holes could be winners. Besides, the company has a whopping geophysical anomaly on duke Island, and also has a great project in the Abitibi belt. There are likely to be three drill programs in the next few weeks, any of which could be a winner.
Profits amid the engineering mumbo-jumbo?
Q: Crew Developments news release sounds positive, but I'm not sure I understand it? What is mining dilution? Can they mine the inferred resources? And mostly, why is it taking so long to develop this project?
A: The news is very positive, and this project will almost certainly become a profitable mine. The issue about mining widths is very important, because the vein is only about 0.7 meters wide. An opening larger than that is required to mine the vein. The adits, or haulage ways, are 2 to 3 meters wide, but the stopes, or the openings to bring the ore down to the adits can be thinner. They have experimented with different mining methods to find the most effective way to get a narrow stope. The reported grade is based on mining the stopes at 1.2 meters wide. That is, the grade of 43 grams/tonne is "diluted" to 25 g/t at a mining width of 1.2 meters. When I toured the project, I could see potential to mine at an even narrower width, and I hope they keep working at refining the mining method. I agree with your concern over the timing. I find it shocking that a project that is so clearly a winner is being studied so intently instead of just taking a decisive decision. This management uncertainty and lack of drive has badly hurt the credibility of the company.
Merger = rollback?
Q: New Millennium shareholders seem to be suffering a rollback in the merger with Platinum Group Metals. How did they arrive at the share exchange ratio? Should I tender?
A: This merger is a very smart move for these companies, and something that should be considered by many other companies. The ratio was set based on the market prices. The merger brings together a strong and dedicated management and technical team, it will give the company enough cash to do a meaningful program and will cut some of the admin costs. Generally, there are too many companies that are too small individually to be noticed. This helps build toward a critical mass that will attract investor attention. Overall, it is very positive, and should have an impact on the price as it gets closer to being consumated.
Is the gold rally over?
Q: If the events of September 11 didn't spark a gold rally, can we ever expect to see gold come back?
A: Gold did OK last month, reaching a price $40 above the level of last April. It will take months, or even longer for the gold market to break free of the overhang and reach its free market equilibrium level. In the meantime, the price will continue to ratchet up, interupted by corrections like this. At present, the selling is coming from speculators that bought gold after September 11 in anticipation of a breakout. Use the dips to accumulate gold equities. SELL into the spikes. In other words, go counter to the market, which is generally a formula for investment success.
Tantalum recommendations.
Q: Tantalum seems to be the flavor-of-the-month. Are you recommending any tantalum stocks?
A: I agree that a lot of companies have jumped on to the tantalum bandwagon. Tantalum is a vital metal in electronics. It is in extremely short supply, resulting in the tantalum price gaining as much as 7-fold in the past year and a half. The price has moderated with the economic slowdown, but there is still a big shortfall. There are no pure public company tantalum plays. Most of the production comes from an Australian company - Sons of Gwalia - which is primarily a gold producer. Several juniors are exploring deposits that contain tantalum. The issue is that the metal is not necessarily economically recoverable from many deposits. Two companies that I like are Navigator (NVR-CDNX) and Avalon Ventures (AVL-CDNX). Both have high potential projects and people with real expertise in this area.
National Gold the next NovaGold?
Q: In your Instant Alert yesterday, you compared National Gold to NovaGold. Are you saying that National gold could reach the same share price as NovaGold?
A: Maybe, but probably not in the short term. I believe that National Gold (NGT-CDNX) could give a 5 for 1 return, as we enjoyed with NovaGold (NRI-T). The difference is that NGT is now only C$0.14, so it has further to go to reach the C$1.90 level where NovaGold is now.
Altius still a buy?
Q: I didn't get in on Altius when you recommended it last July. [at C$0.55] The latest assay results looked very impressive. Is it still worth buying at C$0.83?
A: Those results are only the beginning. I am convinced that they are on to something very substantial in the Botwood Basin area. It is almost inevitable that they will have a major company involved in the project in short order. Don't chase the stock, but it is still very attractive at this price.
Derek free to get on with its business?
Q: Is Derek's settlement with Asdar the end of this legal mess?
A: Yes. This puts an end to the legal wrangle that has overshadowed all the progress that the company has made on its oil project. Steam is now being injected, and oil will again be flowing. The small royalty is a small price to get rid of the chance that the litigation could drag on. The stock may take some time to recover, as some investors have become discouraged and just want a chance to get out. It should steadily recover in the coming weeks.
National Gold giving away too much?
Q: National Gold seems to be giving a lot away in its deal with Alamos. Am I missing something?
A: Many people, including myself, are a little disappointed that National Gold didn't get more out of the deal with Alamos. However, it's a tough market for juniors to raise money. This deal ensures that the project will move forward at a good pace. The people behind Alamos are experts in open pit heap leach gold projects, and that expertise will be an important asset for the project. Overall, I really like this deal.
Gabriel: Takeover still in the works?
Q: It seems to be taking forever for a takeover bid for Gabriel. Is there something wrong with the deposit? Why doesn't one of the majors just make a bid?
A: There is no question that the majors are keenly interested. They are now carrying out intensive due diligence, which started with the completion of the feasibility study two months ago. There are a couple of issues to be resolved, including moving a village. I toured the project, saw the village, and met face to face with senior government officials, including the ministers of mining and environment. Everybody is totally supportive of Gabriel. There are no problems, but just a matter of time to work the issues through the channels. Once these issues are cleared, the majors will fell comfortable in making a bid.
What's happening with Rockwell?
Q: Rockwell seems to have become inactive. I haven't heard a thing since drilling started on the Fox River project in Manitoba. Does the lack of news mean that the project is a bust?
A: They drilled a total of 14 holes into a series of geophysical targets, spread over a huge area, at the rate of a couple of holes per target. The fact that we haven't seen any results from a drill program that started in July makes it obvious that there was no joy in those first holes. However, it have would have been surprising if the first couple of holes into a geophysical target hit a bull's eye. However, investors with high hopes are obviously expressing their displeasure through Sell orders. At this price it is worth holding on or buying, as there is still merit in this large project. Furthermore, the Hunter-Dickinson group won't let a stock languish. I expect to see some further action soon, perhaps by way of a new project.
Exploration and recesssion -- Mutually exclusive?
Q: With the economy in recession, does it make any sense to keep exploring for metals?
A: Being in recession means that there is no economic growth. That means that we are only using up 100% of the amount of metal that was used last year. In a booming economy, we would use 104% of the amount used in the prior year. Clearly, the major mining companies still have a need to develop new orebodies. Most of the major new discoveries in the past few decades have been made by junior companies. Successful exploration will always bee rewarded by investors.
NovaGold still a buy?
Q: I missed your initial recommendation on NovaGold. Do you still like it? Is it worth buying at this price?
A: Obviously, NovaGold was a much better buy last April at C$0.35 when I first recommended it in an Instant Alert. The recent C$2.00 level was a good chance to take some profits. They have come up with some very good results. It looks very good again at the C$1.62 level.
Altius drill results: Flash in the pan or a major find?
Q: The Altius drill results look very impressive. Why hasn't there been more activity in the stock price? Am I missing something?
A: You are absolutely right: Those results are very significant in that setting. It hasn't attracted a lot of attention for a couple of reasons. First: the company is not widely followed, as the shares are tightly held by a small group, mostly the management. Secondly, many people are still skeptical about a Nevada-style gold district in Newfoundland. I stood on that ground a few weeks ago, and I am convinced it is real. In fact, its only a matter of time before one or more of the major gold miners appreciates the potential of the district and gets involved. That will be the stamp of approval that the market needs.
Dip, strike and plunge: Which way is down?
Q: What does it mean when a company announces that it is drilling "down dip"?
A: "Dip" is a geological term referring to the vertical direction of a feature. Imagine a tabular feature like an vein. Drilling down dip means that the holes are positioned to intersect the vein vertically lower than the previous holes.
"Strike" refers to the lateral direction. If a company has extended a deposit along strike, it means that they have expanded the lateral extent of the deposit.
A related term is "plunge" which is typically used when the body has a tubular shape. Down-plunge refers to the down-ward direction along the body.
Platinum - Palladium exploration and the metal price
Q: With the palladium price down from its highs, is the game over for platinum - palladium explorers?
A: Definitely not! We still rely on South Africa and Russia for more than 90% of the supply of these vital metals. There is a huge need to diversify the supply of the metals. Furthermore, the world is using more metal each year than is being mined, and the inventories will run out.
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