 Gold and
the Golden Gate
Bob Moriarty
Archives
December 9, 2004
I just returned from the Gold Show held in San Francisco 10 days
ago. I am pleased to report there were about 245 wildly bullish
mining companies in attendance. I am less pleased to report there
were probably fewer real investors attending this year's show
than last. Probably because they died off. It seems to me the
average age of an investor at a typical gold show is about 85
and it's probably perfectly natural that they tend to kick the
bucket on a regular basis.
So the good news is that mining
companies believe we ride a wild gold bull but the public doesn't
have clue one. I'm not sure how to take that.
Just before the show we posted
a
piece where I suggested we might be due a correction in the
dollar and gold. Well, I'm about 1/3 right. Gold is up $5, the
dollar is down a point or so and gold shares are clearly in a
correction. But now gold has gone up 12 weeks out of 13 and the
higher that number goes, the longer and more severe a correction
will be. (We
got our correction Wednesday).
If you will remember back all
the way to the first of December last year, gold shares peaked
on the first of December while gold continued up for another
eight weeks. We can indeed be correcting in one without correcting
in the other. It's like dancing, sometimes you lead, sometimes
you follow.
We are in a gold bull market.
Corrections are part and parcel of any bull market so saying
a correction is due is hardly heresy. When a trade gets entirely
one-sided such as is true with the dollar, Mr Market likes to
suck people into the market at the very bottom and very top and
then rip their wallets out of their pockets through their windpipes.
The day any trade becomes a lead pipe cinch, it becomes too dangerous
to touch.
A six-twelve month correction
in either gold or the dollar would be enough to convince most
participants that there is no future for gold and that's where
I would be once again a buyer filled with mad passion. I said
from May 12th that you could throw money at gold stocks and I
was pretty much right. But the time to take great care in your
investments has come.
Don't for a minute believe
I am suggesting mass sales. I am not. For most investors, holding
is less risky than trying to time the market. This market is
going to regions not even dreamed of before it finishes. For
example if at the last San Francisco show you went around suggesting
the Canadian Caspurki would be $.85 by this year, they would
have dragged you off the floor in one of those funny looking
shirts with the sleeves that tie in the back and tossed you so
deep into a padded cell that they would have to feed you with
a slingshot. Who would even have dreamed the Caspurki would go
to $.85 by this time?
While I am nervous about the
markets in general, I did find some great treasures at this show,
some companies with stories so compelling they deserve their
tales told.
Governments are filled with
people too lazy to work and too nervous to steal. They work for
the government for no other reason that no business could possibly
hire them for any productive purpose. Basically government employees
are pretty close to useless. And that's been true in every country
and in every age back to the caveman era.
So the action of the current
South African government to create a "use it or lose it"
situation is another opportunity created for those who understand
what it actually means.
A wise mining company stores
up good mining properties. There is no wisdom in producing all
that can be produced. Mining is a business and it's one in which
you consume your raw material. All of which must be replaced
on a regular basis. You can produce at full volume but it creates
problems for the future. In the same way a wise squirrel will
save acorns in the fall for consumption in the winter when ice
and snow cover the ground and the 7/11 is out of nuts.
What the ruling means is that
there will be a lot of chaos. Properties which had been drilled
out and had feasibility studies done are
being forced into a "use it or lose it" basis. And
since the major platinum producers are pretty much producing
at capacity, a lot of ground is being made available on pretty
incredible terms.
Ian Rozier and David Cohen
have joined together, supported by Endeavour Mining Capital to
create the leading PGM mining company on the TSX. Elgin Resources
Inc (ELR-V, $1.25 Canadian 90 million shares, post merger,
website)
They have $20 million in cash and since most of the warrants
are priced higher than the stock, the company stands to add an
additional $20 million or so in cash when the warrants get exercised.
All of the numbers I will quote
and most of the numbers on their site are pretty confusing. They
have picked up two giant PGM properties and are in the midst
of a merger. Basically they have between 10-14 million ounces
of PGM in two primary near-surface deposits in South Africa.
Ian was wise enough to find properties tending to a greater percentage
of platinum which also lend themselves to open pit mining.
The primary project, Spitzkop
is 6.5 g/t PGM, shallow dipping and near surface. It contains
8 million ounces of PGM measured resources (43-101) and 4.2 million
ounces PGM in indicated resources. Based strictly on this one
deposit which can be put into production in less than two years
for a capital cost of about $15 million, you are buying PGMs
for about $6.50 an ounce. An average of 30 gold juniors show
about $58 an ounce for similar gold properties. So basically,
there is a giant upside potential and not a lot of downside.
I'd guess anywhere in the $30 to $90 range would be about right.
$6.50 an ounce is pretty close to stealing on the part of investors.
Mareesburg will cost between $7-$10 million to get into production.
If all of the warrants outstanding
are exercised, that brings in an additional $40 million in cash.
So the company is well cashed up and positioned both for more
acquisitions and for funding production.
It's important to remember
that most of the opportunity here was created as a result of
a change of government rules in South Africa. Ian saw opportunity
and stepped in to fill the vacuum. I am dead certain there are
other properties on the horizon and as time goes short before
the "use it or lose it" deadline, there will be other
deals done which he cannot disclose at this time.
Of all of the writers out there,
I probably put more emphasis on management than the others do.
While many of the mining writers have a technical background
in mining and often multiple degrees, I don't. But I can measure
management. The first company I wrote about was NovaGold
over three years ago and it's been a winner all along the way.
I said their management (all five of them) possessed "vision"
and that it was pretty rare in the mining business.
Well, Ian Rozier and David
Cohen have vision in spades and spurred along by more government
foolishness, they are creating a platinum giant. It's a low risk
and high potential company now and I fully expect more announcements
in the not too distant future.
Of course, the real measure
of how you feel about a company is what you would do with your
own money. Their story was enough to convince me to buy up some
shares on the open market as soon as I got back from San Francisco.
I don't
recommend stocks per se, but if you like the prospects
of platinum, are willing to put up with the political risks of
South Africa, and would like to consider a low risk, high potential
junior, you could do no wrong by looking at Elgin very closely.
Another company that was pointed
out to me by one of the most astute private investors I know
is called CGX Energy, Inc. (OYL.U-V $.60 US 80 million
shares, website). CGX Energy
has a giant land position, 7.7 million acres in an area, the
Guyana and Suriname Basin, with one of the highest resource potential
for oil and gas in the world. Please go to their web site for
the entire story because it simply cannot be told in a dozen
short paragraphs.
Oil and gas drilling is simple.
Energy is in short supply and getting shorter. Drilling for oil
and gas costs a bomb but pays for on a 100-1 basis now and again.
Deep drilling, over 10,000 deep can cost $8-$10 million a hole
for a dry hole, 50% higher if you complete and case the well.
More shallow offshore drilling can be $4-$8 million.
So CGX Energy, under the leadership
of Kerry Sully as president and CEO, is going to drill a similar
risk/reward series of wells, onshore in Guyana. These are shallow
wells, in the 3,000 to 6,000 range, at a cost of around $1 million.
They plan on a series of three wells with drilling to begin in
January, 2005. Kerry comes to the company with 33 years experience
in the oil/gas business.
It's a simple equation. The
wells onshore are very high risk, there have been no hydrocarbon
reservoirs discovered in Guyana. The risk is high. But the company
is OK for cash, at least for the three well program starting
in January. Oil and natural gas drilling consumes capital. If
CGX hits on one of the first three wells, it will generate so
much cash flow, most of the next drilling gets paid for. If they
don't hit, they issue stock until they do hit. If the first couple
of wells hit, the stock has $50 potential. If it takes 25 wells
before they find hydrocarbons, it's a $.50 stock.
So it's high risk and even
higher reward. And since all juniors are at best either lottery
tickets or permanent calls on commodities, I was a buyer when
I came back and it's worth pointing out to my readers.
One of my favorite people in
the business is Bob Dickinson of Hunter Dickinson. I met him
just short of two years ago at the Vancouver Gold show. He pitched
me on Northern Dynasty and I wrote about the stock when
it was in the $.65 range on the way to over $11.
I learned my lesson. When Bob
Dickinson speaks, you need to listen. He cornered me in San Francisco
and this time I listened carefully.
Hunter Dickinson has a separate
company for each major project. You almost cannot go wrong by
investing in any of them, HDI is nothing short of superb. By
having an individual company for each major project, an investor
can pick and chose just which business model to invest in.
Their latest baby is Continental
Minerals Corp. (KMK-V $1.50 Canadian 37 million shares outstanding,
website).
Continental signed a deal on
the property in February and the stock was at $2 a share. The
Chinese insisted wording be changed in the agreement and the
stock got cut in half. And last month the agreement was again
agreed to and the stock jumped 50%. It's still 33% below where
it was in February with the project at the same exact point.
It's a pure copper/gold exploration
play. The primary asset is the Xietongmen property located 240
kilometers southwest of Lhasa in Tibet, People's Republic of
China (PRC). It has a total of two drill holes. Both of them
hit ore grade intercepts of over 200 meters from near surface.
According to Bob Dickinson,
the alteration is very big and he grins with excitement when
he talks about it. The last time I saw him this excited was when
he was talking about Northern Dynasty and they were giving the
stock away at $.65. Very big doesn't qualify as a 43-101 resource,
but when it comes from Bob Dickinson, it means very big.
The company has Northern Dynasty
potential, almost $9 million in the bank and is reasonably priced.
The project shows remarkable mineralization for only two drill
holes and has road and rail access. They have a large drill program
scheduled for the spring. If you like copper/gold exploration
plays with giant potential and brilliant management, look at
it closely.
I had rather an unusual experience
the day before the San Francisco show opened. As I was coming
back into the hotel lobby on Friday night (The show ran Sunday
and Monday) I heard a lovely soft voice from behind me. "Bob,
is that you?"
I turned to look at this tall
drink of water. Drop dead gorgeous would pretty well describe
her. And she knew me! The only problem was that I didn't know
her. But I certainly wanted to. As it turns out, it was the lovely
-- perhaps beautiful -- Susie
Bell of New Sleeper Gold. [Editor, Barb's, comment: er 'scuse
me (click)] She had been told to look for someone with a
grey-haired ponytail and flight jacket. And I reckon there weren't
all that many folks fitting that description at the show.
We started talking since New
Sleeper are advertisers. (Not that I have any problem talking
to drop dead beautiful women). She was with Robert Eadie
Executive VP of Klondex Mines Ltd as well as CEO of Starcore.
Robert casually asked me if I wanted to go look at some 25 feet
of 2.5 ounce gold drill core on Saturday. I agreed and the next
day we set out on what turned out to be quite an adventure.
Klondex Mines Limited (KDX-V
$2.15 Canadian 15 million shares $6.2 million in the bank; website) has held onto
a project in Nevada called the Fire Creek deposit for 25 years.
The company was pretty quite for the last fifteen years, having
farmed out the property to a JV partner who dropped their option
in 1999 after having paid $1.2 million over a 11 year period
in lease payments.
Earlier this year the company
did a financing and began a major drill program. Klondex did
something I really approve of, rather than waiting for years
to drill some good results, they charged out of the chute and
reported
results of 25 feet of 2.59 ounce gold in October.
So I was interested. On Saturday,
nine of us (minus Susie Bell, rats) [!!!]
met in the lobby to go over to Nevada. I had visions of getting
on a chartered Greyhound but Robert Eadie and Bill Solloway (see
photo, left),
President of Klondex had other plans. We took a hotel van over
to Oakland airport and got ready to jump over to Reno in a shiny
beautiful
G-2 jet.
But the Trim Gods weren't cooperating.
The pilot came in and told us that Reno was socked in.
We figured that we would wait for 2-3 hours to see if conditions
would change or until it was too late in the day to make it over
and back.
I guess we got over to Oakland
airport about 10 in the morning and about noon I called Barbara
in Miami to report in. She got on the web and said it was looking
grim but conditions were supposed to improve in the early afternoon.
She could actually read the forecast for Reno to me from the
National Weather Service and Reno was looking at 5-10
inches of snow before clearing.
The Weather Gods smiled on us and we left about 1:30 PM. A short
45 minutes later we landed in a white winter land of snow in
the Reno basin. Again we jumped into vans and headed over to
the storage
area nearby where Klondex stores core (core1
- core2 - core3).
I was at the Ken Snyder Mine about 50 miles north of Fire Creek
a little over a year ago. The mineralization from Fire Creek
is identical to that of Ken Snyder. (Ken Snyder ore
from the Colorado Grande vein). My SWAG (Stupid, Wild-Assed Guess)
is that Klondex is on to something big. They have saved themselves
a lot of time and effort by getting right to it and drilling
some high grade intercepts. If you like the risk/reward of junior
gold companies, look them over closely. They have the goods from
all appearances.
There are a variety of really well-managed gold/silver/copper
companies soon going into production. I happen to believe that
is the sweet spot, you get the most bang for the buck at the
least risk. I will outline some of my favorites.
Desert Sun has a major project at Jacobina in
Brazil coming on line in Q1, 2005. (DSM-T $1.70 Canadian 73 million
shares, website)
$33 million in the bank, they estimate production of 102,000
ounces a year of gold at a cost of $189 per ounce cash costs.
Their plant and equipment has a $150 million dollar replacement cost. Expect
production and resources to continue to increase.
Excellon Resources (EXN-V $.175 Canadian 111 million shares
outstanding, website), has been a favorite
investment of mine for the past 3-4 months. The stock remains
a buy below $.20 and would be a screaming buy if the boneheads
running the company would bite the bullet and do a rollback.
At this stage of the market, a stock priced below $.25 is absurd.
But try getting management of any mining company to deal in a
proactive way with a rollback. Good luck.
Excellon is in the process
of driving a decline as I write into a 65,000 ton ultra high
grade silver (3000 gram) lead/zinc (30%) deposit called Platosa
in Mexico. I wrote about it months ago and nothing at all has
changed including the price of the stock. Except that lead, silver
and zinc are all far higher and the economics are better now
than before.
I tried hitting management
over the head with a 2x4 in Las Vegas and again in San Francisco.
Investors simply will not take a $.17 share seriously even though
the numbers on the project are incredible. Oh, well, in February
they will be producing and maybe after months and months of positive
cash flow, maybe the stock will arise from the dead. They have
all the cash they need to proceed and with the exception of the
number of shares outstanding, it's an incredible play.
Admiral Bay ought to change their name to Admiral
Buy and perhaps they could attract some attention. (ADB-V, $1.02
Canadian 29 million shares outstanding, website).
Management made the mistake of confusing investors a couple of
years back and have been paying for it ever since.
Admiral Bay has a giant coal
bed methane property at Moose River in Canada. The project has
been quiet for 18 months but they are in
the midst of a winter drill program. They got diverted into a
gold/silver play in Mexico and I suspect investors couldn't figure
out if they were investing in an energy company or a gold/silver
company. And then they set off to do another oil and gas play
in Kansas.
I've talked to top management
and I think I know what they are doing. You can't get a clue
from their website or printed material. It's filled with factual
information all of which is both interesting and meaningless
at the same time. They generate great heat but little illumination.
Admiral Bay is now officially
an energy company. They have completed 39 gas wells
in the Shiloh and Devon projects in the Cherokee basin in eastern
Kansas. All are commercial and are in the process of being brought
on line. They also have a coal bed methane project in Pennsylvania
and in Utah. They look to drill an additional 52 wells before
the end of the year.
As much as I like Admiral Bay
and all their people, they aren't all that great at communication.
They are an energy company going into production on a large scale.
Their website doesn't actually communicate that and you pretty much have to beat
the information out of them.
It will be months before investors realize the change has been
taken place. Until then the stock will offer way above average
potential for appreciation. If you like energy, you should look
at Admiral Bay.
I really hope they take a bull
dozer and bury the Mexican gold/silver play. It has consumed
both their money and energy for two years and done nothing more
than confuse investors.
Endeavour Silver (EDR-V $1.55 Canadian 18 million shares,
website),
$7.7 million cash on hand, is in production now. I have covered
the company on a variety of occasions and nothing has changed
except they are doing exactly what they said
they would be doing.
The company is a sleeper for
a bunch of reasons, all of which scream, "Buy me, buy me."
In a year they will be regarded by all as the best-managed and
most-profitable of the silver juniors. I think of them in that
way already.
When I went to China in September,
one of the companies I wanted to visit and missed was Pinnacle
Mines Ltd. I'm sorry I missed them and I have them on my
schedule for early next year. (Pinnacle Mines PNL-V $.94 Canadian
10 million shares outstanding, website),
$2.2 million cash
Pinnacle has not one, but two
company making projects in the works. One, near Eskay Creek in
Northern British Columbia, the Silver Coin project, continues
to show mine making potential intercepts. 24 Meters of over 5
gram gold and 42 gram silver on top of a lot of other great intercepts
reported
lately.
The project in China which
I haven't gotten to is called the Yang Wen Chong gold project
in Southern Yunnan Province. (Sorta rolls off your tongue, doesn't
it?) They reported
very favorable 43-101 results in August of 2004.
I like the management of Pinnacle.
We own shares and have for a year now. They are making great
strides in both China and BC and are well-positioned with cash.
With a market cap under $10 mln Canadian,
it isn't a hard decision to make to own some shares in them.
I reported
on Adanac Moly in August. (AUA-V $.51 Canadian 23
million shares outstanding,
about $8 million market cap ANCGF-OTCBB, website).
There is little more to say about them except for the minor fact
that when I wrote about them, the stock was $.54 and moly was
half of what it is now and by the way, they just added another
great moly project in Nevada. Sometimes you have to wonder what
it would take to wake investors from their stupor. My SWAG estimate
for the moly resource at Atlin Lake is in the neighborhood of
500 million pounds of moly which is currently going for $28.75
a pound. (Updated-STOP
PRESS: As at Friday Dec 10th MOLY is $32.00 a pound!)
That same moly was selling
for $14 and change in August and with no money in the bank, Adanac
was at a higher price. Since then they have added a Nevada moly
property at incredible terms, moly has doubled and in the last
week, the total value of the moly at Atlin increased $1 billion
dollars and the stock is asleep.
It won't be asleep forever.
Moly is a commodity in the shortest of short supply and should
a major or the Chinese decide they need moly, Adanac could soar.
Some of the companies written
about above are advertisers, and we own shares in many of them
and as such have all the reason to be biased. We are biased. We write about
them because we like them. We own them for the same reason. Your
investments are your responsibility, not ours.
Depending on when you read
this I may be gone. I am going up once again to the cold wilds
of Canada. I will be gone from Sunday Dec 12th until Sat. 18th.
So try not to email me between those dates because I won't be
looking at email.
Klondex trip photo
gallery.
December
8, 2004
Bob Moriarty
President: 321gold Inc
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