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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Tuesday, April 29, 2008

Jaguar's March 25 Call Transcript

I just had a chance to read the transcript of the Jaguar Mining conference call from March 25 and wanted to share some of the information with Gold Stock Strategist readers. The following is an URL with the full transcript on SeekingAlpha.

Jaguar's March 25 Transcript

Several items stand out for me after reading the transcript.

First is the following:

"The geological setting we’re in leads us to believe that we can have a rolling resorts base of 8,000,000-10,000,000 oz Au under our feet and on strike therefore we’re leveraging the existing infrastructure we have in place."

This is far larger than the 3.6 million reserves Jaguar is currently reporting and if 8-10 million ounces are eventually proven up, this would represent a significant increase in the value of Jaguar Mining.

Second, they are on track with the Paciência property, which is scheduled to begin production in 2008. Currently, the Turmalina mine is the big producer. Bringing Paciência online will be a major milestone and have production equal to Turmalina during 2009. Total production is projected to rise from 160,000 ounces in 2008 to 270,000 by 2009.

Third, even though production costs were up in Q407, Jaguar expects production costs to come back in line with previous projections going forward.

Fourth, there was an angry comment and a question for management on stock based compensation. Managment explained that the large increase in stock price drove the expense significantly higher in Q407. Revenue for the year was $47.8 million and stock compensation expense was $10.8 million. Management indicated that they were unlikely to continue the past level of stock based compensation and that they were not requesting an increase in the number of options. However, they are reviewing their oveall compensation scheme and should be able to report in a few months. I'm not concerned with the one time charge for stock based compensation. Finding talent is very difficult in the mining industry. Compensation is very important to attract and retain talent. As long as Jaguar keeps hitting milestones, delivers on production, and grows cash flow I am comfortable with appropriate compensation schemes--but will carefully assess their new scheme when it is released. The one time charge explanation was acceptable IMHO.

When all is said and done, Jaguar is now extremely undervalued IMHO at $8.64 per share. Given fundamental valuation metrics, Jaguar Mining should be a two-bagger by the end of 2009 IMHO.

Gold Stock Strategist

Full disclosure: I own shares in Jaguar Mining. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their investment decisions. Do your own due diligence

Will AngloGold Exercise it's Option on Capital Gold?

Capital Gold purchased a 100% interest in 3,544 hectares of property located n Northern Mexico. Capital Gold bought the interest from a subsidiary of AngloGold Ashanti (NYSE-AU) for US$55,000 cash in 2001.

The terms of the deal included a 10% net profits interest with a $1 million cap, a 4% net smelter return royalty with a $17 million cap, and a one-time option to gain a 51% share of the property equal to payment of two-times Capital Gold’s total investment in the project. The option is estimated to cost AngloGold Ashanti $180 million if exercised.

Based on a recent buyout deal by a major where reserves were acquired at about $280 an ounce with the price of gold at $950 an ounce. With gold at $850 an ounce, the buyout valuation metric would potentially be about $250 an ounce assuming spot gold is a reasonable assumption. The AngloGold Ashanti option would be worth the equivalent of $200 an ounce if they acquired 51% of Capital Gold.

Either way, this seems like a good deal for AngloGold Ashanti buying reserves at a 20% to 30% discount to recent buyouts by majors. Capital Gold's low cost of production profile, logistical advantages in Northern Mexico, and friendly mining jurisdiction in Mexico means AngloGold would also find the deal rather sweet.

AngloGold has experienced overall declines in production over the last couple of years and has initiated a program to turn that around. Their largest production share is from South Africa which has had extensive problems providing electricity to industry. AngloGold could use a well-run operation to help boost production at the margin.

It seems like a sweet deal except for two operational considerations and a more fundamental consideration.

First, AngloGold has no operations in Mexico and is not intimately familiar with Mexican rules and culture.

Second, AngloGold has their hands full reforming the operations of their globally diverse holdings so that overall production begins to move up rather than down.

In the end, I think AngloGold’s decision hinges on their projections of the price of gold going forward. If they think gold rises above $1,000 again and beyond, they will buy back in with the 51% ownership option.

My sense is that AngloGold is bullish on the price of gold and therefore is likely to exercise the option. I'm reminded of Don Coxe's rule for investing in mining projects, "unhedged reserves in politically secure areas."

If AngloGold exercises the option, Capital Gold gets a nice chunk of change equal to about $0.95 per share. As a result, $0.95 per share should be the floor for Capital Gold given their successful record of executing their plan over the past 7 years.

But, then again, I could be wrong. Do your own due diligence.


Gold Stock Strategist

Monday, April 28, 2008

Capital Gold

TARGET PRICE RANGE: $1.55 to $2.62

Capital Gold Corp. is a gold mining and exploration company. The company has been in production for two quarters and is in the final stages of expanding their production facilities at the El Chanate Mine in Sonora, Mexico. The mine is expected to have a 10-year life open pit mine with additional discovery potential. Capital Gold is also looking for other mining prospects in Northern Mexico.

Mining operations at El Chanate commenced during the third quarter of 2007.

The common shares of Capital Gold are listed on the Toronto Stock Exchange under the symbol CGC and the Over the Counter market under the symbol CGLD.




Shares Outstanding: 176 Million (196 million fully diluted)

Market Capitalization: ~$120 million

Telephone: (416) 304-2170

Capital Gold Web Site

Capital Gold Video

Capital Gold currently owns a single property with over 1.8 Million oz of gold resources (measured, indicated, and inferred per NI 43-101).

One key advantage is that, similar to Metanor Resources, Capital Gold has a lab on site to hasten exploration of the existing El Chanate project, with mineralization open at depth and to the East.

One disadvantage is that, like Minefinders—another emerging producer with operations in Mexico—Capital Gold is dependent on a single mine site for production.

Production is projected to be 50,000 oz. in 2008; 60,000 oz. in 2009; and 80,000 oz. in 2010.

Capital Gold has 90,000 ounces of gold hedged, but the hedge is structured more like a royalty since they sell the gold at spot prices and pay the counterparty $35 for every ounce sold.

Capital Gold has ~$13 million in debt.

Cash currently available as of February 2008 = ~$5 million.

The following methods are what I use to value Capital Gold for my investment purposes and provide a range of short-run and potential long-run value.


$1.55 per share in 2008 using a cash flow model valuation and assuming the following:

10x cash flow
$250 per ounce production cost
50,000 ounces of production in 2008
$2 million G&A
$10 million capital expenditures
196,100,000 shares outstanding (fully diluted)
$900 price of gold in 2008


$2.62 per share based on current resource base.. The majors are paying about $280 an ounce for buyouts at $950 an ounce POG. Capital Gold currently has about 1.8 million ounces of measured, indicated, and inferred gold times $280 an ounce minus the $13 million in debt equals $501 million. $501 million divided by 196 million shares equals $2.62 per share.

Gifford A. Dieterle
Robert N. Roningen
Roger A. Newell
Jeffrey W. Pritchard
John Postle
Ian Shaw
Mark T. Nesbitt
John Brownlie


Gifford A. Dieterle, Chmn./Pres./Treas
John Brownlie, Chief Operating Officer
Chris Chipman, Chief Financial Officer
Jeffrey W. Pritchard, Corporate Secretary, VP Investor Relations
Robert N. Roningen, Senior VP
J. Scott Hazlitt, VP Mine Development

As a final note, AngloGold Ashanti has an option to buy a 51% share of Capital Gold’s El Chanate project. We will analyze and assess likelihood of AngloGold Ashanti exercising the option in a day or so here on the Gold Stock Strategist.

Full disclosure: I do not own shares in Capital Gold Corp.. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their own investment decisions

Sunday, April 27, 2008

Emerging Producers Ripe for Consolidation

I have written in the past that 2008 should be the year of consolidation for the gold mining industry given the flush coffers of the majors and the large number of severely undervalued emerging junior gold mining producers.

The following article, though almost a month old, supports the consolidation thesis. Many of the names should be famnliar to those investing in the junior gold mining space.

Tomorrow, I will be posting a valuation of a new undervalued emerging junior gold mining producer. Stay tuned!


Gold Stock Strategist

Big miners could be on the prowl
Globe and Mail Update
April 4, 2008 at 6:00 AM EDT

Investors in the mining sector may have been too busy salivating to notice, but metal commodity prices haven't been the only thing going through the roof. The costs of developing new mines have also been soaring – and that could foreshadow a new round of takeovers in the sector, analysts at RBC Dominion Securities Inc. said yesterday.

The investment bank's mining group issued a report showing that in the past year and a half, capital cost estimates for major mining projects under development have surged by an average annualized rate of more than 56 per cent.

Much like Canada's oil sands companies (which are, for the most part, essentially developing mining projects), mine developers are being hammered by surging labour costs amid acute shortages of skilled workers, as well as sharp increases in costs for materials. Costs for steel and cement have risen by as much as 40 per cent annually over the past two years, the report said.

One of the most glaring examples of these runaway costs is right here in Canada. The estimated capital budget for the Galore Creek copper/gold project in British Columbia has jumped from $1.1-billion in the fall of 2005 to a whopping $5-billion today – prompting the project's owners, Teck Cominco Ltd. and NovaGold Resources Inc., to put the project on hold while they seriously rethink the whole thing.

But the cost increases are hardly unique to that project or even this country. New mine developments in such far-flung places as Alaska, Australia, Panama, Romania, Russia and Papua New Guinea have seen project cost estimates soar over the past year, in many cases doubling or even more.

“We do not believe an end is in sight,” the RBC analysts said.

This is creating a very risky and expensive environment for embarking on new mining projects – and this, the analysts believe, is creating the impetus for takeovers.

The pieces of the argument fit together nicely. Mining companies, especially big senior names, are kicking off cash like never before, thanks to record commodity prices. Cash flow at such mining giants as BHP Billiton Ltd., Barrick Gold Corp. [ABX-T] and Xstrata PLC have more than tripled in the past three years.

But these seniors have the same problem they have always had: They have mature mines whose resources are dwindling yearly, and to keep their businesses growing, they have to find ways to replace those depleted reserves and then some.

Developing new mines is all fine and good, but why bother when development costs are skyrocketing? Why not put all that loose cash to work buying existing assets that are already late in the development process? You've got the cash to pay for it, the risk is reduced, and the reward can be realized much sooner.

“Companies looking to expand production, or replace a declining production profile, may be better off acquiring companies with one or more late-stage development projects, rather than funding existing early-stage projects all the way through development,” the analysts wrote.

“The most likely targets for M&A in the short term will likely be companies with established production and/or reasonably near-term growth certainty,” they said.

On the top of that list is Kinross Gold Corp. [K-T], which has a couple of projects (Kupol in Russia and Paracatu in Brazil) slated for completion this year. With a market cap of $14-billion, Kinross would probably be a mouthful for all but the biggest of mining companies. But the RBC analysts also mention some smaller names that fit the mould – including Centerra Gold Inc. [CG-T] and Eldorado Gold Corp. [ELD-T]

Even if these companies don't get taken out, they could still offer nice near-term growth with relatively low development risk. Other stocks fitting this description include Agnico-Eagle Mines Ltd. [AEM-T], Jaguar Mining Inc. [JAG-T], Anatolia Minerals Development Ltd. and European Goldfields Ltd., the analysts said.

On the other hand, RBC cautioned investors to be wary of capital-intensive projects that are years away from completion.

That flashes a yellow light over Barrick. The gold mining giant has three such projects that fit this risky profile: Donlin Creek in Alaska, Pueblo Viejo in the Dominican Republic and Pascua Lama in Argentina/Chile.

“We feel such long-lead-time projects are unlikely to be sought after until permitting and timelines are better delineated,” they said.

Saturday, April 26, 2008

Metanor executes plan . . . and shows it on video

Every once in a while, a company executes a plan, pulls everything together efficiently, and packages it up in a way that makes it easy to understand for investors not schooled in the details of the industry. Metanor Resources has completed all three goals with two press releases this week.

There are strategic advantages Metanor has over most junior gold producers/explorers that are not common knowledge to the casual investor in mining companies.

For example, Metanor has it’s own on-site lab to test drill results. There are significant backups at the official labs used to confirm deposits for purposes of determining “Measured and Indicated” reserves, Having an on-site lab is a great advantage for real-time feedback that can be used to guide drilling. This advances discovery by several months each year rather than waiting to hear drill results from the official labs and then devising additional drilling plans.

Metanor also owns their own diamond drills, reducing delays in getting scarce and expensive drilling resources to mine sites. They are prepared and on track to prove up additional resources at the Barry project with their aggressive drilling program.

At this pace of execution in production, Metanor should be cash flow positive to over one million dollars each month.

Metanor is also expanding the mill to accommodate 1,200 tons per day compared to the current 500 tons per day rate. At that increased rate, annualized net cash flow would likely exceed $0.30 per share at $900 per ounce of gold. Metanor is trading at $1.00 per share currently or about 3x projected cash flow. My short-run valuation model has Metanor at $2.86 per share using a conservative industry standard of 10x cash flow. This is the reason why Metanor is the largest position in my portfolio at about 30%.

In short, I continue to like the reward to risk ratio on Metanor compared to other emerging junior gold producers. As long as the company continues to successfully execute their production expansion and discovery plan, there remains considerable upside share price potential in Metanor.

Good luck and do your own due diligence.

The Gold Stock Strategist
Full disclosure: I own shares in Metanor Resources. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their own investment decisions. Do your own due diligence.


News Release - April 25, 2008 03:34 PM ET

Video Footage of Canada's Newest Gold Mill in Operation; Unique Insight Into Metanor's Operation "From Ground to Furnace"

NEW YORK, NY, April 25, 2008 /Sector Newswire/ - Metanor Resources Inc. (TSX-V: MTO) (Pink Sheets MEAOF) is a new, debt free, unhedged, gold producer in mining friendly Quebec and the subject of video insight that shows Canada's newest gold producer in operation. With less than 73M shares outstanding, no debt, and infrastructure replacement value of approximately $140M; the current intrinsic value (ignoring gold resources, growth, and cash flow from production) is close to CDN$2 per share. Valuation metrics based on forward projected cash flow potential of Metanor's Bachlor Lake Mill operating at full capacity of 1200 TPD and generating in excess of 65,000 oz gold in 2009 suggests a substantial upside share price adjustment as Metanor continues to execute upon its goals.

Video of Metanor in Operation
footage from ground to furnace

This release may contain forward-looking statements regarding future events that involve risk and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual events or results. Articles, excerpts, commentary and reviews herein are for information purposes and are not solicitations to buy or sell and of the securities mentioned. Readers are referred to the terms of use, disclaimer and disclosure located at the above referenced URLs.

SOURCE: Sector Newswire per: Mining MarketWatch Journal and Metanor Resources Inc.

Metanor Pours More Gold, Moves 2nd Drill to Promising Barry Property
Thursday April 24, 9:15 am ET

VAL-D'OR, QUEBEC--(Marketwire - April 24, 2008) - Metanor Resources Inc. (TSX VENTURE:MTO - News) is pleased to announce that it has poured more gold at its Bachelor Lake Mill facilities, bringing the cumulative total to more than 3,000 ounces of gold dore bars. The bulk sample mill-feed is from its promising Barry open pit property. The Bachelor Lake Mill continues to operate consistently at 500 tons/day, 7 days a week, 24 hours a day and is well on its way of producing its minimum 1st year forecast of 25,000 ounces. Ghislain Morin, President and COO commented "The mill continues to operate very well during this start-up phase, with each day comes continued improvements - for instance -recovery is presently at 96.6%. The operations at the mill continue to show testament of the hard work of our team."

As previously announced, Metanor has commenced a 15,000 meter diamond drilling program at its promising deposit at the Barry camp. This drilling campaign was initiated to the southwest of the main zone trying to connect the main zone with zone 48. Due to the core samples taken to date with visible gold present, Management has mobilized a second diamond drill to the Barry camp and the second drill is presently on site and operating at full capacity. The core samples are analyzed at our on-site laboratory and are sent to an independent laboratory for verification, results are pending. This drilling program is being done in an effort to prove up the resources at the Barry camp and to better plan its ongoing excavation and processing of the ore body. To reinforce this program were the very promising results obtained from the most recent study published by Diagnos showing a potential body stretching 4KM in length. "With these core samples ,we continue to believe that the Barry pit is potentially a very large deposit as it is open in all directions and open at depth , this is why we are accelerating the drilling campaign with the addition of a second drill on site " stated Serge Roy, Chairman and CEO.

Mr. Andre Tremblay, P Eng. is the qualified person pursuant to National Instrument 43-101 and supervised the technical information presented in the news release.


The TSX Venture Exchange does not accept any responsibility for the adequacy or the accuracy of the press release.

Serge Roy, CEO
Metanor Resources Inc.
Source: Metanor Resources Inc.

Tuesday, April 22, 2008

Goodman adds 800,000 shares of Metanor

Goodman Company recently added 800,000 shares of MTO to 10 million already owned for a total of 10.8 million shares. Goodman distributes shares to investment mutual funds. That is about 15% of Metanor's outstanding float. Another group of large holders of Metanor are self-directed individual investors I am familiar with who hold a self-reported 13% of Metanor shares. Add another 7% or so and that puts about 35% of Metanor's shares in what I consider strong hands. Other institutional holders are likely also strong hands and adding those holders in means the total is over 50% if my memory serves me.

Metanor's share price is consolidating nicely above $1.00 a share. I expect the share price to rise from this level after 1Q financials are released and into June. How much higher the shares run is anyone's guess.

Everything seems to be on track for Metanor Resources. Timely hitting of milestones in the execution of a plan is a key trait I look for in emerging junior gold mining producers. Metanor has executed well so far in 2008.

Here is the SEDAR report language by Goodman and Company.

"Since our last report filed on March 10, 2008, G&C, on behalf of one or more of the mutual funds or other client accounts managed by it, acquired 800,000 common shares of Metanor Resources Inc. (“Metanor”). This represents an increase in G&C’s position of metanor by 1.12% on an undiluted basis, as at March 31, 2008.

The designation and number or principal amount of securities and the eligible institutional investor’s security holding percentage in the class of securities at the end of the month for which the report is made. G&C, on behalf of one or more of the mutual funds or other client accounts managed by it, exercises control or direction over 10,800,000 common shares of Metanor. This represents an approximate 15.05% interest, on an undiluted basis, as at March 31, 2008. "


Sunday, April 20, 2008

European Minerals Merges with Lero Gold to Form Orsu Metals

On another front related to execution risk in junior gold miner investing, European Minerals (in which I own a large number of warrants, OTC:EPMWF) announced that they are merging with Lero Gold (TSX:LER, OTC:LERGF). This arrangement is curious for several reasons, the most interesting being that Lero is issuing more shares before the deal is closed in order to raise capital for European Minerals to pay off it's creditors about $25 million.

European Minerals (TSX:EPM, OTC:EPMCF) was renegotiating loans and had not planned to run out of money. They couldn't produce the gold they promised and had pre-sold at $574 an ounce, So, they ended up buying gold at almost $1,000 an ounce to cover the "hedge." Even worse, these financial details ended up being released two weeks later than planned.

In essence, European Minerals had miscalculated their credit situation, overspent, and underachieved on production. The result is that current European Minerals management will be replaced by Lero Gold officers who are also bring in outside managers with a history of successfully executing production milestones. I intend to hold my European Minerals warrants, despite the dilution of this project. The new company will be called Orsu Metals. In addition to Varvarinskoye, European Minerals’ key asset, Orsu Metals will have Lero's advanced exploration stage gold and base metal projects in Kazakhstan, Kyrgyzstan and Russia.

Another twist to the European Minerals saga is that the Kazakh government is considering custom duties on exports of metals The export duty is purportedly to be designed to offset the planned cut of corporate income tax and that the duty would be determined once the new corporate income tax was determined.

I still think European Minerals has the potential to be a strong play. However, any runup has been deferred until they can prove the ability to execute on production and manage credit more responsibly.

Aurelian Hit Hard by Ecuadorean Politics

Shares of junior gold miners with operations in Ecuador were hammered on Friday as the country's new constitution approved the revocation of most pre-existing mining concessions. The most promising emerging junior gold mining producer, Aurelian Resources (TSX:ARU, OTC:AUREF) lost $2.32 per share or 31.5 per cent to $5.04 per share on Friday. The market cap of Aurelian was almost $1 billion on Thursday and is now about $685 billion. Shareholders have been hurt badly by this severe change in government policy. Yet, this outcome has been telegraphed by Ecuador's political regime for some time and is one reason I have not invested in Aurelian, despite the great promise of their Fruta del Norte project.

I had been following Aurelain for some time, paying close attention to the Ecuadorian constitutional rewrite. This is of special interest to me, having studied political economy in Ecuador in 1980 immediately after a longstanding military junta handed over power to a civilian government. Ecuador is a poor country and could benefit from economic development. This decision is likely to set back investment in resources projects going forward.

Crystallex International (TSX:KRY, AMEX:KRY), a junior gold miner with production with a large mining project in Venezuela called Las Cristinas, is another example of a company beset by political risk. Last year saw its shares swing wildly Venezuela's government suggested the country planned to take over the mining sector. As a result, the share price has suffered.

KRY is an appropriate symbol for Crystallex shareholders. The stock has ranged from $1.59 to $5.25 over the past year. It is currently at $1.89.

ARU and KRY are excellent examples of why it is important to invest in junior gold miners in politically safe regions of the world. What happened in Ecuador should not be generalized to all of Latin America. For example, Brazil is one of the more mining friendly countries of the world. The Brazilian government has welcomed the jobs and wealth created by mining interests such as Yamana Gold and Jaguar Mining. Mexico (Minefinders), Quebec (Metanor) and Sweden (Gold-Ore) are also considered mining friendly countries.

Monday, April 14, 2008

Gold-Ore Hires Merger Expert

Late last week, Gold-Ore Resources Ltd. announced the hiring of Ron Ewing as Vice President of Corporate Affairs.

I see this hire as a signal that Gold-Ore is open to being acquired by a larger company or being merged into another emerging jr. gold mining producer in order to bring attention to its 1 to 2 million ounces of gold reserves. Production has begun at the Bjorkdal mine in Sweden with projection of 36,000 ounces of gold in 2008, and 60,000 ounces in 2009.

Ewing has been a director at Gold-Ore since 1996. Mr. Ewing knows the mining industry and knows Gold-Ore very well. The press release says he was hired to better communicate with investors.

Moreover, Mr. Ewing helped build EuroZinc Mining into a mid-tier base metal producer and helped prepare it for a merger with Lundin Mining in 2006.

Gold-Ore is—by my calculation—the most undervalued of the four leading junior gold miners in production (Metanor, Gold-Ore, Jaguar, and Minefinders).

This is good news for Gold-Ore shareholders.

The Gold-Ore story has yet to get out and will take some time to build investor interest. The Metanor story is beginning to get out and that is why I have a larger share of holdings in Metanor.

Over the past couple of weeks, I have lightened up on my Jaguar Mining shares and loaded up on my Gold-Ore shares based on valuation. Jaguar Mining shares have declined recently, but remain a solid value. Here is the current weighting in my portfolio for the four leading junior gold mining emerging producers.

Metanor Resources.....30%
Gold-Ore Resources....12%
Jaguar Mining..............6%
Minefinders Corp..........2%

Wednesday, April 9, 2008

Metanor Reports 2,000 Ounces Production!!!

Yesterday, Metanor announced that they have poured 2,000 ounces of gold during their initial bulk sample phase that began in February. This is great news. Even better is that Metanor’s mill has been running 500 tons of ore per day without pause for 7 days a week AND they plan to soon move up to 700 tons per day. They are on track to produce at least 25,000 ounces of gold this year.

Metanor First Pour News Release

The share price had a nice bump today on the news from C$1.03 to C$1.12.

In a recent interview, Ghislain Morin, President and COO, indicated that the Barry deposit ore came in at close to 7 grams per ton in this bulk sample rather than the estimated 4-5 grams per ton indicated by test samples. That is even better news!

Al Korelin and Jay Taylor also released a report this week interviewing Metanor board members Ghislain Morin and Ron Perry. Both Korelin and Taylor see Metanor as one of the most undervalued juniors on the market now that they are producing gold.

Korelin Report

As I said, all of this is good news. But I suspect the market will push Metanor’s share price much higher only after they report positive cash flow and earnings.

This is still my favorite play in the emerging producer junior gold miner space and yesterday's release confirms my sense about this one. I expect Metanor shares to rise sharply sometime this summer. I could be wrong, but don't think so.

Congratulations to the "Boys from Quebec!"

Monday, April 7, 2008

Another Deal in the Year of Consolidation - 2008

Since the middle of last year, I have always believed that 2008 would be the year of consolidation for the gold mining industry. The majors and mid-tier gold miners are loaded with cash from the sales of gold over the past couple of years. It is too risky and difficult to develop new properties and much easier to buy emerging producers with significant reserves.

Logically, consolidation should benefit emerging junior gold producers with large (1 million +) and growing reserves along with low cost production.

Well, yesterday Lihir launched a friendly merger/acquisition of Equigold in an attempt to further diversify beyond their Lihir Island gold mine in Papua New Guinea. Lihir has a low grade gold mine on an island. Get this, the bottom of their Lihir Island pit is 900’ below sea level. They have occasional issues with water seepage and other assorted problems.

Yesterday’s merger announcement of Equigold, combined with acquiring Ballarat Gold almost two years ago is a way of not only growing production and reserves, but also reducing their one mine risk. Lihir in Papua New Guinea represents more than 90% of their projected production in 2008. Management's goal is to be a 1 million ounce producer. Barring problems in execution, this deal does that. Lihir Gold was projected to produce 900,000 of gold in 2008 before this deal.

Equigold owns two mines; one in Queensland, Australia and one in the Ivory Coast of West Africa. Equigold produced 110,000 ounces of gold last year in Australia and was scheduled to begin production in West Africa this year, ramping up an additional 120,000 ounces of gold by 2009 with overall cash costs for both mines below $400 an ounce for Equigold.

Merger Presentation

Just like the New Gold/Metallica/Peak Gold deal, this one is intended to draw greater attention to Lihir Gold based as a diversified mid-tier producer.

This is just the beginning of the great year of junior gold miner merger and acquisitions in my opinion. I'm hopeful a couple of the plays in my portfolio can benefit from this trend.


Friday, April 4, 2008

Why No News on Metanor? . . . and Other Issues

The four leading emerging junior gold producing miners focused on in the Gold Stock Strategist website have important similarities and differences that impact valuation and are sometimes confusing for new junior gold mining investors. Here are a few that might be news to readers.

Metanor Resources and Gold-Ore Resources are currently engaging in the refinement of their production processes. Though formally not yet “in production” they are processing bulk samples as a way of proving and determining the grade of the ore they plan to process.

Reports of Metanor’s first pour come from the bulk sampling process and therefore Metanor is not yet formally in production. Until they formally go into production, there is unlikely to be a report of a first pour from the company. My sense is that Metanor will formally go into production sometime in June. During this bulk sampling process, they are making adjustments to their mill and fine tuning it to run at higher throughput rates.

Gold-Ore is doing the same as Metanor.

At the other end of the spectrum, Jaguar Mining finished their bulk sampling process long ago and is now well into their formal production process.

I prefer owning junior gold miners that are at the bulk sampling phase of their production process. Junior gold miners at this stage generally are still flying under the radar and have the highest potential upside. Metanor and Gold-Ore are clearly the most undervalued compared to Jaguar and Minefinders if they can execute their operational plan.

Metanor and Jaguar each have several minesites with considerable exploration opportunities. This is an important difference. Minefinder has a single minesite—the Dolores project. This raises the risk profile if the estimated grade profile of the reserves (based on drill samples) doesn’t “prove up” at the mining site.

Hedging is a double edged sword. In a rising gold price environment, hedging reduces revenue. In a falling gold price environment, hedging increases revenue. Metanor, Gold-Ore, Jaguar, and Minefinders all have unhedged production going forward. As long as the price of gold remains stable or is growing, being unhedged will treat these four companies favorably,

Open pit mining has a lower cost of production profile than underground mining, which is an important hedge against a falling price of gold. All of the four leading junior gold miners on the Gold Stock Strategist are predominantly open pit miners at this stage. Eventually, they will likely have a growing share of production conducted in underground mines which will increase their cost of production.

The interesting thing about cost of production (usually expressed as $ per ounce of production) is that junior gold miners with a high cost of production profile benefit more from a rising price of gold. Again, this is a double-edged sword as a falling price of gold reduces cash flow and earnings at a higher rate than low cost producers. It is simply a mathematical truism. For example, at $1,000 price of gold (POG) per ounce and $500 per ounce cost of production, the cash flow is $500. If the POG goes to $1,050, there is a 10% increase in cash flow ($50/$500 = +10%). A low cost producer, say one with $250 per ounce cost of production, would have only a 6.7% increase in cash flow ($50/$750 = +6.7%). Hence the intrinsic value of the stock with high production costs would increase in value more than the stock with low production costs. Gold-Ore and Jaguar currently have higher production costs (>$400) per ounce compared to Metanor (~$300) and Minefinders ($0 due to other metal byproduct credits).

These are just a few basic considerations for investors and reasons why these stocks are likely to perform differently given changes in company fundamentals and the price of gold.

Good Luck!

Tuesday, April 1, 2008

New Gold, Metallica, and Peak Gold Merger

CURRENT PRICE: $7.03 per share.
TARGET PRICE RANGE: $12.34 to $12.88 per share.

The “new” New Gold Inc. was announced yesterday, March 31, 2008. My interest was “Peaked” in this combination of New Gold (Inc. AMEX: NGD), Metallica Resources (AMEX: MRB), and Peak Gold Ltd. (OTC: PIKGF) having invested in the “old” New Gold and Metallica Resources in the past.

The combined company will be one of the top (#3 in market cap; #5 in measured and indicated reserves) mid-tier gold mining companies in the world.

The three companies expect to close the merger in July 2008 and operate under the New Gold Inc. name. They may seek a different exchange listing and possibly receive a new symbol.

The common shares of New Gold Inc. are currently listed on the Toronto Stock Exchange under the symbol NGD and the American Stock Exchange under the symbol NGD.




Shares Outstanding: 208.2 Million (234.6 million fully diluted)

Market Capitalization: ~$1,600 million

Telephone: (604) 687-6263

New Gold Web Site


There is a lot to like with this new company. The “new” New Gold Inc. will be a globally diversified mid-tier gold producer and exploration company with 3 cash generating gold mines: Cerro San Pedro (Mexico), Amapari (Brazil) and Peak Mines (Australia). There are very few mid-tier gold producers.

New Gold will also have a strong reserve position including near-term new production in New Afton (British Columbia, Canada), and El Morro (Chile). These are all mining friendly jurisdictions.

They also have a strong balance sheet with $500 million in cash, $292 million in debt, with a growing operating cash flow over the next couple of years.

The overall measured and indicated reserves are diversified by country as follows: Chile (32%), Mexico (25%), Canada (20%), Brazil (13%), and Australia (10%), Exploration is also underway in Alaska, British Columbia, and Chile.

Open pit mining represents 70% of NGD assets and 30% is underground mining. Open pit mining has lower cost of production than underground mining.

There resources are unhedged and they enjoy considerable production cost offsets from silver and copper byproducts.

Production, according to the company, is projected to be 297,000 oz. in 2008; 335,000 oz. in 2009; my projection is 400,000 oz. in 2010.

The “old” New Gold got caught up in Canada’s non-bank sponsored Asset Backed Commercial Paper ("ABCP") crisis to the tune of $51 million, the lion’s share of their $2.00 per share loss in 2007.

If gold stays under $900 an ounce (currently $883), the “new” New Gold is not a buy in my opinion. Another issue is the large number of shares represented by the combined company. New Gold has a lot of nice reserves and the production growth is strong, but the share value based on reserves isn’t as robust as other emerging junior gold miners. They need to prove up a lot more reserves to boost the long-run share value. In essence, they are worth more as a producer than they are based on reserves in the ground at this point based on my analysis.

Robert Gallagher of Peak Gold will be the CEO of the new company, though Metallica Resources shareholders represent over 40% of the merged company shares. According to press reports, Pierre Lassonde, a large investor in all three companies, was the architect of the deal. All three companies CEOs and Mr. Lassonde will be on the Board of Directors.

New Gold makes it's case for higher valuation based on Price to Net Asset Value ratios among mid-tiers, showing in their presentation that the new company will have a 0.94 P/NAV compared to the average mid-tier company with a 1.23 P/NAV ratio. This analysis implies the new company is undervalued by over 30% in the mid-tier gold producer space. They may be right.

The following methods are what I use to value New Gold for my investment research purposes and to provide a range of short-run and potential long-run value.


$12.88 per share in 2009 (2009 reflects a 13x cash flow valuation multiple more commonly used for mid-tier gold miners) using a cash flow model valuation and assuming the following:

-- 13x cash flow

-- $340 per ounce cash costs in 2008; $300 per ounce in 2009 (note that company projections for 2009 are decreasing — under $300 per ounce — due to economies of scale, elimination of duplication, supply chain management and other efficiencies).

-- 335,000 ounces of production in 2009 (~297,000 oz. projected in 2008)

-- $2 million G&A

-- 234,600,000 shares outstanding (fully diluted)


$12.34 per share based on current resource base.. The majors are paying about $280 an ounce for buyouts at $950 an ounce POG. New Gold will have about 8.1 million ounces in measured and indicated reservere along with 2.9 million inferred reserves (this projection assumes half of the inferred reserves) times $280 an ounce equals $3.188 million. $3,188 million divided by 234.6 million shares equals $12.34 per share.


Robert Gallagher, CEO and Director
Clifford Davis, Director
Pierre Lassonde, Director
Craig Nelson, Director
Paul Sweeney, Director
Ian Telfer, Director

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