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

Comments are welcomed!

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!

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