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

Comments are welcomed!

Saturday, May 31, 2008

Fundamental Analysis, False Precision and Emerging Jr. Gold Producers

World of Wall Street has an excellent post on valuing mining companies written by AceOFKY on May 20, 2008 and titled
Valuing Mining Stocks - In Defense Of Net Asset Value.

This is a must read for investors in emerging junior gold producers because it lays out the pros and cons of three common valuation approaches. The post was also published on SeekingAlpha, Stockhouse, and other widely read venues.

AceOFKY favors the “net asset value” (NAV) method over the “in situ” and “cash flow” approaches—both presented here on the Gold Stock Strategist as the primary method of analysis. In general, I agree with his ideas and want to amplify and extend the following statement from the post:

“There are simply too many unknowns in the mining industry to be able to quantitatively account for future reinvestment with any degree of accuracy”

In my opinion, NAV suffers more from an unknown future than a combination of "in situ" and "cash flow" methods for valuing emerging junior mining producers. But, it can be another important piece in the puzzle of valuing emerging junior gold producers.

This opinion is rooted in the notion of “false precision.” False precision is the idea that an analysis provides a level of accuracy or certainty with regard to the present value of an asset that is dependent on future events. Clearly, it is impossible to know the future and that is the weakness of any fundamental analysis. And the further out in time one projects the value of an asset, the greater the uncertainty.

Some equity analysts account for this greater uncertainty in the NAV method by adjusting the discount rate upward, say to 20 percent. Adjusting the discount rate for political risk, management reputation, potential resources, operational risk, etc. requires a subjective judgment and the discount rate is a quantitative tool for measuring this subjective perception of risk.

In traditional financial analysis, the recommended discount rate is the weighted average cost of capital representing the opportunity cost of alternative investments. Theoretically, treasury bonds with a term of 10 to 30 years are believed to represent a risk free return suitable for use in assessing the attractiveness of alternative investments. Today, a discount rate of about 6 percent would make sense.

So, the upper and lower bounds used for choosing a discount rate for valuing emerging junior gold producers might be 20% and 6%.

In addition, the longer the useful life of the asset, the greater impact the discount rate has on the valuation using NAV.

The inflation rate used is also a key factor that can alter valuation using NAV.

As a way of illustrating how important these assumptions are in driving valuation of an asset, I did a NAV analysis of one of my favorite emerging junior gold producers Metanor Resources. I call this exercise, PICK A NUMBER! ANY NUMBER!

Here are the results.

Disc Factor = 20%

a. Inflation = 3%; $2.25 per share
b. Inflation = 0%; $1.93 per share
c. Deflation = -3%; $1.74 per share
Disc Factor = 12%

a. Inflation = 3%; $3.62 per share
b. Inflation = 0%; $3.00 per share
c. Deflation = -3%; $2.67 per share
Disc Factor = 6%

a. Inflation = 3%; $5.56 per share
b. Inflation = 0%; $4.50 per share
c. Deflation = -3%; $3.93 per share

Using the same assumptions (MI&I, oz. production, cost per oz) used for earlier analyses and new assumptions needed to do the NAV method (15-year mine life, mill value/depreciation, warrants, exploration costs, general and administrative costs, 6%/12%/20% discount rate, etc.) the results for Metanor Resources range from $1.74 to $5.56 per share.

If one assumes only the inflation equal to 3% scenarios (far more likely than the other two inflation assumptions IMHO), the range is from $2.25 to $5.56 per share and compares fairly closely to earlier, less sophisticated analyses.

Interestingly, a sensitivity analysis using the NAV method shows that an inflation assumption of 6% puts the share price range at $2.65 to $6.92--amazingly close to the earlier cash flow and in situ value per share.

My earlier cash flow and in situ valuation methods produced amounts ranging from $2.86 to $6.91 per share. Given all the uncertainty for Metanor Resources over the next 15 years, these valuations are for all practical purposes equivalent in my opinion. I will let the reader judge for themselves.

Of course, I look for companies like Metanor Resources that are just entering the production stage of their development, have no debt, offer great potential resource expansion, exhibit passionate and competent management among other intangibles before risking my hard earned capital.

Needless to say, I prefer cash flow and in situ valuation methods for emerging junior gold producers for the following reasons.

1) It gives me a range of the value of a stock roughly in line with NAV as long as the company doesn't have too complicated a capital structure.
2) I don't have to make assumptions 15 years forward into a very uncertain future. I only have to make assumptions for the next year or two.

3) In situ values the resource based on current market prices.

4) The cash flow method is more dynamic and gives a near term value. I can periodically match operational performance with near term milestones of a company. For example, I would expect Metanor Resources to have their mill processing 800 t/pd by June 2008. If not, I can adjust my projected production estimate and revalue the shares.

5) The NAV method is very time consuming compared to the other two approaches.

Moreover, I am unlikely to hold ALL my shares of Metanor to full value ($6?, $7?, $10?) unless it gets bought out by a major at that level (is that full value?). The upside in exploration will also likely increase the value as the resource unfolds.

Again, I agree with AceOFKY's comparison of valuation methods and was impressed with his logic. In fact, it can be downright fun for those of us steeped in finance and economics to test stock valuations based on multiple assumptions.

That said, cash flow and in situ methods of valuation are sufficient for me given my medium-term investment goals and interest in benefiting from increases in valuation due to near-term (12 to 24 months) increases in value due to emerging production and expansion of the resource. I keep looking for better values in this subsector and so far, none are better than Metanor Resources, Gold-Ore Resources, and Kinbauri Gold IMHO.

In summary, fundamental valuations are just rough guesstimates of the value of a company. The idea that fundamental analysis can tell us exactly what a stock is worth is a misguided belief based on the notion of "false precision." That is why I like to provide a range of share price estimates AND qualify my analysis with the reality that there is risk involved in investing in emerging junior gold producers.

At the end of the day, we take our chances and place our bets. I could be wrong.

Thanks to AceOFKY for stimulating this response and a NAV assessment of Metanor Resources.


Gold Stock Strategist

Full disclosure: I own shares in companies listed above. 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.

Sunday, May 25, 2008

Emerging Jr. Gold Producers Ranked -- Market Cap to Reserves Method

ERRATA: The MI&I assumption for Gold Resource in the original post was incorrect. They have zero MI&I. However, they do have an internal gold equivalent (GE) resource estimate of 773,000 ounces. This post has been adjusted to reflect the GE resource for Gold Resource. Thanks Doug for the comment on this mistake. 8:36pm Monday, May 27, 2008.

Another one of the techniques I use to value emerging junior gold miners is to identify their relative value based on measured, indicated, and inferred (MI&I) reserves and market capitalization (MC). Dividing MC by MI&I provides a dollar amount per ounce of reserves metric useful for comparison of companies.

This is just a first step and can be misleading about the valuation of companies who end up with considerably more potential gold reserves than currently reflected in Canada's National Instrument 43-101.

43-101 is a rule developed by the Canadian Securities Administrators that govern the definition of resources and reserves. This definition is generally less strict than the SEC's proven and probable reserves and, in my opinion, a better reflection of company gold reserves.

That said, Jaguar Mining only has 1.3 million ounces of gold MI&I, yet management believe their properties may have up to 10 million ounces. Companies like San Gold, Jinshan, Gold-Ore, Metanor, and others also can be reasonably expected to have larger reserves of gold than reported. As these companies continue to prove up gold reserves and the share price remains stable, they would become even more undervalued.

Another limitation of the MI&I is it does not include the value of polymetallic reserves sometimes found with gold deposits, including silver, zinc, copper and other metals. These non-gold reserves can be used to offset the production cost of mining and milling gold.

This quantitative valuation technique complements my earlier cash flow multiple valuation and is only part of my overall assessment of these companies. Qualitative factors like political risk, currency exchange risk, property rights risk, remote site risk, single mine risk, operational risk, and management competence risk are also important considerations in evaluation emerging junior gold mining producers.

The following is my analysis of 15 emerging gold producers using a market capitalization divided by measured, indicated, and inferred gold reserves based on closing share prices on May 23, 2008. The lower the dollar value, the more undervalued the stock is relative to the others. As a metric for valuing these companies using the MC/MI&I, it is interesting that a recent acquisition of a junior valued the gold reserves at about $280 per ounce. Other recent buyouts have valued gold reserves at about $200 per ounce. My sense is that any company with MC/MI&I below $100 per ounce could be considered a "deep value" emerging junior gold producer, especially if they are quickly ramping up gold production.

Kinbauri Gold......$25
Gold-Ore Res.......$29
ATW Ventures.......$55
Metanor Res........$84
W. GoldFields......$93
Jinshan Gold.......$99
MDN Inc............$105
Apollo Gold........$126
Capital Gold.......$142
San Gold Res.......$151
Aurizon Mines......$208
Gold Resource......$276*
Jaguar Mining......$290
Alamos Gold........$468

* internal gold equivalent resource estimate

This is another way to think about investments in undervalued emerging gold producer stocks. I hope this is useful for readers.


Gold Stock Strategist
Full disclosure: I own shares in several of the companies listed above. 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.

Sunday, May 18, 2008

Modelling Political Risk

One of the dimensions that cannot be easily modeled when assessing investments in emerging junior gold producers is political risk.

As a rule, I generally don’t invest in emerging junior gold producers with its mine(s) in countries with acute political risk.Unfortunately, political risk is a necessarily subjective concept and sometimes controversial.

One of the quick shorthand quantitative sources I use to evaluate political risk in a country is provided by Transparency International's 2007 Corruption Perceptions Index (TICPI).

The index is standardized on a scale of 1 through 10, with 10 representing less corruption and 1 representing more corruption.

Countries with mining operations of interest to me on the TI CPI include:

Sweden—9.3 (Rank tied for #4)
Canada—8.7 (Rank tied for #9)
Australia—8.6 (Rank #11)
U.K.—8.4 (Rank tied for #12)
USA—7.2 (Rank #20)
Spain—6.7 (Rank tied for #25)
South Africa—5.1 (Rank tied for #43)
Romania—3.7 (Rank tied for #69)
Brazil—3.5 (Rank tied for #72)
China—3.5 (Rank tied for #72)
Mexico—3.5 (Rank tied for #72)
Tanzania—3.2 (Rank tied for #94)
Ecuador—2.1 (Rank tied for #150)
Kazakhstan—2.1 (Rank tied for #150)
Venezuela—2.0 (Rank tied for #162)

Another important quick shorthand source I use to evaluate political risk in a country is provided by the Fraser Institute Policy Index that measures the relative “mining friendliness” of 68 political jurisdictions. The most recent version is included in the Survey of Mining Companies 2007-2008.

Leading the Fraser Institute listof mining friendly jurisdictions are the top 10 states, provinces, and countries are:

(1) Quebec
(2) Nevada
(3) Finland
(4) Alberta
(5) Manitoba
(6) Chile
(7) Utah
(8) Wyoming
(9) Ireland
(10) Sweden

The bottom 10 jurisdictions according to the Fraser Institute Policy Index are:

(68) Honduras
(67) Zimbabwe
(66) Ecuador
(65) Panama
(64) Bolivia
(63) India
(62) Indonesia
(61) Mongolia
(60) Philippines
(59) Venezuela

There are four companies that have been hit hard by the market due to unfavorable government decisions. These are cases in support of my “political risk” rule of not investing in corrupt or mining unfriendly political jurisdictions.

Aurelian Resources recently dropped from $10 to about $3 per share after Ecuador decided to freeze exploration and revoke mining concessions.

Crystallex International’s stock price has declined from just over $5 per share to about $1 per share since Venezuela has blocked open pit mining. In late April 2008, Crystallex dropped from about $1.60 to about $0.95 as Venezuela denied previously granted mining concessions.

Venezuela has done this type of action before with Gold Reserves, dropping the share price from $6 to $2 after rescinding a permit in March 2007.

Gabriel Resources dropped from about $5 per share in the summer 2007 to about 3.50 in September 2007. In September 2007, Gabriel Resources dropped even further to $1.50 per share after Romania’s government rejected its environmental impact assessment.

Mining companies with operations in Canada (especially Quebec) and Sweden are likely to be treated in a way that is friendly to investors.

Countries like Brazil and Mexico are somewhat higher risk than Canada or Sweden for investors in emerging junior gold producers. But, these two countries have a track record over the past few years of being more friendly than most countries to mining interests as a way to provide jobs to their citizens and create wealth for their nations.

Clearly, it is best to avoid companies in countries like Venezuela, Ecuador, and Romania if political risk is an important part of your investing calculation.


Gold Stock Strategist

Saturday, May 17, 2008

MDN Inc. Posts Profit for the First Time in History in Q1 2008!

MDN Inc announced net earnings of $1.8 Million or $0.02 per share this week. This is a major milestone for MDN Inc. as are the following facts from the press release.

The Tulawaka Gold Mine in Tanzania produced a record 62,085 ounces of gold with an average grade of 23.3 g/t at a recovery rate of 94.48%. The 30% participation of MDN in the Tulawaka project results in its share being equivalent to 18,625 ounces of gold.

Total cash costs to produce an ounce of gold were US$181.

Tulwaka is, well for lack of a better term, a “gold mine” of a gold mine and that is why I once owned MDN Inc.

I like MDN Inc. but sold my MDN Inc. shares at a loss several months ago for four reasons.

First, Barrick is the operator of the Tulawaka mine with MDN Inc. getting 30% of the revenue from gold sales. I like to own companies that can control their own destiny. It was difficult to get information on the company because Barrick was the operator. Information on ore grades, exploration milestones, production plans were not forthcoming from MDN Inc. because they were not the operator.

Second, the share price dwindled down on no news—good or bad. Even in the face of this week’s good news, someone was selling large blocks totaling 1 million shares right around a dollar. It seems to me a large shareholder would have been smarter and been kinder to MDN Inc. had they arranged these sales over time working with MDN Inc. management rather than dumping them on the open market.

Third, Tanzania has been a relatively politically safe country for mining. But with the increasing willingness of many developing nations to increase their share of resources, even mining friendly developing nations will be tempted to raise taxes on resource extraction, reducing the value of the resource to the companies and shareholders mining the resource. This concern was validated with Mineweb's recent article outlining that Tanzania was about to raise taxes on miners.

Fourth, MDN has significant long-term debt and royalty payments on the first 500,000 ounces of gold sold. These facts, combined with the opacity on ore grades, etc. created too much uncertainty going forward.

Despite these concerns, I am reconsidering my decision to get out of MDN Inc.. I am especially intrigued with MDN Inc.’s exploration programs on the Isambara and Viyonza properties. These projects are controlled by MDN Inc.'s control and according to the release, “are progressing according to schedule,” despite the Tanzanian rainy season through Q12008.

Moreover, MDN Inc. has accelerated its repayment of long-term debt to 39 months rather than the original 54 months and the royalty payments are almost or completely finished.

MDN INc. is ranked 4th in 2009 and 6th in 2010 of the 15 companies identified in my projected cash flow valuation post.

Whoever was selling into the good news this week may have done a favor for potential shareholders and existing shareholders who want to add to their position. Let’s hope they are finished.

I will wait to see how burdensome the new Tanzanian tax regime will be on miners before entering this one again. Good luck to shareholders on this play.


Gold Stock Strategist


Full disclosure: A member of my family owns shares in MDN Inc.. 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.

Gold-Ore Acquires 90% of Nearby Norrliden Mine

Gold-Ore Resources announced an agreement this week to purchase a 90% interest in a near-term production, poly-metallic deposit (650 hectares) in Norrliden 45 kilometers from the Bjorkdal mine.

Gold-Ore is paying three million shares for the 90% interest in Norrliden. Gold-Ore will also be the operator of the mine. Upon a decision to go into production--which seems likely to happen quickly--Gold-Ore will pay C$2.5 million and issue C$2.0 million worth of Gold-Ore shares.

The remaining 10% ownership is by IGE Nordic, a Stockholm-based public company with a well-funded exploration company with additional polymetallic prospects in Norway and Sweden.

I like this deal for four reasons.

First, it provides large and measured resources that can be brought to production very quickly due to 63,000 available ore and existing infrastructure. Bulk sampling will commence this summer.

Second, it establishes a partnership that Gold-Ore can build on for future projects in Sweden.

Third, Gold-Ore is the operator retaining control over setting milestones and operations.

Fourth, this is a very significant resource. By my calculation, this resource include measured and indicated 3 million ounces of gold, 240 million ounces of silver not to mention large zinc and copper offsets to the cost of production.

The buy-in for this seems reasonable given what is already known and the potential of the Norrliden resource. IMHO, Gold-Ore management has added value for existing shareholders.


Gold Stock Strategist

Full disclosure: I own shares in Gold-Ore 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.

Metanor Extends Hewfran Property Purchase Option Six Months

Metanor Resources announced an extension of the Hewfran property purchase option to December 2008 which was set to expire at the end of May. Metanor issued 200,000 two-year warrants at a C$1.20 strike price and C$200,000 in cash or Metanor shares (Metanor’s choice). That means Teck Cominco believes owning Metanor warrants at C$1.20 is a good bet over the next couple of years. I’d say it’s a good bet too.

Metanor had been negotiating this extension over time as they have been putting all their efforts into developing the Barry project. This was a smart move. Barry is a open pit mine already producing gold. Hewfran (underground) is close to Bachelor Lake (also underground) and represent a promising set of projects for Metanor. But Barry is a low cost, high grade project open at depth and multiple sides with great potential.

Metanor has agreed to explore Hewfran with a diamond drill program this year to the tune of C$460,000 and eventually equal to C$1,600,000. One of the two diamond drills currently at Barry will soon or is in the process of being moved to Hewfran. We should have news on the Hewfran drill work by the end of the year before the option expires.

I like this move by Metanor management. It seems like a bargain to me given Hewfran's proximity to Bachelor Lake gold reserves and Metanor management's familiarity with the geology in that area.


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.

Thursday, May 15, 2008

Busy Time at the Hard Asset Conference in NYC

I attended the Hard Asset Conference on Monday and Tuesday of this week. According to veterans of past NYC Hard Asset Conferences, this one was sparsely attended.

It was a busy time as I visited with about two dozen junior gold mining companies, looking for more emerging producers. There were a few producers identified that were not on my radar screen like High River Gold, Alexis Minerals, Great Basin Gold, Timmons Gold, and Petaquilla Minerals.

While there, I sat down with representatives from a few companies on my valuation list including Metanor Resources, San Gold Resources, Jaguar Mining, Western Goldfields, Jinshan Gold Mines, and Apollo Gold. I also visited with representatives from New Gold.

The highlight was meeting with Metanor’s management at the conference. I learned that Metanor was mentioned in one of the regional newspapers. It was listed as the top performer for 2008 among companies in the Montreal Index. The drill program at Metanor’s Barry Project is going very well and everything is moving ahead on schedule at the mill. The mill is running 24/7 for shareholders.

San Gold was also there. I spoke to Arness and he was excited about San Gold's exploration program. I don't own San Gold any longer, but still think it is a nice exploration play with their aggressive drilling program in the gold rich Red Lake area. The stock price is more dependent on proving up the resource than increasing production at this point IMHO.

As time permits, I will update my valuation list by adding the five emerging producers visited this week. It will take a while to synthesize and work through all the information gathered on the companies in NYC.

Junior gold mining companies (emerging producers and explorers) remain undervalued compared to both the price of gold and major gold producers IMHO. Let's hope that changes soon.


Gold Stock Strategist


Full disclosure: I own shares in several of the companies mentioned above. 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.

Orsu Metals Update

I was asked in a comment about my current views of the new Orsu Metals (the name of the proposed merger between European Minerals and Lero Gold). Here is what I am thinking about the new company.

European Minerals has had problems in getting the resource into production. The resource is still there and worth a lot if managed properly. This one will hopefully work out eventually. Lero's management will run the merged company. I am encouraged by the Lero Gold management. They are experienced and have a track record of success.

One important question is whether the European Mineral warrants (A warrants in 2010 and B warrants in 2011) or the shares offer the best reward/risk ratio. At current prices, my sense is that the shares offer the best reward/risk ratio at current prices, exercise price, and date of maturity.

That said, I own a significant number of both A and B European Mineral warrants and am holding the warrants for now.

This one is an extremely speculative play and especially risky—it is not for the faint of heart.

Good luck to European Mineral shareholders and warrant holders on this one.


Gold Stock Strategist

Full disclosure: I own warrants in European Minerals. 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.

Wednesday, May 14, 2008

World of Wallstreet

The World of Wallstreet website reviews base and precious metal junior mining companies, including some of those mentioned by the Gold Stock Strategist.

The Editor is Douglas Dillon, aka MontyHigh.

There will be a permanent link (see left column) on this website to the World of Wallstreet.

Give it a look. I think you'll like it. There is a lot of good information for those interested in junior miners.


Gold Stock Strategist

Saturday, May 10, 2008

Emerging Jr. Gold Producers Ranked -- Projected Cash Flow Method

ERRATA: The formula for several stocks (Gold Resource, MDN Inc., Western Goldfields, Alamos Gold, Apollo Gold, Aurizon) in the original post were incorrectly reflecting lower 2008 cash flow multiple values. This post has been adjusted to reflect the correcting of those errors. Also, in response to a comment the POG used for 2009 is $925 per ounce and in 2010 is $1,000 per ounce. Apologies for the mistake. 6:23pm Sunday, May 11, 2008.

One of the quantitative techniques I use to evaluate emerging gold producers is the ratio of projected future cash flow price (10x cash flow assumption) to current price.

This technique provides a standard quantitative comparison of company share valuation that serves as a starting point for my assessment of whether or not to invest in an emerging gold producer stock.

Once I have a standard quantitative measure of assessment, I can apply qualitative factors to the investment decision like political risk, currency exchange risk, property rights risk, remote site risk, single mine risk, operational risk, and management competence risk.

The following is my analysis of 15 emerging gold producers using a cash flow multiple ratio for projected 2009 and closing share prices on May 9, 2008. The higher the projected cash flow multiple, the more undervalued the stock.

1) Metanor Res......3.7
2) Gold-Ore Res.....3.5
3) Gold Resource....3.5
4) MDN Inc..........2.9
5) ATW Ventures.....2.5
6) Jaguar Mining....1.9
7) Capital Gold.....1.7
8) W. GoldFields....1.6
9) San Gold Res.....1.5
10) Minefinders......1.5
11) Alamos Gold......1.5
12) Jinshan Gold.....1.5
13) Apollo Gold......1.2
14) Aurizon Mines....1.1
15) Kinbauri Gold...(NA)

The following analysis applies the same technique using 2010 projected cash flow rather than 2009 above. By 2010, Kinbauri Gold jumps up from the bottom, reflecting a sharp increase in projected production from 2009 to 2010.

1) Metanor Res.....5.3
2) Gold-Ore Res....5.3
3) Kinbauri Gold...5.3
4) Gold Resource...4.9
5) ATW Ventures....4.1
6) MDN Inc.........4.1
7) Jaguar Mining...2.8
8) Jinshan Gold....2.4
9) Capital Gold....2.1
10) W. GoldFields...1.9
11) Alamos Gold.....1.8
12) Minefinders.....1.8
13) San Gold Res....1.7
14) Apollo Gold.....1.5
15) Aurizon Mines...1.3

This is a demonstration of how the cash flow price multiple method can aid investors in choosing the most undervalued emerging gold producer stocks. It also demonstrates why my portfolio is weighted towards Metanor Resources and Gold-Ore Resources rather than other emerging gold producers.


Gold Stock Strategist


Full disclosure: I own shares in several of the companies listed above. 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.

Friday, May 9, 2008

Jaguar Mining Has Record Production/Sales in Q1; Reserves to Double in Q2

I listened to Jaguar Mining's conference call today and read their press release in advance of their Annual Shareholders Meeting on May 8, 2008 in Toronto, Canada.

Q1 was outstanding by all accounts. Here are a few highlights from the release.

- Record revenue for Q1 2008 totaled $18.8 million, an increase of 187% from the same period last year.

- Gold sales for Q1 2008 totaled 20,344 oz at an average price of $924/oz compared to Q1 2007 figures of 9,885 oz at $662/oz.

- As of March 31, 2008, cash and cash equivalents totaled $99.8 million including $3.1 million of restricted cash, mostly related to foreign exchange hedges.

- In Q1 2008, the Company produced 21,414 oz of gold at an average cash cost of $428/oz.

What was that? Average cash cost of $428!!!

Cash costs in Q1 were higher in Q1 as 4 days of production were lost in order to repair operations at Turmalina, a weaker US$, and processing of low grade ore at Sabara along with other minor problems. Processing higher grades at Sabara and smoothing of operations at Turmalina should improve the cash cost per ounce of production going forward.

Jaguar is planning to have a first pour at Paciência in a few weeks, a mine projected to produce 49,000 ounces of gold in 2008 and projected to ramp up to 258,000 ounces by 2013 when production will level off. Everything is on schedule for Paciência.

More good news is that Blackmont has reiterated a BUY recommendation on Jaguar with a C$18.50 target price.

Blackmont's valuation on Jaguar is similar to mine.

Finally, and importantly, Jaguar is likely to announce a doubling of proven and probable reserves in a few weeks from about 1 million ounces gold to about 2 million ounces of gold.

Here is Jaguar Mining's May 8, 2008 presentation.

All in all it was a good week for Jaguar Mining.

I still like Jaguar as a long term hold as they ramp up production from 70,000 ounces in 2007; 160,000 in 2008; 270,000 in 2009; and up to about 700,000 by 2014.


Gold Stock Strategist

Wednesday, May 7, 2008

Gold-Ore Reports Q108 Results!

Yesterday, Gold-Ore Resources issued a press release announcing their Q108 operational results.

Despite the confusing accounting in the financial report, there is a lot of good news in the release. I say confusing because:

1) The first quarter includes December 2007, and January and February of 2008.

2) The results reflect 1 month (December 2007) as the “operator” of the Bjorkdal gold mine and 2 months as the “owner.”

3) They did not book revenues on the income statement, but under Investing Activities on the statement of consolidated cash flows. My understanding is they could have booked revenues on the income statement, but for some reason will be waiting to account for gold sales in this way until they receive a feasibility study later in the year.

See press release.

In short, until the feasibility study is released and says that the gold is recoverable, Gold-Ore is not officially a producer. This technical detail is similar in effect to Metanor not being officially in production despite reports of a first pour because the first pour was based on “bulk samples.”

All the accounting confusion aside, there is a lot of great news in the Gold-Ore release and Q108 financial report.

1) As of the first of this year, Gold-Ore owns 100% of the Bjorkdal Gold Mine,

2) Gold-Ore processed 198,417 tonnes of ore, averaged 3,307 tonnes per day, recovered 4,038 ounces of gold, and sold 4,318 ounces of gold including gold from inventory. They had an average processing recovery of 87 percent.

3) Gold-Ore’s goal is to source 1,500 tonnes/day from underground, and to have sustained processing of 3,400 tonnes/day at Bjorkdal. They are very close to that goal.

4) Gold-Ore has successfully increased production during February 2008 to an annualized rate of 24,700 ounces of gold. Their goal is to eventually increase annual gold production to 70,000 ounces by the end of 2008 as they process higher grade ore over time.

5) April gold production is estimated at 2,350 ounces.

6) Gold-Ore had accounts receivable of $1,734,797 in Q108.

7) Gold Ore is cash flow positive, realizing $400,291 in free cash flow for Q108.

Moreover, significant Gold-Ore exploration and development was also advanced during Q108.

Gold-Ore remains the most undervalued of all the emerging junior gold producers according to my financial metrics. There is still a way to go before investors realize the deep value in Gold-Ore. I expect this to happen by the end of this year when they hopefully report revenues on the income statement.


Gold Stock Strategist


Full disclosure: I own shares in Gold-Ore 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.

Capital Gold Valuation Update

Jeff Pritchard, Capital Gold's investor relations contact is making news and raising a lot of questions in my mind about AngloGold Ashanti's intentions. Three questions come to mind.

First, why is Jeff Pritchard moving now--midway through AngloGold's due diligence on the option--to be a board member of Tara Gold?

My sense is that whatever is going to happen between Capital Gold and AngloGold is already decided in Mr. Pritchard's mind and he is staking out his next challenge.

Second, why would AngloGold Ashanti need to conduct extensive due diligence given the decision should be about the numbers and assumptions on the future price of gold?

My sense is that AngloGold is doing more extensive due diligence than just the option decision--possibly a buyout.

Third, IF there is a buyout, how much would AngloGold pay for Capital Gold?

My metrics suggest Anglogold should be willing to pay between $1.30 and $1.70 to Capital Gold shareholders.

Here are my valuation calcualtions.


$1.34 per share based on 2010 production (the first year of projected full production for Capital Gold) using a cash flow model valuation and assuming the following:

10x cash flow
$295 per ounce production cost
40,000 ounces of production in 2009 (half of 80,000 since AngloGold will already own 51% of production if they exercise the option)
$2 million G&A
196,100,000 shares outstanding (fully diluted)
$1000 price of gold in 2010


$1.72 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 leaving about 0.9 million ounces (again, this assumes AngloGold owns half of the reserves) times $280 an ounce minus the $13 million in debt PLUS the $90 million or so paid to Capital Gold for the option equals $328 million. $328 million divided by 196 million shares equals $1.72 per share.

Now, Capital Gold has stakes other than El Chanate pending Mexican government approval and this valuation exercise excludes the valuation of those undeveloped properties. I don't know how to value unexplored stakes and I suspect AngloGold doesn't know how to either. A bird in the hand . . .

This play is difficult to assess because of three intangibles. The fisrt intangible having to do with AngloGold's retooling of existing projects to lower costs and boost production and whether they view the Capital Gold deal as a distraction.

The second intangible is AngloGold's strategic direction--whether or not AngloGold wants to establish a presence in Mexico.

The third intangible is AngloGold's price of gold (POG) forecast. A higher projected POG would make a buyout more likely.

If I knew the answer to these questions, it would be a lot easier to make a buy decision on Capital Gold.

Any comments providing insight on the intangibles would be most welcome.

Gold Stock Strategest

Tuesday, May 6, 2008

Capital Gold Announces El Chanate Project Expenses

On Thursday, May 1 Capital Gold's Jeff Pritchard, Vice President Investor Relations
announced that the company's total investment in the El Chanante project since 2001 is between $40 and $50 million at the Latin American Mining Congress 2008 in Miami, Florida. This is the first time Capital Gold has released the number.

Anglogold Ashanti's option on El Chanate requires they pay Capital Gold two times the El Chanate project expenses which would be $80-$100 million. At this price, the option is an even better deal than my previous guesstimate.

My previous guesstimate that Anglogold would have to pay $180 million ($90 million investment)was off by a factor of two. I believe the $90 million El Chanate investment number came from a quick review of the 2007 10K balance sheet which lists Additional Paid-In Capital at $54,016,375 and the Accumulated Deficit at ($38,860,641) which totals a little over $90 million invested. I don't remember exactly, but that is what I must have used to get the $90 million guesstimate. Here is a link to Capital Gold's 2007 10K.

Capital Gold 2007 10K

Here is a link to Capital Gold's Jeff Pritchard's presentation.

Jeff Pritchard's Presentation

Thank you to Gibralter for pointing out the new information on Capital Gold's El Chanate investment totals.

Gold Stock Strategist

Thursday, May 1, 2008

What Will AngloGold Do After Option on Capital Gold?

A reader of my analysis of the valuation on Capital Gold and the AngloGold option asked me what AngloGold does with Capital Gold IF they exercise the option to buy out 51% of Capital Gold's El Chanate project.

No one really knows what Anglo will do and that includes me. All I can do is assess the economic incentives and glean what is available in public documents.

Gold reserves in the ground are worth something, especially if the means to extract that gold is already in operation. If they are paying attention to the numbers, it makes sense for AngloGold to exercise the option.

My sense is that AngloGold eventually goes for a full buyout (for the same reasons outlined earlier) and keeps the existing team operating the El Chanate project. At what price, heaven knows.

The tough thing to gauge is whether Anglo sees Capital Gold as a distraction from their core holdings. Anglo is still digesting other problems, particularly in South Africa. That may stop or slow them down on a "buy out" of Capital Gold.

Good luck,

Gold Stock Strategist

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