The broader markets were of course making year-to-date lows at the same time, and unlike gold stocks, they continued falling after a short intermission. In fact, the Dow fell 2,000 points after Obama was elected. In sharp contrast, the mining stocks went on a tear. Between November ’08 and January ’09, many of our BIG GOLD picks made substantial gains, rising anywhere from 45% to 149%.

This good news isn’t the whole story, of course; many mining stocks saw percentage losses greater than the broader market averages during the Big Selloff. But given the fact that gold stocks started rebounding while the broader markets continued lower, the BIG GOLD portfolio ended the year down 24% while the S&P lost 38%. We were also glad to see our portfolio responded better than the HUI; the broad-based mining index lost 32% on the year. Meanwhile, the demand for physical gold and silver was surging, likely attributed to investors who’d been spooked by the broad meltdown.

We held on to our shares throughout the selloff and advised our readers to do the same – and subsequently watched our stocks rebound mightily. And we fully expect these kinds of surges to repeat as gold pushes higher. Keep in mind that the real mania is yet to come. Once inflation responds to the Federal Reserve’s ongoing monetary foolishness, gold will need a space suit and our miners oxygen masks.

A key point to remember going forward is that gold mining shares constitute a minute fraction of the global equities market, and a small shift in investor interest toward our sector can move gold stocks sharply higher in a big hurry. The market cap of the fifteen largest gold producers in the world — combined — is a paltry $125 billion. That’s barely more than a single company such as General Electric, at $116B; much less than Microsoft ($175B); and waaay less than Exxon Mobil at $400B.

Miners have also had a temporary respite from high energy costs due to the collapse in the price of crude oil. Energy is one of the biggest expenses a miner has to carry. As energy prices came down, the cost of producing gold also declined, fattening the bottom line. Oil is likely to get back to and then beyond $143 per barrel at some point, but not for a while. We doubt it will top $75 this year, which is enormously helpful for our companies.

Recently, gold stocks have outperformed bullion, a trend we’re keeping an eye on and one we’re confident will continue in the future, especially when we see the certain emergence of serious inflation and the dollar resumes its downtrend.

So… what to do now?

What we hope you’ve been doing all along. Our general rules: If you’re already fully committed to this sector, stay the course; you will be well rewarded.

For those with money still to invest, accumulate well-run, sound companies on weakness. Volatility will continue; we expect days and weeks marked by retracement in the prices of even the best companies. The dips will be your buying opportunities. Place below-market bids and let the price come to you. Take positions with half or so of the funds you’ve allotted for this sector, then fill out your portfolio with whatever bargains come your way.

Whether you’re already full-up with gold stocks or are just getting started, you should be well positioned before the all-out mania for gold stocks hits.

The Quandary of Timing

It may surprise some to hear that we are not “all-in” yet with our portfolio. Why? Because our attitude is one of caution, and because we know that our big gains since October could get clawed back, partly or wholly, by another reversal – which would lead to another buying opportunity we wouldn’t want to miss.

But caution can be expensive when the market runs away from you. What if the train has already left the station? In that case, those waiting on a pullback will be disappointed. Just as all below-market bids placed on October 28 of last year went unfilled, so could today’s, or tomorrow’s.

Looking as little as a year out, our money is confidently on our stocks going higher – much higher. We expect the government’s assorted “stimulus” packages to fail to deliver as advertised, and usher in high inflation. This will push gold and gold stocks much higher.

But the question is, if the broader markets head lower, will gold stocks follow them down or ride on gold’s coattails?

That question leaves you in a quandary only if you’re looking at the short term. Or if you get emotional about this stuff. Those with no stomach left after the gut-wrenching selloff into last October probably shouldn’t deviate from the cautious strategy outlined above. If you’re one of those who see the big picture and ignore the gyrations along the way – which is what Doug Casey does – then you’re drawn to the idea of placing a bet when you judge that the odds are in your favor. It’s when you see the price of something is far less than its value that you can have the confidence to load up, whether that’s today or perhaps later this summer.

Whether you buy today or wait in hopes of a pullback, we believe you’ll be looking at profits a year from now. In the big picture, our stocks are still deeply undervalued, even after so many of them have doubled off their lows. But could they retreat again? In a general market pullback, definitely. Could they tread water for a while? Certainly. And could they leave present levels in the dust and double again from here? Absolutely.

There are times when one must put away the crystal ball and simply prepare for more than one scenario. This is one of them. Whether you respond more conservatively or more aggressively, keep your eye on the endgame. We think you’ll be glad you did.

Prudent precious metals strategies for conservative investors – that’s what BIG GOLD is all about. And now that the gold price is going up again, you shouldn’t wait to jump on the bandwagon. Read in our latest report why super-low interest rates mean we could see $1,500/oz gold this year – click here to learn more.

Source: Gold Stocks – the Best Strategy for Portfolio Building

The U.S. Federal Reserve had been expanding the money supply more rapidly than output for more than a decade, since a policy change in early 1995. That’s why the U.S. economy underwent a series of bubbles, from stocks in 1996-2000 to housing in 2002-2007 to commodities in 2006-2008. Then, when the inevitable crisis hit in September 2008, the Fed began expanding the money supply even more rapidly.

In the six months to March 2, the St. Louis Fed’s measure the St. Louis Fed’s Money of Zero Maturity (MZM), the nearest we can get to the old M3, rose at an annual rate of 16.2%, while the M2 money supply rose at an annual rate of 15.9% (the Fed has stopped reporting the old M3, the best measure of broad money growth). Since price inflation was low during that period and the economy was contracting, almost all that extra money has been pumped straight into the economy.

While the global economy is collapsing, all the extra money will have little inflationary effect. In the United States, however, evidence is building that the economy is approaching the bottom. Consider, for instance, that:

• After several months of decline, the Institute for Supply Management indices were more or less flat in the current month;

• February retail sales – excluding automobiles – were up 0.7%; January non-auto retail sales also being revised upwards to plus 1.6%. We may still have a few months of decline to go, but it seems increasingly likely that the U.S. economy will bottom out around the middle of the year – although the ongoing banking problems and huge budget deficits are virtually certain to prevent a rapid economic rebound. As we’ve said repeatedly, once the economy bottoms out, however, the additional infused capital is likely to serve as a serious inflationary catalyst.

Since September, U.S. Federal Reserve Chairman Ben S. Bernanke has repeatedly warned of the dangers of sustained deflation – and not just a few months of falling prices (which we got in the latter part of last year, thanks chiefly to declining commodity prices), but overall price declines over a prolonged period.

What’s the Market Telling Us?

Recent price statistics make it abundantly clear that deflationary dangers just don’t exist. Both the core consumer price index and the core producer price index were up 0.2% in February, and are well above their levels of February 2008. Notably, one of the major factors was a 1.3% jump in the price of apparel, one import that has been holding prices down for the last decade. In other words, rather than the sustained deflation Bernanke warned about, the latest price figures suggest that we should actually be concerned about inflation, which is clearly starting to accelerate.

Indeed, both the unprecedented budget deficits and the very rapid money supply growth point to an inflation rate of perhaps 10% per annum by the middle of 2010. The latest price-and-output figures suggest that any contrary tendency has disappeared. And that points to a strong likelihood that gold may be due for an additional upward run, which may be quite sharp and happen quite quickly.

The gold market underscored the veracity of my scenario in a very clear fashion yesterday (Thursday): Gold posted its biggest gain in six months after the Fed’s plan to buy debt hammered the U.S. dollar and reignited inflationary fears. Gold futures for April delivery actually jumped $69.70 an ounce, or 7.8%, to reach $958.80.

The yellow metal reached a record high of $1,033.90 an ounce on March 17, 2008 – a year ago this week – when U.S. rate cuts sent the greenback to an all-time low against the euro. Gold prices subsequently declined in concert with most other commodities. It’s up 8.4% so far this year, according to Bloomberg News.

If the hedge funds pile into gold, they will overwhelm the physical gold market, in which 2008’s mine output of 2,407 tons and other supply of 1,061 tons had a value of only about $98 billion at recent prices of approximately $900 per ounce. Gold’s peak price in 1980 of $875 was equivalent to $2,300 in today’s money; it is by no means impossible that the price of gold could soar well beyond that level.

Hedge fund interest in gold was demonstrated Tuesday by the hedge-fund billionaire John A. Paulson, who was probably 2007-2008’s most successful investor, thanks to a strategy to short housing assets that generated profits of more than $10 billion. Now Paulson has gone and bought 11.3% of gold miner AngloGold Ashanti Ltd. (ADR: AU) for $1.28 billion. Paulson’s on a hot streak, so there must be a good chance some of his rich buddies will follow him into the sector; that will inevitably shift the market considerably.

The Yellow Metal Hat Trick: Three Ways to Score From Gold’s Gains

There are three ways to play gold, and you should look at all of them:

• Go for the Gold: Of the three ways to play gold, the first is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (GLD). Today, GLD itself holds more than 1,000 ounces of gold, and has a market capitalization of $31 billion. The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

• Bet that Silver Sizzles: The price of silver generally moves in line with gold, but is currently at around $13.50, below its normal historic relationship to the gold price of about 1:30, and therefore possibly offers more upside potential (in 1980, silver peaked at $50 per ounce, equivalent to about $140 in today’s money.) That can be done through the iShares Silver Trust (SLV), which works in a similar manner to GLD, and which has a market capitalization of $3.5 billion.

• Go Deep: Third, you can follow Paulson and buy gold mining shares. I actually don’t like Paulson’s choice much; AngloGold made a loss in 2008 because of inept hedging and is mainly in South Africa, whose political risk I don’t care for. However, your big advantage over Paulson is that you’re presumably not so rich that you have to deploy your money $1.28 billion at a time. Thus, you can buy on the ordinary share market some of the other mines that are cheaper, rather than having to do a special deal with a company like the Anglo American PLC (ADR: AAUK), the British mining giant that sold Paulson the AngloGold shares from its own stake in that company.

A Look at Two Top Miners

Gold mines had a 2008 that was less profitable than you might expect. The price of gold was essentially flat over the year, while the price of oil soared to a peak in July, affecting miners’ costs badly, since fuel represents 25% or more of a mining firm’s total expenses. Only in the fourth quarter, as fuel prices declined and gold prices rose, did mining economics improve – but, even then, many miners were badly affected by write-offs in their copper operations, where prices had collapsed after a long bull market.

However, the good news is that gold prices have risen by almost 10% in the 2009 first quarter from the final quarter of last year, while fuel prices have declined even more; hence, the quarterly results to be announced in April and May could be surprisingly juicy.

So if you’re going to look at actual miners, here are two to consider carefully:

Barrick Gold Corp. (ABX) is the largest and financially strongest gold producer, with a market capitalization of $29 billion, reserves of 124.6 million ounces of gold (plus copper and silver), and operations in North America, South America, Australasia and Africa. It took a fourth-quarter charge of $779 million – because of its copper operations – but was otherwise profitable in 2008, with revenue rising 10%. For 2009, it should benefit from rising gold prices and declining costs; it currently sells on a prospective Price/Earnings ratio of 13.7, but of course as gold prices rise, earnings will rise on a leveraged basis.

Yamana Gold Inc. (AUY) is an expanding gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008, and that is expanding both production and reserves (currently 19.4m ounces) with operations in Canada and Latin America. Its expansion increases its likely benefit from rising gold prices; Yamana’s shares currently trade at a forward P/E of about 12, but earnings should rise sharply if gold prices rise.

Source: Three Ways to Profit as Inflation Causes Gold Prices to Increase

And I believe a small allocation (5% to 7%) has a useful place in a well-diversified portfolio. Over the long haul, studies confirm it helps increase returns while minimizing risk. A benefit we can all agree is desirable.

But over the short-to-intermediate term – the next six to nine months – I think gold is a terrible investment. After breaching the $1,000 per ounce mark again, as I suggested would happen to my subscribers on February 2, it is overdue for a retracement back to roughly $700 per ounce.

Those of you who expected it to drop the day after I suggested shorting gold need to understand that “short term” doesn’t mean “this week.” Just because it moved higher doesn’t negate the point of the recommendation.

Long story short, I view shorting gold as a way for me to hedge my long-term holdings. For traders, it’s a profit opportunity to consider. And whether we see eye to on this is irrelevant. Ultimately, the market will be the great arbiter of our differences.

For kicks though, let’s address a few of those minor points of disagreement…

Shorting Gold is Not Really Contrarian

A small army of you suggested I was being an “arbitrary” contrarian when I suggested that it was time to start shorting gold. That no evidence, just a warm and fuzzy feeling, existed to back up my call.

Are you kidding?

Sure your “Cousin Vinnie” as chronic poster Todd opined, the trash collector or the newspaper boy might not be investing in gold. But the rest of the lemmings certainly are…

• Investments in coins and bars increased 811% in the fourth quarter, according to the World Gold Council.

• Headlines abound in the mainstream press like this one from The Financial Times – “Gold primed to be ‘mania asset.’”

• Wannabe gold bugs are paying – willfully I might add – 20% premiums for coins and small bars. Forget buying gold, we should all become coin dealers!

• Investors – like teenage girls at New Kids on the Block concerts in the late 1980s – can’t reach out and touch the SPDR Gold ETF (GLD) enough. It’s now the second-largest ETF in the United States with a market cap of roughly $33 billion. With more than 1,000 metric tonnes of gold, speculators now control more gold than many industrialized nations. If that doesn’t scream “out of whack” I don’t know what does. Many of you respond by saying the investors here are institutions, so the inflows are not indicative of a top. You’re wrong. Individuals, according to Morningstar, accounted for an estimated 60% to 70% of the investments in the last four years.

• The world’s largest gold refinery is pumping gold coin blanks at a rate not seen in 23 years, according to Bloomberg.

• Reuters reports investment consultants are now advising pension funds and high-net worth clients to invest 5% to 7% percent allocation toward gold and gold stocks. After being an investment consultant to such clients, I can confirm such allocations are new. And will be followed, if they haven’t been already.

• If you’re a newsletter junkie, like myself, no doubt you also noticed the sudden explosion in “gold experts” that have some overlooked, stealth play on gold you need to consider. It’s poised for 500% gains (or more), they say! All you have to do is read a 16-page teaser and sign-up for some newsletter. Marketers tap into what’s hot, typically as a trend is cresting. Don’t expect this time to be any different.

• From today’s Wall Street Journal, futures investors are taking delivery of gold at more than double recent levels (4.5% versus 2%). Paranoia anyone?

If the above isn’t sufficient evidence to be a contrarian, I don’t know what qualifies then.

Why should I listen to you, Lou?

Others of you simply wanted to know, why you should listen to me – a Wall Street flunky, “idiot” or a “young analyst who thinks he’s got the magic touch and will never be wrong.”

Forget that the last reader – and yes it’s the chronic poster and my new “buddy” Todd – is completely clueless and didn’t catch my transparent about-face on the dollar here. Or my confession that I flubbed the rebound in financials.

I’m human. I will be wrong. I’m man enough to admit it. But I don’t think shorting gold will be one of those times.

And if I don’t have enough credentials to make such a claim, in your opinion, fine by me. Listen to someone more “qualified.” Plenty of them exist that are also starting to question the merits of investing in gold, or at least acknowledge the mania…

…Newsletter god, Dennis Gartman says, “It’s a little worrisome that so many people are piling in [to gold].” He expects a pullback, too. Just not as far as me.

…Peter Munk, founder of Barrick Gold, says he’s never seen such strong interest in physical gold ownership.

…”This will all end badly, just like all other bubbles,” predicts Leonard Kaplan, President of Prospector Asset Management, a commodities futures brokerage in Evanston, Ill.

…”Historically, when stocks begin to underperform gold, that’s a sign that gold is running out of steam,” according to Ray Hanson, a technical analyst at RBC.

My Biggest Concern

What really scares me is that some people take gold investing to an extreme. They actually believe in a government-orchestrated conspiracy to suppress prices, as some of you revealed in your comments.

It’s pointless to engage in lengthy debates with conspiracy theorists. Logic means little. But let’s suspend disbelief for a millisecond and say you’re right, that the price of gold is being fixed.

Why in the world would you throw hard-earned money after the slim prospects of actually exposing and overturning the fix? Talk about a low probability of success.

But I digress. What’s most troubling is many investors, including some in my industry, say gold is a forever position and they are committed to “a lifetime pattern of purchasing” and will never sell. Some of you even revealed 50% of your portfolio is invested in gold.

Here’s the thing. I know that Christopher Columbus says, “Whoever possesses it [gold] is lord of all he wants. By means of gold one can even get souls into Paradise.” But if financial Armageddon unfolds, which many gold bulls predict and in some sickly way wish for, gold will be priceless and worthless at the same time.

How so?

If world governments collapse, social order goes to heck, (NYSE:MCD) McDonald’s won’t magically be set-up to “make change” for your gold bars. ATMs won’t spit out Krugerrands.

What’s more, even if the price of gold tops, say $5,000 per ounce under such circumstances, what can you do about it? Cashing in on the gains means accepting the thing gold bugs completely despise, paper currency, in return. So indeed, it will be priceless, useless and worthless all at the same time.

Bottom line, the world isn’t set up to handle gold as a currency. Not now. Not ever. It’s merely an asset. And like all other assets, it’s susceptible to bubbles.

If you’re in the speculative mood, I recommend shorting gold in the coming months. Especially since, as the saying goes, “gold goes up on an escalator and comes down in an elevator.”

At the very least, examine your reasons for owning gold. If you believe the end of capitalism is nigh and financial ruin is imminent, just remember you need gold to be liquid, acceptable and portable for your investment to be really worth anything.

All three are big question marks, convincing me John Maynard Keynes was more right than most want to admit. Outside of a small allocation for diversification purposes, gold is indeed a barbarous relic.

I’m off to the message board to prepare for the onslaught of “fan mail”…

Source: Shorting Gold: 8 More Signs Gold is Overdue for a Correction

Goldcorp is one of the largest and best-managed gold miners in the world. Most of its assets reside in Canada – one of our favorite destinations for resource investment. As you can see from our chart today, this bellwether is exhibiting the signs of a bull market.

A bull market is defined by its tendency to make “higher highs and higher lows.” Goldcorp’s chart below is a classic example. Since correcting down below $22 a share last year, Goldcorp now sits at $40. Each rally reaches a little higher than the previous one. Each decline fails to reach previous lows.

Our colleague David Galland put it in simple terms back in March. After years of digesting higher production costs, big gold miners are reaping the benefits of $900 gold. Cash flow is increasing… and it’s a bull market in gold stocks.

Source: Goldcorp: The Picture of a Bull Market

We received some absolutely brilliant news from a far corner of the world yesterday. Exciting moves are afoot on the island of Bougainville in Papua New Guinea.

We’ve got a brilliant copper and gold mining play on the island… so far we are up by 122% on this investment and the news just keeps on getting better. The international media is taking a much greater interest in the Bougainville story… which means that our gains could be looking to jump up even further.

The mine shut down nineteen years ago due to civil unrest – but these problems have been sorted out, and money is now rolling in the direction of our investors.

Yesterday, Pacific Magazine ran an article on the improving situation on the island. The crucial bit was an interview with the Vice-Chairman of the local Landowners’ Association (PLA). He said that the PLA fully supports the re-opening of the mine after the feasibility studies are completed. “We are content with the way negotiations are going on and we fully support the initiative taken to restart the mine.”

Which is excellent, because it means that there will be no local disruption to the re-starting of the mining operation.

But there’s more to this story…

Our contact in Bougainville has sent us the latest version of the so-called “landowner’s proposal” which gives details on what the revised Bougainville Copper Agreement (BCA) might look like. No other financial publication has reported on it yet. So my Profit Hunter readers are probably the first ones to receive exclusive information.

The four-page-long document written by a long-time adviser to Bougainvillean landowners is supposed to provide the basis for an update of the BCA. It aims for a fairer division of future earnings than the old agreement – especially for local landowners.

It was the unfair distribution of profits that led to rebels attacking the mining site and forcing the closure of the mine. You can’t really blame them. Under the old agreement, local landowners received only 0.2% of profits between 1972 and 1989. The new proposal suggests paying them a royalty of 3.5% of sales.

It also suggests splitting taxes at the ratio of 50:50 between the Autonomous region of Bougainville (ABG) and the National Government.

Of course we would be happy to see the local population get a better deal than the old one. But what really grabbed our attention is the value that the proposal places on our plays mining shares should the mine re-open soon.

The proposal’s calculations are based on the following assumptions: the current price of copper is US$3.88 per pound and the price for one troy ounce of gold is $878; US$1.5bn capital investment is needed to reopen the mine, repayable at an interest rate of 7.5% over 7 years; there will be no issue of additional ordinary shares by the company; The company gets a tax free status for the first two years of production; there will be no dividend withholding tax; the tax rate will be 30% from year three on; there will be a royalty payment of 3.5% of sales to landowners.

We could be looking at a 2,414% gain

Assuming that the mine produces the same amount of copper and gold it did in 1987, total sales per annum would amount to US$1,948m. Even after the operating costs, loan repayment, royalties and taxes, the company would be left with a total profit after tax of US$1,157m, or US$2.49 per share.

On a conservative price earnings ratio of 12, that would value the shares at US$29.88 or A$31.17. That target is a lot higher than we had estimated and translates into a potential gain of 2,414% on the price of A$1.24 at the time of writing! And the company owns several additional licences on the island as well – so there could be additional upward potential beyond that.

This isn’t going to happen overnight though. And nothing is ever guaranteed – especially in Bougainville. But if things play out as we believe they will, we could bank the biggest gains that we have ever made in Profit Hunter’s history.

Our contact tells us that there is now a three-step plan in effect. Step one aims to get all, or most, of the 510 local landowners to sign the proposal. Secondly, to win support for the draft from a majority of ABG MPs. Finally, to attend the planned joint supervisory board meeting in July and win backing for the proposal. They have obviously got their work cut out for them…

The coming months are going to be very exciting for everyone who holds shares in this company. Reaching each off those three milestones should provide a further boost to the share price. And the mid- to long-term potential on this share remains huge.

As a subscriber to Profit Hunter you would have access to this and all our other investment recommendations.

At present we’re looking at one African company we think can do very well as it involves a small company that holds all the cards in a huge oil deal – involving the biggest super-powers and billions of dollars…

If gains of 122% (and that’s just for starters) are of interest to you… learn more about Profit Hunter opportunities right now

Regards,

Manraaj Singh
Editor
Profit Hunter

Source: Our Bougainville Gold and Copper Mining Play Is Way Up, And Climbing

It was two years ago that I first met Dr Jeffrey Malaihollo, the geologist and Managing Director of Central China Goldfields. Then he described to me the five mining projects, all in China, upon which his company was working.

Last week, when I met him for the second time, the number had been reduced to two. Judging that two of the original five had been insufficiently promising to be worth the struggle with local Chinese bureaucracy, Malaihollo gave up on them. He has also withdrawn from a project at Snow Mountain, but this time was able to walk away with a £1m profit having sold out to its Chinese partner.

This has boosted Central China’s bank balance to about £3.4m, useful ammunition for its two remaining projects. Defying the company’s name these are anything but in Central China.

One of them, Dong Mao Huo, is in Inner Mongolia in the far north of the country, while the Nimu project is in Tibet. The two projects are quite different. Dong Mao Huo is a small gold mine that could be quickly brought into production. Nimu, on the other hand, is at an earlier stage. But it could become a very large copper and molybdenum mine – and the one that could really see shareholders hit the jackpot.

The Dong Mao Huo gold mine has a history of sporadic production, with as recently as 2005 70,000 tonnes of ore being mined and sent to local refineries. Central China got involved in April 2006, when it entered into a joint venture with the Shandong Zhengyuan Geology & Resource Company.

Eighteen months later it had completed a thirty four hole exploratory drilling programme which suggested that there may be more gold than previously thought. Further drilling is now underway to define the extent of the resource and Central China intends to release an estimate of the total resource by the end of the third quarter of this year.

All being well it expects to be mining 7,000oz of gold per annum from an open pit mine starting early next year, in which it will have an 80% share, with the potential to extend the resource and ramp up production later on.

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According to broker HansonWesthouse the copper and associated molybdenum grades found so far are ‘about average for this type of system and in order to be economically attractive, a large tonnage deposit will be required. Nimu certainly has the size to fulfil this requirement… and now just needs an increase in grade.’

This month Central China is starting a new drilling programme that will throw further light on the potential at Gan gjiang, while further work will be undertaken on the other six licenses.

In twelve months time Central China could be producing gold at Dong Mao Huo and will have a much clearer idea of the quality of the Nimu project. Although it is early days, there is no doubt that Nimu could be a real company-maker.

At present Central China is valued at just £8m. But in a peer group comparison it lists fourteen other projects from around the world that have an average copper grade equivalent to that at Gangjiang. They have market values of anything from £1bn to about £15m depending upon their location, the size of the resource and their stage of development. This certainly tells us something about the potential for Central China Goldfields, although it does not necessarily indicate that the shares are undervalued at the moment.

Central China must first define its resource, and then it will have to cut deals with Chinese partners in order to bring in the necessary capital for mine development. A railway line that is being built in order to connect Tibet’s capital Lhasa to China’s heartland will pass within some thirty kilometres of Nimu, but still the region is remote.

Hanson Westhouse has declined to put a value on Central China at this stage, preferring to wait for the first resource estimate for the Gangjiang license expected towards the end of this year. A good result here could start to get the ball rolling for a share that has so far flattered to deceive. This is definitely one to watch.

Regards,

Tom Bulford
for The Penny Sleuth

Source: Finding Nimu

Now let’s say, all of a sudden, folks are willing to pay you $6 per hot dog. They’ll buy as many dogs at $6 as you can make. Your profit-generating ability has soared, from $0.50 to $4.50. Now… do you think your business would be worth more to an outside buyer? I think it would… but that’s not how folks see the gold mining industry right now.

America’s largest gold producer, Newmont Mining (NEM), announced its first-quarter earnings last week. The company’s revenue was 60% higher than the quarter one year ago. It sold its gold for an average $933 per ounce during the quarter, up 40% from the same time in 2007. Newmont cut its cost per ounce a bit, but of course, the real kicker was the gold price. People are paying a lot more for Newmont’s hot dogs.

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Do you know what happened to Newmont’s share price? It fell. I could hear Rodney Dangerfield speaking to me from the grave… Newmont got no respect, not even from investors who should know better.

This lack of respect is pervasive across the entire gold industry right now… and it’s giving investors a fantastic opportunity to get into these stocks.

Gold prices have doubled from $427 in April 2005 to about $879 today. Yet the share prices of major gold producers haven’t done much at all. Newmont Mining’s shares appreciated a meager 6% over that same period.

Typically, shares of gold producers give you “leverage” to the price of gold… meaning that if gold doubles in price, gold stocks often quadruple in price. It all comes down to the “leverage effect”…

If Gold Company A can mine gold for $250 an ounce and sell that gold for $300 an ounce, it makes a profit of $50 an ounce. However, if the gold price jumps 50% to $450 an ounce, Gold Company A’s profit per ounce increases from $50 to $200… a gain of 300%.

Now let’s say the price of gold really gets rocking, increasing 100% to $600 an ounce. Gold Company A’s profits increase dramatically… They jump sevenfold from $50 per ounce to $350 an ounce! Of course, Gold Company A’s stock price would explode higher in response to the increased profits.

However, it hasn’t quite worked out that way in the past few years. Due to the soaring costs of fuel, equipment, and upgrading facilities, the costs to mine gold have risen nearly as much as the gold itself!

On May 1, 2006, the AMEX Gold Bugs index (HUI), which tracks the big gold mining companies, closed at 380. Yesterday it closed at 389. The index basically moved sideways… during a period in which gold gained about 32%. As David Galland pointed out in this essay, the gold industry has been busy “digesting” the higher costs it pays to pull gold out of the ground.

But I think the news from Newmont is the latest sign that gold miners are now really starting to rake in the cash… Newmont’s quarterly profit rose 444% over the first quarter of 2007. The elevated gold price is finally kicking in. And the situation is the same with other big miners, including Barrick and Goldcorp… But like Newmont, these stocks are sitting dormant right now.

That’s why I have so many “buy” recommendations in my S&A Prospector portfolio right now. With just a few exceptions, I think gold equities are incredibly cheap. For a relatively conservative portfolio, you should own producers, like Newmont. But for opportunities to make 1,000% quickly, I love prospect generators.

A year ago the Miner Diaries noted that uranium was the unexploited opportunity for South Africa’s gold stocks. It is a by-product of the gold mining process, and the price has been rising, so it could solve mounting cash costs. And it is the raw material for increasingly popular nuclear power. Bingo!

The big South African gold miners have been pretty slow to decide the best way to harness this potential. In fact, before Bernard Swanepoel, (Harmony’s last CEO), jumped ship he admitted that Harmony had been sitting on its uranium potential for five years! At one point, Harmony had even considered selling its uranium assets. Fortunately, that was not to be.

Anyway, after mulling for years over how best to exploit this opportunity, the process is over. Last month, Harmony decided to put 40% of its energy – pardon the pun – into a new company.

This is a strategy that mirrors that of Simmer & Jack Mines. It owns 63% of First Uranium. There is also interest from international companies – Australian-listed Mintails wants a slice of South Africa’s yellowcake. And, unsurprisingly, majors Goldfields and AngloGold Ashanti are also considering how to get the best value out of their uranium assets.

The race is on to dominate this new battlefield.

And there is gold here too

Though initially this baby was just referred to as “newco”, Harmony’s new JV now has a name. The guys have kept it simple. Led by John Munro, former VP and head of corporate development at Goldfields, “newco” has been registered as “Rand Uranium”. Logical! After all, the core assets are at Harmony’s Randfontein site, south of Krugersdorp which is West of Joburg.

The remaining 60% in “Rand Uranium” will be held by Pamodzi Resources Fund. This is backed by private equity investors, First Reserve and also AMCI Capital. The t ransaction is said to be worth $420m.

So, unsurprisingly, Harmony is being energetic about the project. In fact, CEO Graham Briggs has been quite clear that he intends to retain that 40% holding even if that means investing more to avoid dilution of its shareholding.

Gold companies in South Africa need all the help they can get. Using Rand Uranium as a platform for growth seems a step in the right direction. The plan is to maximise returns from its uranium assets while not breaking the bank.

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Drilling has already taken place and the reserves fall into the more reliable ‘measured and indicated’ categories. That is a grade of 0.215kg of U308 per tonne of excavated material, versus 0.05 to 0.07kg/tonne at other dumps around South African’s West Rand. By the way, U308 is ‘yellowcake’ – the impure mix of uranium oxides which are obtained while processing uranium ore. It is used to prepare fuel for nuclear reactors.

In addition to those reserves, there is said to be some underground resource which will yield more uranium and possibly gold. Let’s not rush, though. The project is still in the pre-feasibility stage, so any profit or resource projections would be premature.

The measure of the man

Forty-year old Mr Munro has a degree in chemical engineering from the University of Cape Town. Working at Goldfields since 1991, he has worked his way up the ladder to the top. Soon that seemed a bit run of the mill. He wanted to be closer to some real action with visible pay-offs. The energy sector offers that.

Another key attraction was the “private equity angle”. Spared the disciplines of stock market reporting the company can take a softly, softly approach. Absent are the pressures of quarterly reporting.

Before taking the job he spent two months assessing Cooke’s viability. He is pretty confident! Some estimates value Cooke’s resource at US$40/tonne. Gold accounts for $6-7/tonne of that, and uranium for $33/tonne. Very nice! And Munro is confident that whichever way you look it, the margins are “significant”.

And also desirable! First Uranium and Russia’s Renova apparently also tried to bid for Harmony’s assets.

Timing is everything

As an unlisted company with no share price to assess performance, what should Harmony want to see from its new venture? The immediate plan is to bring the existing assets to production. Uranium production will come first, followed by gold.

There are two critical periods ahead. The first is to complete the feasibility study – that should happen by the end of 2008. Then developing production will take a minimum of two years after that.

Once in production, Rand Uranium could qualify as the world’s tenth biggest uranium producer. And in three years time the plan is to list.

Right now the sale may help Harmony to pay down some of its ZAR4bn debt! And it should certainly mean big profits when the company reports in June. (Admittedly an exceptional profit, which won’t affect headline earnings.)

Still, Pamodzi could just be the energy boost Harmony is after.

Keep mining,

Erin and Isabel