The stock went from about 12c to $10 in under a year. It was called the Fruta Del Norte deposit and geologists will still be talking about it going to their graves.

The latest drilling shows there are almost 14 million ounces of gold in the ground. Given that an ounce of gold costs some $900, you get an idea of the fortunes that were to be made when that mine came into production: not just for everyone involved in the company, but also for the locals and indeed for the country. Unfortunately, that country was Ecuador.

The Ecuadorian authorities, in their infinite wisdom, passed a new mining mandate in April 2006, invoking an immediate 180-day suspension of all activities on virtually every mining concession in the country. What’s more, they abolished some 88% of existing concessions. In a single stroke those fortunes were all but wiped away.

Aurelian wasn’t alone: IMC, Iamgold, Dynasty, All Metals, Corriente, Lowell’s and Ascendant Copper were all hit.

The moral of the story is one I have banged on about many times: the risks in mining are enormous, whether it’s geo-political risk, currency risk or stockmarket risk, i.e. mining shares don’t always track metal prices. So to be sure, you must own the physical metal itself. And if you are going to speculate in junior mining stocks, it’s much better to do so in safe countries.

Where’s safe?

Once such place is Mexico. Her rock is famously rich in gold and silver and her people, who have been mining for centuries, are expert. Mining is deeply set in their culture. With an emerging middle-class and a stable government, respectful of property rights, it’s a reasonable place to do business. The peso is pegged to the US dollar, so thanks to the latter’s weakness, operating costs have been kept low.

It’s possible that, as output from the famous Cantarell oilfield declines, the Mexican government will turn to mining to replace lost revenue – particularly if the silver price ever does what we all hope it will – but for now it is comparatively safe.

The problem is there are more junior mining companies in Mexico than there are Dalmatians in a Disney film. So how do you find the right one?

Well, there are lots. One in particular that I like and recommended back in March as a buy below $4 is Gold Resource Corporation (US:GORO), run by the Reid family. Bill Reid used to run US Gold. He sold out to Rob McEwan, but kept a couple of assets back for himself, which he then rolled into GORO, a new company he set up with his son Jason and his brother David. He then raised some money and set to work developing those assets.

Typically, if you participate in a fundraising for a mining company, you will be given a share at a discount and a warrant. Many investors sell the share as quickly as they can and keep the warrant, thus getting their equity out while still getting the benefit from any serious upside. This process puts unnecessary selling pressure on the stock and, later on, should warrants get exercised, creates undesirable dilution for shareholders.

But Reid never issued a single warrant. What’s more he raised money from sources he believed would remain long-term investors, rather than short-term speculators. So GORO, despite the bear market elsewhere in junior mining stocks, has been tightly held, short of selling pressure and has maintained a nice steady uptrend since its listing at $1 back in 2006. It’s now trading at $6.

Reid’s family own a huge share position in the company, which means that when they act they do so in the best interests of shareholders. When the stock came under selling pressure earlier this year, Reid quickly found out who the seller was – a fund who had to get out to meet margin calls elsewhere – and set to work looking for a buyer, which he duly found. The selling pressure was relieved and the stock resumed its uptrend. The right guy to have on your side.

But that selling pressure meant that you had a chance to buy the stock as recommended below $4. If you did, congratulations. Last week the board announced the appointment of a top operations manager and followed next day with the best drill results to date. The stock cruised on up and you are now up 50% in just a couple of months. GORO remains on course to start production later this year or early next. Needless to say, I own stock.

Buy gold or buy oil?

Finally, a quick alert on the gold-oil ratio. It’s a very useful tool that a lot of traders use: how many barrels of oil will an ounce of gold buy? At the moment the ratio is about 6.85 barrels of crude per ounce of gold. Even with the gold price up so much since last summer, that’s an extreme. We’ve only been at these levels five times in history: during the oil crisis of 1920; in 1976, 1982, 2001, and 2005.

During the post 1929 fall-out, the ratio got to 70 barrels per ounce of gold. But the mean is about 15 barrels, and a reversion to the mean would entail the gold price, measured in oil, doubling from here. I wouldn’t dare to ‘short sell’ oil, it’s too risky a trade. Nevertheless history is telling us to take some of your profits on your oil trades and move them into gold.

Turning to the wider markets:

Weakness in Wall Street was the catalyst for Europe’s late afternoon fall, with the Dow Jones Industrial Average losing some 200 points from its four-month high to close 1.5% down 12829. Figures showing ‘core’ producer prices rising at their fastest pace since 1990 helped to spook traders, while oil prices continued to soar. But the broader S&P 500 and the tech-heavy Nasdaq both ended the day down just 1%.

But there’s been a startling change that means resources and assets could be lucrative for investors for a long, long time.

That’s because the world’s population is exploding, meaning we’ll need more roads, more houses, more resources to satisfy this growing population. Now that growing demand runs smack into the question of supply, is there enough energy…enough water…enough food?

It doesn’t seem like it. The number of people on Earth is set to grow by 50% in the next century or so — an unprecedented explosion.

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Just consider that the human population reached the billion mark sometime in the 1800s. That was double the number that occupied the planet in 1500.

But then the Industrial Revolution came. And by 1900, the world’s population had increased to over 1.5 billion people. In just 30 years, the world had added half a billion people.

By 1930, the world’s population reached two billion people. Fifty years later, it had doubled again to four billion. And in 2000, there were six billion people on Spaceship Earth. By 2030, there could be over eight billion people — a 300% jump in a century!

Of course, the “optimists” claim there won’t be that many, because war and famine will weed many out. But let’s say we’re not that “lucky” — and that we’ll need to find a way to feed, clothe and house eight billion.

Scientists say that to support projected population increases, the world will have to quadruple its agricultural production and increase its energy output by a factor of eight. Meanwhile, 150 years after the Industrial Revolution began, man is beginning to drink down the Earth’s wellspring of natural resources.

But it’s not just that we have more people in the world — it’s what these people are consuming. Currently, the Western world, with just 20% of the world’s population, uses 80% of the Earth’s water, mineral and petroleum resources. But the rest of the world is itching to catch up.

According to the most recent data from the U.S. Energy Information Administration, oil demand for countries in the Organization for Economic Cooperation and Development — which includes developed nations like Japan, Germany and the United States — has gone up 14% since 1980. Oil demand for the rest of the world, however, has skyrocketed 43%. That’s more than three times as fast!

Unfortunately, there’s no way for supply to keep up.

The Supply Picture

The fact is, the heyday of finding new giant resource supplies is over. There hasn’t been an elephant oil field (more than a billion barrels in reserves) discovered in almost 20 years. You have to go back 30 years to find an elephant outside of the Middle East.

In fact, according to a study by PFC Energy, a petroleum advisory firm, the larger integrated oil companies spent about 24% of their cash on dividends last year, 12% on share buybacks and 12% on paying down debt. Only 46% went into capital spending.

The study goes on to say that as a share of exploration and production expenses, spending on exploration has declined over the last decade or so and now accounts for about 20% of the total, down from 30% in 1991! Meanwhile, oil prices continue to set new highs.

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Minerals are in the same boat. Companies have realized there are fewer resources out there. According to the Metals Economics Group, the total spent on worldwide nonferrous exploration in 1997 was $5.2 billion. In 2004, the total was $3.8 billion — a 27% drop. In the same time frame, gold prices have shot up 21%…and silver is up 48%.

Instead of exploration, what you’re seeing is a wave of mergers and acquisitions throughout the natural resources industry. China’s recent attempt to buy Unocal is just one example. We’ve also seen a lot of mergers in industries like precious metals. In 2004, things got ugly as miners Wheaton River Minerals, IAMGOLD, Coeur d’Alene Mines and Golden Star Resources engaged in a series of hostile takeover bids for each other. It just shows how desperate miners are to increase their reserves through acquisitions.

So why are companies choosing to buy up other companies, rather than spending money to find new reserves? Maybe it’s because they know spending a lot of money searching could be fruitless.

Yours for resource profits,
Kevin Kerr

This is all very new and a bit of a shock. The last time the Ecuadorian government changed its mining laws was way back in the early 1990s. Then the World Bank was keen on it deregulation. Critics said it was pushing for Ecuador to let in the internationals at the expense of the environment and local communities.

But this is the age of resource nationalism. Just a few days ago, the pendulum started to swing the other way. President Rafael Correa’s government is already in the throes of redoing oil deals as world prices reach records. Now it is mining’s turn. Here’s another yet reminder to check company risk when investing!

Dire mining news hits the headlines

Just about unanimously, Ecuador’s parliament voted to suspend 80% of the 5,000 mining concessions and impose a moratorium on new ones. There is absolutely no mention of the world ‘compensation’. And it gave the government six months to re-write the country’s mining legislation. That grabbed the newspapers!

According to Reuters, the assembly’s president, Alberta Acosta, said that: “What’s at stake here is to define the future of large-scale metallic mining in Ecuador.” So the assembly passed the mandate by 95 to 1, with 25 abstentions.

Quite a few international mining companies operate in Ecuador. Around 40 is the estimate. The figure of $220bn put on the mineral reserves there is quite an attraction! They’ve been investing around $100m a year. At this stage output is relatively low. Many of the mines are in early stages.

A lot of these companies are Canadian. There’s Ascendant , Aurelian Resources, Dynasty Metals & Mining and IamGold, for a start. Of course, on the news their share prices headed south in a rush, halving or worse.

Boy, are they not happy! “The government …is saying ‘Let’s get our hands in the cookie jar, too,” was the bitter response of Midas Management’s Tom Winmill, a big investor in Aurelian, when speaking to Bloomberg.

Millions wiped off capitalisations

With nice understatement Haywood Securities analyst Eric Zaunscherb described the situation as being “fraught with negative actions.” We can see what he means!

More to the point was Dynasty’s spokesman William McCartney with his “it’s devastating and could affect everybody. We’ve just had millions of dollars of market capitalisation wiped out.”

A foretaste of what is coming might be taken from comment from Ecuador’s MPs. Acosta’s was: “The new mining law will favour serious entrepreneurs, not the speculators.” Another, from a member of Correa’s party was: “In Ecuador concessions were handed out for the price of a sick chicken!”

Continues below

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Also on the cards at this stage is a limit of three concessions per company.

The assembly has the power to make laws without the need of the President’s sanction. However, he sounds sympathetic to their cause. He came to power last year vowing to increase state control of the country’s national resources and the economy. A US trained economist, he spoke a lot about mining with social, environmental and economic responsibility. This includes protection of the country’s water resources and containment of pollution.

Local environmentalists are cockahoop.

Carlos Zorrilla, executive director of Defensay Conservación Ecológica de Intagwas was quoted by Reuters as calling the assembly’s decision a victory of “right over might.” At one point he was forced to go temporarily into hiding because of his anti-mining and environmental activism against Ascendant Copper’s Jinin project. He was saying in the stories that all this could “lead to an Ecuador free of large and medium scale metal mining in the near future.” 

So, who is going to carry out the large-scale mining that is currently done by foreign groups? These days it’s increasingly hard to lay your hands on all the things you need for mining. That extends right through from skilled workers and specialist equipment to the money. This will no doubt present a few dilemmas for the Ecuador government, as it is for resource nationalists the world over.

A worry for the miners is Ecuador’s links with neighbouring Venezuela. No good for the short term is augured here! President Hugo Chavez is into nationalisation in a big way.

Behind all this is, of course, the current anti-US feeling running through the southern continent. Correa has dismissed his defence minister, army chief of intelligence and commanders of the army, air force and joint chiefs. Why? He said that Ecuador’s intelligence systems were “totally infiltrated and subjugated to the CIA!”

Another lesson to look out for resource politics

He accused senior military officials of sharing intelligence with Colombia, the Bush administration’s top ally in Latin America. He is chafing at ties between US intelligence agencies and Ecuadorean military officials. Thus he is purging his army of alleged friends among his top commanders. More than 100 members of the US military are to leave and he plans to close a US base that surveys drug-trafficking.

Meanwhile, Correa has tried to reassure the hundreds of miners, rioting for return of their jobs, saying that “it is absurd to say ‘no’ to mining.” They booed him as he stood on a balcony of his presidential palace above them. Opposition delegates in the assembly have been speaking of the loss of tens of thousands of jobs.

There were quotes in the papers from an unnamed top mining ministry official that it had “flexibility to apply the decree and interpret some issues.” That does not, however, including undoing the licence suspensions.

So, at a time of rising world shortages here is another event that looks like making them worse. Good for prices, of course. And further lesson to keep a wary eye open on resource politics!

Keep mining – if you can!

Erin and Isabel.