Engineering & Mining Journal

APR 2013

Engineering and Mining Journal - Whether the market is copper, gold, nickel, iron ore, lead/zinc, PGM, diamonds or other commodities, E&MJ takes the lead in projecting trends, following development and reporting on the most efficient operating pr

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PDAC ROUNDUP 2013 thing pressured down. At some point, we will see a massive binge of buyout from overseas, probably China, that clears out all of these worthless ounces and pounds in the ground, using U.S. dollars in the Chinese central bank that they would like to swap for title in long-term assets. Hopefully we won't lose all these projects at ridiculously cheap prices from the low bottoms that are being engineered by the market bias to the downside which is linked to the gold bug narrative. Dr. Ned Goodman is the president and CEO of Dundee Corp., a geologist, a securities analyst, an asset manager, a senior executive and a professor at the school he founded, the Goodman Institute of Investment Management at Concordia. Goodman: If Eric Sprott believes there are dark doings in the metals markets, I agree with him. I have no clue, but he spends his time there and probably because there is dark doings in every market. If he blames governments for being part of the problem….That's the most likely culprit. Central bankers are given their jobs to tell lies and use inside information. We don't have that advantage. What drives metals markets and metals prices is the expected future prices of metals, not what's happening today or tomorrow. According to the Mackenzie Resource Report, which is an in-depth report, the world definitely needs more metals and commodities and we simply do not have enough of them. The future, what's going to happen, is good for mining companies that have the right geology or corporate structure. I'm a long-term investor and I don't really care too much about what the commodity traders and central bankers do to themselves day in and out. Are they dark? Yes, probably. The market is driven by Mr. Market. Mr. Market was created by Benjamin Graham in the 1920s It puzzled him that stocks commanded such a radically different valuation from one investment phase to another….Goldie cuts him off; he's over his time limit. Topic 2: How can a junior arrange to have itself taken over? Sprott: The junior is beholden to the market. There are junior explorers and junior producers. Fortunately, the junior and senior producers can do something about their fate. Their fate right now is that nobody likes you anymore. But, we're in a zero interest rate world. We have companies with huge long-life reserves and huge amounts 54 E&MJ; • APRIL 2013 of cash flow. The problem is that they like to invest that cash flow in the next MINE. If you take a small company, one with $20 million of free cash flow [after Capex and local exploration]…if they paid a $20 million dividend, they would have $200 million market cap because you would yield 10%. But, if you say I'm going to take my $20 million for this year and the next three years and put it back into the ground in a $100 million project, your market capitalization will go down because investors do not want to wait five years to see whether the project will be successful. In a zero interest rate world, those people in a position to convert cash flows to dividends will change their market cap dramatically, which then allows them to reconsider buying exploration properties, which still might be cheap. They will be able to fund a dividend paying instrument in the market place. That's what investors buy now. If mines paid dividends, people would buy those stocks too. Goldie: How many of those juniors will survive long enough to be taken over? Kaiser: Of the 1,800 companies I follow, 675 have less than $200,000 in working capital. That's enough to stay alive for 1 more year doing absolutely nothing. Here at PDAC, where the cream of the crop exhibits, there are 527 companies and 114 of them (22%) have less than $200,000 in working capital remaining. Why are they here? Nearly half (47%) are trading at less than $0.20 per share and 48% of them have less than $20 million in market capitalization. Building on what Ned said. The junior miners are all about the future. Long term, the destiny of gold and copper prices are twinned, premised on a growing global economy, where the U.S. undergoes relative decline as growth accrues overseas in places like China leading to a very potentially unstable world in 2030. There is structural demand in place for gold and copper. The juniors need to disconnect from the current situation and focus on this future and help the market visualize what the deposit would be worth at these various prices. One problem that we have is that the companies are very restricted in helping the public understand the potential. They can present fantastic data-qualified dots, but they are not allowed to connect them. These companies intrinsically have a zero value in so far as they have real project and there is optionality value. The way to disconnect from the metal value is to focus on what you are doing on the ground. What is the funda- mental outcome? Plug in $3.50/lb copper and $1,600/oz gold because the trend in real prices is upward going forward. Goldie: Can the junior miners use the disconnect? Goodman: They can try. I use the disconnect to my advantage. When they show up looking for money and the market hates them, that's when I want to buy them. Having answered that question quickly, I can return to my Mr. Market discussion. Mr. Market is not only manic depressive, he also believes that there is an efficient market. When he loses or misses the market, he refers to it as a bubble. When he's in and it's going up, he calls the bubble a bull market. Mr. Market is pretty stupid and insane. That's who you are going up against. The juniors can try it, but they are not going to make it. Topic No 3: Equities? We have machines trading stocks. Do we need more regulation? Sprott: My answer is: No. Now, I can move on to my soapbox. I would love to see the people who run precious metals mining companies appreciate gold and silver for what they really are: alternate currencies. All of them should have kept their gold and silver instead of the trash cash they have now that generates nothing. These metals are up 500% and 600% since 2000. Instead, they are hedging and doing all of these weird things. They are afraid of their earnings going up or down based on precious metals prices. They should realize what's going on in the world. What's going on in the world? Most G6 countries are broke. They can't possibly repay their debt. The U.S. Treasury released a report in September 2012 that said the deficit for the U.S. was $6.9 trillion in a $16 trillion economy. Last year it was $5 trillion and next year it will be $8 trillion. Who in their right mind thinks that those people who are entitled to these payments in the future are going to get them? If you do, then you don't understand basic math. Underfunded liabilities, such as Social Security, Medicaid, civil service pension plans… these countries are broke and they will pay the people with funny money and that's why you have to own gold and silver. Goldie: The regulators we are worried about…Are they government ones or do some brokerage firms have in house regulators we should worry about? (Continued on p. 136) www.e-mj.com

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