meadles june 2010

8/9/2019 Meadles June 2010

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Maedels June 11 2010

funds saw $13.4 billionhead out the door andinternational funds lost$3.9 billion -- the larg-

est outflows in eachcategory since the weekending March 11, 2009. Fibtimer.comwhich was dead on inpredicting the 2007-2009 market crashnoted in a bulletin June6th: Last Thursday theNYSE had up volume ex-ceeding down volumeby 36 to 1. It is histori-

cally rare for such trad-ing days (better than 9to 1) to occur and if ithappens twice withintwo months it usuallymarks the beginning ofa new bull market. ThisWednesday we had thesecond such bullish daywith up volume exceed-ing down volume by 20to 1 on the NYSE. Histori-cally such action resultsin about a 14% advancein the next six months.

Meanwhile theproverbial wall of wor-ries grown to a verybullish height. MarkHulbert reports thatthe average recom-mended equity expo-sure by short-term

stock market timers hasplunged from 20.3% onFebruary 8th (the pre-vious correction low)to last Tuesdays mi-nus 8.8%. This is afterhis NASDAQ Newslettersentiment index alsoplummeted from 80%recommended equityexposure first week of

May to a recent 45.This translates

to a negative senti-ment regarding equi-

ties so great that mostnewsletter advisers arerecommending sub-scribers sell stock theydont even have (goshort) which leads tothe question of whosleft to sell?

Finally Insid-ers sales compared tobuys have plummetedfrom over 7 sales for

every 1 buy last Febru-ary, to only 1.2 salesfor every buy. Whatdo they know that wedont? Clearly theycant be too concernedabout predictions of aprofit-growth-haltingslowdown. This lookslike a bottom and weare adding to our posi-tions.

Gold breaks outIn the November 2009Maedels my techni-cal 6 month upsidetarget for gold was$1300. In May I warnedGold looked ready tobreak out to new highs,which has occurred.Gold reached $1251

last week and normallyI would not wait for thelast $50 of a technicalmove which looks to bein a terminating wave 5within a larger bull mar-ket wave up. Howeversentiment is relativelysubdued and indicatesfurther upside just asthe fundamentals un-

derpinning the metalsrise remain very bull-ish.

The long term

bullish case was recent-ly illustrated when twoof the worlds most in-formed gold producers,Barrick Gold Corp. andKinross Gold Corp. de-cided to develop thelow-grade $4.2 billionCerro Casale copper-gold project in Chile.At $800 gold the proj-ect is barely economic

with a 5.5% IRR but atcurrent prices its IRR isaround 15% which justi-fies proceeding. Clear-ly both companies arecalculating that goldsprice stays at its cur-rent level or goes evenhigher.

Also bullish is that goldsupply has yet to reactto the metals histori-cally high prices. Inthe World Gold Coun-cils words:

Today, the overall levelof global mine produc-tion is relatively stable,averaging approximate-ly 2,485 tons per yearover the last five years.

New mines that are be-ing developed are serv-ing to replace currentproduction, rather thanto cause any significantexpansion in the globaltotal. The comparativelylong lead times in goldproduction, with newmines often taking upto 10 years to come on

stream, mean miningoutput is relatively inelastic and unable to react quickly to a change

in price outlook.

Gold bullions risepushed many gold ma

jors shares higher buthe ongoing flight fromrisk and thus equitiesin general moderatedtheir moves. The re-cent equity market cor-rections real damagewas done in the small

and micro-cap arena asinvestors abandonedthese higher risk invest-ments for presumedsafe havens such as UStreasuries, gold and toa much lesser extentlarge cap gold stocks.

Compoundingthe gold sectors challenges, AustraliasPrime Minister KevinRudd added to the ap-parent risks associated with owning re-source stocks whenhe shocked investorsby announcing a 40%Resource Super ProfitsTax.

In Africa whencompanies such asFirst Quantum Miner

als (or more recentlyExtract Resources inNamibia) get their as-sets arbitrarily confiscated to benefit theinterests of others, itbecomes just anotherdreary and somewhatexpected This Is Africa moment. Not uncom-mon and a risk which


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most investors accept

as part of the great risksthat come with the con-tinents immense profitpotential.

When a moderndeveloped country likeAustralia confiscates amajor part of the earn-ings of its miners, it isnot expected, and be-cause it highlights thevery investor unfriend-ly trend of resourcenationalism, it makesphysically owning golda an even safer andmore attractive alterna-tive.

Also dogginggold producer returnsin the mushroomingcost of producing thestuff. There may be no

inflation yet in the USbut there certainly isin the mining business.

A Fortis Groupled study estimatesaverage cash costshave risen from around$450 in early 2008 toUS$544/oz in the first

quarter of 2010. Thishelps explain the largegold producers underperformance. It also

shows like oil, the ageof cheap to get gold islong behind us. Recallthat the average grademined in the 1950s was12 grams per tonne ormore than one third ofan ounce gold and isnow around 3 grams.

Harder to findand produce goldmakes those juniors

with highly developedexploration projectsand serious productiongrowth profiles all themore attractive to ma-

jor producers lookingto replace their declin-ing reserves.

Although the lessdiversified a juniorsgold production or inthe case of pure explo-ration plays the morethey are dependent onfinancings, the morethe volatile they willbe as they will be moreeffected by changes inrisk tolerance - Hencethe deep correction inmany gold juniors overthe past month.

The Trickledown effect

As golds price increas-es so do gold produc-ers and in an effort tomaintain their existingreserves (for exampleBarrick, the worldslargest producer mustfind roughly 8 million

ounces of gold everyyear just to replacewhat it produces) ac-quiring smaller compa-

nies such as the recent$139 million takeoverof Underworld Re-sources by KinrossGold are bound to in-crease.

One conse-quence of such take-overs is investors suchas Underworlds sud-denly find themselvesleft with un-deployed

cash which they eitherspent or reinvest. It isonly natural for them toredeploy some of thoseprofits into similar ex-ploration stories whichoften are in the vicin-ity. This influx of newmoney in itself under-pin the resource stockbull market.

At Maedels wethink we are in the ear-ly days of this processand many more successstories and sector pro-pelling takeovers areon the horizon. So it isimportant to be patientand remember that thefoundation of this bullmarket is the increasingprofits of the gold pro-

ducers and their needto replace the gold theyare producing.

Additional retailinvestors will flock tothe sector as the num-ber of takeovers in-crease.

Recall the 1970sgold bull market and

how rising gold priceswere accompanied bythe development ofheap-leaching which

allowed the profitablerecovery of gold frompreviously uneconomic low grade oxidizedgold ores. Gold miningstocks did not begin totake off until the mid1970s when gold hadalready tripled to $500(adjusted for inflationis about $1400 today).

The Carlin Trend

in Nevada was at theforefront of the goldstock rush and hassince produced morethan 50 million ounces more than any othergold trend in the US.

Many investorsmade a lot of moneyfrom gold bullions risebeginning 1975 theyear US investors wereallowed to buy it. From1975 it rose from a lowof $140 to $850 fiveyears later. But those600% gold bullion gainswere nothing comparedto the action in the junior resource sector. had just begun workas a trader at the Van-couver Stock Exchange

in 1978 and witnessedsome of those spec-tacular gains made byowning the right juniorgold stories. One ofthe most famous start-ups was Nevada-basedheap leach pioneer Glamis Gold which beganas a penny stock witha market capitaliza

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Minerals

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tion of a few hundredthousand dollars calledRennick Resourcesand was bought out byGold Corp

. in 2006 for$8.6 billion.Critically dur-

ing the late 1970s in afew short years, a mul-titude of investors weresitting on enormousprofits from invest-ing in small cap goldstocks. This successcombined with a risinggold price made other

types of previouslymarginal gold resourc-es economic, attractedeven more investorswhich underpinned thebull market. And com-pared to then we are ata very early phase.

The addition-al influx of investorsfunded exploration (es-pecially by Canadiancompanies) world-widewhich later resulted inhuge discoveries suchas the Goliath, GoldenSceptre discoveries atHemlo and later PrimeResource Groups Es-kay Creek (eventuallytaken over by Home-stake) and ArequipaResources Pierena

discovery (bought byBarrick for $1.1 billionafter its shares rosefrom $0.40 to $32).

We can see themarket already comingto life in this respectas a new influx on in-vestors funds a waveof exploration which isalready starting to re-

ward investors. I thinkwe can be confidentthat the momentumwill continue to build

in this highly profitablesector as new discover-ies attract more moneyand new investors justas existing investors re-invest their profits innew gold stories.

Our experienceis that when golds bullmarket is at a terminalstage gold and goldstocks will move in tan-

dem - Radically higher,very quickly and thedifficulty will be havingthe discipline to chosean exit point. Everyonewill be bullish. Remem-ber internet stocks in1998: we are light yearsaway from that finalstage.

Buy on weaknessOur strategy is to con-tinue adding resourcestocks to our portfoliowith a focus on gold ju-niors. Our position inthe George Young runPan American Gold-fields (OTCBB:MXOM$0.30) is being in-creased. The com-pany has just begun

gold production at itsCieneguita gold depositand they are negotiat-ing the acquisition of amajor project in Argen-tina. This makes senseas Mr. Young is wellknown for his ability tofind and acquire majorassets. George was in-strumental in acquiring

the Gualcamayo goldproject in San JuanProvince, Argentina forViceroy Resource Cor-poration

. The Gual-camayo went on to beViceroys principal as-set as it became a hugesuccess with over 11million ounces of gold.Viceroy was taken overby Yamana at aroundUS $10 per share (.97Yamana for every 1share of Viceroy) andaccording to Yamana

it was: because of theGualcamayo. WhenMr. Young cofoundedInternational RoyaltyCorporation not onlywas he key in its acqui-sition of an interest inthe giant Voiseys Baynickel mine, but moreimportant was directlyresponsible for get-ting IRCs interest inthe Pascua Lama - a gi-ant 17 million oz/gold/635 million oz/sliv-er mine. The PascuaLama was one of theprincipal reasons citedfor IRCs later takeoverby Royal Gold. He alsoco-founded the majorsuccess story MAG Sil-ver (TSX:MAG $6.50),

which we are also con-

tinuing to accumulateHe acquired for MAGits Cinco de Mayo project which is developing

into one of the richestmolybdenum depositsin the world. Now hesbusy working his magicon Pan Americans be-half while we continueto accumulate the com-panys shares.

We are addingone more gold juniorstart-up Rio Novo GoldInc. (TSX:RN $1.28

to our portolio. It is aBrazil based new is-sue which is expectedto begin producingroughly 100,000 ounc-es per year beginninglate 2011. The com-pany has considerableproduction and reservegrowth upside and intensive drill programis currently underwaywith first results ex-pected late this monthThe company has90.75 million sharesoutstanding giving ita $116 million marketcapitalization. A com-prehensive report willbe distributed to sub-scribers shortly.


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meadles june 2010

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