By Christopher Briem, on June 7th, 2011
We’ll crib off Mike explicitly this time, who is himself commenting on Harold’s column over the weekend on women owned businesses. All I can say it reminds me again of a quote I have wound up using a lot. Really, it is one of the most remarkable quotes I have ever found about the Pittsburgh economy, past, present, or future, and use whenever the topic comes up:
(Pittsburgh) will, however, slowly decline unless new industries employing women and those engaged in the production of consumer goods are attracted to the area.
Which is from a report written by a place called the Econometric Institute based in News York City and titled: “Long Range Outlook for the Pittsburgh Industrial Area”, stamped February 12, 1947 and was for the Allegheny Conference and the Pittsburgh Chamber of Commerce.
That date is no typo and as we have looked at this in depth, it really was true for a long long time that female labor force participation in Pittsburgh lagged the nation by a lot. It really took decades after the employment within manufacturing imploded for the region’s labor force to reach some semblance of gender-normalcy when compared to the nation. This change in the regional labor force I still will argue is the single biggest factor in the economic transformation of Pittsburgh over the last 25 years. Put another way, as long as women failed to have similar opportunities here compared to elsewhere, the entire regional economy was doomed to lag the nation. It was as predicted in 1947.
No secret that Harold is often talking about manufacturing. It is indeed the continuing decline in local manufacutring employment that has precipitated the speed at which we have achieved a new paradigm I mentioned recently as well… namely that the regional workforce has in some recent quarters become majority women. Here is some more specific data for employment in Allegheny County which has now been majority women year-round since 2005.
By Simon Grey, on June 7th, 2011
The United Kingdom, where, on average, people live longer than in the U.S., spends only about 9 percent of gross domestic product on medicine, compared with our 18 percent. The British control costs in part by having the will to empower a hard-nosed agency, the National Institute for Health and Clinical Excellence, to study treatments and declare some ineffective. Some hope the United States will create a similar agency, but I fear it would be hopelessly politicized and declawed.
My solution: admit we are cost-control wimps, and outsource our treatment evaluation to the U.K. Pass a simple law saying Medicare (and Medicaid) won’t cover treatments considered but not positively appraised by the Britain’s national health institute.
Even better, use clinical evidence evaluations of the British Medical Journal. They’ve classified more than 3,000 treatments as either unknown effectiveness (51 percent), beneficial (11 percent), likely to be beneficial (23 percent), trade-off between benefits and harms (7 percent), unlikely to be beneficial (5 percent) and likely to be ineffective or harmful (3 percent). Let’s at least stop paying for these last two categories of treatments! And to put pressure on doctors to collect evidence, let’s stop paying for “unknown effectiveness” treatments after 10 years of use.
As I’ve said before, and will continue to say until everyone in this world understands, universal health care plans will never work. Resources are limited, and no amount of political posturing will change that fact. As Robin Hanson notes, there will come a point where the government must cut back on providing health care, and that’s because there are simply not enough resources available to make sure that everyone is always in perfect health. Anyone who says otherwise is stupid, ignorant, or lying.
By The Gold Report, on June 7th, 2011
School’s out for the summer and junior explorers are back in the field commencing summer drilling programs. That’s what makes early summer a good time to seek out bargains in the junior equity sector, according to Fraser Mackenzie Analyst Mike Starogiannis. In this exclusive interview with The Gold Report, Mike offers some promising names from Canada to Peru (where, yes, it is winter).
The Gold Report: In a recent National Post article about gold’s rising price versus the languishing prices of gold equities, Mining Reporter Peter Koven quoted Yamana Gold Inc.’s (TSX:YRI; NYSE:AUY; LSE:YAU) CEO Peter Marrone as saying, “. . .people rely on net asset value to value gold companies, and the calculations don’t seem to rise so dramatically because the long-term gold price used by analysts is at a deep discount to the current price. . .there’s a tendency to say, ‘I’m not taking advantage of the equities because they’re not reflecting the current gold price.’” As an analyst, what’s your view?
Michael Starogiannis: I think Peter is correct in that the long-term gold price deck used in net present value (NPV) calculations is relatively sticky. But a lot of people also use a cash flow multiple to value companies. Cash flow isn’t relevant for junior exploration companies, but it is relevant for junior producers. I think pricing, to some extent, reflects fluctuations and the steep gold price. If you combine valuation methodologies, including NPV and cash flow multiples, you should see some fluctuations in the junior-producer space.
TGR: But do you think Marrone is right? Could there be something else behind those languishing prices?
MS: I think it also reflects the part of the cycle we’re in; we had a very busy fall and winter with respect to the number of new equity raises in the space. If you use the show-and-tell analogy, all the companies told us their stories. The markets have raised money for them and now they’re trying to show us what they can do with it. We’re in that pause stage, as companies begin their summer drill programs and sink those big equity raise dollars into the ground, into mine development or building new mill facilities.
TGR: But you’re referring more to smaller rather than large companies. As the news cycle picks up and drill results come in, do you expect to see a rise in the juniors share prices?
MS: Provided that the gold price remains in the $1,400–$1,500/oz. range, the juniors should start to come back in earnest. All of that deployed capital will have been put into the ground and results will start showing which projects are of merit and which will fall by the wayside.
TGR: In your five years as an analyst with Fraser Mackenzie, you’ve seen a lot of market fluctuation. How does what we’re seeing now in the funding cycle compare to what was going on in 2007?
MS: Overall, the market is fairly efficient right now, particularly in valuing gold stocks. We’re benefitting from having gone through a little bit of a retracement, as we did in 2008 when the juniors pulled back and the market got a bit savvier. Prior to that 2008 blip, the valuations in the junior space were getting a bit ridiculous. Now, the valuations in gold stocks reflect the true value of the companies.
TGR: Prices for precious metals typically fall off in early summer before strengthening in August and into the fall. How would you recommend playing the precious metal sector now, in terms of junior equities?
MS: Many of our companies under coverage have a drilling and news flow hiatus this time of year, which coincides with a drop-off in commodity prices. For investors who believe in commodity prices coming back in the fall and in the long-term health of those commodity prices, the early summer months might be the opportunity to pick up some bargains.
TGR: You’re based in Toronto and cover many Canadian-based companies with gold and silver projects. What role does Canada play in the global gold market today?
MS: I have a biased view because I’m based here and I don’t see a lot of the work that’s being done elsewhere. But I believe Toronto and Vancouver are powerhouses in financing the junior sector, in particular. But more than just financing, a lot of the companies are headquartered here. That means much of the technical talent resides, or is based, here. So, Toronto and Vancouver, and Canada in general, play a very important role in advancing projects in the junior space—particularly on the precious metals side.
TGR: What are some of the companies with projects in Canada that you feel are the better buys right now?
MS: Gold Canyon Resources Inc. (TSX.V:GCU) is one of our top picks in the exploration space. Its flagship asset is the Springpole Gold project, an alkaline gold deposit about 100 km. from Red Lake. The company’s had quite a bit of success over the past 18 months delineating a zone of mineralization that’s about 1,300 meters long, at an average of 75m wide by 300m–350m deep. The grade is particularly interesting. For a bulk deposit, the grade seems to be averaging 1.3–1.4 grams per ton (g/t). If you compare that to some of Canada’s better-known bulk mineable deposits, such as Osisko Mining Corp.’s (TSX:OSK) Canadian Malartic project, that grade is about .97 g/t. Detour Gold Corp.’s (TSX:DGC) Detour Lake deposit grade is about 1.02 g/t. So, the Springpole zone appears to have 30%–40% higher grades than either of those.
TGR: But is the deposit as large as those others?
MS: Based on our in-house estimates, we think there’s the potential to demonstrate 5–6 million ounces (Moz.) at Springpole, which is a fair bit smaller than Osisko’s or Detour’s deposits. However, grade is a very telling factor in the potential economics of any deposit. There is also still some significant depth and strike potential.
TGR: Would you compare Gold Canyon to Brett Resources Inc. (TSX.V:BBR)?
MS: Well, Brett is no longer there. The Hammond Reef project is now owned by Osisko. But, yes, it’s a good comparison from the perspective of permitting challenges. The Hammond Reef and Springpole deposits would face very similar permitting challenges with respect to their proximity to adjacent or overlying bodies of water. From the perspective of grade, the Springpole grade is more than double that of Hammond Reef.
TGR: When do you expect more news from Gold Canyon?
MS: Gold Canyon put out its final few holes from the winter program on May 31, with some good infill results. The company showed grades and widths very consistent with our 5–6 Moz. estimate. There will be a bit of a news hiatus as we await results from its deep-drilling program, which is designed to show some depth potential. Gold Canyon won’t start its summer program until mid-June. We wouldn’t expect to see new step-out or infill drilling until early to mid-July.
TGR: You also cover Confederation Minerals Ltd.’s (TSX.V:CFM) Newman Todd Project in the Red Lake District. Why haven’t we heard this name before?
MS: This project has been around for quite some time. It languished from not having had systematic drilling across the length of the property. Previous operators were very cautious in the way they drilled. New management has taken over, with good technical talent that is starting to drill in a more systematic way. This is not a large property package in the context of the bigger players in the Red Lake District, such as Rubicon Minerals Corp. (NYSE.A:RBY; TSX:RMX) or Premier Gold Mines Ltd. (TSX:PG). However, in the context of finding a deposit within the property limits, it’s quite conceivable that Confederation may find a high-grade zone within 2,000 meters of strike length that it can contain within the Newman Todd property package.
TGR: Confederation is trading at about $0.71 right now. What will push Confederation to new levels?
MS: The current drill program is designed to do systematic drilling and stepouts from drill fences that the company’s already drilled and which have demonstrated consistently high-grade hits at various depth horizons at four different locations along a 1,500m–2,000m strike. We expect that all successful fences will build the case that there’s a significant gold resource hiding on the Newman Todd property.
TGR: Are there other Canadian plays you’d like to share with our readers?
MS: Two other exploration plays that I would mention are Kaminak Gold Corp. (TSX.V:KAM) and Taku Gold Corp. (TSX.V:TAK; OTCBB:TAKUF), both of which have significant land packages in the White Gold District of the Yukon Territory.
TGR: Kaminak has the Coffee Gold Project, close to Kinross Gold Corp.’s (TSX:K; NYSE:KGC) White Gold project, which was previously owned by Underworld Resources before Kinross bought out that company. One hole there hit 17 g/t gold over 15.5m. Do you expect similar results from the current drill program?
MS: Yes, that was an early discovery hole in the Supremo Zone. Chances are they’ll hit similar grades this summer with follow-up drilling. We also expect Kaminak to hit different types of systems; for example, lower grades but broader intersections, such as in its Latte Zone. The company will do follow-on drilling in all of the previously discovered zones, including Supremo, Latte, Double Double and Americano, as well as more grassroots exploration in targets that have yet to be drilled.
TGR: Taku just added about 13,000 hectares in claims to its holdings in the White Gold District. When will it start drilling those?
MS: It probably won’t drill on those claims this year. Instead, the plan is to drill the Rosebute and Portland properties. There is good soil geochemistry and geophysical anomalies on those properties. The plan is to drill about 7,500m on various drill targets, split between the two properties. In the meantime, the company’s work program, basically, is follow-up soil geochemistry grids, ground proofing, ground mapping and some geophysics.
TGR: And that’s a relatively cheap stock, trading just below $0.38.
TGR: Looking more to the south, you like Evolving Gold Corp. (TSX.V:EVG; OTCQX:EVOGF; Fkft:EV7).
MS: Evolving Gold is largely a Nevada-focused player with its Carlin-Humboldt projects. It’s engaged in a deep-drilling program targeting a horizon that’s anywhere from 700–1,500 meters deep. The company’s looking for a true Carlin-type system, right in the heart of the Carlin Trend. Evolving Gold is one of the largest property holders along the Carlin Trend, second only to Newmont Mining Corp. (NYSE:NEM).
TGR: One interesting thing you state in your report on Evolving Gold is that the economic mineralization in the Carlin Trend should be valued more highly, given its proximity to major players like Barrick Gold Corp. (TSX:ABX; NYSE:ABX) and Newmont, as well as the existing infrastructure.
MS: That’s right. Most of our companies under coverage, for which we do have targets, are resource-based valuations that we value at $100/oz. of potential in situ. Assuming that Evolving can show us sufficient drilling information on the potential for some ounces, we would likely value the company much higher than $100/oz., given that it’s in the heart of one of the world’s most prolific gold trends.
TGR: It’s not as if Evolving hasn’t found anything. One hole from the most recent drill program intersected six separate zones of mineralization, including one intersection at 31 g/t gold over 4.6m.
MS: Yes. Based on what we’ve seen so far, it seems like the company is into a Carlin-type system. That’s microscopic gold in the right kinds of rocks, such as muddy limestones and siltstones. But, Evolving Gold demonstrated those kinds of grades and widths only in holes 7 and 10. The trick now is to go back, do some systematic step-out and infill drilling and prove some continuity in those higher-grade zones.
TGR: For readers who are unfamiliar with that, it’s like a grid where the company’s putting holes in between the holes to track where the mineralization is along a given line.
MS: That’s right.
TGR: You also like some companies with projects in South America, including Apogee Silver Ltd. (TSX:V:APE). Isn’t it aggressive to be bullish on a company whose main asset, the Pulacayo Silver Project, is in Bolivia?
MS: Bolivia has seen a rise in political uncertainty in recent months. There’s talk of nationalizing assets, but it’s our firm belief that much of that talk was political posturing on the part of the current government to curry favor with the unions. Furthermore, Apogee’s underlying property interests are already owned by Bolivian Mining Corporation (COMIBOL), the state-owned mining company. So, the asset doesn’t have the same level of exposure to nationalization as some other projects in Bolivia.
TGR: Don’t you also think there is short-term potential for another 30 Moz. silver equivalent there?
MS: That’s right. Apogee is now doing a systematic infill and step-out program in the heart of the mine proper, where there is already an existing resource, basically, it is a step-out to that resource. And it appears to be hitting consistent grades and widths. Volumetrically, based on some of our in-house estimates, we believe there is immediate upside to show a bump up in the resource within the next 12 months.
TGR: Are there other projects in South America that you like?
MS: Another one of note is Sulliden Gold Corp.’s (TSX:SUE; OTCQX:SDDDF) Shahuindo Project in Peru. It’s doing an infill program on the core of the mineralization trend and demonstrating fairly consistent mineralization of good grades and widths. This would be a relatively low-grade, bulk-tonnage type of deposit with grades somewhere around 0.65 g/t. We’re currently valuing Sulliden on a NPV basis. We’ve got a cash-flow model that assumes it has 2.2 Moz. of mineable oxides, which it would be mining and heap leaching within a timeframe of, say, three years.
TGR: Sulliden recently found a new mineralized zone highlighted by the discovery that the zone was 1.6 g/t gold and silver over 33m. That’s a little bit higher than the average grade there.
MS: That’s right. If you start accounting for mining dilution and such, the zones so far have consistently shown that it’ll probably end up with 0.6–0.65 g/t. We would be pleasantly surprised if there was a grade uptick, because that would be good for the economics of the project. But even if you just value the company at the lower-grade assumption, we still show ample upside for Sulliden.
TGR: Some majors operate in that area of Peru. Could that be a factor?
MS: I think if Sulliden demonstrates a project of sufficient scale, it could be a factor in the company’s valuation. At this point, with anywhere from 2–3 Moz. of potentially mineable gold near the surface and open pittable, it probably would not be a prime candidate for a major or midtier to come in as a suitor. However, if it can demonstrate parallel zones and show multiples to that potential resource size, the company could be in serious contention.
TGR: Certainly, CEO Peter Tagliamonte has done it before.
MS: Yes, he has he’s done it before. Peter has generated, and knows how to generate, shareholder value and build good projects.
TGR: Michael, thank you for your time and your insights.
Michael Starogiannis is an analyst for Fraser Mackenzie covering the metals and mining sector. He is a professional engineer and a graduate of the University of Toronto with a BASc in geological and mineral engineering. He started his career as a consulting geotechnical engineer working for Golder Associates on a variety of projects entailing rock mechanics, hydrogeology and tailings. Since finishing his MBA at the Rotman School of Management in 2001, he has held roles in equity research, private business and investor relations. He has prior experience researching the gold and precious metals sector for several Canadian broker/dealers.
By B.P.T., on June 7th, 2011
At 7:45 AM EDT, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 3:00 PM EDT, the Consumer Credit report for April will be released. The consensus estimate is that there will be an increase of $5.0 billion in the consumer credit available from March to April, after an increase of $6 billion last month.
By Christopher Briem, on June 6th, 2011
So I feel obliged to update my graphic on the region’s relative unemployment rate. The region’s data for April came out the other day and with the region at 6.8% unemployment we are coming in 2.2% points below the nation’s 9.0% for April. The latest on the nation’s unemployment rate is that it ticked up in May to 9.1%.
For us though, the 2.2% point difference is tied with one recent month in 2009 as the largest difference between local and national unemployment rates since at least 1970. I emphasize the at least part since I have not compiled a consistent time series further into the past and I suspect you would have to go quite a ways to find any comparable gap, if it really exists. Probably did in a theoretical sense in the middle of WWII only in that our local unemployment rate then was probably negative.. but since we don’t really talk about negative unemployment rates that wouldn’t count.
 And this is my personal perspective on studying regions, but you really don’t want to measure just where we are at on the vertical axis at any point in time. Look at the two dimensional areas on this chart for periods when we are above or below the national average (zero on this chart). One month can be all sorts of things, but when you really compare areas you get a sense for a) how bad the 1980’s were for us, and how different the last few years are compared to most any point in our recent history.
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By TamzinRosenwasser, on June 6th, 2011
Suppose you went into a grocery store, and found no prices on anything. You ask a clerk how much five pounds of potatoes would be, and he asks you whether you are 65 or older. Youre taken aback, but you tell him you are 64, and he asks whether your income is less than $40,000.00 a year. Startled, you say it is more than that, and then he asks whether you have food insurance. Why would the
price of potatoes depend on the buyers age, income, and insurance status, rather than on the cost of growing, transporting, and stocking the potatoes? That would be absurd.
Yet thats how it is with medical care. I would be unable to find out, for example, the cost of an echocardiogram from the hospital where I did my residency. The price is different for different people. The government instituted this ridiculous situation, in 1965, with Medicare and Medicaid. There is a lot of mythology about these programs, but few people understand them like the physicians who are on the front lines actually seeing the patients. For some of them, it has been a gravy train. They game the system. For others, it has been a disaster to go through medical school and residency, and come out a de facto servant to government programs, but of
course, without benefits or retirement. If you are scrupulously honest, these programs will bankrupt youeven while turning you into Public Enemy #1.
Senators Ron Wyden and Charles Grassley have put forth the Medicare Data Access for Transparency and Accountability Act (the DATA Act) to open a database so that everyone can see how much money Medicare has sent to any physician enrolled in it. Regardless of the cost to provide medical services, the price the taxpayers are forced by the government to pay for other peoples medical care has gone down and down per procedure, per diagnosis, per office visit.
The public wont see that, but it will hear about some isolated cases; for example, an Oregon neurosurgeon who allegedly performed multiple spine surgeries on the same patient, or a Florida physician accused of $3 million dollars in Medicare fraud.
Gaming the system is fraud. But the biggest fraud is the one perpetrated on the working people of this nation who are forced to pay for other peoples medical problems. When Medicare was first instituted, Americans were reassured that it would never cost the taxpayers more than $9 billion a year. It is more like $500 billion a year now.
Patients learn to game the system too. Workers must pay through their taxes for even the most trivial complaint when someone on Medicare makes an appointment for it; say for a cosmetic skin lesion that has been present for 30 years without causing any problem. Working people are also forced to pay for the consequences of other peoples smoking, excess drinking, or risky lifestyle choices. Thats fraud, perpetrated by the government on taxpayers. Its hidden behind political smoke and mirrors.
Amazingly, we managed somehow for 189 years after 1776 without Medicare and Medicaid, and things were getting better and better until Lyndon Johnson came up with a good fraudulent vote-buying scheme, and then a lot of people decided there was money to be made off medical problems with the taxpayers the losers.
So, Wyden and Grassley, open your database. But include a list of all the procedures and diagnoses, and what Medicare and Medicaid actually send the physicians as reimbursement so people can see that physicians who spent years of their life in training while incurring tremendous debtare paid about the same as auto mechanics. And also account for where the rest (about 80%) of the
$500 billion goes.
That would be a good start for medical price transparency. And a good precedent for another database, one detailing just how much value politicians give taxpayers who pay their salaries.
About the Author:
Dr. Tamzin Rosenwasser earned her MD from Washington University in St Louis. She is board-certified in Internal Medicine and Dermatology and has practiced Emergency Medicine and Dermatology. Dr. Rosenwasser served as President of the Association of American Physicians and Surgeons (AAPS) in 2007-2008 and is currently on the Board of Directors. She also serves as the chair of the Research Advisory Committee of the Newfoundland Club of America. As a life-long dog lover and trainer, she realizes that her dogs have better access to medical care and more medical privacy than she has, and her veterinarians are paid more than physicians in the United States for exactly the same types of surgery.
By Simon Grey, on June 6th, 2011
Mark Thornton shares a story:
Remarkably, the cost of air conditioning plummeted over the decades. The cost of air conditioning units declined, and they became increasingly reliable, safe, and efficient in turning electricity into relief from heat and humidity.
That is until recently. Twenty years ago I had an air-conditioning system (i.e., heat pump, HVAC system) installed in a house that was almost 1,000 square feet for $1,600. I just got the preliminary estimate, not an actual bid, to replace a system on a similarly sized house for $11,000. Not surprisingly, this is the reason for this article.
Thornton goes on to describe how government intervention on behalf of the environment has led to higher prices by mandating more efficient end-user systems. This mindset is all too common among the environmentalist crowd, and belies a shocking amount of shallowness and ignorance.
(As an aside, the efficiency of end-user products and systems tend to be targeted the most by environmentalists because it is part of their pathology. Like the group Opus Dei, at least as described by Dan Brown, environmentalists believe that one can only show penance by feeling pain and undergoing sacrifice. As such, they target popular consumer goods in order to feel better about all the evil that man has done to the environment.)
If the environmentalists were truly concerned about protecting and saving the environment, their analysis would take into consideration not only the efficiency of the end-user product, but the efficiency of the production process of said product, the efficiency of transporting the product, the efficiency of selling the product, and the efficiency of maintaining the product, among other things. Consumption of the product is not the only process that consumes energy and incurs environmental costs.
Production can incur massive amounts of environmental costs. There is pollution, obviously, in addition to energy consumption, raw material consumption, and the energy costs of labor. All these things require environmental resources. Energy comes from coal or nuclear plants, which have their own forms of pollution and their own energy costs as well. Workers have to eat, have to drive to work, and generally wish to relax when not at work. These desires have an impact on the environment. Meeting stricter production costs generally requires more materials, directly or indirectly, and requires more labor besides. Furthermore, new standards may lead to a net increase in pollution because they require more energy.
Besides that, the higher standards may mean that the product wears out more easily or quickly, requiring either repair or replacement. Both of these processes require a net increase in energy consumption, which is not good for the environment. The former might require a repairman to drive out to someone’s house to make a repair, which does cost energy and lead to an increase in pollution. The latter requires more units to be produced, which likewise requires more energy and leads to an increase in pollution.
As such, when environmentalists focus on the efficiency of end-user products, they often ignore the unseen environmental costs that new standards incur. If only there was a way to gauge systemic efficiency.
Believe it or not, there is, in fact, a very easy way to judge systemic efficiency and that is by a market mechanism known as the “price.” Prices signal to consumers the relationship between supply and demand for given product. In this case, cold air within a closed system is the product, and prices let consumers know how much air can be provided relative to demand.
Incidentally, the market system encourages systemic efficiency because producers have an incentive to provide a given product for the highest price to consumers at the lowest cost to themselves. This incentive is known as “profit.”
If there are two competing companies that produce identical products and one can produce their product with one-third fewer works and ten percent fewer raw materials, they can sell their product for a lower price and make a higher profit than their competitors. Employing fewer workers helps reduce the strain on the environment by lowering the consumption of energy as would have been used for commuting. Lower demand for certain raw materials also helps the environment in that less energy is needed because there is less material to extract, and so on.
Thus, the market serves the goals of the environmental movement quite well. Unfortunately, most environmentalists are too dense to realize this, and thus focus their attention on obvious costs while ignoring the less visible costs. Their superficiality, then, has led to outcomes that are worse for the environment. Therefore, it would simply be best to refer to environmentalists as earth-hating idiots, for they are nothing more than simpletons, unable to make any observations other than the most obvious and incapable of thinking abstractly and rationally for any length of time. Quite simply, they are enviromorons.
By B.P.T., on June 6th, 2011
At 3:45 PM EDT, Federal Reserve Chairman Ben Bernanke will give a speech at the International Monetary Conference in Atlanta, GA.
By Simon Grey, on June 3rd, 2011
Scott Adams notes the problem with an increasing number of people who don’t pay taxes:
We all understand that no entity can survive for long if it gives away its resources while asking nothing in return. And this leads me to my point: In the United States, 51% of adults pay zero federal income tax, and yet they have the right to vote. That’s the very definition of a system that can’t last.
I’m not sure where the tipping point is. So far, the power of the non-tax-paying majority has been blunted by the influence of political parties and the misdirection of the media. If the majority ever figures out that they can legally confiscate the wealth of the minority, tax rates will double overnight. My best guess is that the United States will go into a death spiral at about the point that 55% of adults pay no federal income taxes. We’ll probably get to that point as baby boomers continue to retire in large numbers.
As Vox has noted, “It’s not quite a legitimate analysis, in that many of those who don’t pay any income tax do pay payroll taxes.” I would also add that everyone pays certain federal taxes indirectly, like the taxes on automotive fuel, so even those living off government largesse don’t escape all taxes. At any rate, Adam’s sentiment is largely correct, and is a sentiment shared by economists Thomas Sowell and Walter Williams, among a host of others. Furthermore, the United States is definitely trending towards becoming a nation that has more taxtakers than taxpayers. Consider the following chart from Zero Hedge:
If this trend keeps up, we will definitely be in trouble.
By The Gold Report, on June 3rd, 2011
 Many resource market investors greet the approach of summer with the adage: “Sell in May and go away.” Michael Ballanger, an investment advisor at Union Securities and a 30-year veteran of the junior resource market, says he is taking the opposite tack. In this exclusive interview with The Gold Report, he explains how the continuing worldwide financial upheaval is influencing his investment decisions regarding the resource sector and why his focus on the huge opportunities for junior resource stocks in the Yukon cause him to say: “Buy in May and make some hay!”
Companies Mentioned: ATAC Resources Ltd. Clifton Star Resources Inc. Explor Resources Inc. Hinterland Metals Inc. Kaminak Gold Corporation Kinross Gold Corp. Lake Shore Gold Corp. Osisko Mining Corp. Taku Gold Corp. Tinka Resources Ltd. Xstrata PLC
The Gold Report: In your last interview with us in April of 2010, you predicted higher precious metals prices and inflation. Both came true. We continue to see more “quantitative easing” (aka money printing), global civil unrest and high unemployment. Do these factors portend higher prices for precious metals?
Michael Ballanger: Approximately three years ago, I read Ayn Rand’s “Atlas Shrugged” for the first time, after which I urged every client to do the same. Of the hundreds of books that I have read over my 34-year career, no book has ever mirrored the current investment landscape like this one. You have big government in bed with big business on a global scale at the expense of the middle class. Period. History has proven that capital moves to locations in which it is fairly treated and since the G20 nations are hell-bent on debasing the purchasing power of their respective currencies, capital has been fleeing currencies in favor of hard assets of every flavor—gold, silver, copper, oil, grains and so on so forth…where that capital is “fairly treated.”
TGR: What about near term, over the summer months?
MB: Near term, until around mid-August, the junior mining sector will be very, very quiet as measured by the TSX Venture Exchange. Not only do we have the seasonally quiet summer months, we also have a sector that rallied from 1,400 to around 2,460 since our last interview. Any market up 75% in 13 months is ripe for a correction and we have already seen a 20% haircut off the highs in early March.
TGR: The old market maxim dictates: “Sell in May, go away.” We’re through May and apparently survived the Rapture. Do you have a plan for summer investing?
MB: For the junior mining sector, it is actually March that historically marks the peak and tends to coincide with the PDAC (Prospectors and Developers Association of Canada Mining Investment Convention) held in Toronto each year. However, I have patented a new phrase which applies to the Canadian Yukon explorers. “Buy in May and make some HAY!”
The traditional rationale is based upon climate, money and precedent. Climate constraints make it impossible to drill in the winter months, so all of the activity fires up in June. As for money, last year the Yukon attracted around $70M in exploration and it all began with the $140M friendly buyout of Underworld Resources, Inc. by Kinross Gold Corp. (TSX:K; NYSE:KGC), followed by the big discoveries for Kaminak Gold Corp. (TSX.V:KAM) in the same White Gold area as well as the Rau-Osiris discoveries by ATAC Resources Ltd. (TSX.V:ATC).
This year, the junior Yukon companies have raised over half a billion dollars for exploration that has to be compressed into a five-month period. As for precedent, we watched two juniors generate enormous wealth for investors as Kaminak advanced from $0.35 to $3.80 while ATAC moved from pennies to $9.00 in that same five-month window back in 2010. With a 12-fold increase in exploration capital going into the Yukon, there are going to be more discoveries and enhancements of the existing discoveries by KAM and ATC. Therein lies the strategy of being underweight the TSX.V (non-Yukon) but overweight the Yukon.
TGR: You’re a real veteran of the junior resource investment market going back into the 1970s. How does the current investing environment compare to years past?
MB: Nowhere does the dynamic duo of fear and greed play a stronger role than in the junior mining sector. And nowhere do the merciless matrons called Lady Luck and Mother Nature exert a greater control over our fates. That was the case in the 1970s and it is the same today. The only method that I have learned to overcome the random nature of success in this sector is through investing in companies with extraordinary management. By that, I do not refer to companies with superb promoters at the helm—I refer to companies where management excels in execution on the ground. It is very difficult in today’s environment to find managers with the experience and knowledge to execute. By contrast, it is easy to find great promoters talking up their deals. I have rarely made any money focusing on the “sizzle” rather than the “steak.”
TGR: In your last interview, you gave your criteria for investment in juniors. Any changes in your criteria since then?
MB: In today’s market, I’m paying more attention to execution than at any other time in the cycle. The easy money made in the advance from $300/oz. to $1,500/oz. in gold is not going to repeat itself in the next 12 months. If you want to make money from here on, you better have successful projects that can fly at current prices rather than praying that you are going to get skated onside by rising prices. That’s a sucker’s bet after the kinds of advances we have seen.
TGR: Last year, you were hot on silver as the better precious metals play over gold. You were right and it had a great run. What are your thoughts on it now?
MB: It was a delightful run, but I am even more delighted that we have now corrected that heavily crowded trade that marked the move from $30/oz. to $50/oz. No one was saying anything about silver when we did the interview a year ago, but it sure was the metal du jour in April 2011. Any time you get so many “experts” coming on to CNBC and Bloomberg for “commentary,” you know the market is ahead of itself.
Rather than the price of silver itself, I am far more focused on junior mining stocks like Tinka Resources Ltd. (TSX.V:TK; Fkft:TLD; Pksheets:TKRFF), which I mentioned, and it was around $0.25 per share last year. It has recently corrected from $0.73 to under $0.50. Tinka’s President and CEO Andrew Carter and his team have had extensive operating experience in Peru. In terms of Mother Nature, the geology’s right and what they have there is really interesting, which is a NI 43-101-compliant silver resource of approximately 20.3 Moz. that could grow dramatically with continued exploration. They have just begun the long-awaited drilling of the Colquipulcro deposit. This is still my favorite silver story for 2011 and in the interest of full disclosure, I am a shareholder and our firm has an investment banking relationship with Tinka as well.
TGR: We know you are keen on the Yukon. Many new companies are rushing to the party up north. What strategy would you recommend for sifting through these companies and investing there?
MB: In any area play, there is always a leader that actually creates the area play. In the White Gold area of the Yukon, Underworld Resources Inc. was the leader until it got absorbed by Kinross in March 2010, after which the Latte and Supremo discoveries by Kaminak vaulted it into “lead dog” status. Coincident with the White Gold discovery was the Rau District discoveries by ATAC. If you are going to play the Yukon, you pretty much have to own either one or the other or both. The White Gold District is in what was once the hub of North America’s largest gold rush—the Tintina Gold Belt, which has produced nearly 30 Moz. of gold, and boasts estimated resources of over 39 Moz.
Now, as to the juniors with ground in the area, I have stayed with what I refer to as the “Shawn Ryan Claims.” Since Ryan won Prospector of the Year in 2011, his scientific methods for prioritizing properties using intensely disciplined soil geochemistry allowed him to screen much of the White Gold Area. I also look at the time that the land was acquired. If it was acquired after 2010 or late in 2010, chances are that either the Ryan crews or those competing with the Ryan crews got the premium ground. As for the Rau District, ATAC would appear to have the lion’s share of premium ground, so the juniors in the Rau are difficult to handicap.
TGR: What are the challenges faced by and benefits to companies exploring in the Yukon?
MB: The fact that there is such a short exploration window is the major challenge. Accelerated costs due to a relative paucity of infrastructure is also a challenge. However, therein lies the benefits to Yukon explorers. Little systematic exploration has been done in the area, until now. Considering that the 1903 Klondike Gold Rush has yielded over 18 Moz. of gold to date from placer deposits, one can only speculate how many ounces might be discovered if these companies locate the bedrock, up-elevation sources of these placer deposits.
TGR: What are some of your favorite names in the Yukon and why?
MB: My rule dictates that if you take the risk of entering an area play, you absolutely must own the lead dog and that means that Kaminak and ATAC are core holdings. Moving to the pre-discovery companies and going back to what I said earlier about when and how the ground was acquired, Taku Gold Corp. (TSX.V:TAK; OTCBB:TAKUF) acquired claims through a deal with Shawn Ryan on two parcels. Taku Gold is one of the largest stakeholders in the White Gold District, with 3,683 claims totaling 76,238 hectares.
The first of the Ryan parcels is the Rosebute Property, located due north of Kinross’ Golden Saddle where soils and geophysics have made them drill-ready this July. The second is the Dan property, again tied on to the Kinross J.P. Ross property. Taku has begun an aggressive exploration program relying on Shawn Ryan’s methodology and guided by state-of-the-art airborne survey, soil sampling, mechanical trenching and drilling techniques.
Kinross also has a TAG Gold-Silver Project near Atlin in northern B.C. This project follows a 6.2 km. gold-bearing fault that has yielded gold and silver in 67 holes drilled to date. In 2008, trenching work revealed a new discovery with values of up to 7.8 grams per ton gold (g/t Au.) in an area underlain by a quartz diorite intrusion. This suggests the potential for a large-tonnage open-pit deposit. This is an advanced project that could benefit from a climate that is suitable for year-round drilling, as well as a fully winterized camp and convenient barge access for equipment and supplies.
TGR: Anyone else you like?
MB: Also high on my list is the Ballarat Property of Hinterland Metals Inc. (TSX.V:HMI; OTCPK:HNLMF), which will ultimately reside in Stakeholder Gold Corp. Stakeholder is a Hinterland subsidiary that is a spinout holding of Hinterland’s Yukon properties in a beautifully structured company with only 20 million shares outstanding. Ballarat is located between Kaminak and Kinross and is also drill-ready for July.
TGR: What about other jurisdictions?
MB: Talk to me in mid-August. Then we can look at politically friendly areas like the provinces of Ontario and particularly, Quebec, which is the best mining jurisdiction on the planet. Within those provinces, our favorite exploration company remains Explor Resources Inc. (TSX.V:EXS). We maintain that, over time, Explor’s Timmins Porcupine West property, adjacent to Lakeshore Gold’s Thunder Creek discovery of 2009, will prove to be one of the most significant gold discoveries in the Timmins West camp. Explor is close to unlocking the secrets of what could be an “elephant-type” discovery modeled around the Hollinger-McIntyre-Conorarium Model, which is a 30 Moz. model. An elephant in the junior exploration game is an ore body that takes on, just like it sounds—elephant status, something huge.
TGR: Since you like Explor so much, can you elaborate a little more on its prospects?
MB: First let me say in the interest of full disclosure that I am a shareholder and our firm and I have been corporate finance and investment banking representatives for this company since May 2007. Explor is in the heart of the Abitibi Greenstone belt, which is a geological environment stretching from north of Duluth, Minnesota, across the top of Ontario and into northern Quebec. Over the last 120 years, the Abitibi Greenstone Belt has produced 180 Moz. of gold and 450 Mts. of copper-zinc ore.
I’m very impressed with Explor’s CEO and president, Chris Dupont, who is a seasoned ex-Inco, ex-Noranda mining engineer born in the heart of the Abitibi. He knows the area very well. The land package that Explor has put together is the biggest quality package of any junior I’ve ever seen and it is largely within the Abitibi Greenstone Belt.
As I mentioned, the one that is the most exciting in the gold arena right now is an acquisition they made in 2009 in the Timmins Porcupine, west of the Mattagomi River in Timmins, Ontario. Over the last 100 years, 70 Moz. of gold have been produced out of Timmins.
On June 25, 2009, in an area west of Timmins, a junior called Lake Shore Gold Corp. (TSX:LSG) made a discovery at 83m of 12 ¾g at an elevation of 865m of depth. This was the first of its kind west of the Mattagami. In fact, it was one of the best drill holes in Canadian gold mining and exploration history. Explor has a 1,900-hectare parcel of ground called The Timmins Porcupine West Gold Property, which has had around $25M of shallow exploration work completed over the years. Explor is executing a deep exploration program following the Hollinger-McIntyre model, which is significant because those two mines (located about 10 km. to the east) produced over 30 Moz. and, like Explor’s land, were associated with a major porphyry unit.
The second major package is the first serious land package assembled in over 40 years, located next to the world’s largest and richest volcanogenic massive sulfide deposit, Xstrata PLC’s (LSE:XTA) Kidd Creek Mine. It was a 140 Mts. copper-zinc-lead-silver deposit that would have an in situ metal value of over $70 billion at today’s metal prices. The most recent addition to that assemblage is a four-claim block located 600m from the Kidd open pit.
The third property, called the East Bay property, is located in the Duparquet region of Quebec, and is tied onto the Clifton Star-Osisko joint venture. When Clifton Star Resources Inc. (TSX.V:CFO) announced a joint venture with Osisko Mining Corp. (TSX:OSK) on November 3, 2009, their stock was trading around $2.35/share. Within three months of that joint venture announcement, the stock traded as high as $8.25/share. They have a low-grade, big-tonnage, big-ounce deposit in that area and Explor has the biggest land package surrounding that deposit.
TGR: What final thoughts do you have for our readers?
MB: As I have stated numerous times since gold moved beyond $300/oz. some 10 years ago, never underestimate the replacement power of stocks within an inflationary spiral. Today, policymakers are conflicted by rising prices everywhere in the cost of living, except for the area where it’s causing the greatest pain—housing. Politicians in the U.S. and abroad are empowering their central banks and treasury departments to reflate in order to liquefy the system, but the quantitative easing (QE) exercises are reflating everything except housing. If they now tighten, housing will continue to be a deflationary nightmare to a great many American families. In my view, they must turn housing around in order to save the American middle and working classes. I believe that there will be a QE III and QE IV and as many QEs as required until we see the Case-Schiller Index begin to turn. Until that happens, the conditions for rising gold and silver prices will put a serious bid into the TSX Venture Exchange until well into 2012. Unless we see citizens in the U.S. and Europe coming after the policymakers with pitchforks and torches, currencies will continue to rot, commodities will advance and the TSX Venture Exchange will continue to forge ahead to my longer-term target of between 4,000 and 5,000.
TGR: Thank you for taking the time to give us your current insights and ideas.
MB: Thanks for the opportunity.
Michael Ballanger completed his undergraduate studies at Saint Louis University, where he earned a BSc in Finance and a BA in marketing. He joined the investment industry in 1977 with McLeod Young Weir, Ltd., and currently serves as an investment advisor at Union Securities, Ltd. His substantial background in corporate financing is further informed by his 30 years of experience as a junior mining and exploration specialist.
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