We were pleased with the appreciation results of our precious metal developer picks in the first quarter of 2009. While the quarter end appreciation average was about 52%, for each pick the closing price at the end of March was not the high for each company in the first quarter, and each high was above the closing price for 2008. Resource developers require effective credit or capital markets and bear a higher than average amount of risk. The absence of willingness and ability of banks to lend or invest in November and December of 2008 pushed resource developers to extreme lows regardless of their underlying assets or management’s success in creating value. This was, no doubt, exacerbated by the “January effect” or tax loss selling.

We were pleased to attend the grand opening ceremony for Minefinders Corporation’s (MFN) Dolores Mine in Chihuahua, Mexico on February 18, 2009. The ceremony marked the successful development of one of Mexico’s most important precious metal discoveries in recent history. Important dignitaries adding gravity to the occasion, and support for the project, included the Mexican Federal Minister of Mining, Maria Jimena Valverde Valdes and Chihuahua State Secretary, Sergio Granados. With Minefinders recently announcing positive cash flow on an operating basis, the ceremony in February marks the most significant milestone for both the company and the village of Dolores in the last eighty years.

Seabridge Gold, Inc. (SA) released an updated NI 43-101 resource estimate for the Mitchell Deposit at its KSM project located in northwest British Columbia. The new estimate upgraded a portion of the resource to the Measured category from the Indicated category, nearly doubling the Measured and Indicated gold and copper resource in 2009 over the 2008 resource estimate. Clearly, the resource growth at the Mitchell deposit has moved the KSM project into the ranks of the world’s largest gold-copper porphyry deposits. We believe that precious metals companies with good projects with expansion and development potential may provide an above average investment opportunity in 2009.

click to enlarge

South American Silver Corp. (SOHAF.PK) received its first NI 43-101 compliant Preliminary Economic Assessment (PEA) study on its 100% owned silver-indium Malku Khota project in Bolivia. Because the study is the first un-optimized study and includes only about 3.5 km of the project’s 15 km strike length, we believe the project has significant upside. We consider Malku Khota, with an established silver indicated resource of 145 million ounces of silver, to be one of the largest silver discoveries in the current metal cycle. The Malku Khota project also includes an indium indicated resource of 845 kg (indium is in demand for use in solar panels and flat screen televisions).

Malku Khota Project Location Map

Santa Fe Gold Corporation (SFEG) is scheduled to begin processing gold-silver ore as early as March of 2009. It has begun stockpiling ore from its Summit mine near Duncan, Arizona, for processing at its mill in nearby Lordsburg, New Mexico. We have visited the Summit mine and Lordsburg mill site three times in the last two years. While a modest operation, scheduled to process only 400 tpd, the ore is fairly high grade averaging an estimated 0.143 ounce per ton (opt) gold and 10.28 opt silver, which should provide an IRR of about 82.8% over the project's scheduled seven year mine life. While the mill had been relocated from Winston, New Mexico, we have never seen a used mill that was in such "new" condition.

The Banner Mill, Lordsburg, New Mexico

We had an opportunity to meet with Exeter Resource Corporation (XRA) at the recent Cambridge House conference in Vancouver B.C. and capture their corporate presentation. Exeter is on path to join the ranks of other mid-tier gold producers with several projects advancing to resource level in Argentina and Chile.

ExeterCorporate Presentation

We are approaching an inflection point in the economy and the metals markets favorable to precious metals and mining equities. Moving beyond 2008, investors long in mining and metals equities are no longer burdened by the combination of redemptions and tax loss selling. While producers appear less risky, we see mining and metal equities with development potential as offering the greatest leverage for appreciation in the new year.

Increasing operating costs in 2007 and declining metal prices in 2008 have increased development risk and squeezed operating margins. Turmoil in the credit and housing markets have reduced access to capital, exacerbating a lengthy decline in both precious and base metals mining equities to the lowest level in several years.

It became plain that the mining sector was on the edge of the much anticipated consolidation as suggested by comments at the 2008 Denver Gold Forum (Mining Sector Ripe for Consolidation Following Recent Corrections). The recent acquisitions announced by Kinross Gold Corporation (KGC) and IAMGOLD Corporation (IAG) provide a model for accretive transactions, a value metric for potential take-over prospects in the current market, and possibly signal the beginning of a succession of value creating business combinations. Especially with the valuation disparity in the current market between development stage companies and producing companies, the values must be compelling for potential consolidation by the producers.

Kinross, Teck Cominco, and Anglo American on Lobo-Marte

There appears to be an enhanced investment opportunity for long-term value investors in emerging producers selling near cost of investment or book value. We see the mining sector gaining in interest for value investors as they screen for companies selling at 52-week lows, below book value, and with potential to expand margins and earnings. Wholesale redemptions by investors, along with tax loss selling in both the U.S. and Canada, are creating opportunities for value investors looking to acquire companies with both real assets and the potential for increasing production.

Reduced global lending and investment, which caused a shortage of liquidity, has resulted in a deflationary environment unfavorable to commodities, including precious and base metal prices. Recent actions by governments and central banks are largely inflationary, which should lead to higher gold and silver prices as banks begin to lend and invest. A reduction in credit risk should spur a resumption of global growth, increasing demand for commodities and leading to higher base metal prices. While this cycle appears inevitable to long-term investors, this scenario may be delayed by credit markets or anti-growth policies including protectionism, higher taxes, and increased regulation.

We see the agreement between Alexco Resource Corp. (AXU) and Silver Wheaton Corp. (SLW) as one of the most important deals in 2008.  Coming on the day of the U.S. Congress vote on the bailout, the agreement validates Silver Wheaton's confidence for the potential of Alexco's Keno Hill Silver District and outlook for the price of silver.

Alexco's Keno Hill Silver District, Yukon Territory

We attended the recent Silver Summit Investor Conference in Coeur d'Alene, Idaho.  We looked forward to taking the pulse of silver enthusiasts following the spring-summer long retreat in the metal's price.  As luck would have it, with the volatility in the credit and metal markets, it turned out to be the most fortuitous time for holding the conference.  A true skeptic might suspect that the government had conspired with those organizing the conference in the timing of the event. 

Major themes at the Silver Summit included the suspicion over the integrity of major currencies, transparency of central bank actions, and reliability of reporting actual stores of precious metal inventories.  The conference was well attended.  While silver enthusiasts bought nearly all the physical silver for sale from vendors in the halls, we could not ascertain to what degree this enthusiasm extended to precious metal equities. 

The lengthy period of time required to advance a project from discovery to production might be likened to "a journey of a thousand miles commencing with a few steps."  Many of the companies discussed in our 2008 Emerging Producers: Fall Season - Special Report are trading near their 52-week low, at levels similar to that at the outset of construction, suggesting reduced risk with significant near term upside.  The potential cash flow is important to fund exploration and development of other projects or complete additional expansion of operations while minimizing shareholder dilution. 

We have seen 2008 as important for several companies in our coverage universe to re-rate upward as they complete their journey of a thousand miles, ending with a final few steps.

We recently met with Minefinders Corporation Ltd.’s (MFN) management at the Denver Gold Forum and discussed their Dolores project scheduled to move into production in October of 2008.  While Minefinders commenced mining nearly one year ago, timely commissioning and production have been delayed due to illegal blockades. Minefinders has since received written assurance by government authorities, resumed commissioning, and is soon to begin leaching and/or commencing production. Given the disruption to the mine schedule and uncertain credit markets with stable to declining metal prices, shares of Minefinders are now trading at a significant discount (pdf file) to third party economic studies.

The mood at the Denver Gold Forum was reminiscent of the week following September 11, 2001.  Both mining equities and metal prices continued their decline with much talk but little action by bullish investors.  We were reminded of the adage that “a bear market ends with the capitulation of the last bull” which may suggest we are on the cusp of one of the greatest investment opportunities in years.

We have seen several points on the calendar as catalysts for the mining sector.  One, being the Olympics in Beijing, where China demonstrated its determination to show itself as a leader on the world stage in culture, sports, and economics.  China’s impact on the future, and appetite for precious, base, and industrial metals, is now apparent to anyone with a television.  Secondly, as the summer holiday season comes to a close, the investment community is now back at work, and the seasonal period of increasing global gold demand has commenced.  Lastly, the Denver Gold Forum provided the platform to for consolidation which might draw investment funds into the sector setting off the next bull market.

Alexco Resource Corp. (AXU) has an uncommon opportunity in the metals and mining industry. The Keno Hill silver district in the Yukon has some of the highest grade silver and base metal deposits in the world. These grades should enable Alexco to put highly profitable mines into operation. Alexco is aggressively advancing the Bellekeno mine to a production decision in early 2009 (see complete research report). This will be the first mine to be opened in Keno Hill since the district was closed in 1988 during a period of low metal prices and growing environmental regulation.

In addition to its talents as an explorer and mine developer, Alexco operates an environmental business specializing in mine permitting, closure and clean-up. Alexco was successful in buying this world-class Keno Hill silver district out of bankruptcy. This unique situation afforded Alexco the dual benefit of contracting as the sole provider of environmental cleanup of the district, as well as allowing it to be held harmless of all historic environmental liability while it pursued Keno Hill's mineral resources. More precisely, Alexco has a guaranteed multi-year contract with the government for cleanup of Keno Hill (of at least $60 million), and unfettered opportunity to explore, develop and mine its silver-lead-zinc resources.

Emerging producers advancing to production have significant unrecognized value.  Uncertain credit markets have increased risk for exploration companies making it difficult for them to obtain financing and maintain momentum.  While major operators with higher visibility have enjoyed the benefits of higher metal prices, emerging junior producers should benefit from increasing market exposure as they generate cash.  Many of these companies (contained in our Special Report) include other assets not fully recognized in their current stock prices.

NovaGold Resources Inc: Moving To Full Production in 2008

We visited Minefinders Corporation’s (MFN) Dolores mine in Chihuahua, Mexico. It was an exciting opportunity and a privilege to visit such a significant project at a time when the very first ore was being placed on the leach pad. Minefinders’ CEO Mark Bailey was part of the team that discovered the Dolores deposit in 1996. In twelve years he led the development of Dolores, drilling over 1,000 holes, 200,000 meters and completing several feasibility studies. (Note: This piece includes both photos and links to video clips captured by the author.)

The Dolores project is coming into production at a time when investors have been disappointed in an industry becoming known for shelved projects, delays, and/or cost overruns. It would appear to us that Minefinders’ management is becoming more confident that reaching full commercial production is within reach. Given the significant amount of drilling and study being done to develop the reserve estimate and mine plan, we believe the project has been conceived in a manner that should allow it to move into production with the greatest opportunity for success, while minimizing the potential for negative surprises which are currently disappointing investors with other companies.

Paramount Gold and Silver Corp. (AMEX: PZG) announced signing a letter of intent to form a strategic alliance with Mexoro Minerals Ltd. (MXOM.OB). The alliance should provide shareholders of both companies an improved opportunity to realize the potential of their projects during a period of record metal prices. Paramount and Mexoro plan to pool resources to accelerate development of their projects. This arrangement should create critical mass for both companies, helping to improve economics and the potential to secure additional financing, while becoming more attractive to a potential major producer. Successful execution of the alliance may logically lead to a friendly merger of the two companies.

Alexco Resource Corp. (AMEX: AXU) recently provided an update of its activities to advance several initiatives at its Keno Hill project in the Yukon. We believe the Keno Hill district is among one of the highest grade silver and base metal districts in the world. Alexco acquired the district, which is roughly 20 miles in length and ten miles in width, for purposes of environmental remediation, but bears no environmental liability for earlier mining activities.

Keno Hill Silver District, Past Production

Paramount Gold and Silver Corp. (PZG) continues to report good results from its drill program at its San Miguel Zone of its San Miguel project near Chihuahua, Mexico (Paramount owns 70% of the San Miguel project). The initial goal of the drill program was to obtain additional evidence of near surface mineralization encountered by sampling and trenching in the vicinity of historic workings. Targeted mineralization follows a strike length of about two kilometers along a well defined contact of andesites and rhyolites. More importantly, Paramount has enjoyed good success locating deeper and higher-grade veins extending below the near surface mineralization, which it refers to as ‘Clavo 99.’