Gold: Plus Ca Change, Plus Ca Reste La Même Chose
(The more things change, the more they stay the same)
John Ing
A good part of the population voted for change
but not less than a month into the new
administration's term, change is nowhere in
evidence. President Bush's Plan A involved the
purchase of Wall Street's toxic assets but then
Henry Paulson switched to Plan B by buying
stakes in the banks themselves. President
Obama's Plan C devised two plans, a $2 trillion
bank rescue plan which sets up a government
controlled "bad" bank and yet another
economic stimulus plan. President Obama's
much anticipated package was a mixed bag of
plans from support for dodgy assets to tax
breaks to the de facto nationalization of Wall
Street. Creditors and even shareholders will be
protected at the expense of the taxpayer - how
inclusive indeed. But still nothing seems to work
as America stumbles from one rescue to the
next. Debt on debt won't work.
Yet despite promises of change, Mr. Obama
appears to be pursuing the identical tax cuts and
deficit spending policies of his predecessor.
Unfortunately the President all but repeats
Bush's Keynesian approach of borrowing and
spending the country's way back to prosperity,
without tackling the underlying causes of the
crisis. Even with his stimulus plan, the
Congressional Budget Office (CBO) estimates
that the deficits will amount to $2.9 trillion over
the next three years and Obama's stimulus plan
will spend only 20 cents of every dollar in fiscal
2009 (roughly $650 billion will be spent later).
The Audacity of Change
Is it really different this time? Obama's stimulus
plan is promising relief when the ink is not even
dry on the last bailout package. Sadly, this
stimulus package was more political than
economic stimulus. Obama's goal is to create or
save 3 million jobs when there are no jobs. The
US lost 2.5 million jobs last year at a pace not
seen since the forties. Adding these jobs only
replaces the ones lost and yet unemployment is
still rising. So $787 billion later, like his .predecessor, the only change to the status quo
is no change.
Much of this "seat of the pants" spending is
directed to helping the consumer by stimulating
the housing sector. The Treasury Department
also hopes to attract private money to finance
along with the Fed. Since America's GDP is
composed of more than 70 percent consumer
spending, the government's bailouts are now
being redirected to these sectors with an ever
increasing role for government. Yet the housing
sector has too much capacity and the problem
cannot be cured by a pickup in demand. Indeed,
there is a one year supply of new homes today
that are vacant. The problem is that more debt
will not revive the housing sector nor reverse
the effects of a burst bubble on Wall Street.
Besides, US cars sales are at their lowest in 40
years despite generous cash incentives.
The markets remain frozen and despite, lending
or spending almost $3 trillion over the past two
years, financial institutions are still grappling
with the same problems when the crisis seized
up over eighteen months ago. As it happened,
by running the printing presses overtime, the
government is creating a monumental monetary
overhang that raises the inflation risk
significantly and even bigger financial instability.
Are the Toxic Assets Really Assets?
Looming in the background are some $3 trillion
worth of once highly rated asset -backed
securities backed by subprime, credit cards
commercial mortgages or complex derivatives
that are festering on the banks' books that have
yet to be sold or dealt with. A key element
missing from Obama's stimulus package is how
the government plans to value the toxic (oops
legacy) assets that would be rescued under the
plan. Unfortunately neither Bush and now
Obama can't put lipstick on this pig.
The public purchase of these troubled assets
was initially proposed by Paulson but the banks'
problems became so troubled that they required
funding themselves. Trillions of their impaired
assets simply cannot be valued because for
many they are worthless today and will be
tomorrow. Besides, if written down, who will
take the loss? And, why set up a bad bank when
there are already "bad banks" out there such as
Bank of America and Citigroup for those
investors willing to buy them. In buying the toxic
assets, the Treasury is pouring good money after
bad money of which their value is unknowable,
unsecured and in many cases, outright fictitious.
Not only does the valuation issue need to be
resolved, but in previous clean -ups such as the
Swedish model or the Resolution Trust setup in
the eighties to fix the S&Ls, the assets were first
acquired by government and then split up into a
"good" or "bad" bank with the bad bank holding
the insolvent assets. This time it is different. The
centerpiece of Obama's "fuzzy" proposal
partners with the private sector and leverages
the Fed's balance sheet by 10 to 1 or a
whopping $1 trillion which is insufficient to
finance the growing loan losses anticipated in
the $2 trillion or so range. Left unclear is what
would happen to the thinly capitalized bank's
capital after they transferred the troubled assets
and wrotedown the value of any loans which
would further erode their precious capital. Or, if
the assets were provided with overgenerous
valuations or guarantees, who pays the price?
They should accept the reality that the banks are
insolvent and not too big to fail. Let the banks go
and clean -up the remaining banks. Central banks
have become central planners.
Addiction to Debt
And where will the Treasury find all those dollars
in order to pay for the world's first trillion
deficit? There is only one answer. The Treasury
has been printing money and flooding the
banking system with cash without sterilizing the
monetary consequences. Since August, the Fed
has tripled its balance sheet by taking on the
toxic assets of Wall Street and acquiring stakes
in banks. And despite spending trillions to
restore consumer confidence, the economy is
still sinking. Moreover, government revenues
have slipped as the private sector copes with the
meltdown so the budgetary deficit itself will be
even bigger. Easy money is not the panacea.
America's dream was built on cheap credit and
the US is going even deeper into debt to dig
itself out of its economic hole. Multi -year trillion
dollar deficits and dollar debasement will not
solve this crisis since the cure for the credit bust
is not more credit.
The root of the current crisis lies in excessive
debt, cheap money and the monetary excess
that led to a boom and the inevitable bust.
Following the Second World War, public debt
stood at 100 percent of GDP to finance the
rebuilding of America. America's public debt to
GDP ratio could approach 60 percent next year
up from 38 percent today. However, including
housing -related private debt, the ratio of private
and public debt to gross domestic product was a
whopping 358 percent in the third quarter,
surpassing the peak in 1933.
To finance this growing deficit the US Treasury
must issue record debt. Already yields on 10
year Treasuries rose to almost 3 percent up from
just over 2 percent at yearend. The rise in yields
has pushed 30 year mortgages up, causing the
Fed to consider capping rates by purchasing
debt as they did in the Great Depression.
America's Ponzi Scheme
Today's bailouts replaces private consumption
with government consumption and Americans
still have not figured out who is to pay for big
brother's largesse.
Governments have unlimited powers of money
creation. The Treasury issues bonds and the Fed
purchases them (quantitative easing) by putting
money in the system by explicitly printing
money. The funds then go to pay for bailouts,
SUVs and even Obama's inauguration.
While the US is still a creditworthy borrower,
foreigners no longer appear to have the capacity
nor desire to allow the Americans to continue to
subsidize their consumption with borrowed
money in a now capital starved global economy.
And China, with more than $1 trillion of
American debt is spending its cash hoard instead
domestically to revive its own economy. And by
calling China a "currency manipulator", newly
minted Treasury Secretary Geithner masks his
problems. Despite a 20 percent revaluation of
the yuan since 2005, the US trade deficit has
worsened each year. America needs less
rhetoric from its policymakers and more dollars.
Creditor nations like China and Japan who
already own trillions of dollars of US
denominated debt, will lose confidence in
America's ability to repay its debt and its
addiction to debt. With only five percent of the
world's population, America accounts for some
25 percent of the world's debt.
Billions were lost in the collapse of Bernie
Madoff's biggest Ponzi scheme. The pyramid
scheme collapsed like others under its own
weight of greed. But the government itself is
running a bigger Ponzi scheme than Madoff. To
finance its debts, the Federal Reserve has
resorted to monetizing the debt in a Ponzi -like
scheme.
To keep their homes, millions of ordinary
taxpayers borrowed from institutions solely for
the purpose of repaying another without the
remotest expectation to repay the loan they
arranged. Similarly, the United States is
borrowing billions and now trillions from
creditor nations when there is also no hope of
repaying the loans until the next round of
funding. Now with the bursting of the greatest
credit bubble in history, the government is
attempting to reflate this bubble, by
"quantitative easing" in which the Fed increases
its balance sheet by printing money. And since
the government has little hope of paying off the
debt, the printing of money itself devalues that
debt but risks higher inflation, which ironically
reduces the debt as if repaid by another source.
The widening gap between the drop off in future
revenues and its growing expenses in the wake
of the global meltdown dictates as in all Ponzi
schemes, the government must get new
investors to buy out current obligations. In
getting Peter to pay Paul, they are also hoping
that the old investors get paid from the new
investors so that they will not be the bag
holders. The last one holding the paper
eventually loses. As in a game of musical chairs,
countries like China and Japan were the early
investors and are banking on the government to
create new investors. Bernie Madoff's Ponzi
scheme failed in a widely publicized crash, but
the failure of Wall Street exposed an even bigger
failed Ponzi scheme today with its failed CDOs,
subprime mortgages, and soon to be defaulted
credit default swaps. Foreign central banks
were stung in the last go around and the
American taxpayer will be stung from this go
around as those IOUs come home to roost. After
all, who is going to lend to a bankrupt county
that is using Ponzi -like schemes to finance its
consumption?
Who Is Lord Keynes?
There is much debate about using public funds
to plug a capital hole too big to fill in any single
way with public or private funding. Mainstream
economists continue to push for a prescription
of Keynesian -inspired spending in the belief that
throwing good money after bad will somehow
reverse the downward spiral. Amazingly, most
money managers today do not even know about
Lord John Keynes. Keynes was a British
economist whose ideas and theories enjoyed a
following thirty years ago. Old -fashioned
Keynesian economic theories are enjoying a
revival as justification for the recent bout of
public spending and tax cuts. In Keynes' 1936
book, "General Theory of Employment, Interest
And Money", he argued it was better for
government to use fiscal policy to stimulate
economies suffering from a lack of demand.
Keynes advocated regulating the economy
through investment, not consumption by using
low rates of interest and cheap money.
In only a few weeks of his inauguration, the
Obama administration unveiled the greatest
increase in government spending in history. It is
our belief that government spending whether
for reduced taxes, pork barrel spending or
infrastructure spending is still government
spending. Today having exhausted monetary
policy measures, the government has revived
Keynesian economics to justify priming the
pump. The Fed has even resorted to using
unorthodox tools to stimulate the economy and
is hinting of more. Many forget that it was
Keynesian economics and the reckless spending
spree that led to runaway inflation and double
digit interest rates in the seventies. Ironically, it
was Paul Volcker the now Chair of Obama's
Economic Recovery Advisory Board that had to
deal with the consequences of Keynesian
economics by sending rates to double -digit
levels to conquer inflation in the eighties.
Modern Day Underworld
Three decades ago, the banks provided $3 out of
every $4 of credit worldwide. The debt to capital
leverage then was a robust 8:1. Today, the share
of the big banks has shrunk to only $1 out of $4
of credit world -wide and the leverage ratio is a
more robust 20:1. Securitization filled this
vacuum and the private equity and leveraged
hedge funds provided more loans to the credit
markets than the banks. The combination of
computing and mathematics created fancy
structured products like collateralized debt
obligations (CDOs) or credit default swaps (CDS)
which replaced bonds and equities. These
"made in Wall Street" securities allowed
investors to gamble on prices or defaults and
leverage grew exponentially, outpacing
economic activity. There were even CDS
securities that insured against the default of
CDOs. Mortgages were "sliced and diced" into
securities, backed by paper and resold to
investors around the world. Rating agencies
gave their seal of approval and these funny
money derivatives exploded into such size, that
Warren Buffett called them, "financial weapons
of mass destruction".
A largely unregulated "shadow banking system"
made up of money markets, hedge funds,
financial conglomerates and private equity funds
came into existence. This modern underworld
evolved into a mammoth leveraged over -the -
counter (OTC) system and provide the credit
that forever changed the banking and credit
market scene and is the source of our problem
today. Because today, there is no real value for
many of these products nor is there any idea of
their attendant risks and what is actually left are
trillions of illiquid, leveraged and thus toxic
paper - a legacy indeed for the next generation.
As a consequence, the trillions of bailouts have
had little effect because this modern day
financial system was rooted in debt.
Government funds have largely been directed to
the big banks rather than this much bigger
underworld of securitized products and
unregulated players. Not wanting to miss the
rewards of this alternate banking system, the
banks created conduits and special entities to
create and trade these derivatives. Ironically, it
was those vehicles that sank America's banking
system. The disappearance of many of the
participants has left a large hole in America's
financial system hurting liquidity which cannot
be plugged by just a few trillion dollars.
Be Careful What You Wish For
Shareholders were at one time happy when
managements' interests were aligned with their
own but soon discovered that the same group
gave themselves princely bonuses and stock
options, turning shareholders into bag holders.
Indeed in 2007, bonuses on Wall Street
exceeded the bailouts last year. Bankers became
promoters of the new and improved structured
products based on flawed arithmetic formulas
that spawned ever newer derivatives, the
lifeblood of the shadow banking system. With
the implosion of the bubble, Wall Street's icons
have disappeared. But now, the survivors are
lining up at the public trough and just don't
seem to get that by accepting taxpayer monies,
there are strings attached and they must adhere
to conditions, new codes, morals and even
salary caps. And one by one, they must endure a
public flaying over their role. The buccaneers
have been hoisted on their own petards or in
one case, commode.
What To Do
The non -partisan Congressional Budget Office
(CBO) projected a record deficit of a $1.2 trillion
this year, even before the cost of Obama's
nearly $787 billion package and of course
entitlements. Bailouts today are only down
payments. So what to do?
To get out the deep economic hole, America
needs to rid itself of its spendthrift ways,
encourage investment, thrift and savings.
America must reduce its dependency on cheap
energy and tackle global warming. Central banks
need to try other ways than the age -old familiar
tools that led to bubbles and inflation.
Governments, for example, could reduce or
eliminate the capital gains tax which would
encourage sustainable investment. And to pay
for the loss of taxes, reduce deficit spending.
Where to start? Start by reducing America's
dependency on expensive energy that allows
America's competitors and enemies to
accumulate dollars that are often used against
America's interests. Start by killing subsidies,
equalization payments and other pork barrel
spending. Start by allowing institutions to fail.
What Not To Do
In 1933, the unemployment rate was 25 percent
and in January of that year the credit system
collapsed as economic output fell even more
steeply. Investors are clinging to the historic
parallel of Mr. Obama with the election of FDR.
Common in both times was the need to restore
confidence. Italy and Japan then had modest
deficits, but a move to competitive devaluation
gave each a trade advantage, which brought the
introduction of the much reviled Smoot -Hawley
bill and trade barriers. Today, Mr. Obama's
stimulus package has similarly stoked the
embers of protectionism this time with a "Buy
America" clause.
The US has a current account deficit of almost 8
percent of GDP, but its problem is not of
exporting so much but that they import too
much. In 1930 the US had a large manufacturing
base but today the economy is largely service
based and even with the decline in the dollar,
exports will not reduce the deficit that much. As
a consequence, the erection of protectionist -
type barriers is ineffective and will only
antagonize America's creditors. Indeed, the
threat of a loss of the United States' coveted
AAA rating like Spain or Iceland is looming since
all face the same predicament, of a downward
spiralling over -leveraged financial system.
The Need For A New Currency
With the shift to Keynesian deficit financing,
politicians are following the path of least
resistance, fiat currency debasement. The dollar
is the world's reserve currency backed by
America's balance sheet which is now stretched
from Keynesian -style bailouts. But the
purchasing power of the dollar is collapsing as
trillions of dollars are created every few months.
America's problems began when President
Nixon went off the gold standard in August 15,
1971. No longer backed by gold, the greenback
was instead backed by the government's
balance sheet. In the eighties, the dollar sank
amid a heavy bout of deficit spending and the
subsequent spike in inflation required an
expensive devaluation. This time, it is not
inflation that is undermining the dollar, but the
growth in debt which will lead to another
currency devaluation, driving more assets out of
dollars. The bottom line is that without the
discipline of gold, the dollar is being devalued by
first a series of burst asset bubbles and now a
debt bubble. Furthermore, by guaranteeing
trillions of dollars of private indebtedness, more
money is being printed to finance even bigger
fiscal deficits. And of course, in the process of
deleveraging the private sector, the government
has transferred more liabilities onto its own
books. What we are really seeing is a transfer of
private debt to public debt and that too has
limits.
New Economic Order?
Without a reserve currency, the global financial
system is dysfunctional. Trust itself has fallen by
the wayside without which there is no money,
exchange rates and capital flows. What is
needed also is a revamp of our institutions such
as the International Monetary Fund (IMF) and
World Bank to give recognition to rising powers
such as China allowing them to play a bigger role
in the new economic order. The Americans must
recognize that their trillion dollar deficits must
be financed which cannot be sustained by
sucking up the savings from other global
markets.
Although China has the world's largest reserves
that country has only 3.7 percent of the IMF
quotas or "voting rights" and fast growing India
has 1.9 percent. Meanwhile the US has 17.1
percent of the IMF's quotas. There can be no
restructuring unless the creditors are allowed a
seat at the table. Since the IMF has inadequate
resources to help out troubled governments, the
best start will be to expand the quotas to many
of the emerging countries particularly those
with large reserves. Also, since China's trillion
dollar cash hoard is largely made up of US
Treasuries, the country could protect its reserve
position by buying gold with some of its US
dollars. Gold is denominated in dollars and such
purchases would protect China against a
declining dollar.
Gold Is an Antidote to Our Problem
Today, the public is worried. The World Gold
Council reported that investment demand for
physical gold increased 25 percent in the fourth
quarter last year. If the current trend continues,
inflation is a certainty with positive implications
for hard assets like commodities and negative
implications for the dollar.
Gold is a good thing to have. The modern
financial system is bust. Financial alchemy is
past. The shadow banking system is in need of
unwinding. The age of leverage is done.
We believe Obama will be good for gold, but bad
for the dollar as he inflates the cost of debt
away.
Obama's policy prescription is to print our way
out of the financial hole which will lead to
currency debasement. Inflation is next. Inflation
allows the government debt to be repaid, in
devalued dollars causing a massive transfer of
wealth from savers to borrowers. Inflation of
credit and then prices allows Obama to
repudiate the mountain of debt with devalued
dollars
What remains is a need for a resurrection of
trust and honesty. Needed is a light on the
shadow banking system with a deleveraging
process and time for the system to absorb the as
yet unquantifiable losses to come. Needed is
transparency and Wall Street to become a
vehicle for capital building not destruction.
Needed is an emphasis on capital preservation
instead of short term speculation. Needed is the
bankruptcy of the "too big to fail" entities.
Part of the solution for the current crisis is to
remove the potential cause of future crises - the
build -up of debt. Paper money is done. Needed
is a new currency of trust.
We continue to believe gold is the antidote to
our problems. There are too many dollars being
printed and devaluing debt significantly raises
the inflation risks. Inflation is the product of
excess money creation. We believe the rising
deficits must be financed and US creditors will
no longer accept devalued dollars in exchange
for their currency or inflation. Gold will continue
to rise in value as long as the United States
keeps printing more money than the economy
can use.
Gold Is the New Currency
Gold is thus the new currency. Gold's rise is
inevitable. As such, we also suggest the
introduction of a basket of currencies with gold
as an anchor. Moreover, the usage of gold today
as backing for an asset backed security like the
International Monetary Fund Special Drawing
Rights (SDR) is already in existence. The IMF, the
third largest official holder of gold on behalf of
its member countries is also in need of funding.
Created in 1969, SDRs are international assets
whose value is tied to a basket of widely traded
foreign currencies. The International Monetary
Fund can issue SDRs to member countries or
increase member profits which would
supplement reserves and provide needed
liquidity. The IMF proposed to sell 403 tonnes of
gold in 2007 to fund itself but needed is
congressional approval which is unlikely amid
today's climate. More likely we believe is the
growing usage of gold.
We suggest the creation of a new asset -backed
security, but this time backed by a real asset,
gold. Good money will always drive out bad
money. The United States is the world's largest
holder of gold at 261 million ounces or 8,133
tonnes representing 77.2 percent of their
reserves. The Fed could issue gold backed
debentures, using its holdings as backing which
would both create needed liquidity and trust in
its already weakened financial system.
Alternatively we could modify and expand the
usage of SDRs. The bottom line in that gold will
become the new currency.
Gold is within a few percent of its all time high
and despite the fall in jewellery demand,
physical and investment demand has picked up.
Today, the gold exchange traded funds (ETFs)
are now among the top ten holders of gold in
the world. Meanwhile the supplies of gold are
declining as mine costs continue to rise and
central banks themselves have opted for gold's
safe haven characteristics for preserving worth.
When will the Chinese decide to buy gold? It is
only a matter of time, simply because they are
not going to keep on buying deflated dollars.
Gold is a finite currency, its value against the
dollar must rise. After all it has already hit
record highs in sterling, yen and euros. Keynes
once called gold "a barbarous relic". Gold is a
barometer of investor anxiety and today there is
much. Gold will hit $2,000 an ounce this year.
Again Keynes will be shown to be wrong.
Gold Recommendations
Gold stocks finally revived led by the senior
producers like Barrick whose market cap makes
it the largest company on the TSX today. Gold
stocks still lag bullion but are enjoying a
resurgence as investors seek safe havens. Since
the October Lehman collapse last year, the
Toronto gold index has actually returned more
than 100 percent. During the same period,
bullion has risen 30 percent demonstrating
shares' superior leverage to the gold price. We
continue to recommend Barrick as the go to
institutional favourite, we believe that with a
new CEO, Barrick will continue its acquisition
ways, since it is cheaper to buy ounces on Bay
Street than to explore. We also like the growth
midcap producers like Agnico Eagle who will
triple its production as well as more junior
Eldorado for its strong balance sheet and
growth profile. Since there are so few mega
ounces deposits left to be developed we also
like Detour Gold and silver players MAG Silver
and more junior Excellon. As for the junior
exploration stocks which have been largely
neglected and pounded by tax loss selling, there
are opportunities as this group will likely enjoy a
revival around the March PDAC when
exploration results are released. Producers such
as Aurizon and Detour Gold are expected to
attract attraction and will likely be involved in
M&A activity.
Mining is one of the oldest sectors in Canada
and there have been few big deposits found
recently. The mining industry is still an
important sector of the economy with almost
400,000 workers. Toronto has developed into
the mining capital of the world and despite the
last Canadian budget, capital will still be directed
to develop new mines and extend the reserve
life of existing mines despite a round of fourth
quarter writedowns and serial share issuances.
Agnico -Eagle Mines Ltd.
Agnico has a combination of a strong balance
sheet and a rising production profiles as the
Company anticipates a quadrupling of
production over the next few years. Unlike
others, the Company has enviable growth profile
in terms of reserve growth and production.
Operating in politically stable and mining
friendly areas, Agnico has a flush balance sheet
and is a low cost producer. Agnico is fully
financed to complete its development pipeline.
Agnico will produce 590,000 ounces this year
due to the commissioning of the Goldex in
Quebec and the Kittila mine in Finland. Lapa and
Pinos Altos in Mexico will be brought on stream
in the second half of this year. Of interest is that
these four mines alone will produce over
900,000 ounces compared with Agnico's
300,000 produced in 2008. And while zinc has
been beaten up with other base metal prices,
Agnico's gold leverage will pick up with the Lapa
production. As such we continue to recommend
Agnico Eagle for its growth profile.
Aurizon Mines Ltd.
Gold production from Aurizon's 100 percent
Casa Berardi mine totalled 159,000 ounces.
Exploration continues and the Company will
spend $13 million to boost reserves at Casa
Berardi as well for infrastructure and equipment
improvements. Noteworthy, however is that the
company continues to explore the huge Joanna
property, where work is continuing and the
company has an attractive Kipawa uranium
signature, which it is exploring. We continue to
recommend Aurizon for the its low cost
production base and large acreage position in
the Abitibi region of northwest Quebec.
Barrick Gold Corp.
Barrick has a new president, Aaron Regent at
the helm that is expected to maintain Barrick's
acquisitive ways. Barrick operates 27 mines and
will produce 7.4 million ounces of gold. Barrick
is also bringing on the huge Cortez Hills project
in Nevada and the billion dollar plus Pueblo
Viejo project in the Dominican Republic which
will add almost 1.9 million ounces of gold to be
produced in the next four years. But, while its
stellar balance sheet has grown, the ounces of
annual production have been flat over the last
year or so. Consequently, we believe that with
cash reserves totalling $1.4 billion and debt less
than 15 percent of capital, Barrick is well
positioned to take on yet another acquisition.
Barrick has more than 138 million ounces of
reserves which provides an attractive base.
However, Barrick must still deal with 9 million
ounces of Pascua Lama hedges.
Centerra Gold Inc.
Centerra produced almost 740,000 ounces at a
total cash cost of $483 an ounce. This year
Centerra expects a more normalized production
at 760,000 at a cash cost of $485 an ounce due
to a pickup in production from Kumtor.
Centerra is cheap because of the uncertainty
over the Kumtor ownership agreement with the
Kyrgyz Republic government. The political
dispute has resulted in Centerra's shares lagging
behind in both reserve growth which has about
5.8 million ounces of contained gold and
performance. Nonetheless, we continue to
recommend Centerra for its low valuation and
the expectation that it will resolve its issues with
the Kyrgyz Republic. The company continues to
hold discussions with the Kyrgyz Republic. Also
Centerra has the ultimate weapon of
international arbitration. However, the Kyrgyz
government appears supportive of the company
which is the country's largest employer in the
government. Centerra has a cash position of a
quarter of a billion dollars and generates easily
over $100 million of free cash flow. Centerra is
the only company trading at five times earnings.
And thus, we continue to recommend the
company.
Detour Gold Corporation
We also continue to recommend Detour Gold
for its 13 million plus ounces located in northern
Ontario in the backyard of most of the Canadian
majors. Detour completed an ambitious two
phased drilling program and results are
expected shortly plus a prefeasibility study
which is expected in April. Detour also
announced to acquire PDX Resources in an all
stock deal which paves the way for a takeover
since the acquisition simplifies Detour's
corporate structure. This property was a former
gold mine operated by Placer Dome and Detour
has been drilling to build up a multi -ounce near
surface gold reserve which is amenable to open
pit mining. Buy for the takeover potential.
IAMGOLD Corp.
IAMGOLD has finally struck a creative deal
through the acquisition of Orezone Resources
for a value of $139 million of paper. The huge
four million ounce Essakane gold project located
in Burkina Faso is one of West Africa's largest
undeveloped gold reserves but Orezone ran out
of funds. The project should produce over
300,000 ounces per year, at a $400 cash cost.
Production is expected in late 2010, early 2011.
The Essakane project is need of $350 million and
IAMGOLD's balance sheet will enable the
completion of this attractive project. IAMGOLD's
problem was that its main mines were in a
harvest mode and growth could not be seen.
The acquisition of Orezone partially corrects this
and we like the deal. IAM Gold produced almost
1 million ounces last year. With the closure of
the Sleeping Giant and the Doyon mines in
Quebec, the company will produce 100,000
ounces less to 880,000 odd ounces, reinforcing
the need of Orezone's resources.
Mag Silver Corp
MAG Silver is resisting the "take -under" bid from
its joint venture partner, Fresnillo PLC, the
largest silver producer in Mexico. MAG has
sought to block Fresnillo's bid because it
undervalues MAG's assets, in particular, the
Juanicipio joint venture in Zacatacas, Mexico.
MAG shareholders have also resisted the bid
and we expect Fresnillo to sweeten the bid, if it
wants to takeover its joint venture partner. The
Juanicipo joint venture has over 100 million
ounces to MAG's credit (44%) and Fresnillo
(56%) needs its partner's shares to consolidate
the area. MAG Silver has more than 11 other
attractive properties including Cinco de Mayo in
northern Chihuahua which is a potential large
carbonate replacement silver/lead/zinc system.
We believe that ultimately that MAG will spin
out its other exploration properties, leaving
Juanicipio to be monetized. Consequently we
believe that the shares are attractive at current
levels and should be bought for its attractive
silver leverage and the expectation of an
improved bid.
John R. Ing
Maison Placements Canada
130 Adelaide St. West - Suite 906
Toronto, Ont. M5H 3P5
(416) 947-6040
jing@maisonplacements.com
19 December 2008
The information contained herein has been obtained from sources which we believe reliable but we cannot guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell for the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that Maison Placements Canada Inc. is to be under no responsibility whatsoever in respect thereof. Directors, shareholders or employees of this company may be beneficial owners of the securities referred to herein.
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