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It’s Time to Look at Companies, Not Markets

Resource markets remain extremely volatile in the face of global economic uncertainty. After a terrible beating in the first half of the year, resource company shares began to recover in August and September. A reversal of that uptrend in October leaves many companies still priced at irrationally low levels.

On a superficial analysis, the junior resource markets are merely treading water, with the TSX Venture Index barely ahead of the low point in June. A closer examination shows a very different story. Many companies are still losing share value, creating an aura of a flat or declining market. In fact, many companies with little or no cash and without tangible assets are still trading well above their fundamental values and will continue to sink.

On the other hand, a few tens of companies with strong management, good projects and which have cash are appreciating in value. We counted at least a dozen companies that we follow in Resource Opportunities which have appreciated by 50% to 200% in the past six months. Those big gains have come at a time when “the market” has been moving sideways.

While investors in general are not putting much value on the development-stage companies, larger mining companies can see the values, as evidenced by several takeover offers in recent weeks. The bid prices in those offers are well above market prices, with at least a couple of the deals priced at two-times the trading prices before the offers.

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Interestingly, many of the takeover offers are coming from companies in emerging countries: Galway is being purchased by a private Brazilian company in a $300 million cash deal; Inter-Citic is being purchased for $250 million cash by a Chinese company.

Several of the companies that we are following are well positioned for takeovers, with large advanced-stage metal deposits. While many investors and analysts cast their eyes over the traditional developed world, for mining companies as the only players in the takeover game, the reality is that many, or most, of the offers in the future will come from rapidly growing mining companies in the developing world. Those companies can see the intense need for new resources and are prepared to pay reasonable prices. Investors in the developed world, taking a myopic view of the short-term issues close at hand, are missing the global picture and are under pricing resource assets.

A few investors, those who can identify the best companies, are coming back into the markets in a big way, quietly picking away at the higher quality companies. By the time that “the market” has turned around, the high quality companies will be trading at prices well above current levels.

The past year has been extremely difficult for resource investors. Looking forward, we believe that the extremely low valuations, the recent takeover offers and the improving global economic outlook provide strong evidence for a rebound in high quality development-stage companies. In due course, “the market” will also begin to move higher. In the meantime, we continue to present high quality companies which can generate big gains in spite of the near-term market sentiment.

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Resource Opportunities
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Life Goes On

Nearly half of American voters are disappointed by the election results. A slim majority of voters are reveling in the success of their candidate. Like it or not, Barack Obama is the president for the next four years. With the House of Representatives still under Republican control, Americans can look to more brinksmanship as the nation hurtles toward the fiscal cliff.

Without compromise and cooperation from both parties, the $600 billion package of spending cuts and tax increases will kick in early in the new year. If the media is to be relied upon, the American economy will instantly hurtle over a cliff when those measures come into effect.

Investors took the dire threats seriously, with American stock markets today posting the biggest losses in a year. Ironically, investors fled to the safe haven of US government debt. Among the big losers were defense contractors and suppliers, as investors see the fiscal cliff putting an end to the easy money that has been doled out to that sector.

Whatever happens over the coming weeks, it is abundantly clear that no feasible combination of “new revenue” nor spending cuts will eliminate next year’s budget deficit, let alone begin to reduce the $16 trillion debt load and the much larger bundle of unfunded liabilities.

It is a certainty that the dollar will continue to decline in value, being the only possible way out of the financial mess. With Europe, England and Japan also in a mess, it becomes a race to the bottom for the world’s major currencies. Gold and other hard assets will continue to appreciate in price, as measured in dollars or other currencies.

Junior resource companies are not high on any investor’s list of favored investments at this moment – which makes this a good time to buy them. Once the current mood washes through the system, people will again realize that quality companies, adding value to gold and other metal deposits, represent an excellent way to protect against currency devaluation and at the same time gain the prospect of real returns.

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Looking Beyond the Moment

Europe again dominates the financial news, with concerns that Spain may be the next country to need a bailout. Spanish bond yields have surpassed the 7% threshold, which is seen as a tipping point, making it impractical for the country to raise new debt and/or roll over maturing bonds.

Fear continues to be the dominant investor mood, making the apparent safe havens of American and German debt a popular destination for global funds. Indeed, those T-Bills and Bonds are not really investments at all; with yields lower than the rates of inflation, investors are effectively paying the governments a safe-keeping fee for holding on to their money.

The massive US debt load remains sustainable as long as the mess in Europe distracts investors from the rapidly growing mountain of debt in America and people keep giving their money to the government to keep it safe.

The other top news story in the financial media is the “slowdown” in the Chinese economy. The economy, having grown by “only” 7.2% in the most recent quarter, down from 7.6%, is hardly slowing: It is continuing to grow at an astounding pace, even if it growing slightly less rapidly.

Some businesses are undoubtedly impacted by that slightly less rapid pace of growth. From the mining industry perspective, the world’s largest consumer of metals used 7.2% more metal in the recent quarter than the earlier quarter.

Metal prices are down, impacting on the profits of the metal producers in the current quarter. The longer term picture has not changed.












Even the gold price is suffering as investors turn to the short term security of short term government debt. Looking longer term, investors globally will increasingly see the value of gold, silver and other hard assets as being a secure means of long term wealth protection in the face of growing financial uncertainty.

Looking beyond this moment, one can see that metal consumption continues to grow, mines are being depleted and the mining industry will continue to develop new mines. The mining industry faces a continuing challenge to develop enough new mines to replace depleted mines, with further new mines needed to keep up with the on-going growth in demand for metals.

The exploration and development companies will continue to play a vital role in the mining industry. In spite of their enormous long term values, in this moment many companies are trading for little more than the value of their cash in the bank, getting little or no credit for deposits that will be purchased for hundreds of millions or even billions of dollars in the not-too-distant future.

Most investors will continue to shun resource stocks, especially the juniors, until there is a clear signal that the global economy is rebounding. In the meantime, knowledgeable investors are now seeking out the best of the grossly underpriced companies and accumulating them.

It is important to be extremely selective, as many companies will see their share prices continue to wilt. The most favorable companies are seeing strong investor support. After all, how much downside risk is there from cash value.

By the time that the media makes the pronouncement that it is time to buy resource companies, the higher quality companies will have rebounded, in some cases gaining by multiples from the present oversold levels.

We will continue to highlight companies with quality assets, with capable management teams and, ideally, enough cash to see them through this depressed time in the resource markets.