More FYI --Samex InvestorsSAMEX – Los Zorros Heating Up
Eric Hommelberg,
January 26, 2004
SAMEX reported new findings (Jan 24) which continue to indicate a large Gold/Copper potential at their Los Zorros property in Chile. How important are these results ? What do they suggest ? Is SAMEX on the verge of discovery? If so, in what time frame they should live up to their expectations? Is this a good entry point from an investment point of view? This article tries to shine a light on these questions and explains why the industry is desperate for new discoveries.
SAMEX on the verge of discovery ?
Why the industry is desperate for major discoveries.
Why the industry isn’t able to respond immediately on higher Gold prices.
Why the majors are forced to go after the Juniors.
What impact a discovery could have on a Junior
SAMEX on the verge of discovery ?
The new findings reported by Rob Kell (VP Exploration SAMEX) in the latest news release continue to indicate a large Gold/Copper potential at their Los Zorros property but only time will tell if it’ll lead to a discovery or not. Please notice that only three Exploration Areas out of seven have been drill tested so far (phase I core drill program) and just two Exploration Updates have been issued. It’s still very early stage but things are gaining momentum here. With each single Exploration Update the prospects rise. Shortly we can expect an Exploration Update on Exploration Area III and soon thereafter they will start a phase II core drill program on Exploration Areas I, II and III. The SAMEX geologists are very upbeat of what they’ve found so far. They say the Los Zorros property has a strong potential for the discovery of large base and precious metal deposits. At current pace of Exploration we’ll know before year end if SAMEX is a winner or not. Exciting times indeed !
Some people argue to be on the sidelines until SAMEX reports spectacular Gold/Copper grades. Although I do respect this kind of reasoning I simply disagree. Why ? Simple, in order to enjoy spectacular gains you have to buy low and sell high. Of course investors getting in now do take the risk here of NO discovery, but what do they have to loose when buying at rock-bottom price levels ? It’s all about risk/reward. Let me give an example here. Tyler resources was trading around 20 cents CAD$ September last year. On October 28 they announced a phase II drill program on their Bahuerachi porphyry Copper/Gold project Mexico. Investors arguing to wait until solid drill results came out had to wait until January 6, 2005. Yes, the results were good but getting in wasn’t that easy since the share price of Tyler resources already appreciated by 500% to 1.20 CAD$ since September 2004. Now let me ask you, what was the risk of getting in at 20 cents ? Yes, the risk was NO discovery but still the downside risk was almost none. Investors who waited for solid drill results ended up in chasing rapidly appreciating share prices and therefore buying high ! (see also chart of Tyler in section ‘what impact a discovery could have on a Junior’
So in Tyler’s case the start of the phase II drill program would have been an excellent entry point for investors. Would the same apply for SAMEX as well ? Time will tell, guarantees in Junior investments simply do not exist, all we can do is base our investment decisions on the expectations of the company’s geologists.
SAMEX CEO Jeff Dahl is very excited :
We are thrilled with the potential that our current prospects hold. We believe a significant economic discovery may now be within our grasp. END.
It’s simple, nobody can guarantee a discovery but if you share the excitement of the SAMEX geologists then this could be a perfect entry point.
Also from a TA point of view the Juniors are a screaming BUY since the entire sector remains in a severe oversold condition. Just see the SAMEX chart below and judge yourself :
Why the industry is desperate for major discoveries.
Since 1999 only a few major world gold class deposits have been discovered. The senior producers are desperate for new major discoveries in order to replace their dwindling gold reserves. And when I say desperate I really mean desperate. Actual gold production is already declining (-5% 2004 vs 2003) while worldwide demand is on the rise (+11% 2004 vs 2003). According to Barrick’s VP Exploration Alex Davidson reserves will be depleted in 10 years at current annual production rates.
reserves will be depleted in 10 years at current annual production rates.
So the gold Industry faces a tremendous challenge. Gold reserves are running dry in coming years and not enough funding has been taken place for sufficient exploration in order to replace existing Gold reserves. It takes at least a couple of years of exploration in order to find new Gold reserves. After a discovery, it takes another 5 to 8 years to bring the property into production. So big mining companies are facing fewer Gold reserves coming years which leads to fewer ounces of Gold reserves per share.
Why the industry isn’t able to respond immediately to higher Gold prices.
Trevor Steel, partner at Baker Steel Capital Managers told delegates at a two-day Euromoney gold seminar recently :
"The way I like to think of it is that the gold industry is in overdraft. It's been relying very much on discoveries that were made many, many years ago and it is not replacing the reserves it is mining every year,"
Paul Burton, editor of World Gold said :
"But the industry needs major new finds to replenish the inventory pipeline. What we need to reinvigorate the industry is some major new finds. Such discoveries are rare.”END.
Let’s repeat the last sentence here :
“What we need to reinvigorate the industry is some major new finds. Such discoveries are rare.”
Indeed, such discoveries are rare. According to Alex Davidson (Vice President Exploration Barrick) only a very few major deposits (5+ million ounce) have been discovered since 1999.
Ah, just spend a few more dollars on Exploration you say ? Well, that won’t be of any help in the short term :
Newmont president Pierre Lassonde :
“The 20-year bear market in gold has weeded out marginal gold producers and significantly curbed exploration and production.”. "If gold was $1,000 an ounce, it still takes four to seven years to open a mine," END.
Barrick CEO Greg Wilkins : (Nov 2004) :
“The average lead time for a large discovery to go on-stream with production was around five to seven years but that seven to 10 years was probably more realistic. “. "The industry isn't going to be able to respond immediately to higher gold prices. It is going to take a long time." END.
So there it is : The industry isn't going to be able to respond immediately to higher gold prices.
Why the majors are forced to go after the Juniors.
You think shareholders will be cheering a declining Gold production in a rising Gold environment? No, of course not, so the pressure on the senior Gold producers will be huge in order to replace their dwindling Gold reserves. It's not only a matter of satisfying shareholder demand but also a matter of survival. In his Essay "Open the Checkbooks - Buy the ounces" Jim Puplava of Financial Sense Online quoted Geologist H.R. Bullis who said:
It is no longer a question of finding ounces anymore. It has become a question of survival. According to geologist H.R. Bullis, today's VLGP's are unlikely to survive at current production rates over the next decade. It is time to open the checkbooks and go get the ounces. END.
Frank Veneroso said more or less the same at the New Orleans Conference Nov last year
Frank Veneroso (New Orleans Conference, Nov 2004)
Production is depleting their reserves (major producers) and many of them cannot find new deposits to replace their production. The junior golds have deposits and they are valued cheaply by the marketplace. Because the juniors are cash constrained their deposits tend to have large growth potential. At some point the majors will move to acquire the juniors. That is what we are hoping for. But so far the majors have been restrained. When they eventually do move the juniors will be revalued upward en masse. We are ever watchful for this eventual positive development. END.
Jim Sinclair (JsMineset.com Dec 03, 2004)
As majors are forced to acquire juniors because of the need for more reserves, gold shares will be brought onto the radar screen of those major firms that have long simply ignored them. END.
It seems that the majors are waking up :
Gold Fields: Investing in juniors make sense
Ian Cockerill : “We invest in 10 juniors in the hope that one or two of them come up trumps, and the value you get off the table there will pay for the other eight that do not. But you are spreading your exploration dollars, It increases your chance of success.”
“It has been a very successful program,” Cockerill declared. He estimated that Gold Fields invested $30 million to $40 million in the junior exploration company process, converted $120 million in value, of which $40 million was harvested.” END.
And what about Anglogold ?
AngloGold CEO Bobby Godsell said: "It is the end of big picture gold consolidation; there is no compelling logic to combining anymore. The real challenge now is how to replace your ounces for the future." The race to replace ounces is about to begin. It will take the form of takeovers of small producers with long reserve lives and high quality junior mining companies with large in ground reserves that can be mined economically." END.
A few month later these thoughts were echoed by Sam Jonah, the company president :
Where will AngloGold by next ?
Sam Jonah, the company president says small gold companies will be the point of entry.
"We will look at juniors that have attractive assets in there portfolios and require our expertise and capital to move these projects forward." END.
And what about Newmont ? Are they interested in Juniors ? Well, it seems they are ! Last year they took an interest in Gabriel Resources Ltd. So what happened to its share price ? It shot up by 54% !
Newmont adds muscle to Gabriel gold find, stock up "VANCOUVER, British Columbia, Aug 30 (Reuters) - Shares in Gabriel Resources Ltd. leapt as much as 54 percent on Monday on news that the world's biggest gold producer plans to buy a stake in it -- a major credibility boost for the small Canadian miner that owns Europe's largest gold deposit. "
"At a time when the world's biggest producers are mining out reserves more quickly than they are replacing them, the project is regarded as a big and important future source of gold, and rumors have surfaced frequently that a major may buy it." END.
Barrick isn’t far behind , they opened an office in Vancouver last year in order to monitor Junior companies :
"Barrick Gold's New Office Tracks Junior Exploration Cos.”
“Barrick Gold Corp. (NYSE:ABX) has opened a Vancouver office to monitor junior exploration projects, executive vice-president Alex Davidson said at an exploration conference. Davidson said two or three employees in the office are tracking junior projects, and visiting managers of companies and their exploration sites. The local office also handles Barrick's exploration efforts around Eskay Creek, its 100%-owned gold mine in northern B.C." END.
What impact a discovery could have on a Junior
Just to remind you what could happen with a junior making a big discovery is best illustrated with the example of Arequipa Resources in 1996. Arequipa shares were trading at 1 CAD$ just before they found 7 million ounces of Gold. Within 6 month they were taken out by Barrick Gold at a share price of +30 CAD$ , see chart below :
The awareness among Gold analysts regarding such opportunities is growing. The Wall Street Journal (Dec 02, 2004) quoted John Bridges, a senior gold analyst at J.P. Morgan Chase & Co who said :
“If you are lucky enough to buy into an exploration company that makes a discovery, you can effectively buy your own auto teller machine. Some of these things are just phenomenally profitable.” END.
A discovery pays off, period ! No matter what the Gold price does, a discovery simply pays off ! A good example is Tyler resources which jumped almost 1000% over the last four months and in the face of the latest Gold correction, see chart below. Notice how things gained momentum after the start of their phase II drill program on their Bahuerachi porphyry Copper/Gold project Mexico on October 28, 2004. Even during last month were Juniors were bleeding heavily all together, Tyler resources managed to double again on excellent drill results :
Highlights :
Due to lack of Exploration during the 1997 – 2002 period (Exploration budgets were cut by 67%) major Gold producers are facing declining Gold reserves.
The Industry is not replacing the reserves it is mining every year
The industry isn't going to be able to respond immediately to higher gold prices .
Reserves will be depleted in 10 years at current annual production rates
Mine Supply already down 5% in 2004.
The industry needs some major new finds desperately. According to Alex Davidson (VP Exploration Barrick Gold) such discoveries are rare.
75% of all discoveries are made by Juniors
Majors are forced to acquire juniors because of the need for more reserves
Newmont, Barrick, AngloGold and Goldfileds already showed some interest in Juniors.
Juniors making discoveries are phenomenally profitable.
SAMEX could be very well on the verge of discovery, the new findings reported by Rob Kell (VP Exploration SAMEX) in the latest news release continue to indicate a large Gold/Copper potential at their Los Zorros property. The SAMEX geologists are very upbeat of what they’ve found so far. They say the Los Zorros property has a strong potential for the discovery of large base and precious metal deposits.
At current pace of Exploration we’ll know before year end if SAMEX is a winner or not.
Eric Hommelberg
ehommelberg@planet.nl
January 26, 2005