ALLAN BARRY REPORT - CANDENTE RESOURCESALLAN BARRY REPORT ON PRECIOUS AND BASE METALS EXPLORATION
15th EDITION
November 25, 2007
Welcome to the 15th edition of our report on Precious and Base Metals Exploration. The month of August this year was challenging for stocks worldwide. During the early part of the summer, prices of precious metals, many base metals and mining stocks were solid. Then August rolled around and there was a significant sell-off of stocks that hit all markets throughout the world. Metals related stocks were also hard hit. In September, things started to improve for stocks in general when the Federal Reserve lowered interest rates. The lowering of interest rates added weakness to an already poor performing American dollar and as metals are quoted in dollars this caused a strong move in metals prices. Some metals moved quite significantly but the reaction in the stocks of mining related companies hasn’t kicked in to the same degree although they are primed to play catch up in the near term.
This change of direction on interest rates by the Federal Reserve added pressure to the already weakened American dollar that looks to continue weakening. The dollar is just like a commodity in that price is governed by supply and demand. Supply has been growing rapidly and the oversupply of American dollars has been ongoing for a long time. At the end of the day there is softening demand into a market of over supply and this doesn’t bode well for the dollar. Another recent rate lowering has only added fuel to the fire of the weakening dollar that has little chance to rally in the near term.
A drop in the dollar usually results in a corresponding upward move in the prices of commodities because they are quoted in dollars. This is quite noticeable in the price of gold; as the dollar has been softening, the price of gold has been increasing.
Gold started the month of September 2007 at around $672.00 USD and recently traded at well over $800.00. An explosive move like this would usually cause a significant upswing in the price of gold mining stocks but they were tame compared to the move in the price of gold. If you look at the stock prices of companies in the industry, from the major mining to the junior exploration companies, not a lot are making new 52 weak highs. Mining stocks have a lot of catching up to do and that is highly likely to happen in the near term.
Gold is important to watch because it is a barometer for metals prices in general. Obviously, all metals don’t move entirely together but they do follow a similar trend and gold is a strong indicator of that trend. The recent move in the price of gold wasn’t the only metal that performed well. Copper has been solid and we follow this metal closely because it is a very important indicator of global economic growth. When economies are growing they use a great deal of copper and demand for copper worldwide is a strong confirmation that the global economy is still growing quite impressively. Price movements in gold are telling us that sentiment toward metals in general is bullish and the demand for copper is a strong argument that global economic growth is strong.
Metals prices really started on their bullish trend in 2001 and the last few years have been quite impressive; this has a lot more to do with supply and demand than moves in the price of the American dollar. Supply and demand are the most accurate indicators to predict the long term trend in prices but moves in the dollar can play a short term role that can significantly impact prices. During the twenty year period prior to the year 2000, there was a prolonged bear market for metals. During this period there was a severe under investment in development and exploration for new mines. In the latter part of the bear market, the emerging economies of China and India started to play a growing role on demand.
When prices started to improve in 2001, more money started to flow into exploration for new mines. However, despite the improved funding, finding new mines remained as difficult as ever. Improved funding for exploration enhances the chances but finding new mines is not an easy task. Another important part of the puzzle is people. During the prolonged bear market fewer students enrolled to study geosciences and today there is a significant shortage of geologists and lab technicians. In fact, nearly every type of job in the industry needs people. Again, just because prices for metals improved doesn’t mean the industry can go back in time and add more highly trained people to the system.
As prices for metals continued to rise (because of strong demand coming from emerging economies and tame supply from current mines), the large mining companies had to do something to take advantage of the strong prices. Their efforts were basically two-fold: one - they started taking over other large major mining companies and two - they tried maximizing production from current mines. In the last year or so, takeovers have worked their way down the food chain to the middle sized mining companies. These two efforts have limitations. In order to continue the takeover method of growth there has to be companies left to take over. In the last few years the pool of available companies has shrunk. And when it comes to maximizing production at current mines, once they reach maximum capacity it becomes difficult to keep up production numbers.
As time goes on we will see two things happening: on the takeover front the acquiring companies will have to look at smaller companies, and on the production front there are recent signs that companies are having a harder time keeping their production numbers up. These two trends should be very positive for the companies we follow as more of them could become takeover targets. As these two issues play out, it should highlight the importance on exploration for new discoveries. Historically it is usually the smaller exploration companies that go out and find new mines.
The combination of the under investment for exploration and new mine development in the past, lack of people for exploration and mining, production numbers under pressure and growing demand, has to add up to higher prices for precious and base metals.
Many times in our past reports we have argued that the past has created the environment for the long-term bull market in the mining industry. Current actions confirm and in fact add to our confidence that we are still in the early stages of a bull market that will be measured in decades. In this kind of bull market quality exploration projects and teams will become more in demand. As demand for these projects and teams grow, the potential for aggressive moves in valuations will gain strength. Recent moves in the prices of several metals has left stock valuations lagging behind and we suspect valuations will be playing catch up in the coming months.
As mentioned many times in past reports we follow copper closely because it is an exceptional barometer for economic growth worldwide. When economies are growing they use a lot of copper. The trend for copper demand suggests that the global economy is growing at a healthy pace.
Of course supply plays an important role in the price of copper and the same arguments that we outlined when discussing gold also apply to copper. During much of the period that gold was in a bear market, copper was too and this led to copper falling as low as $0.60 per pound. The low price caused a serious under investment in exploration and mine development and is a major reason why supply is under pressure. And while supply is under pressure demand is very powerful. This kind of supply and demand outlook is why we are bullish for the price of copper and nothing has changed that would make us change that opinion.
Candente Resource Corp.
First featured in May 9/2006 edition, price on that date $1.10
Second feature in July 12/2006 edition, price on that date $1.06
Third feature in Oct 3/2006 edition, price on that date $0.81
Fourth feature in Jan 23/2007 edition, price on that date $1.30
Fifth feature in Apr 2/2007 edition, price on that date $1.41
Sixth feature in Sept. 09/2007 edition, price on that date $1.59
Current price $1.90
Most often when we look at a junior exploration company our goal is to find companies that make discoveries which would attract major mining companies to take them over at a premium to the prices we paid for our shares. Candente could be that kind of company but to us they have a company-making asset that could turn them into a mining company. We are shareholders of the company.
In the last few years there has been a lot of takeover activity by major mining companies that has seen a shrinking pool of large to middle sized mining companies. Middle-sized mining companies play a very important role in the mining business but as many have been taken over there is a real shortage of these middle-sized companies. The main role they play is to develop mines that aren’t quite large enough for the largest mining companies or to be acquirers of smaller exploration companies and develop their discoveries into mines. This method of growth has helped several companies grow into major mining companies.
The reality is that no mining company starts out as a major mining company – they grow into that position. Growth through acquisition of large mining companies has taken off in the last few years and this scenario has created a vacuum in the middle-sized mining company market.
This vacuum has created an opportunity for a small ambitious exploration company with a company-making asset to move into. Candente fits the bill as far as having the kind of project that could turn them into a very solid mining company and leverage that into becoming a much larger company. In addition to having that key asset they also have an aggressive management team that looks like they are prepared to take that path to unlocking value at the Canariaco project in Peru.
It is probably obvious that we are very impressed with the Canariaco project and the aggressive management team of Candente and it seems based on the company’s recent market value appreciation that others are starting to understand this as well.
Candente’s stock symbol is DNT and the shares trade on the Toronto Stock Exchange. Their website is www.candente.com. Their website contains past news releases and additional information to do your own due diligence.