Bank of Montreal T.BMO

RE: My favourite gold (PM) plays...........

[TENSNE1]

An update to the last post................

Now here's a play that was flying under the radar screen but no longer and is beginning to make a charge up. Galway Resources (V.GWY). The company NOW has a hidden association with mining giant Xstrata. Well I'll let you read the synopsis and decide. For the record I have 80K shares at an average of approx. $0.11. Best of luck, Tennis.


Feb. 12, 2009
Galway Resources (GWY.V $0.10)
www.galwayresources.com
shares outstanding - 53 million
Cash Balance $4 million ($0.075/share)
Every $0.01 is only adding $1/2 million of value
This company caught my attention Feb 5th with news that contains an important (hidden) association with mining Giant Xstrata. I have explained that in detail below. In addition, and this is unrelated to Galway directly but still very important. Monday AngloGold Ashanti (AU:NYSE), Africa's largest gold miner, announced its "most significant" find in a decade in Colombia. The company is "very excited" by its 12.3 million ounce gold resource in Colombia, Chief Executive Officer Mark Cutifani said in a conference call.
The discovery will continue to drive foreign investment in Columbia by large international miners. Galway has a highly skilled technical team on the ground in Columbia and it would make sense they will now look for potential gold projects in Columbia. More important is the fact that this will drive partnerships between the large multinationals and the small guys on the ground with exploration skills and contacts.
My interest with Galway lies with their coal projects in Columbia. The importance of a deal announced this past week was recognized by a select few and the trading initially reflected that. However, the upside potential is quite dramatic and I will explain why below. If they even have "moderate" success, the potential exists to make several hundred percent in 2009. If they have significant success, the terms of the deal are such that Galway would stand to make up to $80 million ($1.50/share). A lot of "what-ifs" exist with any speculation of this nature, but the story is compelling enough to feature.

First - A Quick Snapshot
Slide presentations also exist on the Galway home page.

1) victorio project (new mexico) carries zero value - 150 to 250 million lbs of molybdenum and tungsten (215,000 total feet of drilling from 96 drill holes). positive scoping study showed project NPV of $95 million to $270 million
2) Coal in Columbia
coal export market in columbia growing significantly. latin america's largest producer - very high quality reserves with low capital and operating costs, 70 million tons exported in 2007.
Two concessions:
Galca (rail through middle)
Carboluis (San Luis coal basin)
carboluis project - potential to be over 20 million tons of high quality, surface mineable coal - 25% could be metallurgical coal. strategically located close to the caribbean highway, atlantic railway, and proposed carare railway. bituminous A with average BTU over 15,000.
Carboluis is located in the new San Luis coal basin - resource potential estimated at 300 million tons (based on 29 historical drill holes) - galway's land position represents 50% total area. centromin has 2yr old mine in the region and will be doing 600k tons per year.
Galca - potential for new world class coal basin. prodeco will fund 19 drill holes and if looks good, fund the feasability study for 60% earnin. Prodeco would pay $.80/ton up to $80 million for any coal tonnage found to earn in 100%. 77 concessions total 135,000 hectares. petroleum drilling and seismic info indicates significant coal seams in area and goal is to find coal "pushed to surface". nearby rail, river, and road access. Galca is located in southern part of Cesar State (mineral rich and excellent infrastructure)
https://www.galwayresources.com/s/Galca.asp 3) Management and technical team in columbia are extremely talented with extensive experience working for major mining and coal companies in Columbia and South America.
4) Colombia is Very Politically Stable and encouraging foreign investment
https://www.cia.gov/library/publications/the-world-factbook/geos/co.html 5) No matter how much Obama wants to reduce coal usage, other sources take years to develop (and money - which seems to be in short supply). Coal imports from the U.S. should remain stable and so will exports by Columbia to other countries.

THE HIDDEN GEM IN LAST WEEK'S NEWS
Thursday Galway announced that they entered into an exploration and joint venture agreement with Prodeco for the Galca coal project in Colombia. On the surface... no big deal. However, further digging of Prodeco uncovered the following:
- Xstrata Plc, the largest exporter of coal used by power plants is currently raising 4 Billion pounds in a London financing.
- Deutsche Bank AG and JPMorgan are underwriting the offer. N.M. Rothschild & Sons is Xstrata's adviser on the acquisition of Colombian coal assets from Glencore International AG, which Xstrata will pay for using a $5.46 billion credit facility. Xstrata will use the proceeds of the offer to pay down the facility.
- Xstrata's biggest shareholder (35%) is secretive Swiss based Glencore.
- as part of this complicated financing deal, Xstrata must buy a pair of coal mines from Glencore - a deal worth £1.39billion.
- In the end, Xstrata brings in money from its other shareholders (non Glencore ones). Glencore doesn't have to put up more money and instead it turns over two important coal mines.
- On Monday Feb 2nd, Xstrata issued the prospectus for its rights issue and for the deal with Glencore to buy the crucial mining asset, a coal operation in Colombia under the name of Prodeco.
- Many are questioning the value of the assets being shuffled around but apparently Prodeco's operating profit last year was close to 150 million pounds. They expect this to increase significantly.
- HOWEVER, Prodeco has a deal with the Colombian government under which most of the project's output is exported through a single port, Puerto Zuniga. Interestingly, that agreement expires next month. Access to Puerto Zuniga is crucial until a new port facility comes on stream in 2013.
- According to recent reports, Xstrata has applied for an extension of its rights to continue exports through the existing port - that has become highly questionable.
- If temporary authorisation is not granted, the group will not have a facility to export coal from the Prodeco assets (other than via other, third-party ports, which would constitute a significant production bottleneck).
- Another report states... "no matter how wonderful the Prodeco mine is, Xstrata will only be able to export its wares if it can strike a deal with the Colombian government. There is a second unknown. Prodeco's full potential can be realised only if it can secure permission to divert a river that runs across its acreage. Xstrata hopes for approval within the next couple of months. But if there is a significant delay, its expansion plans for Prodeco from 2011 onwards could be delayed."
Puerto Zuniga
https://www.maritime-database.com/port.php?pid=3214
SO WHY DO WE WANT TO SPECULATE ON GWY ?
Read all the above carefully and then digest the news issued from Galway. It seems to be a terribly strange coincidence that this joint venture just surfaced with Galway on what MAY be a large (new) coal field with a railway running through the middle of it - directly to a Columbian port. Take a look at the maps here - www.galwayresources.com/s/Carboluis.asp

"February 5, 2009 - Galway Resources Ltd. is pleased to announce today that it has entered into an exploration and joint venture agreement with Prodeco for Galway's GALCA coal project in Colombia. The GALCA coal project comprises 132,000 hectares that Galway believes could host a new undiscovered coal basin that occurs close to surface".


Valuation Even at $0.10, the market cap of Galway is just over $5 million - $4 million of that is in cash. In the interim, the market values their large moly and tungsten property at zero - odd enough, but i have little interest in that side of the business. The coal side in Columbia however could be exceptionally valuable. The market says at $0.10, ALL their projects are only worth $1 million. That is ridiculous. However, that is also how you find microcaps and smallcaps with strong growth potential and very attractive risk.

I never like to discuss price targets on anything we follow as 90% of the time its no better than throwing darts. The other issue is market volatility and we've seen for months now where the market won't even value cash as cash. That is starting to change but no idea who long it will last.
With all these companies we've followed since October, we are simply tracking discounted cash - and then watching for a break on the business valuation side. With Galway's $4 million in cash we know its worth about $0.08/share so thats pretty cut and dry with 55 million shares out.
That being said, the comments below on Galway, are nothing more than "thinking out loud". I find this story interesting because its coal and most people have a very difficult time valuing coal projects. It used to be that people ignored them entirely but we saw that change dramatically in 2008.
IMPORTANCE OF MARKET AND INFRASTRUCTURE
Last summer Goldsource (GXS.V $1.20) hit a coal discovery in central Saskatchewan and the stock went from $0.40 to $19 in 2 months. For lack of a better term... this was completely asinine ! They even managed to raise $18 million at $11.75 in the middle of that. It baffles me how people have so much money to invest stupidly ! And the brokerages are more than happy to accomodate it.
When Goldsource was near $14, I wrote a couple reports on Stockhouse suggesting the stock was grossly overvalued and people needed to be very cautious. Not only with GXS, but every penny stock with a promoter and a landman jumped on the bandwagon and pushed area plays up several hundred percent. Needless to say, my comments were not taken too kindly and while it didn't result in a "hit" on my head, I am sure people thought about it. Goldsource kept falling and by October was at $1 while all the area plays lost everyone (but the insiders) their money. Nothing new unfortunately.
The point I tried to make at the time (which no one wanted to listen to), was that infrastructure was as critical as having an actual market for the coal. They faced significant dewatering and overburden challenges, the only close market was Ontario Hydro who were scaling back all their coal fired plants, and they would never compete with Fording or Sherritt. For me it seemed kind of obvious as I worked as an analyst for almost 10 years in the coal industry, but try to convince people of that when you're in the midst of the hype.

THEORETICAL TARGET on GALWAY
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The terms of the GALCA exploration and joint venture agreement include the following: Prodeco will fund the first 19 drill holes, up to $7.5 million, and in consideration for agreeing to fund the feasibility drilling program thereafter will earn 60% of the project. Prodeco will then earn the remaining 40% in the project by paying Galway $0.80 per ton of economically viable coal tonnage up to $80 million. The feasibility costs that are not associated with drilling with be spent based on a pro rata basis.
_________________________
I cannot find what coal is selling for out of Columbia so it shouldn't be too terribly different from what we're seeing overseas. Here is the latest from Feb 2nd... Prices of power-station coal from Australia, a benchmark for Asia, $83 a tonne / Bituminous coal with heating value of 5,800 kcal/kg in the range of high-$60s to low-$70s (Indonesia)
For sake of speculating, lets just assume they could prove up 50 million tons. Again it could be dramatically higher than this (or nothing at all), so lets stick with 50 million. If Prodeco pushed ahead with a deal and Galway's cut was $0.80 per ton - that could give them $40 million.
GWY has 55 million shares out so that would be worth (in theory), $0.72/share. However, if i was Prodeco and had to pay out $40 million to a stock trading with a market cap of $20 million (approx. $0.40/share), why would I not try to buy GWY outright ? They could still give them twice the market price and save millions.
Again, this is nothing more than "thinking out loud". We don't know if there is coal there yet, what tonnage, or what grade. All we know is that they have a huge land package, proven regions, and a deal tied to Xstrata and Prodeco.
You can see however, that IF this does materialize to something, the potential for substantial gains from this level is excellent - especially when we had (or have) the opportunity to get in near cash value. If they ever prove up tonnage approaching 100 million, the upside from here is off the chart.
The speculation will begin to build as Prodeco starts exploration drilling. I don't know timing of this yet but we will follow them closely for the next couple quarters.