Post by
glimmertwins on Oct 31, 2007 11:23am
WHY BUY JUNIOR MINERS (SUCH AS EXMIN)?
WHY BUY JUNIOR MINERS (SUCH AS EXMIN)?
The content of this EXMIN Market Commentary is for informational purposes only. It expresses the views of the EXMIN team only. It does not include material information that has not been published in previous EXMIN news releases.
The team at EXMIN Resources Inc. monitors market events as part of our larger strategy incorporating discipline and long-term focus. Given ongoing events in the public markets, we have decided to share one of our recent team discussion papers with our investors and potential investors.
A Watershed Year in 2007?
2007 has easily been the strangest year of the seven since Precious Metals commenced its generational bull market in 2000. Gold and silver have risen by 20% and 9%, respectively, the former to a 28-year high and the latter not far behind. The CRB Commodity Index, led by Energy, Grains, and Base Metals, has rallied to an all-time high, while the U.S. Dollar Index has fallen to an all-time low. The HUI and XAU indeces of gold mining stocks are up by 20% and 24%, respectively, both at or near all-time highs as well. However, junior mining companies, both producers and explorers, have on average fallen significantly.
Could The Markets Shift?
We examine three factors, starting with the fundamentals for gold and silver, which are clearly improving at an increased rate. Supply is declining significantly (gold production peaked in 2003), with more declines likely for at least several more years, while demand is rising dramatically, led by Eastern Hemisphere regions such as India, Russia, and the Middle East. Moreover, given the Federal Reserve's aggressive monetary policy at a time when inflation is rising sharply (per the CRB index), it seems reasonable to believe that the trend for the U.S. dollar will continue downward. Additionally, the U.S. is not the only country currently printing money at exponentially high rates. In fact, compared to other Central Banks such as the ECB, the Bank of England, and the Bank of China, the U.S.'s 15% M3 growth rate (per John Williams' Shadow Statistics (https://www.shadowstats.com/cgi-bin/sgs/data) is quite tame.
Next, we examine the markets in general. Be it expectations of a global economic boom, a new technology revolution, or simply dramatic amounts of money being filtered into the market via the largest "liquidity injections" in history, worldwide stock markets have been on a roll all year (excluding Friday), particularly in China where shades of internet mania have surfaced. Consequently, investor focus has not been on the "safe haven" Precious Metals sector, particularly, in our view, due to its above average volatility this year (another time, another article).
Finally, we examine the gold mining sector specifically, where nearly all the group's performance has been weighted toward large cap companies that are either producing or near production. Movement into the sector has been rather reluctant all year long, but given the aforementioned factors (rising CRB Index, falling Dollar Index, and surging Gold Price), rotation has clearly picked up in recent months.
The below article describes just how steep the disparity has gotten between the valuations of the large cap producers/resource holders and the juniors, clearly the largest seen in years, in our view a dichotomy that will eventually reverse as the Precious Metals bull intensifies.
https://www.gold-eagle.com/editorials_05/sobolev100807.html
In our view, the reason for this disparity is the perceived risk/reward between the two groups, with the larger companies clearly having lower risk due to their better capitalizations, larger reserves, and, in some cases, positive cash flow. But there is a price for everything, and at the current levels many junior mining companies have seen their shares fall so much that reserves are being valued as negligible and their upside potential nearly nil.
What Does Market Volatility Mean for EXMIN?
The merger mania going on among the big caps (such as FCX/PDG, ABX/PD, ABX/NG, AEM/NTO/MDG, GG/GLG/WTZ, and now NEM/MNG) is evidence that reserve replacement via the drill bit is no longer a viable option given soaring production costs and rapid depletion, and in our view this trend is just getting started. Roughly 90% of all producing oil companies in Canada were acquired over the past decade, with no visibly positive impact on production, and the same is likely to occur in Precious Metals over the coming decade. Aside from this shuffling of the deck chairs, very little is being found in the way of new reserves, and what is being found is typically higher cost and in either politically or geologically difficult areas. The only known significant source of gold reserves is in South Africa, but because it is buried so deep in the ground will not be economic until gold prices are significantly higher.
Given this situation, where will the new reserves come from? In our opinion, the answer is in junior exploration companies. Some are fully or partially owned or funded by larger producers with EXMIN being a good example, but most work independently with the goal of eventually becoming a major producer or selling out to one. Their role in the mining chain is becoming increasingly more valuable, and in our view where the next wave of investor money will be heading as the Precious Metals bull enters the second phase.
A major misconception about the group appears to be that juniors are all "wildcat" exploration companies, in our view a major misnomer. Many junior companies explore for reserves next to or around previously discovered reserves, essentially the same formula that worked wonders for dozens of small oil exploration companies over the past decade. Certainly some wildcatting occurs, but for the most part exploration programs occur in areas where at some time success was encountered. Many of those successes occurred during the late 1970s and early 1980s (even the early 1990s) when mining economics last peaked, and presumably many of those same areas will again be cash cows once mining economics peak again, particularly for gold and silver. Moreover, many gold and silver mines produce base metals as well, diversifying the revenue stream of the mining companies. That is one of the main premises on which EXMIN Resources was founded.
So What About EXMIN?
We believe EXMIN's equity valuation is extremely low given our combination of production, previous exploration success, multiple JV partnerships, share ownership by larger producers, 43-101 resources (https://www.exmin.com/news/index.php?&content_id=26), and upside exploration potential. As highlighted in our September 20th correspondence (available upon request), we made significant accomplishments over the summer, and look forward to further improvements in shareholder value over the next year.
Currently, Hochschild Ltd. and Industrias Penoles own roughly 17% and 2% of EXMIN's outstanding shares, respectively, with both currently amidst major JV exploration programs funded 100% by their exploration departments. In fact, Penoles commenced a highly prospective 3,000 metre drilling program in September, while our joint venture with Yale Resources is rapidly approaching the drilling phase. Most importantly, first production at our 30%-owned Moris mine commenced in September, with 2008 production anticipated to be approximatley 25,000 ounces of gold and 60,000 ounces of silver. Finally, we had initial drilling success at our 100%-owned Horcon mine this summer, and at present are debating what our next moves will be at Horcon and Reyna de Oro, our other 100%-owned drilling success.
We continue to aggressively target the growth of shareholder value through a variety of methods including exploration, production, project acquisition, and M&A activity. Over the next year, we see the potential for material price appreciation, when, for the aforementioned reasons, capital flows start moving back into the junior mining sector.
About EXMIN
EXMIN Resources Inc. (EXMIN) is currently focused on the exploration and development of precious metal properties of exceptional merit in the Sierra Madre gold belt of Northwestern Mexico as well as in other highly mineralized areas of Mexico.
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