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The IKN Weekly
Week 216, June 23rd 2013
Contents
This Week: Selling positions and adding to short hedge, Gold price targets, A BMO report on
miners at lower metals prices.
Fundamental Analysis: Pretium Resources (PVG) (PVG.to) part two.
Stocks to Follow: Overview, Gold Resource Corp (GORO), Bellhaven Copper and Gold
(BHV.v), Duran Ventures (DRV.v), Plata Latina (PLA.v), OceanaGold (OGC.to) (OGC.ax),
IMPACT Silver (IPT.v), B2Gold (BTO.to) (BTG), Pretium Resources (PVG.to) (PVG), Rio Alto
Mining (RIO.to) (RIOM), Bear Creek Mining (BCM.v), AQM Copper (AQM.v), Focus Ventures
(FCV.v), Lara Exploration (LRA.v), Minera IRL (IRL.to) (MIRL.L).
Copper Basket: Overview, Reservoir (RMC.v), Oracle (OMN.to).
The Lottery Ticket Basket: Overview, Darwin (DAR.v), Tango (TGV.v).
Regional Politics: Regional risk update deferred until next week
Market Watching: Necessary withdrawal and portfolio re-alignment, Meetings last week.
I remind subscribers that no part of this newsletter can be copied, reproduced or
given to any third party without the express permission of the author.
This Week
Selling positions and adding to short hedge
See ‘Market Watching’ for the details but to make sure it’s clear and read early by all, please
note that next week I plan to sell the long positions in producers OceanaGold (OGC.to) and
IMPACT Silver (IPT.v), the two near-term trade positions in Bellhaven (BHV.v) and Duran
Ventures (DRV.v), plus I’ll be closing the Plata Latina (PLA.v) trade that’s been called a “sell” for
a few weeks already. Along with those sales I plan to add to my short position in Gold
Resources Corp (GORO).
This is risk management, which has to come first today. It’s possible that I’m raising cash by
selling positions at the very bottom of the market (and frankly, I hope that’s true) but the
present day must be dealt with before any further soothsaying is done and that means getting
less long the market. By the time it’s done I hope to be roughly 60% equities and 40% cash in
the trading portfolio (it’s unlikely to be less than 65%) and as the boosted short position is
considered part of that (I don’t consider the capital deployed as part of margin, thus leaving
extra cash “free”) my net length on the market will be less than that. Though please be clear,
this is not a person throwing in the towel, this is a trimming of exposure and an adjustment,
not a binary move.
Gold price targets
I have been pointed variations of this chart’s conclusions from several angles, so rather than
pretend I haven’t heard or thought about it...
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...the charting theory goes that as long as gold (roughly) respects the move it’s made since
(roughly) 2005 then the price should bottom out at somewhere between $1,200/oz and
$1,400/oz. Roughly. Today we find ourselves at the mid-point between those two and we also
find ourselves at a point when your author will even take TA arguments into consideration as a
crumb of hope amongst a sea of gloom and despair. Make of this chart what you will,
remember that those blue line parameters are approximations only and if you want to know
more, go visit the TA practitioner of your choice to hear more exact price points. For the
moment, what I need to do as a stock analyst is to lighten exposure to this market, mostly via
selling companies that won’t be able to perform adequately at this new gold price (my thoughts
are now in the $1.2k to $1.3k range, as necessity entails). That’s what is announced in the next
segment and what will happen next week to your author’s portfolio.
A BMO report on miners at lower metals prices
I was sent this on Friday by a kind reader, the link (1) to a BMO note on downside risk analysis
in the gold and silver industry. I haven’t really had time to read it carefully, but I have scanned
over the piece and taken in its main points, which are made in a sober manner and then let
readers draw their own conclusions on how best to use the information offered. I like that. The
companies covered are in general larger than most of the names cover here at the Weekly, so
I’ll defer comment on the conclusions but do encourage you to use the link and read it yourself.
Here’s the front page blurb that might help you get interested, but be clear that there’s plenty
more nuance in the report than there is the short paragraph and three categories laid out:
The clear signals that the Fed is nearing the end of quantitative easing earlier this
week and the resultant strengthening in the USD continue to place downward
pressure on gold and silver. The near 5% decline in gold and 8% decline in silver
yesterday have renewed investor interest in downside risk analysis of the sector.
1: Defensive companies include Alamos, Primero, Silver Wheaton and Franco Nevada
2: Companies with the highest sensitivity to a change in metal prices include Allied
Nevada, Golden Star, Petropovlask, Teranga and Avoca.
3: Companies with the largest change in free cash flow include Harmony Gold, Avocet
and Rangold.
Fundamental Analysis of Mining Stocks
We return to finish the analysis on our new position, Pretium Resources (PVG) (PVG.to)
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NOBS report dated June 16th 2013
Pretium Resources Inc. (PVG) (PVG.to)
Company Overview
Pretium Resources Inc. (Canada PVG.to, US: PVG, Frankfurt:) is an exploration stage gold
mining company operating in British Columbia, Canada. Its flagship asset is the Brucejack
project in Northwest BC Canada, which includes the main high grading Valley of the Kings
(VOK) target. Share structure is as follows:
Shares out: 102,256,532
Options: 8,626,950 (4.3m at $6/$6.10, rest out of money)
Warrants: Zero
Fully diluted shares: 110,883,482
Current share price: $6.60
Market Cap: $674.89m
Approx cash per S/O: $0.49
All prices are in US dollars unless stated. Forex U$1=CAD$1
NB: For valuation and modelling purposes, we use the US listing as our benchmark
Part two
Last week I couldn’t think straight enough to do the necessary number work due to a after-
effects of a twisted ankle (it was either painful or pills that zonked me out). This week all is good
(well, all is getting better) and we finish up the analysis of Pretium Resources (PVG) (and thank
you to the three mailers who wrote in and agreed that the way they spell it with a V is
particularly annoying...I thought it might just be me).
So today we cover three aspects of PVG at Brucejack/VOK: We take a look at the updated feas
numbers, we then run our own numbers on the potential financials and arrive at a price target,
then comes the time to discuss what might go wrong, with that last part probably the key to the
whole shebang.
The feasibility study
The news release of Tuesday June 11th morning PVG announced (2) that its eagerly-awaited
feasibility study (FS) for Brucejack had been completed and although we don’t yet have the
document itself, the NR was full of the type of highlight data that works for financial modelling
purposes. Readers are encouraged to read the NR for full details, but suffice to say here that it’s
one of the most robust full feasibility studies I’ve seen in a long time. There are plenty of likeable
aspects to it, including:
• A reasonable capex figure of $663.5m which includes a 20% contingency, which looks
conservative on the part of the company as most FS stage projects will run a 10%
contingency.
• A 22 year mine life, with production weighted to the first ten years of around 426,000 oz
gold per annum average, then continued at a rate of 280,000oz/annum for the
remaining years of production.
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• An post-tax IRR of 35.7% at the $1,350/oz base case, with a still reasonable IRR of
13.7% if gold does something really crazy and drops to $800/oz. In other words, this
mine is profitable even if the bottom drops out of the gold market and at-or-around
where we are today, return is excellent.
• A post-tax NPV (5% discount) of $1.76Bn
• The feas NR also outlines reasonable and logical timelines for construction and
operation and other FS-type “serious” assumptions that point to a logically makeable
and workable mine.
As for the gold held at Brucejack, the previously measured and indicated resource (from the
September 2012 43-101 update, which added up to 6.9m oz Au M+I+I) has been shifted into the
more reliable proven and probable reserve category and now looks like this:
That adds up to 7.1m oz gold with a small silver kicker at a base case price of $1,350/oz gold
(and $22/oz Ag) at a cut-off of 5g/t Au, which means the resource has grown in size as well as
improved in reliability since last year. As we can also see, the vast majority of the reserve is
contained in the Valley of the Kings (VOK) target, the zone where PVG has hit extremely high
grading material. In short, VOK is the key to the whole project and it’s where all hopes,
optimism, cynicism and criticisms are levelled. We’ll return to that subject in a moment, first it’s
time to run the numbers
Valuing PVG
We’re using a lot of the parameters as supplied by the company in its FS and from them, work
out a cash flow valuation from the modelled financial performance. Notably, we’re basing our
valuations on the average of the first ten years of mine production, rather than the 22 year full
mine life. Assumptions we use that are straight from the FS include
• Throughput tonnages
• Annual average gold production
• Annual average Cash costs
• Annual average G&A costs
• Annual average sustaining capex
To those we add the following assumptions
• Capex is raised in classic 50/50 debt/equity style, with annual average debt servicing
marked at an estimated $40m and the share count raised to 150m S/O as a result
• An 8% charge for worker participation/royalty, to the conservative side
• Depreciation/amortization of $40m/annum average in first 10 years, reflecting the higher
charges to this item due to exploration having been capitalized by PVG
• By-product credits for the silver content years 1-10 (which are lower than 11-22) are
calculated on 11g/t Ag and a lowball 70% recovery. The result is smallish revenues of
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perhaps $4m to $6m that helps a little with costs, not much more, and underscores that
VOK is very much a pure gold project.
• We ignore the company’s preferred price scenarios and base our calculations around
the current $1,300/oz gold and $20/oz silver prices. However, we’re making sure that
the downside to gold is covered by two other price scenarios (Au $1,100/Ag$18 and
Au$900/Ag$16) to see if things hold up as robustly as imaged. The other price deck
considered is $1,500/oz gold and $25/oz silver, which not so long ago might have been
considered a base case level in itself (sigh).
Here’s the abridged income items table that comes out the other end
PVG at Brucejack: Income items for model year (years 1 thru 10)
At 2,700tpd thruput $900/oz Au $1,100/oz Au $1,300/oz Au $1,500/oz Au
Sales (U$m) 387.3 473.0 558.7 645.1
Cash COGS 108.4 108.4 108.4 108.4
Depreciation 40.0 40.0 40.0 40.0
SGA 24.6 24.6 24.6 24.6
Op income 214.3 299.9 385.6 472.1
Interest 40.0 40.0 40.0 40.0
Workers Part/royalty 17.1 24.0 30.9 37.8
Tax 47.1 70.8 94.4 118.3
Net income 110.0 165.2 220.4 276.0
Shares out (m) 150 150 150 150
EPS 0.73 1.10 1.47 1.84
Capex -15 -15 -15 -15
FCF/sh 0.90 1.27 1.64 2.01
Source: PVG data, IKN ests
And here’s the target box
PVG: Sales and earnings Target price & valuation data at various gold prices
Gold Price $900 $1100 $1300 $1500 using four different gold prices
Sales ($m) 387 473 559 645 12-month target $11.75 (on 8x annual EPS using
Upside to target 78% gold at U$1300/oz)
EPS 0.73 1.10 1.47 1.84 Mkt cap ($m) $637 Enterprise value $647
Cash flow 1.00 1.37 1.74 2.11 P/sales ($900) 1.35 EV/sales ($900) 1.37
P/E ($900) 9.0 EV/EBITDA ($900) 2.5
P/E ($1100) 6.0 EV/EBITDA ($1100) 1.9
P/E ($1300) 4.5 EV/EBITDA ($1300) 1.5
cash flow defined simply as EPS + depreciation
By using an 8X PE to generate a target we take into account that this is a high (nay very high)
grading deposit that offers robust economics and plenty of free cash flow to its owner, as well as
a reasonably short timeline to first construction from now (PVG plans to begin construction next
year and 2015 could see first pour). To the downside, we recognize the dismal state of the
current market and therefore don’t assign the type of 12X or 14X multiple that a top quality
deposit such as this could have commanded even less than a year ago. The result of all this
brainjabbering is an $11.75 target, representing a 78% upside from Friday’s $6.60 close (which
of course is down from the market price of this time last week).
Having a target is fine, but the real takeaway from the financial modelling of PVG at
Brucejack/VOK is just how robust these economics really are. I think that of all the numbers up
there, the one that gets me rocking back on my heels (figuratively of course, the ankle is still a
bit sore even though the swelling has all but gone) is the $215m in operating income per
annum, over ten years, at just $900/oz gold. That alone means that any potential buyer of PVG
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(and we have to be clear that even though PVG is capable of putting a team together and
building the mine itself, what with all that SSRI corporate background, the most likely exit
strategy is a sale to a major) could afford to pay double the current market cap then spend
$700m on the mine and then get its whole investment back in nine years of a 22 year mine
life...even at $900/oz gold! That’s the kind of price that will put many (but many) mining
companies out of business if it comes and stays, but PVG at Brucejack will do just fine.
What can go wrong
Back in the Flash update of June 11th (see IKN215) we considered three aspects to the PVG
story that could become stumbling blocks, namely “Capex blowout”, “Community objections”
and “Stock price leaves little upside”. Since that time many of you and a whole lot of market
commentators have pointed to another potential weak point in the story, that of the resource
continuity and the potential problems that the very high grading rock at VOK, which carries most
of the gold resource in a comparatively small percentage of the overall reserve tonnage, may
give any eventual mining operation at VOK.
Fair enough and I’ve read several viewpoints on the problems over the last two weeks. Some of
them take a more optimistic point of view while others suggest (and one went even further to
say that “VOK will never be a mine”) that the way in which the reserve has been calculated
means that there are a lot of assumptions which may or may not be the reality of the deposit
come the crucial day that the rock is blasted out the ground, taken to surface and processed.
One of the better bearish viewpoints I’ve read (and I’ve read it a few times) was that published
by Brent Cook on June 16th (recommended reading but behind a subscription paywall) who is
particularly worried that the “probabilistic” modelling being used by PVG to predict the resource
won’t be truly confirmed until the mining starts (and if things go wrong, that would mean
something between a billion a two billion dollars is wasted by the operator to get to that stage.
Obviously a risk.
To address these concerns, PVG is now running a 10,000 tonne bulk sample of the mineral ,
chosen carefully to represent the whole of the deposit, which will be mined and then test
processed to see whether the company’s model stands up to hard science testing. All industry
eyes will be on these tests because (so goes the theory at least) if PVG can show that the bulk
test tonnage returns a usefully uniform grade that holds up to the reserve grade average and
would make every tonne that passes through a processing facility a profitable tonne, then
nerves will be calmed and the project given more backbone.
Or so the theory goes. Personally I have more doubts about how the bulk tonne sample results
are going to be received, as even if they are good and the deposit works in the way that the
company predicts it will work there will be enough naysayers and doubters around to cast
shadow on the company. The situation developing at VOK reminds your author of the Red Lake
mine moved into production by Goldcorp and in that case, the doubters doubted from the day
the very high grade intercepts were announced (2.5m of 9oz gold) all the way through the
development process, and basically for the same reasons. Even after GG had its mine and was
producing half a million ounces per year at $100/oz cash cost, the naysayers said that GG had
been lucky. In the case of VOK, there are geological reasons to point at potential problems for
the deposit and as is their wont, there are plenty of geologists getting their jollies by doing just
that. However, as well as that being no different to the Red Lake case, there are also geologists
giving VOK the thumbs up and it’s not all gloom and doom from the rockbangers.
As you all know (or should do by now) I am not a geologist, never pretend to be and never will. I
might know enough about rocks to be dangerous at times but I also know when to shut up,
listen and learn from people who are pro geols. However, I’ve also learned in the time doing this
crazy job that geols aren’t often so hot at stockpicking, that analysts aren’t good mining
engineers and that mining engineers aren’t often good geols. And you can mix and match those
three in all sorts of ways and get equally valid results. And while I greatly respect the people
that are casting doubt on VOK today through geological experience, I’m also confident enough
to place my money on the line on PVG and keep it placed there for the following main reasons:
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The economics of VOK are outstanding (see above) and that alone gives plenty of margin on
several variables without the deposit ever slipping towards the marginal or even uneconomic
financial barriers.
The PVG “probabilistic” model for reserve calculation has come under scrutiny and has had
doubt placed upon it by professional geologists that know what they’re talking about. However,
it’s notable that in its May 28th and June 6th NRs (3) results from drill testing went a long way to
confirm that the PVG model for the reserve (then resource) ounces was working. This again
was hard science at work, the way things are supposed to be. First the PVG team made
predictions then the predictions were tested in the field and the results matched very closely to
their model. Those who have been overly criticizing the reserve calculation in the last couple of
weeks all seem to have forgotten that small point.
VOK is very high grading material and if there’s one thing that the history of gold mining teaches
us, it’s that high grades of gold do not stay in the ground. The way things are in the world of
mining today it’s highly likely that the 25m oz held by XRC at Caspiche will never be mined (to
name but one of a dozen low grade bulk mine projects out there) but one way or another the
VOK gold is coming out, period. How, when and at what cost are questions as yet unanswered,
but if grade truly is king, VOK will not be looked over by the serious mining companies.
Penultimately and importantly the document announced on June 11th isn’t a PEA, it’s not a a pre
feas either: the document in question is a full feasibility study and the team behind the report is
full of top class names who wouldn’t sign off on any old guesstimate. The reliability of the
Canadian 43-101 system has been called into doubt at times, but this isn’t any ordinary 43-101;
rather it’s a high visibility FS with a lot riding on its future and in the end, if you can’t trust the
word of the professional signing off on this particular study there’s a serious problem with the
whole construct of the 43-101. Yes, there does come a time when trust comes into the equation
and in this case, without swooning at their feet, I’m inclined to place enough trust into the words
of the people publishing a Feasibility Study (which means economically viable, folks) to put my
money on the line.
Lastly, I’m a sucker for a strong Feas. Ask somebody else about rocks or mine building, but
when you give me a sparkling set of numbers like the ones offered up to the market on June
11th by PVG, I admit my weakness and will fall for them (almost) every time. Be clear that it’s not
the same for PEAs (scoping studies) or PFSs either. But yes, I’m a sucker for a good FS.
Conclusion
Reward outweighs risk in the story of PVG. It is not without risk and I’ll be watching as keenly as
the next market participant for the bulk sample results when they appear (supposedly 3q13), but
those picking holes in this story today do seem to be basing their project killing thesis around
the worst of all possible cases. The economics of VOK mean that PVG has a lot of leeway and
things don’t have to be perfect for this mine to be an obvious winning deal.
The IKN Weekly sets an $11.75 price target on Pretium Resources, representing a 78% upside
from Friday’s close (and a 48.7% upside from your author’s entry price in US dollar terms). This
is the only stock bought in the last few months that I consider an investment position rather than
a near-term flip trade opportunity. Assuming good results from the bulk sample (i.e. the
company’s predictions from their model are once again confirmed by experimental data) the
stock should benefit from de-risking and move considerably higher. The eventual likely outcome
is a sale to a third party, but as our model shows PVG could make this mine their own. Either
way, our target price is reachable even at today’s depressed $1,300/oz gold price and would, of
course, beenfit greatly if gold decides to rebound and move back up.
End of Report
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Stocks to Follow
There were four weekly risers on our list (BTO.to, IPT.v, AQM.v, BHV.v), so a little cheer there
and a special mention for AQM Copper’s late rally to 4c (AQM.v up 33.3%) and IMPACT Silver
(IPT.v) up 11.3% as it was. But only a little, as the other eleven positions dropped (no need to
list them all) and far too many of them dropped nastily indeed in a week that must go down as
the worst of the year...so far. Biggest loser was Bear Creek Mining (BCM.v down 31.0%)
followed by OceanaGold (OGC.to down 22.5%), Rio Alto Mining (RIO.to down 21.5%), Pretium
Resources (PVG.to down 14.6%), Focus Ventures (FCV.v down 14.3%), Duran Ventures (DRV.v
down 14.3%) and Minera IRL (IRL.to down 9.6%).
We presently have 15 names on our open list, our self-imposed maximum, but that will change
quite substantially by this time next week. Just two of the positions are in the green.
Company Ticker this week Avg Price Reco date Current PPS Gain/Loss% Notes
Top Picks
Rio Alto Mining RIO.to hold C$2.30 07-apr-11 C$1.97 -14.3% $6.29 tgt, added Apr13
B2Gold BTO.to buy C$3.07 28-nov-12 C$2.26 -26.4% $5.70 tgt added Apr '13
Recommends
Minera IRL IRL.to spec buy C$0.73 22-jul-12 C$0.235 -67.8% $1.56 tg, added, new avg
OceanaGold OGC.to selling C$3.03 16-sep-12 C$1.24 -59.1% selling on gold drop
Lara Expl. LRA.v hold C$1.15 08-apr-12 C$1.03 -10.4% solid biz model, LT hold
IMPACT Silver IPT.v selling C$1.14 13-jan-13 C$0.69 -39.5% selling on silver drop
Gold Res Corp GORO short U$10.00 03-may-13 U$9.53 4.7% tgt $7.50 adding to short
Duran Ventures DRV.v selling C$0.045 10-may-13 C$0.03 -33.3% closing ST trade
Bear Creek BCM.v hold C$2.06 30-may-13 C$1.38 -33.0% Looks v cheap, will wait
Rio Alto Mining RIO.to buy C$2.68 07-jun-13 C$1.97 -26.5% ST trade position, separate
Pretium Res PVG.to buy C$8.20 11-jun-13 C$6.89 -16.0% New position, M&A play
Smaller/Riskier
AQM Copper AQM.v hold C$0.31 16-oct-11 C$0.04 -87.1% holding thru for my sins
Focus Ventures FCV.v spec buy C$0.175 01-jul-12 C$0.12 -31.4% revised tgt 25c
Plata Latina PLA.v selling C$0.79 10-apr-12 C$0.15 -81.0% trying to sell
Bellhaven BHV.v selling C$0.065 03-jun-13 C$0.135 107.7% selling ST trade
Closed in 2013 closed close price
USA Graphite USGT feb'13 U$0.93 08-jan-13 U$0.17 81.7% short tgt made/trade closed
Lachlan Star LSA.to feb'13 C$1.50 30-sep-12 C$0.95 -36.7% sold to reduce port risk
United Silver USC.to mar'13 C$0.21 28-oct-12 C$0.095 -54.8% small Ag sector trade, failed
Aurcana Corp AUN.v apr'13 C$1.07 11-nov-12 C$0.55 -48.6% closed on poor YE results
Gold Res Corp GORO apr'13 U$14.11 25-jan-13 U$9.38 33.5% short tgt made/trade closed
Marlin Gold MLN.v apr'13 C$0.075 10-feb-13 C$0.065 -13.3% closing this week (def)
Bear Creek BCM.v may'13 C$2.58 01-apr-13 C$2.40 -7.0% near-term, time ran out
Lupaka Gold LPK.to may'13 C$1.12 23-oct-11 C$0.32 -71.4% towel thrown in
Tahoe Resources TAHO may'13 U$18.62 08-apr-13 U$14.70 21.1% took profit on ST short
2009, 2010, 2011 and 2012 closed positions in appendices below
Now for some notes on a selection of the above stocks.
Gold Resource Corp (GORO): Adding to short. Reasons for the addition are laid out in
‘Market Watching’ below. Here we note that GORO dropped under $9 on Friday morning but
staged a recovery and even managed to finish one penny up on the week when all was done.
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This suits me, the higher it goes the better my entry point for the additional short next week.
Bellhaven Copper & Gold (BHV.v): Selling.
Reasons for the sale in ‘Market Watching’ below.
Here’s last week’s price action chart in BHV and
those who dumped during the Thursday panic have
to be seriously kicking themselves, as BHV showed
impressive resilience to bounce right back and finish
at weekly highs Friday, all on decent volume. Yes,
this means that my sale next week may cause
another episode of seller’s regret to come my way
but as BHV is a near-term position (and was from
the start), selling now as part of the cash raise is
the way it will be.
Duran Ventures (DRV.v): Selling. As before, more on the reasons for the sale in ‘Market
Watching’ below. This is a near-term trade that simply hasn’t worked, and its make-up as a
small exploration play makes it easy enough to cut. There’s reasonable liquidity in this one, so I
expect to be fully gone by IKN217.
Plata Latina (PLA.v): Selling. Again, more in ‘Market Watching’ below but in this case we’re
only going to make official something that’s been in the cards and advertised for several weeks.
The difficulty in PLA is the wafer thin volume which impedes an immediate sale, but 100k was
traded last week between 16.5c and 15c (trending downwards, natch). I’ll be looking to sell at
least a few in order to mark a closing price here, even if all of them don’t go immediately
OceanaGold (OGC.to): Selling. The reasons for the
sale are laid out in ‘Market Watching’ below. As for the
week, OGC got merry hell kicked out of it once again,
particularly Thursday when the overnight trade in
Australia was arbed into the Toronto listing. I expect
OGC to rally at least some from its Friday evening close,
at which point I’ll sell.
IMPACT Silver (IPT.v): Selling. The reasons for the
sale are laid out in ‘Market Watching’ below. As for last
week, the finish was 69c which makes the weekly
percentage change look pretty, but as you can see from
the five day chart there was some fairly hefty tape-
painting going on late day Friday.
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With due mention made to the portfolio changes, on to the normal stock comments.
B2Gold (BTO.to): The big big trade that went through at the end of the day in B2Gold’s US
listing, BTG, caught several of your eyes if my
inbox is the judge. The reason for the buying is
that BTG is replacing Nevsun as a component of
the gold miner ETF GDX as of next week and
the NYSE/Arca ETF needed to buy nearly 50m
shares of the thing in order to make the
weighting. It’s almost certainly this fact, which
was announced on Monday, which allowed BTO
to buck the general market trend and put in its
winning week, though the rally had been much
better before the Fed announcement and its
aftermath had washed through the market.
Aside from the GDX purchase, BTO traded strong volumes all week in both Canada and the
USA. The stock sold with the rest of them on Thursday but its Friday was a fair rebound and
another indication that this market, irrational and panic strewn as it might be, isn’t about to
throw all the babies out with the bathwater. So Friday was good (71.8m volume in USA and
22.1m in Canada, though some of that may well be duplicity) barring the late day dumpage
that was likely connected with the GDX affair. As long as gold stays where it is, BTO should
recover some more next week. Sadly, that’s a big assumption these days.
Pretium Resources (PVG.to): Ouch. We wrap up the argument in favour of being long PVG
above today. Here we see that your author’s timing sucked to high heaven.
10

But is there some cheer to be taken from the way it rebounded on volume Friday?
Rio Alto Mining (RIO.to) (RIOM): See ‘Market Watching’ for more on RIO. Here we simply
note the share price carnage in the stock price last week.
Of specific interest is the acceleration in selling on Thursday (3X average volume) and Friday
(4X average volume) which would sit with theories of final capitulation (allow me a little
reverie), as would the sharp way in which it rebounded from the intraday lows (you can’t see it
on this Yahoo chart, but RIO touched $1.80 on Friday morning before running back up by 10%.
Fundamentally the company is in sound shape (see below), but market-wise it’s a total nervous
wreck. I feel no shame in saying that I’m sticking firmly with the fundies on this one.
Bear Creek Mining (BCM.v): The news from Corani is much better than the news from the
market, as the round table set up between company, community and government (local and
national) sat for the first time late last week. Unlike other such round tables (e.g. Cañaris)
where the objective is to gain approval for the mine project, what will happen over the next few
months are discussions on exactly how planned investments that come with the mine, from
both company coffers and government budgets, should be implemented in the local Corani
provincial area. There was plenty of Peruvian coverage on Corani last week (example (4)) which
also made clear that the social licence from the community is already officialized and the final
key environmental impact permit (EIA) is well advanced. In fact, the reason why you don’t hear
much about Corani up North is probably due to the lack of conflict or controversy about the
project, but that’s another story.
Meanwhile, over at market level BCM.v stock was beaten into near oblivion, with anecdotal
reports reaching this desk of Morgan Stanley behind the biggest selling blocks due to “portfolio
re-weighting” (translation: dumping). I am, sadly, stuck in value trap mentality regarding this
position now, as a market cap of $130m that includes a cash treasury of around $50 is mightily
cheap for a company with a Corani sized asset, official social/community backing and on the
cusp of its EIA permit. My thoughts now turn to the upcoming feasibility update for Corani,
because if BCM can show robust economics at, let’s say, a $20/oz base case silver price then
the market will be able to look at the project with fresh eyes. But perhaps all that is a little too
far into the future for the purposes of this trade, as it was set up as a near-term position and
can be let go easily enough. It would pain me to see it sold at such a low price however, so on
this one at least I’ll wait a while and see how the market develops for a week or three, even
though I’m fully aware that things could get worse rather than better.
AQM Copper (AQM.v). A couple of things to mention about AQM. Firstly its late Friday trade
that popped it back to 4c and made for a good looking, though wholly unimportant, percentage
gain on the week. Secondly that late day pop came when there was a full 500k on the bid at 3c,
so there’s somebody out there who fancies a tilt at this. But thirdly, while doing the rounds of
Lima last week a little tidbit floated my way regarding AQM, as people who know the specific
11

office in which decisions are made on Zafranal say that Teck is still interested in Zafaranal but is
biding its time and is keen on watching its 50/50 partner wither on the vine before moving in
and scooping up 100% of the thing. There are some more details to the story, but we’ll leave it
there because I don’t want sources to be burned. But it may be worth keeping an eye on this
stock after all.
Focus Ventures (FCV.v): A single 137,500 share trade on sell-off Thursday was the only
action in FCV last week (bar a fragment 200 shares on Friday, which doesn’t count) that saw
the price drop back to 12 from 14. No big deal, no other takers for the 12c bid and no real
“chart damage” (as they say) done to the stock, either. It was one of those occasional moments
when owning a low volume stock was a considerable advantage. We wait for news on first
results at the Reventon drill program, though the state of the market probably means that even
an outstanding hole would be lost in the noise. We’ll see.
Lara Exploration (LRA.v): Lara was another that took a hit on Thursday but held up better
than most, though its normal thin volumes don’t help the cause much. The low point was
$1.00, which means it’s still (just about) inside the trading range we’ve come to expect from
the stock. A defensive-minded investor looking for new exposure to the juniors sector could do
a lot worse than buy some LRA at the $1 level, as its conservative approach and diversification
of risk over a plethora of properties gives you exploration upside potential and relatively low
risk. LRA also runs a very low G&A bill (the attitude is clear when you visit the Lima HQ, which
is a pleasant working environment and has all the necessary, but its address, just a few blocks
from the expensive rental zones, shows foresight and cost awareness) which means it can go
into hibernation mode easily if needs be, protect its cash position and see through rough times.
Minera IRL (IRL.to) (MIRL.L): See ‘Market Watching’ below.
The Copper Basket
After twenty-five weeks of 2013 The Copper Basket is showing a 25.65% loss to level stakes.
company ticker price 1/1/13 Shares out Market Cap current pps gain/loss%
1 NGEx Resources NGQ.to 3.40 168.63 347.38 2.06 -39.4%
2 Augusta Res AZC.to 2.43 144.1 309.82 2.15 -11.5%
3 Copper Fox CUU.v 0.83 399.61 251.75 0.63 -24.1%
4 Lumina Copper LCC.v 9.43 43.46 215.56 4.96 -47.4%
5 Nevada Copper NCU.to 3.50 80.5 183.54 2.28 -34.9%
6 Hot Chili Ltd HCH.ax 0.72 286.78 137.65 0.48 -33.3%
7 Reservoir Min. RMC.v 2.41 41.46 122.31 2.95 22.4%
8 NovaCopper NCQ.to 1.80 51.89 97.03 1.87 3.9%
9 Western Copper WRN.to 1.39 93.78 51.58 0.55 -60.4%
10 Panoro Minerals PML.v 0.62 176.25 48.47 0.275 -55.6%
11 Curis Resources CUV.to 0.70 56.31 33.22 0.59 -15.7%
12 Candente Copper DNT.to 0.375 121.93 22.56 0.185 -50.7%
13 Yellowhead Min. YMI.to 0.59 60.97 21.34 0.35 -40.7%
14 Oracle Mining OMN.to 0.80 49.03 14.22 0.29 -63.8%
15 Strait Minerals SRD.v 0.08 56.86 3.70 0.065 -18.8%
NB: HCH.ax priced in AUD$, rest CAD$ Portfolio avg -28.70%
The Copper Basket average lost another 3% (and bits) last week but at least a few components
managed to add to their closes in IKN215. Of the fifteen, four made gains (NGQ.to, LCC.v,
PML.v, OMN.to), one remained unchanged (RMC.v) and ten lost ground (AZC.to, CUU.v,
NCU.to, HCH.ax, WRN.to, NCQ.to, DNT.to, YMI.to, CUV.to, SRD.v). There were three 10%+
losers amongst the field, namely Curis Resources (CUV.to down 13.4%), Yellowhead Mining
(YMI.to down 11.4%) and Western Copper and Gold (WRN.to down 11.3%).
12

Copper Basket 2013 average, weekly
12%
8%
4%
0%
-4%
-8%
-12%
-16%
-20%
-24%
-28%
-32%
13
ht6naj ht31 ht02 ht72 r3bef ht01 ht71 ht42 dr3ram ht01 ht71 ht42 ts13 ht7rpa ht41 ts12 ht82 t5yam ht21 ht91 ht62 dn2nuj ht9 ht61 dr32
source: IKN calcs, TSX data
31/1/1
morf
egnahc
%
As for copper prices, they could have been worse (and things here were indeed better than in
the precious metals zone). This time last week copper
stood at $3.20/lb, Wednesday saw weakness, Thursday
saw copper selling off with just about anything else in
the world, but Friday kicked in with a decent rally off the
$3/lb level (near enough at least) and the metal finished
at the $3.10 level. That rebound Friday was far more
than the precious metals could muster.
Inventories showed and increase of 59,156mt (+6.9%) in
global copper stocks that now total 921,403mt. The big
move was a 9.0% increase in LME warehouse inventories
to 664,850mt, which according to Chile’s market
watchdog Cochilco was due to big stock rises in Malaysia
and generally weak demand in Asia. Comex stocks
dropped 5.0% to 67,344mt and Shanghai Futures
Exchange warehouse inventories rose 4.3% to
189,209mt.
Cancelled warrants continue to signal a confusing number. They rose sharply to cover 47.4% of
LME inventories, which once again smells of warehouse controlling groups playing the
warehousing system, perhaps trying to prevent de-stocking. Whatever the reason might be, it’s
now pretty clear that the upsurge in cancelled warrants, now into its third month and showing
little sign of abating, has little to do with true end-user demand for copper.
Cancelled Warrants at LME, IKN157 to date
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
751NKI 951NKI 161NKI 361NKI 561NKI 761NKI 961NKI 171NKI 371NKI 571NKI 771NKI 971NKI 181NKI 381NKI 581NKI 781NKI 981NKI 191NKI 391NKI 591NKI 791NKI 991NKI 102NKI 302NKI 502NKI 702NKI 902NKI 112NKI 312NKI 512NKI
source: Cochilco, LME
rof
yrotnevni
EML
%
latot
yreviled
resu-dne
Now for updates on just two of the basket stocks this week:

Reservoir Minerals (RMC.v): RMC remains strong while all around wilt and die. The thing I
have against its action at the moment is a distinct lack of volume, because in a market as harsh
as the one we have today the low volume may quickly play against the stock if some holder is
forced to sell (there are a thousand reasons, etc).
Oracle Mining (OMN.to): On Wednesday 19th (and just hours before the company AGM)
OMN published an open letter (5) to shareholders detailing its progress over the past year and
how it sees things moving forward. Although
OMN used the dreaded “challenging” word early
on in the letter, it turned out to be a good and
reasonably even-handed appraisal of things at
the company.
OMN is one I’ve had more than a passing
interest in over the year but its recent share
price action has been rotten, so I’m at least
glad I didn’t add a position in this one to my
collection of failed trade in 2013. However the
acceleration in traded volume in June has been
notable, looking as it does that a large position
has bailed or is in the process of liquidating,
and the NR last week did seem to muster a bit
of buying interest in OMN for the first time in a very long time (we saw 31c printed on Thursday
before the big Fed chill set in).
The problem with OMN today is a classic one; a lack of money. It does have a debt deal
arranged in theory at least and on delivery of a positive feas the lender, Credit Suisse, will sit
down and arrange a fully closed deal (or so we’re led to believe). The issue here is that such a
lender is almost certain to require hedged production to guarantee repayment of its principle
and at current prices, OMN may end up diverting too much away from us lowly (potential)
shareholders and being too intent on paying the bank to justify holding equities. This in turn
suggests that the wisest course will be to sit out on OMN until its feasibility study is completed,
then wait again until the terms of the capex financing are known.
The Lottery Ticket Basket
After 25 weeks of 2013 The Lottery Ticket Basket is showing a 33.82% loss to level stakes.
company ticker price 1/1/13 Shares out Market Cap current pps gain/loss%
1 Marlin Gold MLN.v 0.10 379.9 19.00 0.050 -50.0%
2 Bellhaven BHV.v 0.14 137 18.50 0.135 -3.6%
3 Eagle Star Min. EGE.v 0.125 69.48 13.90 0.200 60.0%
4 Tango Gold TGV.v 0.13 45.59 8.89 0.195 50.0%
5 Fancamp Expl. FNC.v 0.125 118.41 8.29 0.070 -44.0%
6 AQM Copper AQM.v 0.08 105.57 4.22 0.040 -56.3%
7 Glass Earth GEL.v 0.155 104.79 4.19 0.040 -74.2%
8 Gryphon Gold GGN.to 0.085 194.64 3.89 0.020 -76.5%
9 Darwin Resources DAR.v 0.20 26.16 3.14 0.120 -40.0%
10 Inca One Res. IO.v 0.12 34.0 3.06 0.090 -25.0%
11 Copper North COL.v 0.10 58.62 2.93 0.050 -50.0%
12 Rio Cristal RCZ.v 0.025 149.26 2.24 0.015 -40.0%
13 Cream Minerals CMA.v 0.03 155.34 1.55 0.010 -66.7%
14 Firestone Ventures FV.v 0.045 36.32 1.09 0.030 -33.3%
15 Netco Silver NEI.v 0.025 47.01 0.47 0.010 -60.0%
Portfolio avg -33.82%
14

The Lottery ticket end of our coverage probably fared best of all through last week’s carnage,
because several of them are now at the point
where they can’t go much lower. We even had
five go up (GGN.to. BHV.v, AQM.v, EGE.v, 25% Lottery Ticket Basket 2013 average, weekly
20%
TGV.v) with the best showing from Gryphon 15%
(GGN.to up 33.3%) in a move with a 10%
5%
percentage change that’s more impressive 0%
than its reality. There were also three that -5%
-10%
remained unchanged (DAR.v, CMA.v, RCZ.v)
-15%
which leaves seven stocks that lost ground -20%
-25%
(MLN.v, GEL.v, FNC.v, COL.v, IO.v, FV.v,
-30%
NEI.v). Worst lsoers were Netco Silver (NEI.v -35%
down 33.3%), Ina One (IO.v down 28.0%)
and Firestone Ventures (FV.v down 25.0%).
The overall basket average loss was 2.9% but
we’re still not at year lows for the basket.
Pathetic glimmers of unfounded hope, we got ‘em.
Overall the basket average gained just under 2%, which isn’t bad but there’s still mountains to
make up here and with several of the stock to all intents and purposes now dead as investment
alternatives, interest from now on is reduced to a selective level.
Darwin Resources (DAR.v): See ‘Market Watching’ below for a report on my meeting with
the DAR team.
Tango Gold Mines (TGV.v): I had a bit of a pop against the name change of this company
(from FDG to Tango) back when the move was made early May, wondering why anyone would
voluntarily want to connect a mining company with the image of Argentina. But as this chart
shows, TGV has done a whole lot better
than the average microcap since Antonio
Ponte took charge.
The reason behind the June move is
unlikely to be the imminent arrival of
superfine exploration news, as the last NR
from the company made it clear that its
was more about necessary baseline
exploration work at the moment (mapping,
samples, some trenching) than any activity
that moves markets. We’re therefore left to
conclude that the upmove is one created by
marketing, most probably in the Swiss
areas well known to Ponte. Volumes have risen too, which points in the same direction.
Or in other words, I expect this upmove to be short-lived.
Regional politics
Regional risk update deferred until next week
There’s suddenly a large and shifting political risk scenario down this neck of the woods, with
the suddenly hot situation in Brazil due to protests and the unfolding Snowden-in-Ecuador
events that are bound to make some waves. Harold Wilson was right when he said that a week
is a long time in politics and as anything noted this week might be redundant by next, the
executive decision today is to defer and as(technically at least, feel free to call foul) I have “end
15
ht6naj ht31 ht02 ht72 dr3bef ht01 ht71 ht42 dr3ram ht01 ht71 ht42 ts13 ht7rpa ht41 ts12 ht82 t5yam ht21 ht91 ht62 dn2nuj ht9 ht61 dr32
source: IKN Weekly data, TSX
2102/1/1
morf
egnahc
%

2q13” for the next update and that means I can squeeze it in next Sunday, last day of June.
The new format has enjoyed a bit of extra tinkering, thanks mainly to a couple of your ideas
mailed in from readers too modest to want even their initials in print (thank you people, you
know who you are). One of the additions asked for is to cover the party political scene a little
more closely, as although it’s not usually of direct relevance to our subject, that of junior mining
companies in LatAm, it does set an undercurrent and can often signal on a medium or longer-
term basis where country policy (pro/anti mining) could be heading. I’m not an expert on every
country’s political scene down this way and will not pretend to be either, but at least for most
South American countries and the more interesting Central Americans, keeping a pulse on
things may provide some use.
Market Watching
Necessary withdrawal and portfolio re-alignment
The bottom line goes at the top, so that things are nice and clear. Next week I am selling the
following positions:
• OceanaGold (OGC.to)
• IMPACT Silver (IPT.v)
• Bellhaven Copper and Gold (BHV.v)
• Duran Ventures (DRV.v)
• Plata Latina (PLA.v)
I am also adding to one currently open position:
• Gold Resource Corp (GORO) short position
Now for the thinking behind the overall decision to raise cash and then the specifics of each
company involved.
The market move last week (well, more the last two or three weeks, but the action last week is
the bit that really hurt) has caught me more than a little flat-footed portfolio-wise, with recently
added longs (most recently PVG.to just ten days ago) and less short hedging positions (i.e.
covering Tahoe Resources (THO.to) (TAHO) in May). There’s no mitigation, it’s a case of being
too long at the wrong time, reading the near-term incorrectly and have paid the price. The
strategic error is patently obvious so what needs to be done now is some better-late-than-never
adjustments to the portfolio in light of the new gold and silver price deck and that starts with
addition of more short to give more hedging. The touchstone to next week is risk management,
risk management and more risk management and if gold decides to laugh in my face
afterwards and immediately spring back, then so be it. As mentioned on previous occasions,
this is not a video game in which I have the luxury of reciting the St Crispin’s Day speech to the
assembled masses and if things go wrong get to hit the reset button with no personal
consequences; this is real life, real money and being the whuss that I am I will act accordingly.
Therefore, six trades are planned for next week.
• One of them, selling PLA.v, has been in the cards for weeks and shouldn’t come as a
big shock.
• Two of them, selling BHV.v and DRV.v, are the closure of trades that were always set
for the near term and were small sized in absolute cash terms. That one has turned out
to be a win while the other a loss is secondary at this point.
• Two of them, selling OGC.to and IPT.v, are closing producers that are no longer
profitable at the current market prices for gold and silver (plus minor byproduct metals
sales). We still like the companies and fully acknowledge that they have delivered on
their guidance parameters over the last few quarters. The problem is that their
16

attraction , which came from leverage to PMs at the previous price deck, has now
turned wholly negative with gold at $1,300 and silver at $20.
• One of them, adding to the GORO short, is driven by the desire to hold more hedging
to the the portfolio.
Now for details
Adding to Gold Resource Corp (GORO) short: I’ve considered other short positions
potential recently and had whittled down the names to a list of one, but sadly that one got hit
really hard last week and the potential has been diminished. Next to the potential short now
discarded adding to GORO short makes far more sense at current market prices.
Firstly, our back office calcs indicate the company now barely makes a profit on its silver and
gold production despite its never-ending promotion about its low cash cost make-up. At $20/oz
silver and $1,300/oz gold, the model spits out a $4m net profit, which doesn’t even cover its
newly reduced monthly dividend (3c/month = ~$5.1m) let alone the supposed exploration and
development work the company plans in 2013 in order to grow production further down the
line. We’ve recently seen drilling results from its properties that look good on paper, but drilling
is one thing and development is another and with the mine depth now pushing up costs, what
we assume from the newly drilled potential resource additions is an extension of mine life at
current production rates, more than any significant production growth.
Meanwhile at corporate level things are clearly not well at GORO. The news that the founder
family members of Gold Resource Corp (GORO) received negative votes at the company AGM
made the blog Thursday (6) but doesn’t seem to have been picked up anywhere else in the
chattersphere (but perhaps you know better, as for one thing I don’t waste my time reading or
writing at bullboards). Here’s the information...
...and although unsure whether Reids père et fils (along with cohort Bill Conrad) will go without
a fuss or will potentially point to the withholds not being greater than for + non-votes as reason
to stay. If there is indeed a change at the top, this might give a short-term boost to the share
price if the market perceives the changes as a positive after the lacklustre way in which the
company has been run by the Reid clan. However, there are three bigger reasons to consider
this bearish news, namely 1) if the Reid people “are resigned” and removed from the board
they get to sell their substantial shareholdings without any necessary disclosure. Their track
record has shown that they haven’t been shy about selling their equity positions and cashing in,
either. Then 2), there’s a distinct possibility that any new (Hochschild (HOC.L) sponsored)
management team will find some nasty surprises that the Reid clan has been covering while in
control and 3) the voting of last, with or without the surprises and with or without the
departure of the Reid clan, may well be the first stage of HOC’s exit from GORO. This was one
of the main scenarios upon which we hung our original (well, the second) short call a few
weeks ago and with Burstein now gone and the vote of unconfidence in the Reids at the AGM
now clear, if HOC decides to pull in its investments and concentrate on its core business by
selling its chunky 25% (or so) of GORO, the downside will be sharp and will be fast.
To sum up, the addition to the short in GORO next week is justified by the ongoing bearish
market for PMs (remember, most of GORO’s revenues come from silver and not gold, don’t get
fooled by that corporate title), the new prices for silver and gold that leave GORO barely
profitable and unable to cover its newly cut but still overgenerous dividend payments, plus the
17

potential for upheavals on the company’s corporate side. I continue to wager that the most
likely scenario is one in which HOC sells its position, but exactly how the cards fall is as yet
unknown. Whichever way it’s cut, the GORO market cap of $500m+ for a breakeven miner with
sub-100k AuEq production still looks mightily overvalued compared to peers, especially when
many of its peers are well run mining companies without the air of promo-push fly-by-nighters
that the Reids bring to the table. Adding to the short, target remains U$7.50 for the moment.
Selling OceanaGold (OGC.to) (OGC.ax) (OGC.nz): Here’s a quote from the piece “Stress-
testing OceanaGold Corp” from IKN212, dated May 27th. More specifically, it’s how the
conclusion section began:
“OceanaGold (OGC.to) (OGC.ax) (OGC.nz) is today, for me, a hold. It’s not a
share price without risk, because with gold at-or-around $1,400/oz we’re at
the company’s comfort limit as regards earnings potential and what it needs
to show to the market. If gold drops below $1,300/oz I think I’d reach my
own comfort limit too, dump my shares and take the subsequent loss...”
And that’, ladies and gentlemen readers, is the crux of this decision. OGC is a decent enough
operator and Didipio has started well, with only minor teething glitches and (from what we can
ascertain from the latest company declarations (7) better than expected production thanks at
this early stage. As for its debt obligations at the end of this year, the credit facility in place is
set to cover its near-term needs so there’s less worry about an immediate cash crunch here.
No, the call to sell OGC is a function of the gold price, no more no less. OGC has basically
delivered on all it guided, but that guidance is still for a company with a higher than industry
average cash cost due to its main New Zealand operations. The way to improve overall portfolio
quality amongst producers is to reel in exposure to higher cost, which is why OGC gets the
chop as of next week.
This one, especially after last week’s major dumpage in the stock, is a significant loss for the
portfolio in bother cash and percentage terms. The call to hold until now was based on OGC’s
earnings ability at a higher gold price but with gold now at $1,300/oz, that potential is now
whittled down to little or nothing and the decision to sell, admit error, take loss is a relatively
straightforward one, strangely enough it’s easier to call sell now than to have made that ‘hold’
call at $1.4k four weeks ago.
Selling IMPACT Silver (IPT.v): This one was a more difficult decision than OGC, but on due
consideration it’s one that has to be made. The basic things I like about IPT haven’t changed
since looking at it in IKN214 and it should be noted that intraday fluctuations aside, IPT has
held steady around the 65c price point of the weekend of IKN214 (while silver has seen a drop
from $22.60 to $19.87 per ounce, as per the London Fix (8)) which suggests that the stock was
indeed underpriced the last time we looked at it carefully. We like the company balance sheet
position and we like the way in which the major capex items needed for its 2012 turnaround
and (re)growth period are now a thing of the past. And on a personal note, up to this week I’ve
been happy enough to keep my toe in the silver sector via this stock, especially compared to
larger and more expensive peers (in relative and absolute terms).
Which again points to the same type of reasons to sell IPT as are mentioned in the OGC piece
above. IPT as a company has done nothing wrong, but our long position is now victim of
circumstance and a silver price that’s now too low for this relatively high cash cost performer to
be able to stay operationally cash flow positive. Exposure to a market with lower metals prices
has to trend towards quality and away from risk and at $20/oz (or below) silver, IPT is more
risk than quality.
Selling Bellhaven Copper and Gold (BHV.v): BHV performed very well last week, with
Friday especially strong after being hit along with just about all others on Thursday. This one
might turn out to be a place where I get a strong dose of seller’s regret later, as market action
18

of the type seen Friday often indicates more upside to come. However (and yeah, there’s
always a ‘but’ isn’t there?) this was always set out to be a near-term trade, it was due closed by
the end of this month and thanks to a luckily timed purchase it’s also going to give me a
reasonable cash (and very decent percentage) profit and in this market, a win is nothing to sniff
at. I therefore sell and take profits while the other bits of portfolio cleaning are going on.
Selling Duran Ventures (DRV.v): This one simple hasn’t worked. The idea was to buy in
with a near-term perspective and get a bounce on drilling and eventually assay results from its
Minasnioc project, JV’d and optioned out to Rio Alto (RIO.to). However, the permits have not
been forthcoming and since our purchase DRV has drifted down (the market wisely ignoring the
new 43-101 from its waste of time Aguila copper property). The combination of no drilling
activity at Minasnioc, the deterioration of the share price (largely in line with the general
market, no more no less) and the desire to cut exposure and raise more cash results in this one
being sold next week.
Selling Plata Latina (PLA.v): The call to sell this one has been in place for a few weeks and
the idea was to wait until the stock price rebounded to something more reasonable before
bailing. This market is not reasonable. It’s not an easy one to sell due to liquidity, so it may turn
out to be one of those positions that gets a partial sale to mark my personal exit price and then
I’ll patiently leave in dribs and drabs as the weeks drag on. But I will be looking to sell at least
that marker and have PLA in the closed positions part of the table next week.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Meetings last week
Apart from a couple of other meetings that were more to do with keeping in touch with the
local political scene, there were four meetings with mining company people
Strait Minerals (SRD.v): Due to a problem with the original meeting time and the inability to
rearrange the date, the programmed meeting with SRD didn’t happen.
Minera IRL (IRL.to): The main themes taken away from the meeting with IRL people are:
1) The company is in austerity mode. The overly large burn rate it ran in previous quarters
has been cut right back, with drilling plans shelved, geology teams being thinned out
and G&A cuts being made. As things stand the company can get through an extended
period of slump without the need to finance for running costs only purposes.
2) The Don Nicolas financing negotiations are continuing and they are advancing. I know
how difficult it can be to negotiate with Argentines (first hand, business and pleasure,
multiple occasions) and the anecdotal evidence offered up by management rings true.
To cut a long story short the bottom line message and the only really important thing to
report is that I was told to “give it one more month”, which is something I’m prepared
to do, albeit with a slightly exasperated sigh. However, there will come a time when
Don Nicolas will have to be frozen as a project and IRL will have to walk away for its
own good and concentrate all its efforts on Ollachea.
3) The basic plan to raise cash for Ollachea has always been to raise roughly half the cash
in classic debt finance and then the other half via a rights issue to current shareholders
(thus avoiding complaints of dilution). That’s still on the table but that type of right
issue at the low prices we see today would suggest a total issuance of perhaps 300m or
400m shares, which is a helluva burden on total shares out and would would potentially
see IRL with a share count of 500m or 600m shares. I’m really not sure whether I’d
want to buy in to my rights under those circumstances.
4) The most annoying thing I took away from the meeting was that management is rather
too obstinate about progressing on Argentina according to plan and refuses to
recognize that exposure to Argentina is one of the main causes, if not the single main
cause, of its recent price decline. To paraphrase, the exchange goes like this:
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IRL: “What do you think is the problem?”
Your Author: “You’re exposed to Argentina.”
IRL: “Yes, but it’s only a small part of the business.”
Your Author: “True, but I’ve had a dozen conversations about IRL where the
other person says, “Oh, that’s the one with the project in Argentina...” and
the voice trails off and suddenly the conversation changes.”
IRL: “You should tell them that the exposure is a minor part of the company.”
Your Author: “I do, it doesn’t matter. The optics of being there are far more
important than the reality or specifics of your exposure. Or even whether
Argentina is a reasonable place to go mining today.”
IRL: “Well we agree! Argentina really isn’t that bad! And the property is
great!”
Your Author: “No, we don’t agree. I might have a different view, but that’s
not the view of people looking to invest in juniors today.”
IRL: “Well that’s your job to tell them.”
Your Author: “No, it isn’t. It’s my job to tell people what I’m doing with my
money and respect the decisions of others. I have a small corner of my
portfolio exposed to Argentina, whereas you guys are risking your whole
company on the place.”
IRL: “But it can’t just be Argentina, the share price drop is too great to justify
it.”
Your Author: “Shall we order coffee?”.
As I see it, the problem IRL has with Don Nicolas is twofold. Firstly, it truly is close to a
financing deal to secure the capex and get the thing moving forward and that’s no bullshit, so it
makes total sense to press on and try to close the deal. However, the counterparty has clearly
been dicking them around a little and that might continue a while longer, not just one more
month. If it happens in the next month I’ll be happy and pleased to have been overcynical at
this point, because during the next month I’m definitely still going to be a shareholder in the
company and I’ll see the benefit of the closed deal there, but if it doesn’t happen in the next
month there’s not an ounce of my body and soul that will be surprised. Secondly, the company
is too in love with its property there and doesn’t have the type of hard-nosed corporate
structure that will allow it to make the tough decision to give it up (or at the very least put it on
the back boiler), which is the bit that most concerns me. Ollachea is a great property, will make
a great mine and will make some group of people a very decent profit. I want that group of
people to be its current shareholders. Don Nicolas is also a very good property, let there be no
doubt, but I don’t want my interest in Ollachea to subsidize an ongoing liability in Argentina. It’s
not past the point where closing the deal on Don Nicolas is a priority, it’s now absolutely vital to
get the deal done and the potential liability off the books.
Darwin Resources (DAR.v): The meeting with DAR was the last of the stay in Lima and it
was the most optimistic one of the lot, too. For example, about ten minutes after I arrived at
the office the guys (led by head honcho Graham Carman) received a phone call from the on-
site team at Suriloma saying that drilling had been going on since 7pm the previous evening (as
disclosed in its Weds AM NR (9)) that initial teething problems were out the way and that 22m
had already been drilled. Ground conditions were good and if all went according to
expectations, the first hole would hit mineralization at the 50m to 55m mark. The call (it was on
the ConfCall loudspeaker, they let me listen in) also said that the local community were
supportive and interested in the new activity and that the drill and team were performing well.
The plan is for 2,000m of holes, comprising of perhaps 12 separate holes testing the La Puerta
area (see IKN199 dated February 24th for the site visit report and details of location) that go
downhole ~150m each. The team does have some flexibility on holes depths and locations that
may change as data from holes drilled are received, but the 2,000m number is likely set in
stone. There is currently one hand transported rig on site (but it’s a big hand-moved one, I saw
a photo) and another will join it next week. As for timing on the first assay results, the best
guess from the team is that we should have the first hole or holes back and to the market by
mid-July.
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Regarding treasury, DAR says that things are OK and once the drilling is done there will still be
about a million in the bank (note market cap of $3.14m today). As for movements, the main
DAR team including Carman arrived at Suriloma Friday and is now there supervising the drilling
and, overseeing QA/QC and making sure the logging, sampling and shipping to the labs goes
correctly.
From here it’s all about The Truth Machine and DAR.v is well aware of that, too. The first three
or four holes will set the tone for the rest of the campaign, so those of you considering this as a
drill spec play (and let’s be clear, I’m one of those) should mark in the first or perhaps second
week of next month as the time to be long in anticipation of hard assay numbers. In a good-
rather-than-perfect world, Suriloma would return long intercepts of perhaps 100m mineralized
and grades of perhaps 0.6 g/t Au or above on this first run. In essence, what we’re looking for
here is something that stacks up to the La Arena property of Rio Alto, which is also oxide gold
and operated as a open pit dump leap operation in the same way that La Puerta would be if (a
very big if) it made the grade. Yes it’s a tough time for explorecos and the market is as bearish
as they come, but the advantage of a bet on DAR is the leverage such a small market cap can
offer you. Also, as CXO recently showed, the market is still keen on a good drill story and will
buy up your cheaply valued company on good exploration results.
Rio Alto Mining (RIO.to): The meeting on Tuesday with RIO confirmed that there were
rumours flying around, confirmed they were all untrue, confirmed the company’s current better
than guided 2q13 and also that cash costs were at or below expected guidelines. One thing it
did give me was a better handle on how sales would run compared to pad ounces and eventual
production. The scoop here is that the ramp-up in production in 2q13 was putting pad ounces
far ahead of expectations, but recovery kinetics mean that the full benefit of those extra ounces
won’t be seen until 3q13 and beyond. The current quarter is going great guns no doubt, but
when it comes to sales there’s going to be a lag that gets caught up in the third quarter. This
means that sales for 2q13 are still very likely to be higher than guidance but your author is now
peggin his best guess at around 48,000 oz sold, rather than the 50k+ oz guess of the last
couple of weeks that was a straight extrapolation of the easier to estimate on-pad ounces.
This puts our estimates as seen in this chart, which compares the quarterly production/sales
(sales confirmed for 1q13) guidances to our house estimates.
RIO.to: 2013 quarterly sales, guidance vs result
70000 65000
guidance 62000
60000 result
48000
50000
40000 36355
30000
20000
10000
0
1q13 2q13 3q13 4q13
source: RIO data, IKN ests for results 2q13+
As for cash costs, they look to be in line with guidance and so my best guess at this point is a
company that runs an operating cash cost of ~$7000/oz and an all-in cost of around $1,000/oz.
If we then assume an average gold sales price of $1,400/oz for the quarter (with six trading
days to go, the London Fix average for the quarter is $1,422/oz, though that’s bound to be
dragged down a little) this gives us a quick lines of math that looks like this:
48,000 oz sold X $400/oz net margin / 175,000,000 shares out = 11c per share quarterly EPS
If something like that comes to pass, a straight line forward annual EPS of 44c would imply a
P/E ratio of 4.5X as per Friday’s close. If 4.5X isn’t cheap enough for you for a working and
21

profitable gold mine, then sorry folks I can’t help you any longer, time to unsubscribe, stop
wasting your time with mining companies and invest in another sector. Hell, even 6X fwd PE
would look cheap to me and without even considering the production upside that will kick in
during the second half of 2013 and isn’t going away in 2014 either.
The gut feeling for RIO.to today is that it’s stupidly cheap and I just want to bang on the table
again and again. That’s as maybe, but it’s the same things I’ve said over the last two weeks
and look where that’s got me? Yup, a brand new $2.68 average near-term trading position
that’s been tacked onto the core holding but is already a full 26.5% down. So my gut my ache
but it’s also a bad stock weathervane, which is why I return to the financial parameters of RIO
today and note that even at $1,300/oz gold it’s a decently performing, profitmaking company
with a significant EPS in the pipe and growth to come. RIO is, fundamentally speaking, trading
at a very discounted valuation. Better market timers than I who have until now stayed out have
an excellent entry price. Your author has to be content with holding through, no more.
The caveat to our near-term position has always been (and still is) the gold price, as we didn’t
want a big swoon between the date of purchase and the date that RIO.to announces its second
quarter production. This, unfortunately, is exactly what has come to pass and the move down
to $1,300/oz has sent another bout of severe jitters through a shareholder base that was
already a collective bag of nerves (in Peru at least). However, a sub-$2 share price bakes in a
gold price of around $950/oz (according to your author’s spreadsheet) so even with the gold
droop and even if the drop continues to $1,200 (there, I’ve said it) RIO would still be an
oversold stock on rational and conservative financial parameters.
Conclusion
IKN216 is done, we close with bullet points:
• Some unwanted but necessary wholesale changes to the portfolio this week, with five
sales planned and more short added. Time will tell whether my move to reel in
exposure to the junior market marks the bottom of the slide in gold. I hope it does, but
for the moment it’s time to collect some cash and lower the profile. Risk management,
risk management, risk management.
• Despite its hefty drop last week, I’m comfortable enough about my new position in
Pretium (PVG) and will look to hold this one through its development process. Geols will
tell you grade is king, whereas numberpushers like I insist that margin is king. PVG has
them both, and in spades.
• Aside from the meetings with companies in Lima last week, the nervousness in the
mining market was rammed home to me on several occasions during other
conversations. There really isn’t anything as coward as a million dollars and until there’s
a significant turnaround in the price of gold (from which all things will take their cue)
things are likely to stay that way.
• That’s not to say the future won’t be without specific opportunities and one such
potential trade is Darwin Resources (DAR.v) now that drilling has started at Suriloma. I
won’t be taking a position until closer to the assay results time window, though. Three
weeks, perhaps?
• A rather chatty edition this week with more prose, more opinion and fewer numbers.
Perhaps a subliminal reaction on my part, because we’re now at a point where the
movements in the price of gold control just about everything and there seems to be
less point in coldly calculating any given company’s financial potential when the
22

underlying metals can make all forecasts redundant in a matter of days. I will, however,
continue to focus on the prospects of individual stocks rather than trying to pin the tail
on the golden donkey because that’s what The IKN Weekly is all about.
The top long-term picks are Rio Alto Mining (RIO.to) and B2Gold (BTO.to). I thank you in
advance for any feedback sent in. Flash updates will be sent promptly if required by events.
I wish you good trading fortune, ladies and gentlemen.
Otto
Footnotes, appendices, references, disclaimer
(1) http://research-ca.bmocapitalmarkets.com/documents/32F9881F-2C59-4E0C-8562-AA702B9AFB23.PDF
(2) http://finance.yahoo.com/news/pretium-resources-inc-positive-feasibility-090000489.html
(3) http://finance.yahoo.com/news/pretium-resources-inc-valley-kings-090000013.html
(4) http://www.larepublica.pe/21-06-2013/alcaldes-de-provincia-de-carayaba-respaldan-inversion-privada
(5) http://finance.yahoo.com/news/oracle-mining-provides-oracle-ridge-214708571.html
(6) http://incakolanews.blogspot.com/2013/06/gold-resource-corp-goro-agm-vote.html
(7) http://www.newswire.ca/en/story/1187173/company-insight-didipio-performs-strongly-growth-outlook
(8) http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
(9) http://finance.yahoo.com/news/darwin-commences-diamond-drilling-suriloma-125553571.html
23

Stocks To Follow Closed Positions, 2012
Closed in 2012 closed close PPS
Soltoro SOL.v jan'12 C$0.87 07-nov-11 C$0.94 8.0% cash moved to BCM.v
Gold-Ore Res GOZ.to feb'12 C$0.84 13-oct-10 C$0.98 16.7% trade closed on ELG.v offer
Minefinders MFN feb'12 U$11.68 17-nov-11 U$14.80 26.7% target made, trade closed
Iron Creek IRN.v mar'12 C$0.58 26-sep-10 C$0.31 -46.6% time up on small bad trade
U.S. Silver USA.to apr'12 C$2.18 15-mar-12 C$1.86 -14.7% ST trade no good, cut loss
Augusta Res. AZC.to may'12 C$3.10 29-ene-12 C$2.07 -33.2% bad mkt, bad trade cut loss
Bellhaven BHV.v may'12 C$0.50 22-sep-10 C$0.28 -44.0% new mgmt not impressive
Zincore Metals ZNC.to may'12 C$0.325 29-jul-11 C$0.17 -47.7% bad mkt, bad trade cut loss
Soltoro SOL.v may'12 C$0.70 18-mar-11 C$0.41 -41.4% bad mkt, bad trade cut loss
U.S. Silver USA.to aug'12 C$1.78 27-jul-12 C$1.36 -23.6% fail ST trade close pre split
Estrella Gold EST.v aug'12 C$0.91 27-mar-11 C$0.14 -84.6% Closed on port realignment
Fortuna Silver FVI.to sep'12 C$1.07 03-may-09 C$5.32 397.2% sell call $6.17/ Mar25
Strait Minerals SRD.v oct'12 C$0.125 09-dic-11 C$0.12 -4.0% closing coverage til FY13
Sunward Res SWD.to oct'12 C$1.47 13-mar-11 C$1.21 -17.7% sold, took loss
Gold Res Corp GORO oct'12 U$21.47 09-sep-12 U$17.40 19.0% Short trade closed
Yellowhead Min. YMI.to nov'12 C$1.00 01-abr-12 C$0.63 -37.0% sold, took loss
Primero Mining PPP nov'12 U$7.26 07-oct-12 U$6.73 7.3% Short trade closed
Bear Creek Min. BCM.v nov'12 C$3.38 07-nov-11 C$3.72 10.1% Took small profit
Vena Resources VEM.to dec'12 C$0.70 31-may-09 C$0.18 -74.3% Failed trade (caps F)
Galway Res GWY.v dec'12 C$2.19 24-nov-12 C$2.30 5.0% closed good ST arb trade
Stocks To Follow Closed Positions, 2011
Closed in 2011 closed close PPS
Sunward Res SWD.v jan'11 C$1.05 21-nov-10 C$1.63 55.2% target made, trade closed
Serengeti Res SIR.v mar'11 C$0.245 05-dec-10 C$0.285 16.3% sold pre-tgt, ST trade fail
Fronteer Gold FRG apr'11 U$2.37 03-may-09 U$15.24 543.0% buyout, trade closed
Minefinders MFN apr'11 U$9.09 07-nov-10 U$16.89 85.8% target made, trade closed
Metalline Min. MMG may'11 U$1.04 26-jan-11 U$0.89 -14.4% exit, resource disappointed
Peregrine Met PGM.to jul'11 C$0.87 06-mar-11 C$2.60 198.9% buyout offer, closed
Dynasty Metals DMM.to jul'11 C$4.20 03-may-09 C$2.85 -32.1% Sold. Fail. Move on.
Aura Silver AUU.v aug'11 C$0.22 13-oct-10 C$0.16 -36.4% Bad pick. Take loss
U.S. Silver USA.v aug'11 C$0.52 26-jan-11 C$0.71 36.5% closed to make room
B2Gold Corp BTO.to sep'11 C$2.80 12-may-11 C$4.27 52.5% target made, trade closed
Bear Creek Min. BCM.v sep'11 C$3.80 27-may-11 C$4.17 9.7% macro sell call victim
Minefinders MFN sep'11 U$14.70 10-aug-11 U$15.15 3.1% macro sell call victim
Great Panther GPR.to sep'11 C$3.03 22-aug-11 C$2.64 -12.9% macro sell call victim
Fortuna Silver FVI.to sep'11 C$1.07 03-may-09 C$5.36 400.9% sold 20%, macro sell call
Focus Ventures FCV.v nov'11 C$0.40 20-apr-10 C$0.20 -50.0% cut losses, bad trade
Regulus Res. REG.v dec'11 C$1.17 14-aug-11 C$0.52 -55.6% cut on news of poor 43-101
2009 and 2010 closed positions in appendices below
24

Stocks To Follow Closed Positions, 2010
Closed in 2010 closed close PPS
B2Gold Corp BTO.to Jan'10 C$0.88 08-nov-09 C$1.49 68.2% target made, trade closed
Radius Gold RDU.v Jan'10 C$0.18 23-aug-09 C$0.40 122.2% target made, trade closed
MAG Silver MVG mar'10 U$5.60 23-nov-09 U$7.28 30.0% closed in pdac week
Riverside Res RRI.v mar'10 C$0.435 20-sep-09 C$0.60 37.9% closed in pdac week
Amarillo Gold AGC.v mar'10 C$0.81 31-may-09 C$0.70 -13.6% closed in pdac week
B2Gold Corp BTO.to apr'10 C$1.24 18-feb-10 C$1.50 21.0% target made, trade closed
Lumina Copper LCC.v apr'10 C$0.84 14-jun-09 C$1.55 51.2% total position now sold
Troy Resources TRY.to may'10 C$1.10 03-may-09 C$2.25 104.5% sold on negative results
AuEx Ventures XAU.to may'10 C$2.51 24-may-09 C$3.38 34.7% trade closed
Nevada Copper NCU.to jun'10 C$3.27 14-mar-10 C$2.03 -37.9% need to lower Cu exposure
Carpathian Gold CPN.to jun'10 C$0.39 14-mar-10 C$0.35 -10.3% too exposed to cap raising
Amerix PM Corp APM.v jun'10 C$0.065 08-nov-09 C$0.05 -23.1% victim of macro bear
Antares Minerals ANM.v jun'10 C$1.42 06-dec-09 C$2.10 47.9% sold half
Vena Resources VEM.to jun'10 C$0.37 31-may-09 C$0.23 -37.8% sold half
Minera Andes MAI.to sep'10 C$0.75 28-jul-10 C$0.95 26.7% ST trade closed
Gold-Ore Res GOZ.to sep'10 C$0.52 01-aug-10 C$0.75 44.2% target made, trade closed
B2Gold Corp BTO.to sep'10 C$1.45 25-may-10 C$2.01 34.5% target made, trade closed
Blue Sky Uran BSK.v oct'10 C$0.41 19-may-10 C$0.22 -46.3% v small v bad trade closed
Dia Bras Expl DIB.v oct'10 C$0.14 30-aug-09 C$0.35 150.0% target made, trade closed
S. Amer. Silver SAC.to nov'10 C$1.38 24-oct-10 C$1.60 -15.9% loss on short, small fail
Ventana Gold VEN.to nov'10 C$7.92 27-jun-10 C$13.51 70.6% trade closed on buyout
Lumina Copper LCC.v nov'10 C$1.42 11-aug-10 C$3.65 157.0% trade closed
Antares Minerals ANM.v dec'10 C$1.42 06-dec-09 C$8.40 491.5% trade closed
Rio Alto Mining RIO.v dec'10 C$0.69 23-mar-10 C$2.16 213.0% trade closed
Coro Mining COP.to dec'10 C$0.585 03-oct-10 C$1.24 112.0% target made, trade closed
Stocks To Follow Closed Positions, 2009
Closed positions closed closing PPS
Cardero Res CDY/CDU.to May'09 U$1.20 03-May-09 U$0.87 -27.5% sold on negative news
Eastmain Res. ER.to May'09 C$1.04 06-May-09 C$1.315 26.4% trade closed
Radius Gold RDU.v May'09 C$0.165 03-May-09 C$0.235 42.4% trade closed
Latin Amer Min. LAT.v May'09 C$0.12 03-May-09 C$0.158 29.2% trade closed
Aquiline Res. AQI.to July'09 C$2.03 16-Jun-09 C$1.68 -17.2% took loss, bad timing
Chariot Resources CHD.to Aug'09 C$0.20 12-Jul-09 C$0.415 107.5% trade closed
Castle Gold CSG.v Sep'09 C$0.64 02-Aug-09 C$0.60 -6.3% ST trade didn't work out
Guyana Goldfields GUY.to Sep'09 C$2.30 12-May-09 C$4.50 95.7% profit taken
Los Andes Copper LA.v Sep'09 C$0.09 21-Jun-09 C$0.09 0% trade closed
Pediment Gold PEZ.to Oct'09 C$0.80 09-Aug-09 C$1.00 25.0% trade closed
Minera Andes MAI.to Oct'09 C$0.68 03-May-09 C$0.71 4.4% too much bad news
Dynasty Metals DMM.to Nov'09 C$4.18 03-May-09 C$6.01 43.8% half sold
Rusoro Mining RML.v Nov'09 C$0.55 03-May-09 C$0.57 3.6% underperformed
Important Disclosure
The information and opinions contained within this report reflect the personal views of the author and therefore all
material within should not be construed as accurate or reliable or be utilized as advice for investment or business
purposes. Independent due diligence and discussions with ones own investment and business advisor is strongly
recommended. Accordingly, nothing in this report should be construed as offering a guarantee of the accuracy or
completeness of the information contained herein, as an offer or solicitation with respect to the purchase or sale of any
security or as an endorsement of any product or service. All opinions and estimates included in this report are subject to
change without notice. It is prohibited to copy or redistribute this report to any type of third party without the express
permission of the author.
25