IKN #264Premium

The IKN Weekly
Week 264, June 1st 2014
Contents
This Week: Travel plans, Mailbag best and worst, US macro watch.
Fundamental Analysis: Adjusting the GoldQuest (GQC.v) model.
Stocks to Follow: Overview, Timmins Gold (TGD) (TMM.to), Goldquest Mining Corp (GQC.v),
Minera IRL (IRL.to), Rio Alto Mining (RIO.to) (RIOM), True Gold (TGM.v).
Copper Basket: Overview, NovaCopper (NCQ) (NCQ.to), Augusta (AZC) (AZC.to), Lumina
(LCC.v).
Low Cost Producer Basket: Overview, B2Gold (BTO.to).
Regional Politics: Peru: Puno files criminal charges against leaders of the Santa Ana protest,
Peru: Gregorio Santos begins his Cajamarca governor re-election campaign, Mexico: After a
cyanide spill, New Gold (NGD) San Xavier gets an inspection, Ecuador: Same script.
Market Watching: Lachlan Star (LSA.to) (LSA.ax).
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
Travel plans
I’ll be on the road next week. First stop is Lima, where I’ll have the chance to sit down and talk
with the Rio Alto (RIO.to) (RIOM) team, up close and personal and in their head office. Then a
site visit is in order and full details next week, suffice to say that even in these leaden times for
projects it’s one that shows plenty of promise. The whole trip will keep me away from the office
until late Thursday, which means the blog is likely to be quiet for most of the week.
Mailbag: Best and worst
Here’s the best mail received this week, which came on Saturday afternoon from reader ‘JB’
after the latest round of my series that shows how poorly the Kitco experts predict the moves in
gold.
Kitco Monkeys with dart boards
At least they give it a try. You haven't had any revelations lately. RIOM sucks.
My faith in the sector and everyone involved is just about bill.
To which I replied:
There aren't many revelations to be had in a flat market. I'm also looking for
shorts and seeing nothing.
And that’s the truth. To expand a little on that, Gold’s apparent breakdown from its fairly long-
standing U$1,280-U$1.320 price range last week (wouldn’t surprise me if it popped right back
in the days to come and is then called a “false breakdown” on somesuch wise title by the TA
guys) caused the whole complex to drop, but just as before at $1.3k or so, I still see better
1

opportunities for trades (let alone longer-term investments) to the long side. For sure equities
can go down further (they can go down to zero, as that’s what the word equity ultimately
implies)
Meanwhile, the worst mail received was from somebody who I trusted that decided to do
something very dirty instead of the right thing and as that person has a public presence, I’m
going to have to let it drop and leave the whole thing annoyingly cryptic for all but two of you
now that I’ve got that off my chest. But that’s part of the territory and frankly, if you’re not
making enemies in this sector you’re not doing it right. So yes JB, it all gets me down on
occasion, too. It was a healthy reminder that mining and writing about the subject is not the
way to form friendships; this is capitalism and if your not like JB and here for the money,
there’s something out of kilter. Message ends.
US macro watch
The one to remember is Friday and the BLS Employment Report of May, which according to the
evergreat Calculated Rick (1) has a consensus call of +213,000 non-farm payroll jobs on it this
weekend (though that consensus often moves one way or the other before the week’s done).
So be ready for the normal drill here:
• US jobs beats (cid:1) economy strong (cid:1) bad for gold
• US jobs misses (cid:1) economy weak (cid:1) bad for gold
Fundamental Analysis of Mining Stocks
Updating the GoldQuest (GQC.v) Romero financial model
Last week’s announcement (2) from GoldQuest (GQC.v) of its PEA for its main Romero project
in Dominican Republic was covered by our Flash update Tuesday morning May 27th (see
appendix 1) and the overall first impression of “acceptable, we hold” stands today as the main
reason to like GQC isn’t the PEA on what we know about Romero already, but the results from
the current drilling program. If things go to plan on that (and what could possibly go wrong?)
Romero will get bigger and more valuable, which would make last week’s PEA a baseline from
which the company can build a more economically attractive model.
So Today’s update note isn’t about any change to the call, but I am taking the opportunity to
plug in the main parameters from the PEA, adjust my previous assumptions (that were only
ballpark to begin with, please recall) and put together a slightly more refined economic model,
just to see what we’re up against here. Please note that today’s analysis follows on from the
NOBS report featured in IKN262 and a lot of the model assumptions remain as stands, so if
something doesn’t get mentioned here, it’s the same as three weeks ago.
What’s changed
Here’s a list of things that have changed compared to our model of IKN264:
• As noted in the Flash update on Tuesday, the capex bill to build the mine came out
higher than expected and which ever way you look at it, assuming a $333.5m initial
capex (to which we should add mention of the minor $40.4m in sustaining capex over
the assumed 15 year mine life (LoM)) is expensive for a 90koz/annum gold miner. No
matter that there’s a big revenues kicker from the copper, no matter that LoM cash
costs are low end, nobody’s going to spend that much to build a small mine in a
country that is as yet unproven on its stability towards the mining industry (NB, I like
Dom Rep and I think for mining it’s going in the right direction fast, but unproven is
unproven so when there’s a third of a billion dollars of OPM in play, rewards don’t
2

match risks at the current price decks). To its credit, GQC doesn’t shy away from the
high initial cost issue in its NR and here’s the part of the GQC spiel we can consider:
“The mining method requires sinking and equipping the shaft, installing the primary
crusher station at the bottom of the mine and making provision for backfill from bottom
up during the pre-production development period, which generally increases up-front
capital (lowering IRR) but results in lower sustaining capital and lower operating costs
per tonne, compared to other operations”. In plain English, the plan is to mine the
orebody (I can use that word, they can’t) from the bottom up, which means that
they’re going to have a higher proportion of sunk costs (quite literally and pardon the
pun) than similar sized operations, they need to spend to get up and running. Though
when Romero is in operation, it’s going to be a cheap one to maintain.
• The another big difference is the assumed mill throughput, which I guessed at 5,000tpd
but the PEA assumes at 3,800tpd. So a smaller mine for a higher price but there were
things to like as well from the PEA, so lets continue our list with a few more likeable
things from the NR.
• Average head grades are slightly up at 2.69 g/t au and 0.61% Cu. As reverse
engineering of the model suggests GQC is using a reasonable 10% mine dilution figure,
those are pretty good results for this first pass.
• Although we don’t have details yet, by the looks of the numbers in the NR it seems
GQC has solved a lot of the metallurgy issues. It’s assuming a 91% recovery for copper
and 83% for gold, where our previous guesses went 78% for gold (which I thought
was fairly close) and 60% for copper (which was deliberately lowball).
• Semi-on subject, our average annual operating costs assumption of $83.2m was pretty
darned close, as GQC is using $82m per annum. GQC offers a range of ways to cut and
slice the costs parameters in the NR and they’re all reasonable and logical. This is a god
thing, because it suggests the mine will scale well if the drills find the type of extra
ounces we’re expecting from them during this current campaign.
• The PEA price sensitivities chart
which GQC supplied along with
the NR last week (3) and
reproduced here shows in
visual form the thing you’ve
probably already picked up
from the model; that the
project economics are
leveraged to metals prices. As
an example, at 120% of metals
price assumptions (which
would imply gold at
U$1,560/oz, copper at
U$3.90/lb and silver at U$26.40/oz) the cash flow doubles. This makes the case for
GQC as an interesting option for those of you looking for a risk leverage play to gold.
Overall, I think my first pass of three weeks ago passed muster. It was only ever going to be a
ballpark attempt and now that we have some better criteria, the model starts to tighten. Some
things are different, others slightly different and others pretty similar. Therefore it’s time to get
to the numbers and put it all together. Main changes to the previous model of IKN262 include
• Throughput now at 3,800tpd
• Adjustments to gold and copper metals grades and recovery rates, as per the data
supplied in the NR. The minor silver by-product model is left unchanged.
• Mine dilution of 10%
3

• Our base case now uses the same metals prices as GQC (i.e. 1.3k/oz Au, $3.25/lb Cu,
$22/oz Ag), though as you’ll read below we offer up other alternatives in the tables for
comparative purposes
• Royalty at 1.25%, as per GQC model
• Interest due moved up from $20m to $25m per year, to account for the higher capex
cost.
• Depreciation/amortization up from $15m to $18m, for the same reason (higher initial
asset value)
These criteria and the ones we used before are then applied to four different metals price
decks, which I’m going to call “Lowball Case” for a fairly negative price scenario, “IKN Base
Case” for my idea of what a base case should be, then “GQC Base Case” to show the metals
price numbers GQC is working with in its PEA, then a final “Positive Case” which hints at a bit of
price blue sky in the future (though nothing wild). Here are the US Dollar numbers for each of
those:
• Lowball Case: Gold $1,100/oz, Copper $2.80/lb, Silver $19/oz
• IKN Base Case: Gold $1,300/oz, Copper $3.00/lb, Silver $20/oz
• GQC Base Case: Gold $1,300/oz, Copper 3.25/lb, Silver $22/oz
• Positive Case: Gold $1,400/oz, Copper $3.50/lb, Silver $25/oz
Here’s what comes out for income items:
CGQ at Romero: Income items for model year
At 3,800 tpd thruput Lowball Case IKN Base Case GQC Base Case Positive Case
Sales (U$m) 136.5 156.5 160.4 172.8
Cash COGS 83.2 83.2 83.2 83.2
Depreciation 18.0 18.0 18.0 18.0
SGA 3.5 3.5 3.5 3.5
Op income 30.1 49.9 53.7 66.0
Interest 25.0 25.0 25.0 25.0
Workers Part. 0.9 1.5 1.6 2.0
Tax 1.3 7.0 8.1 11.7
Net income 2.9 16.4 19.0 27.3
Shares out (m) 250 250 250 250
EPS 0.01 0.07 0.08 0.11
Capex -5 -5 -5 -5
FCF/sh 0.06 0.12 0.13 0.16
Source: CQC data, IKN ests
And here’s a target price for you:
GQC: Sales and earnings Target price & valuation data at various gold prices
Gold Price lo'ball IKN B GQC B POSI using four different gold (& Eq) prices
Sales ($m) 136 157 160 173 12-month target $0.50 (on 6x fwd EPS using
Upside to target 76% GQC base case)
EPS 0.01 0.07 0.08 0.11 Mkt cap ($m) $42 Enterprise value $32
Cash flow 0.08 0.14 0.15 0.18 P/sales (lo'ball) 0.27 EV/sales (lo'ball) 0.20
P/E (lo'ball) n/a EV/EBITDA (lo'ball) 0.7
P/E (IKN B) 4.4 EV/EBITDA (IKN B) 0.5
P/E (GQC B) 3.8 EV/EBITDA (GQC B) 0.4
If you compare that to the nominal target in IKN262’s analysis (though also back then we were
only using it as a guide, not setting a price target for this trade), we’ve dropped from 65c to
4

50c. That’s largely a function of the higher initial costs but I’m still ok with this, in the same
‘proof of concept’ terms I used before. The upside to GQC is always going to come from the
drillbit and the chance to see this deposit made larger and that’s exactly why I’m long GQC
today.
It’s also why I’m staying long, though the PEA didn’t provide some kind of surprise boost that
would have got me buying more at this early stage. The bottom line to GQC today is that the
stock’s a decent spec play right now. We’re looking to the current exploration program to
provide a catalyst boost, though another may come from any rebound in metals because we
see GQC at Romero is pretty sensitive to gold (and copper) prices. So, no hurry to add as yet,
but the small position held in the stock sees no worries after this PEA. The real decisions come
later once the drill assays start coming in.
Stocks to Follow
Of our 12 open positions last week there were zero that moved up. Not a single one. As for the
others, three remained unchanged (IRL.to), TGM.v, LRA.v) and nine stocks lost ground (the
others), with the worst percentage losers coming from the smaller positions in Coro (COP.to
down 12.5%) Salazar (SRL.v down 10.0%) and GoldQuest (GQC.v down 9.5%). So no massive
dump loser, mainly thanks to the Friday relief rally in the sector, but still a depressing and long
drudge of a week to follow both gold and the junior miners. Which is why I’m going to make a
addition purchase next week, of course. What else would you expect from a contrarian who
sees opportunity all around him? Or in the words of Gary Tanashian in this weekend’s edition of
his excellent letter, “Bulls want to feel all alone as the entire world schools them on why they
are wrong to be bullish”. Exactly.
We currently have 12 open positions on our ‘Stocks to Follow’ list, three less than our self-
imposed maximum. Two are green, ten are red.
5

this Reco Current
Company Ticker week Avg Price date PPS Gain/Loss% Notes
Top Picks
None at moment
Recommended long positions (in current order of preference)
Focus Ventures FCV.v str buy C$0.23 01-jul-12 C$0.27 17.4% tgt 50c, added, avged up
Timmins Gold TGD adding U$1.39 09-apr-14 U$1.25 -10.1% adding 3rd time, $2 tgt
Minera IRL IRL.to hold C$0.30 22-jul-12 C$0.15 -50.0% top pick called 24c, demoted
Rio Alto Mining RIO.to hold C$2.30 07-apr-11 C$1.85 -19.6% Demoted top pick, now hold
Dalradian Res DNA.to hold C$0.65 27-oct-13 C$0.85 30.8% Going well, tgt up to $1.70
Goldquest Min. GQC.v buy C$0.295 27-oct-13 C$0.285 -3.4% drillplay spec
True Gold TGM.v hold C$0.395 02-feb-14 C$0.375 -5.1% LT hold, takeover play
Santacruz Silver SCZ.v hold C$1.04 26-jan-14 C$0.74 -28.8% silver/M&A spec, rel. small
Lara Expl. LRA.v hold C$1.15 08-apr-12 C$0.76 -33.9% solid biz model, LT hold
Eco Oro Min. EOM.to hold C$0.48 22-sep-13 C$0.275 -42.7% paramo resolution missing
Recommended short positions
None at moment
Smaller/Riskier
Coro Mining COP.to spec buy C$0.125 26-jan-14 C$0.07 -44.0% Cu spec play, can add
Salazar Res SRL.v hold C$0.28 02-mar-14 C$0.18 -35.7% small risky spec, vg rocks
Closed in 2014 closed close price
Fortuna Silver FVI.to jan'14 C$2.80 23-dic-13 C$3.19 13.9% small ST trade closed
Rio Alto Mining RIO.to jan'14 C$2.06 07-jun-13 C$2.30 11.7% trading position finally closed
Network Expl. NET.v feb'14 C$0.01 22-jul-12 C$0.005 -50.0% position closed, did nothing
Tahoe Resources TAHO feb'14 U$13.10 08-abr-13 U$21.72 -65.8% short closed due to reality
Darwin Res DAR.v mar'14 C$0.10 14-jul-12 C$0.045 -55.0% tiny risk play dropped
B2Gold BTO.to mar'14 C$3.07 28-nov-12 C$3.35 9.1% closed to free up capital
Pretium Res PVG mar'14 U$5.38 22-nov-13 U$6.50 -20.8% short closed as port longer
Gold Res Corp GORO may'14 U$5.07 26-ene-14 U$4.12 16.7% Re-short now full position
Bear Creek Min BCM.v may'14 C$1.63 23-mar-14 C$2.05 25.8% Ag/pol risk trade, avged down
2009, 2010, 2011, 2012 and 2013 closed positions in appendices below
Now for some notes on a selection of the above stocks.
Timmins Gold (TGD) (TMM.to): Adding. This is the right price to add and average down for
the last time in this stock, the cash is there waiting for a home and this price makes for
excellent and back-stopped gold equity value. I have room for a few more and to average down
and I want gold equities at bargain prices. An easy call to make and I’m looking to add this
third time for a total cost average of around $1.33.
Goldquest Mining Corp (GQC.v): Plenty above, here’s some price talk. As the week wore on
the call looked made in the Flash update about right, as although GQC eventually lost ground
and dropped a couple of pennies it was more about reaction to the gold slump, less about its
own internals. It’s still rated as a “buy” on the near-term weekly sentiment column, because
GQC’s fate as a trade was always and still is about its drilling, not the reasonable looking PEA
we saw on Tuesday (well, we saw the NR, the PEA document will pop up on SEDAR eventually).
Minera IRL (IRL.to): Even though it was a bit of a puff piece, the article that appeared in
America Economia on Friday (4) made for a very interesting read, because IRL is now being
pretty open about the general details of the financing deal with Macquarie that will fund
Ollachea, which speaks volumes for the confidence they have in closing the financing. Here’s a
translation of the section that caught my eye most:
According to Benavides, the rest of the money can be raised from another bank or
6

from the capital markets. The executive added that there are companies interested in
purchasing a part of the project, that’s to say there’s a third alternative to raise the rest
of the money. Benavides hopes that the project moves into production at end 2015.
In total, Ollachea needs U$180m in investment. How will IRL finance to this amount?
According to [company president Diego] Benavides, this month the company will
receive a letter of financing intention for U$120m for the Macquarie Bank of Australia.
The other thing the America Economia article did was to put IRL and its story in front of a
whole new audience, as it’s most widely read in Chile and that’s a business and financial
market that’s looking for opportunities in the mining sector too.
As for price action the stock did ok in a rough market, finishing unchanged on the week in
Toronto and generating a couple of days of decent volume along the way too (800k traded on
May 27th in Toronto, three strong days out of four in London), though it’s still clear that until
the financing deal is closed this stock isn’t going to rally (or better said be allowed to rally, as
the long-term equity holders want their financing round of cheap shares to happen at a price
they like, not a price that’s imposed upon them).
Rio Alto Mining (RIO.to) (RIOM): The share price drifted and went lower with the rest of
the world, which means the company has a lot of convincing left to do. Meanwhile and just so
you know, on the morning of Friday May 30th Louis James of Casey Research recommended
RIO.to as a buy to the Casey “Investment Alert” (or whatever the top level of the Casey Ponzi
scheme is called) subscribers. I’d expect the Casey lesser levels will get the same message in
due course. You should know my opinion of that particular junior mining investment service by
now, so I’m just going to state the fact and move on In other news, I’m talking face to face
with RIO.to CEO Alex Black tomorrow Monday afternoon. You’ll get a Flash update if anything I
deem as actionable is heard.
True Gold (TGM.v): TGM keeps cranking out news releases and development updates from
Karma. Last week we had news of (5) the ground-breaking ceremony at the site, then (6) a
second NR which announced detailed engineering for the Karma project had been completed
(with nearly $10m in cost savings implicit) and finally its quarterly financial filings (7) (on that
one everything was in line, working cap at $65m and the rest held no surprises either). Of the
three NRs the most interesting was the groundbreaking, which means development has kicked
off at the project and we’re now on course for a new mine late next year.
The Copper Basket
After twenty-two weeks of 2014 The Copper Basket is showing a 6.65% gain to level stakes.
company ticker price 1/1/14 Shares out Market Cap current pps gain/loss%
1 Augusta Res AZC.to 1.51 144.41 431.79 2.99 98.0%
2 Lumina Copper LCC.v 6.29 44.07 359.17 8.15 29.6%
3 NGEx Resources NGQ.to 1.43 168.71 337.42 2.00 39.9%
4 Reservoir Min. RMC.v 4.97 47.5 294.03 6.19 24.5%
5 Nevada Copper NCU.to 1.35 80.5 165.83 2.06 52.6%
6 Copper Fox CUU.v 0.375 402.96 92.68 0.23 -38.7%
7 Western Copper WRN.to 0.76 93.68 89.00 0.95 25.0%
8 Hot Chili Ltd HCH.ax 0.425 333.11 83.28 0.25 -41.2%
9 Panoro Minerals PML.v 0.35 204.71 78.81 0.385 10.0%
10 Curis Resources CUV.to 0.57 74.79 56.09 0.75 31.6%
11 NovaCopper NCQ.to 1.60 53.4 56.07 1.05 -34.4%
12 Cordoba Min. CDB.v 0.90 58.81 41.76 0.71 -21.1%
13 AQM Copper AQM.v 0.11 139.05 13.91 0.10 -9.1%
14 Coro Mining* COP.to 0.10 159.37 11.16 0.070 -30.0%
15 Oracle Mining OMN.to 0.27 49.03 8.34 0.17 -37.0%
HCH.ax in AUD$, rest CAD$ //CDB 2x1 split May'14 Portfolio avg 6.65%
7

There were five winners (LCC.v, NGQ.to, HCH.ax, PML.v, OMN.to), two unchanged stocks
(CUV.to, AQM.v) and eight losers (AZC.to,
RMC.v, CUU.v, NCU.to, NCQ.to, WRN.to,
The Copper basket 2014, weekly evolution
COP.to, CDB.v) over the week and as a 25%
result, the overall basket dropped by just
20%
under a percentage point though stayed
well within the range of the last two 15%
months. Best winners on the week were
10%
Lumina Copper (LCC.v up 27.7%) and
5%
Panoro (PML.v up 11.6%), while worst
losers came from NovaCopper (NCQ.to 0%
down 13.2%), Coro (COP.to down 12.5%)
and Cordoba (CDB.v down 11.3%).
In the copper market, the edge came off
the prices last week as the market dropped with the
general negative tone of most (not all, just most)
commods. However, the uptrend channel is still intact
and copper looks healthy to me.
So to inventories (one of Cochilco’s
weekly datasets) with another down-
spike in world copper inventories. Here
come the bullets:
• Total stocks dropped by a modest overall 6,404 metric tonnes (mt), or 2.3%, to stand
at 278,842mt.
• Shanghai Futures Exchange copper warehouse inventories were unchanged on the
week at 92,652mt.
• The LME copper warehouse, finished down a little to 171,350mt.
• The smaller-scale Comex warehouses copper inventories dropped to 14,841mt.
In other words, a quiet week after the recent downdraft storms and perhaps connected with
the drop we saw for the market price for copper, as the sector takes a breather. As it’s the end
of another month, here are the data tracking charts for your consideration (edit: placed above
text to make things more compact) and they underscore the speed of the copper stocks
drawdown and also how the LME has regained its top dog position. As per this weekend, 62%
8
ht5naj ht21 ht91 ht62 dn2bef ht9 ht61 dr32 dn2ram ht9 ht61 dr32 ht03 ht6rpa ht31 ht02 ht72 ht4yam ht11 ht81 ht52 ts1nuj
source: IKN calcs
Copper inventories, per month 2012-2014
1000000
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
21.naJ bef ram rpa yam nuj luj gua pes tco von ced 31.naJ bef ram rpa yam nuj luj gua pes tco von ced 41.naj bef ram rpa yam
Copper inventories: percentage held per exchange
80
70
60
50
40
30
20
10
0
Mt Cu
LME Shanghai Comex
source: Cochilco
21.naJ bef ram rpa yam nuj luj gua pes tco von ced 31.naJ bef ram rpa yam nuj luj gua pes tco von ced 41.naj bef ram rpa yam
LME Shanghai Comex
source: Cochilco

of exchange stocks lie in the LME system.
Now for updates on a few of our featured basket stocks:
NovaCopper (NCQ.to): I spent the last two days of last week slapping my hand away from
the buy button here. NCQ dropped hard and went under a loonie for a while, which has all the
hallmarks of a stock looking to find its level before the inevitable financing comes along. This is
now firmly in the cheap zone and if it were for the crappy lifeless market, I would have bought
and tucked some away. As it is, i still think that wait until at least the financing announcement
is the smartest course of action. But this price is very tempting.
Augusta Resource Corp (AZC.to) (AZC): The HBM bid was again extended and it now looks
set to carry through to the end of the
shareholders’ rights period, in two weeks’
time.
This chart shows how HBM had a soft week
(like the rest of them) and dragged down its
near-proxy share AZC with it. The market isn’t
pricing anything but a successful bid into this
one these days, slight arbitrage aside.
However, it’s worth noting that in the event of
HBM dropping its bid, AZC would fall hard and
HBM would likely rally. Just in case you need
another reason to throw in the towel, Mr
Garofalo.
Lumina Copper (LCC.v): Up hard on some speculative whispers, LCC had to publish a NR to
address its share price moves and tried to say as little as possible, as always. It could be Boy
Who Cried Wolf material, but we’ve seen this type of spike in this stock before, accompanied by
the “China is about to buy!” whispers. Nothing’s come of them so far. This continues to be an
easy avoid for me, as the thought of spending billions on a mine in Argentina...nah.
The Low Cost Producer Basket
After 22 weeks, the Low Cost Producer Basket is showing a 3.06% gain to level stakes
company ticker price 1/1/14 Shares out Mkt Cap (Bn) current pps gain/loss%
1 Freeport FCX 37.74 1040 35.41 34.05 -9.8%
2 Goldcorp GG 21.67 812 18.98 23.37 7.8%
3 Barrick ABX 17.63 1000 16.11 16.11 -8.6%
4 Newmont NEM 23.03 497.87 11.40 22.89 -0.6%
5 Silver Wheaton SLW 20.19 357.39 7.34 20.54 1.7%
6 Franco Nevada FNV 40.74 147.01 7.14 48.58 19.2%
7 Agnico Eagle AEM 26.38 173.43 5.57 32.09 21.6%
8 Pan American PAAS 11.70 151.41 1.87 12.37 5.7%
9 B2Gold BTG 2.02 651.4 1.58 2.42 19.8%
10 First Majestic AG 9.80 117.02 0.98 8.39 -14.4%
all prices in U$, using NYSE ticker prices Portfolio avg 3.06%
A big drop for our basket that covers the bigger caps and the producers, which speaks volumes
on the sentiment out there last week. All ten of our component stocks lost ground last week
and some of the moves were big compared to company size, with the worst seen by B2Gold
9

(BTG down 11.7%), First Majestic (AG down 7.4%) and Agnico Eagle (AEM down 5.8%).
The Low Cost Producer Basket: Weekly performance and
comparative to GDX control
35%
30%
25%
20%
15%
10%
5%
0%
10
ts13ceD ht21 ht62 ht9 dr32 ht9 dr32 ht6rpa ht02 ht4yam ht81 ts1nuj
basket
gdx control
source: Yahoo! Finance, IKN calcs
Low Cost Basket: Percentage difference between
basket and GDX control, 2014
8%
7%
6%
5%
4%
3%
2%
1%
0%
ts13ceD ht5naj ht21 ht91 ht62 dn2bef ht9 ht61 dr32 dn2ram ht9 ht61 dr32 ht03 ht6rpa ht31 ht02 ht72 ht4yam ht11 ht81 ht52 ts1nuj
source: ikn calcs, NYSE/Nasdaq data
This week’s message: Don’t blame the junior mining sector, it was rough out there for
everybody.
B2Gold (BTG): Buyers of Papillon? The rumour about B2Gold being the likely bidder for
Papillon Resources (PIR.ax) started flying about in Australia Tuesday (8), which means it
affected markets in North America as from the open Wednesday. And as this chart (probably)
shows, BTO’s drop last week can only be partly blamed on the sag in the gold price:
Here’s BTO, GLD and GDX all together on the same chart and yes, BTO dropped along with the
others on Tuesday as gold lost ground and the sector took a bath. But come Wednesday
morning GDX managed to rebound and ended the week roughly in line with gold, while BTO
saw accelerated losses on accelerating volume.
In other words, a big fat “Don’t Do Clive Clive!” message from the market. This was pointed out

by Iwnattos on his blog (9) along with a second post which shows how well the RIO.to share
price has done since announcing the SUE purchase (10) (hint: not very). For what it’s worth, if
it turns out to be true I’d call BTO buying PIR as far worse, horrid empire-building at exactly the
wrong time (at least RIO.to can point to synergies and the local advantages it has, as long as
said locals let them build the thing). Also for what it’s worth I don’t think BTO is going to buy
PIR, so when nothing happens or when some other company steps up and reveals itself as the
mystery suitor, BTO stock has a ~7% rally to offer the nimble amongst you.
Regional politics
Peru: Puno files criminal charges against leaders of the Santa Ana protest
This one made me laugh in that special way. Three years and three days after the uprising in
the Aymara region of Puno, Peru, that ended with the Alan García government rescinding the
Bear Creek (BCM.v) Santa Ana concession (the same one that’s now on its way to being
reinstated), the judiciary in Puno have brought charges (11) of aggravated extortion, disturbing
the peace and blocking road transit against the leader of the protests, Walter Aduviri, along
with 20 other community leaders. If found guilty as charged, the accused would spend between
16 years and 28 years in jail.
It’s complete showtime bullshit, of course. Even if the charges reach a court hearing level
(which they might) and even if Aduviri and colleagues are summoned by the beak, the chances
of him turning up voluntarily to such a kangaroo court are between slim and zero. Then the
thought of Peruvian authorities sending in a police car to arrest and bring in the accused is a
joke; if they go there I’d recommend a convoy of 20 vehicles including light armoured and a bit
of air support, then they might have a chance.
Aduviri has said he’ll fight the charges “tooth and nail, but at the right time” (12). In the
meantime you can imagine how this Peru government move has gone down with those who’ll
also be asked in a few weeks’ time to support the new project plans from BCM to open the
Santa Ana mine. The layers of stupid that run Peru are never-ending.
The BCM trade worked out well, but unless the stock drives higher and then a line to short the
stock becomes available, it’s not one to which I’m planning a return.
Peru: Gregorio Santos begins his Cajamarca governor re-election campaign
On Friday, governor of Cajamarca Gregorio Santos officially resigned his post, a protocol move
which allows him to begin his re-election campaign for the October elections. Here’s an extract
from this report in Peru’s national newspaper “La Republica” (which, like all other national
newspapers, has a clear anti-Santos editorial line but at least gives him a fair hearing most of
the time).
Santos told La República, with some regret, that he will miss some of the
privileges that come with his job. But despite the negative attack campaign
that he has to put up with from several fronts he will put body and soul into a
strong campaign in order to defeat the candidates sponsored by the mining
companies and sent from Lima to stop him from consolidating his
development model for Cajamarca.
“In these elections there are a lot of (outside) interest in these elections, there
are millions of Soles in play and the right wing have never forgiven me for
stopping Conga. But I warn them that they’re going to have Santos for a while
yet and that we’re going to return to govern the region”, he said.
All that and more besides. The negative attacks on him from all sides of the national press have
been non-stop and will continue in the months to come, that’s a guaranteed prediction.
However, the tone also underestimates his candidature and his grassroots support and due to
11

the first-past-post type of vote, where there’s no second round run-off and 25% of the popular
vote will likely give any candidate the win, his re-election isn’t that hard to imagine. More on
this next week.
Mexico: After a cyanide spill, New Gold (NGD) San Xavier gets an inspection
On Wednesday, reports came in of cyanide contamination at the San Xavier gold mine in San
Luis Potosí State, Mexico. The mine, which is a wholly owned subsidiary of New Gold (NGD),
called the spill “an isolated incident” in its press release (13) in Mexico (and once again, we
stand amazed that NGD decided this wasn’t newsworthy for its English language stakeholders)
and also said that the company had taken action to prevent the cyanide pollution from reaching
or entering the local water system.
In fact, the alert was due to a report (14) delivered on May 21st to the local municipality by
national environmental and health authorities and only made public last week. The report tells
of substantial lead, arsenic and cyanide contamination in the local area due to the mine activity
and stated that 13 people had been recently hospitalized as a result. As a result of the clamour
kicked up once the report became known, the State environmental bureau Semarnat sent a
delegation to the mine on Friday (15) to make an inspection, paying particular attention to
apparent problems with areas of the leach pads and the tailings dam. We’ll find out later the
results of that inspection, but as this mine and its operations are particularly unpopular with
locals who have always complained of noise problems, problems caused to building structures
nearby and general pollution, it’s unlikely to be an issue that goes away quietly. In Mexico at
least, because NGD already seems very keen to keep a tight lid on the subject for the wider
world.
Ecuador: Same script
An update from Ecuador, where apart from “reluctantly conceding to his party members” and
allowing a debate to open on the possibility that the country laws might be changed to allow
him to run again (oh so reluctantly), Rafael Correa also last week sang from the same
songsheet he’s sung from for a number of years and defended his pro-mining position for the
country (16) “We are going to develop and socially and environmentally responsible mining
industry”, and then “We’re the Saudi Arabia of metals. In Saudi Arabia it’s much easier to
produce petrol than here, but in the case of mining the situation is reversed”, he continued,
while extolling the virtues of the low cost of operations in Ecuador.
Tell that to Kinross.
Correa gets a quasi-dictatorial image painted of him by the mediocre Northern English
language press, but in fact is a popular President and has brought both political stability and
good economic development, largely on his own terms. There are reasonable causes for dispute
over his way of government, including cracking down on the worst excesses of a hostile press
in the country, which does infringe of freedom of speech (but really, you ought to read the
libellous stuff they used to say about him and other people there). Also, the caudillo President
that tries to cling onto power and is eventually weakened is a classic history of Latin America,
so his latest “well maybe I’ll run again if you let me” gambit is a first step down that unwelcome
road. But in the great scheme of things he’s been a good influence on the country and deserves
his strong popularity ratings. However, his grand plans to mine Ecuador have never taken off
despite his best efforts, probably because they depend on getting indigenous groups on-side
and developing out of the way rural and jungle areas which are home to people that simply do
not want large scale civil works in their regions. If there’s an unfulfilled weak point to Correa’s
presidency so far it’s mining (and to some extent hydrocarbons, with the ITT project facing stiff
opposition for the same reasons)
12

Market Watching
Lachlan Star (LSA.to) (LSA.ax) dumps to 10c
I don’t really have much for you in the way of ‘Market Watching’, mainly because it was such a
crappy market to watch and nothing much happened while gold slid from under us. Though one
that did catch my eye (and one other reader too, judging by the mailbox and thanks PB) was
the big selling Friday in Lachlan Star (LSA.to) (LSA.ax), which you can see on this chart of the
Toronto issue:
As there doesn’t seem to be any news accompanying the dumpage, chances are it’s one large
holder or perhaps insto throwing in the towel on a very poor performing stock.
LSA has its problems, not least of which being a revolving door management team, difficult
balance sheet and an asset that can’t produce gold at a profit at current prices. However it is
widely held and if gold perked up enough it would provide decent leverage from this heavily
discounted price now on show. It’s a risky proposition, don’t think anything else but that, but as
I wrote back to reader PB (who’s an experienced trader and doesn’t need his hand held), “The
general plan would be 1) take a risk and buy some 2) gold reverses the downtrend and gets
people loving it again over $1,300 3) sell your 10c LSA for 20c. Risk/reward, just like anything
else.”
Be clear that I’m not going to buy any myself. Even if it did appeal, it’s the type of trade that
would need constant attention and I’m going to be off-line for large segments of the next few
days.
Conclusion
IKN264 is done, we end with bullet points:
• I’m on the road for four days next week. Expect findings next weekend
• My copper exposure is too low. I need to get more copper on board this portfolio.
• At 17 pages total (including the end pages guff and by keeping the use of charts to a
minimum) it’s turned out to be a pretty short edition of the Weekly this time. Fear not,
I’ll make up for that next weekend.
There are no long-term top pick stocks at the moment. I thank you in advance for any
feedback. Flash updates will be sent promptly if required by events.
I wish you good trading fortune, ladies and gentlemen.
Otto
13

Footnotes, appendices, references, disclaimer
(1) http://www.calculatedriskblog.com/
(2) http://finance.yahoo.com/news/goldquest-reports-positive-preliminary-economic-103000745.html
(3) http://www.goldquestcorp.com/images/press_release/GQC_PEA-sensitivitiesgraph.png
(4) http://incakolanews.blogspot.ca/2014/05/minera-irl-irlto-mirll-in-america.html
(5) http://finance.yahoo.com/news/true-gold-holds-ground-breaking-104000162.html
(6) http://finance.yahoo.com/news/true-gold-announces-completion-detailed-103000283.html
(7) http://finance.yahoo.com/news/true-gold-mining-reports-q1-220000325.html
(8) http://incakolanews.blogspot.ca/2014/05/the-clive-again-b2gold-btg-btoto-linked.html
(9) http://myownmarketnarrative.blogspot.com/2014/05/b2clive-buying-papillon-good-idea.html
(10) http://myownmarketnarrative.blogspot.com/2014/05/rio-alto-buying-sulliden-good-idea.html
(11) http://www.larepublica.pe/29-05-2014/piden-hasta-28-anos-de-carcel-para-dirigentes-de-aymarazo-en-puno
(12) http://diariocorreo.pe/ultimas/noticias/9667431/aduviri-voy-a-defenderme-hasta-con-las-un
(13) http://pulsoslp.com.mx/2014/05/28/evento-aislado-genero-presencia-de-cianuro-en-pozo-minera-san-xavier/
(14) http://www.jornada.unam.mx/ultimas/2014/05/29/trece-intoxicados-por-contaminacion-causada-por-minera-san-
xavier-en-slp-6962.html
(15) http://www.sdpnoticias.com/estados/2014/05/29/profepa-atiende-derrame-en-minera-san-xavier-de-slp
(16) http://www.prensa-latina.cu/index.php?option=com_content&task=view&idioma=1&id=2740791&Itemid=1
Appendix 1: Flash update dated Tuesday May 27th
Good morning, less than an hour before the opening bell on this rather chilly and very windy Tuesday morning.
GoldQuest (GQC.v) has this morning delivered its PEA (scoping study) on the Romero project in the Dominican
Republic.
http://finance.yahoo.com/news/goldquest-reports-positive-preliminary-economic-103000745.html
After an initial look at the document, comparing to my own ballparked model, and then considering my investment thesis
in this small and new long position, main thoughts are as follows:
•
At $333m (plus minor sustaining capex levels), whichever way you look it's ultimately an expensive bill to pay
for a 90k/annum gold producer.
•
This is reflected in the low-ish 15.1% post-tax IRR estimate. That number will have to go higher before this
project gets off the drawing board, it's not enough potential return for a small mine in an unknown jurisdiction.
•
However there's reason to like this result today. It's largely understood by the market that GQC needs to
expand Romero from its current resource size to have a winning project on its hands and this PEA underscores that.
What we have from today's PEA is a type of "proof of concept", the company can say that even under less than perfect
circumstances Romero shows positive economics. That's not bad and in that framework, understanding today's PEA as
a starting point for potentially better things to come means this risk/reward play is intact.
•
As for my investment thesis, I made it clear (or I think I did anyway) in the analysis of IKN262 that the project
economics and the target price generated by the modelling are a secondary concern. What we're looking for from GQC,
14

first and foremost, is success from the drillrigs from the current program. The PEA is with us and shows reasonable-
under-circumstances numbers, but Romero isn't going to happen on this document alone. However it sets a baseline
from which GQC can work, and with exploration fortune this stock can go higher pretty quickly.
Bottom line: I have a small position in GQC and will happily hold it on the back of today's PEA. I won't add any more to
the position. The true catalyst for GQC will be the drill assays from the current program and that's the point when I'll
decide whether to add to the trade or withdraw.
Best, O
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-jan-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-dec-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-apr-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
15

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.
16