IKN #265Premium

The IKN Weekly
Week 265, June 8th 2014
Contents
This Week: Adding to Minera IRL position.
Fundamental Analysis: Rio Alto Mining (RIO.to) (RIOM): A meeting with management and a
Gonzo Site Visit to the Sulliden Gold (SUE.to) Shahuindo project.
Stocks to Follow: Overview, Minera IRL (IRL.to) (MIRL.l), Timmins Gold (TGD) (TMM.to),
Goldquest Mining Corp (GQC.v), True Gold (TGM.v), Eco Oro (EOM.to).
Copper Basket: Overview, NGEx Resources (NGQ.to), Lumina Copper (LCC.v).
Low Cost Producer Basket: Overview, B2Gold (BTO.to) (BTG).
Regional Politics: AP’s important report on Antamina, Peru project risk and NPV discounts,
Brazil Serra Pelada: A meeting tomorrow.
Market Watching: Minera IRL (IRL.to): Adding to the position, 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
Adding to Minera IRL position
I’ll be buy a few more of these shares, now very cheap, next week. Headsup complete, details
below.
Fundamental Analysis of Mining Stocks
Rio Alto Mining (RIO.to) (RIOM): A meeting with management and a Gonzo Site
Visit to the Sulliden Gold (SUE.to) Shahuindo project
There’s a reason I kept quiet about my exact movements last week when writing up IKN264
last weekend and now it can be revealed. There are two basic parts to the report on most of
my movements:
1) On Monday, I had a 2+ hour meeting with Rio Alto Mining (RIO.to) (RIOM) CEO Alex
Black and COO Eduardo Loret de Mola (my first meeting with him, unsurprisingly he
turns out to be a smart and affable man). We talked Shahuindo, the deal, the political
and community risk as they and I see it. It was a very constructive meeting and set my
mind at rest on several aspects,m while providing food for thought on others.
2) On finishing the meeting and as explained in the Flash update last week (see appendix
1) I got in a plane, travelled to Trujillo, then took an overnight bus to Huamachuco,
then another bus to Cajabamba, arriving at my destination around 9am Tuesday
morning. From there I had a couple of morning meeting with local government people,
then left the town to visit as much of the nearby Sulliden Gold (SUE.to) Shahuindo
project as possible. The visit was uninvited and unannounced (RIO don’t own it and it’s
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not even worth my e-mail time to ask SUE for a visit) which posed its own logistics
problems, but in the end I saw way more than enough (before nearly being arrested)
to come to some pretty solid conclusions. From there I spent the night in Cajabamba,
had one more meeting with a local politico then wended my way back down the hill for
the night flight back to Lima. Thursday in Lima was spent on business matters other
than RIO/SUE, then a final flight and home that evening
So that’s the itinerary and as you already know the main conclusion of the office-plus-site visit,
that of restoring Rio Alto Mining to a Top Pick here at The IKN Weekly, let’s not beat about the
bush, it’s time for the details and analysis.
Meeting with CEO Black and COO Loret de Mola
Unsurprisingly, most of the meeting on Monday afternoon was about the pending friendly
takeover for Sulliden (SUE.to) and top of the agenda were political, social and community risk
factors for the Shahuindo project, because when it comes to things such as rocks and
economics there was little more than agreement about the projects clear strengths and viability
(we’ll do more on that at a later date). I’ll do the main points from the meeting in this way:
• RIO.to is very, but very confident about SUE/RIO wrapping up the necessary surface
rights purchases from the people who have not sold as yet, and they expect the
purchases to happen within a matter of weeks, perhaps a month. COO Loret de Mola
went through the details of the people who were still negotiating (I call them holdouts)
and on a case by case level, there seems to be just one person left who’s potentially a
stickler and even then, his land holdings only graze the very edge of the stage one part
of the pit development and should cause a particular problem to begin. The other
landholders who need to sell are either at final agreement or very close to final
agreement stage and all the deals are being done in in a win-win style.
• Before signing a Confidentiality Agreement (CA) a few weeks ago, CEO Black told me
that RIO had no idea what the company was doing on a community relations level and
once the CA was in place, it was his first worry and the thing he most wanted to learn
about SUE’s efforts in the locality (as via what’s known about the deposit, there were
far less concerns and a lot of confidence about its economic potential already). What
RIO learned about SUE’s community relations efforts pleasantly surprised them,
because they’d also expected to find SUE in a tough spot but instead found a company
that’s made good and low key headway in the last 12 months. SUE has plenty of
support programs in place with locals and has the deal of approval from the local
government for its efforts.
• When it came to regional politics and the influence of Cajamarca regional governor
Gregorio Santos, one thing RIO keen to emphasize was the geography of the region
and where Cajabamba was compared to the politically hot zone around the capital,
Cajamarca City. The visual aid used was a map of the region and the RIO guys pointed
out how Cajabamba was in the South of Cajamarca and more influenced by its
connection to Huamachuco, La Libertad region (where La Arena is located) and on to
the coastal city of Trujillo, than it was by the area in the North of the region where
most of the political controversy lies. This makes sens eon an intuitive level and it was
one of the things I’d determined to find out more of for myself later that week,
unbeknown to the RIO team.
• We talked extensively about the illegal/informal miners on site and in the area. It turns
out that there were many more illegals on the concession a few years ago than there
are now, with previous levels in the thousands but this year those are down to a few
hundred. As for more detail, they told me there were three main groups of informals
there, with one group being locals form a local village mining areas uphill that don’t
touch the Shahuindo reserve/resource zone and another small local organization
covering a patch further out as well. The only potential problem were the 200-or-so so-
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called “foreigners”, who although Peruvian come from different areas of the country,
have a bad reputation locally and are not made welcome by locals. They’re currently
mining an area that would become part of phase two of Shahuindo, so even if they
decide to really dig in their heels they’re not going to stop the mine from opening and
when that happens, the game is largely up.
• Away from the political/community risk question, we also talked about the deposit and
what RIO planned to do with it. As I’d suspected on hearing the RIO/SUE merger
confcall and also getting to talk with CEO Black a little on the phone a couple of weeks
ago, RIO isn’t going to follow the feasibility study plan as published by SUE to the letter
and rather it’s going to apply the knowledge it’s gained from mining La Arena to
Shahuindo. As CEO Black put it (and I’m paraphrasing as I can’t remember the exact
quote), RIO isn’t not buying the feas study, it’s buying the deposit. Which naturally led
to the question of capex and how much RIO expected to shave off the current plan’s
$130m capex estimate and the answer to that is a lot, way more than I expected. CEO
Black wouldn’t give me an exact figure because even he doesn’t know it yet, but when I
asked him if he expected to get the final capex bill under $100m he said “Oh yes, well
under” (and that is an exact quote). After fishing a little more than that, I’d put my best
guess on Shahuindo capex at $90m and as for financing that ticket price, I’d expect
RIO to raise financial debt for some of it and then pay for the rest out of its own cash
flow and treasury of “New Rio”.
Those were the main points covered, but as well as that the impression was that the confident
image that CEO Black has projected these last few weeks is way more than skin deep and he’s
truly confident about bringing Shahuindo into production soon. So the meeting ended as
meetings do and I left to go North on a plane.
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Sulliden Shahuindo gonzo site visit, June 2014
I arrived in Cajabamba town (in fact it’s officially a city as it’s the provincial capital and it also
has a nice little
cathedral, seen here)
on Tuesday at around
9am and the town
centre was already
open or opening.
Here are a couple of
scene shots from the
centre which include
a small pedestrian
walkway where the
main shops are
located, a central square and locals doing their thing, some of
them wearing the traditional wide brimmed hats of the region
(both men and women wear them, particularly in the rural
areas).
Before making my first appointment with the town hall
government people, the job was to stroll around and get
impressions. One of the things to note was the amount of
political propaganda already adorning walls in the city, with all
the main party candidates for mayor of Cajabamba and also
those running for the more important job of Cajamarca regional
president on display. Here are a few shots of those:
Of them all, the most interesting candidate propaganda was for the MAS party candidate for
mayor of Cajabamba, one Shander Rodríguez (Shander being his first name). It was noticeable
that inside the town boundaries there was just about equal amounts of campaign adverts for all
the main parties, but once you were out of town and in the rural areas the MAS party stuff
dominates. The MAS party is of course the party of current governor of Cajamarca Gregorio
Santos, the one who’s branded “anti-mining” by just about all the national and international
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media for his stance against the Conga gold project in Northern Cajamarca. Here’s a shot of an
out-of-town wall painting for MAS which simply says “Water and
Life”, one of the slogans used by “Goyo” Santos during his
mandate.
As well as the political daubings, the impression received from
Cajabamba city, both Tuesday morning, Tuesday evening and
Wednesday, was of a very sleepy provincial market town. The
population must be around 15,000 to 20,000, the place is out of
the way geographically and has none of the hustle and bustle of a
main connecting city or large urban area. Its main activity was
clearly agriculture and much of the town centre was geared
towards that, with agro supplies shops, agro machinery shops and
loan companies specializing in small loans for agro/landowners the
order of the day. Being there was a bit of a throwback for me too, as it was like my first
experiences in Peru in the upper highland areas of Puno, where small town inhabitants had
rarely seen a foreigner (let alone one that spoke Spanish) and had that same naive curiosity
about their attitude towards me. The atmosphere was never threatening or negative, in fact the
people were helpful and kind a fault, but it was clear that they didn’t have many people through
there of my ilk.
On this subject, let’s recall a little of the Rio Alto promotion of its friendly takeover deal and the
way in which it tells the world Shahuindo is just 30km in a direct line from its current mine, La
Arena. That’s true, but the reality is that there’s plenty of distance packed into those 30 clicks.
At the moment, the connection from one to the other involves 15 minutes to the city of
Huamachuco, then two hours from Huamachuco to Cajambamba by a road that will soon be all
paved, but is currently seeing plenty of work and civil construction in order to upgrade it (this
type of activity flurry on public works is far from unusual just before a main election) and will
also need upgrades on a few of the small stream bridges if it’s to take an increased amount of
heavy mine truck traffic. That’s just to get you to Cajabamba, because the project lies another
40km from the city on the other side of a valley and half that road is dirt track. It’s decent dirt
track and probably wouldn’t need much in the way of upgrading, but it’s dirt and it’s another 90
minutes of travelling all the same. Overall and at the moment there’s a four hour trip between
La Arena and Shahuindo, which will cut down the immediate synergies between the two
somewhat. There is a remote and more direct dirt track that runs roughly directly to Shahuindo
from La Arena and misses out both of the main towns, but that would still be a 75km trip and
according to information, would need plenty of upgrading to get it to industrial use level.
Back to the visit and next a couple of photos taken outside places in which I had meetings. The
“Municipalidad de Cajabamba is the town hall and the provincial
political centre. It’s where the mayor works (didn’t speak with him)
and inside I sat down with a couple of functionaries (names kept
in reserve) who told me that Shahuindo/Sulliden was a welcome
partner in the region and gave me some standard, cookie-cutter
spiel that was nevertheless welcome, because there’s clearly no
type of official animosity towards the company’s presence. I
mentioned that I’d heard SUE had been active in its community
relations programs and had provided support to people around its
area of influence in things such as crop improvement and
marketing of produce, to which they agreed. After hearing their
somewhat unsure comments on what exactly SUE was doing with
local farmers, the impression is that SUE isn’t trying to re-invent
the wheel and has adopted a few programs that are being used in other places in the region,
but that’s not such a bad thing. What I heard was enough, that SUE at Shahuindo was an
accepted part of the community and was helping out. The two functionaries also commented
that the electricity sub-station being built near to the Shahuindo project had provided dozens of
jobs for locals and that it was nearing completion. More on that later.
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My next port of call was here, at the local offices of the National Water Authority (ANA) for my
second pre-arranged meeting. It turned out to be brief-ish, as
my only official concern was to check whether Shahuindo was
being a good corporate citizen environmentally and whether
there had been any reports or protests from locals about its
practices or whether they’d affected the water supply. The lady
who attended me gave SUE a clean bill of health, but said that
for some years they’d been monitoring the effluent discharges
from the informal/illegal mining going on at the site. She agreed
that illegals activity had diminished in the past year or so and
didn’t really know why.
It was now time to stop enjoying the luxuries and comforts of
the city and head out to see how much I could see of the project
itself. Situated 90 minutes drive and on the upper parts of the opposite side of the valley to
Cajabamba, it wasn’t going to be easy to make a quick and efficient tour of the site, especially
as I hadn’t been invited and really didn’t want to be thrown off the hill at the first opportunity.
The solution therefore was this:
A Honda 250cc trails bike (as it turned out 500cc would have been better, but 250cc was just
about adequate) owned by a local resident who knew the area where we were going very well
(and this person’s ID goes absolutely no further than that). My guide up front, myself as pillion
and off we went. Here left we are on the road out of Cajabamba going down towards the river.
The centre photo as we crossed the river, about 30 minutes out of town and roughly an hour
before we got to the Shahuindo site. Then on the right the road turns to dirt track as we start
up the other side and it stays that way.
I took plenty of shots from the back of the bike on the way up (to around 3,000m/9840 feet
above sea level, with the town of Cajabamba the other side at 2,660masl) but although very we
climbed a pretty valley dotted with a couple of small villages along the way, it wasn’t much
more than another trip through the Peruvian countryside so I’m editing out a little in order to
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get to the paydirt. Just under 90 minutes after leaving Cajabamba town we were at the top and
now on Sulliden project property, i.e. I was trespassing.
I already had a plan in my head, and that was to visit the places that were less likely to have
the strictest security. That meant staying away from the deposit and those gold ounces and so
rather than turning left at the top of the hill, the call was to turn right and visit the main thing i
wanted to see, the site of the electricity substation development. Here’s a photo taken as we
approached that site.
This was in fact the key part of the visit and as physical stuff goes, the thing I most wanted to
see. The substation was awarded its construction permits in April last year and although we
have some photos available at the Sulliden site (1) of progress from around September 2013 to
three close-focus shots dated posted March 2014, there’s been nothing since then (it is in fact
the same electicrity line that will supply La Arena with its grid power under contract from
approx 3q14 onwards) and it’s been kind of difficult to work out just how much progress has
been made, particularly recently.
We arrived at the site and my pilot asked whether I wanted to stop. The answer was no, let’s
just drive through so we ran through a couple of (open barrier) checkpoints and did just that,
with me taking photos on the way. What I saw was impressive, far more than I expected.
Brand new pylons, still shiny from recent galvanization, are now erected and the site itself was
bigger and more advanced than I’d imagined. It was difficult to do an exact headcount, but
there must be at least 50 people working on site (perhaps 80) with plenty of CAT-type plant
operating, walls being built, foundations laid etc etc.
This shot of the camp and living quarters, the housing located directly opposite the civil works,
gives an idea of how many people need to be on site for this construction project. This is only
the electricity project and unconnected to the Shahuindo camp at the other end of the property.
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This next photo was from the other side of the substation construction site, with a semi-view of
the deposit in the distance behind that large peak. The direction of the main grid connection is
given too, as I hiked up the hill to the left and
took a look (the bike with two passengers
couldn’t manage the now stiff gradients any
further). On the other side of the valley the
pylons are already strung with cable, so the final
connection should be relatively straightforward
with maybe 2km or so to connect to the sub-
station.
Overall, I was VERY impressed with what I saw
at the electricity substation construction site and
here’s why: We know that work had started
there, but to see the amount of people and
progress being made is testament to a project
that must have not only its formal permits, but
official and tacit consent to move forward from
all strata of government in Peru, including (in
order of size) national, regional, provincial and local. Be clear that large works simply do not
happen in Peru unless it’s political green lights all the way and not only that, this one is
happening with plenty of hands on deck and at the beginning of a key election campaign for
the Cajamarca region. Of all the things I saw, seeing this part of the project moving forward
aggressively made the whole trip
worthwhile by itself.
It was time to move on with the
direction now back towards the
main Shahuindo camp, but along
the way there were other things
to see such as this shot of the
non-Shahuindo side of the peak
next to the project. As you can
(just about) make out, there are
illegal/informal miners dotted over
the flank, their ops visible by the
blue plastic tarpaulins they use for
roofs of their shelters. I was told
that the people here are from a
local village (to left of shot and
down valley) and are tolerated by
Shahuindo on both sides of the
peak, including its direct property
area, because they’re not mining
any part of the resource and
keeping on good terms with these locals makes political sense.
We got to a checkpoint, barrier down, and with a SUE-hired
security guard. As I knew we were on a public thoroughfare
road I gave him my passport details and just told him “passing
through”, at which point he radioed (probably to the main
camp) and opened the barrier. A little further on and before
getting into view of the camp site, we CAME across this
development to the right. Called Charlie Three, it’s the Sulliden
main core shack and as I was feeling pretty inquisitive by this
point so decided to go down and take a look. There was a one
security guard on site too and after a little jawbone, was given
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the tour of the facility (though not allowed into the shacks, they were under padlock and my
man didn’t have possession of the keys). I managed to take a few photos (trying not to be too
blatant about it at this point though) and here are three of them, including a bit of proof
positive (left), portrait of your author the trespasser next to waste baskets (centre) and a shot
from the edge of the core shack site which gives an idea of how close we now are to the
deposit (right), just 1km away.
But perhaps the best and most instructive photograph from this point is the one below, which is
why it’s larger and with some notes scribbled on it. This is a view from the edge of the core
shack looking across the valley towards the town of Cajabamba (circled) and does a decent
enough job of showing the scale of the area and how little the city will care about a mine on
the other side of the valley.
Because it won’t, except for the Fact that Shahuindo will provide a few hundred jobs for locals
and townsfolk will likely be among that headcount. Shahuindo lies a long way from major
population areas, across a river and up a hill. There are a few small villages in its area of direct
influence and of those, the main one Algamarca is populated by the very people who they’ll
need to build and then operate the mine; locals with plenty of (informal) mining experience
who have a shot at a salaried position for the first time in their lives.
At this point I’d seen just about all there was to see apart from the deposit zone itself. I knew
that there would be a main checkpoint before crossing into that and I’d worked out from the
geography that my biker friend and I would have to pass by the main campsite as well, but as
9

we’d managed to talk our way through a couple of checkpoints already and breezed past a
couple of others without stopping over at the substation site, I thought it would be worth the
risk. Which was the wrong call, but as things turned out it wasn’t a disaster either.
So on we went and here’s the last photo I managed to take, with the start of the campsite up
to the left and the checkpoint just round the corner. I just had
time to stash the camera before the fun began, which started by
being stopped and asked for ID. I handed over my passport and
they took the details, at which moment things started to go a little
bit wrong. I was introduced to the site manager, then the site
security manager and then a couple of local police officers, who
were really keen on finding out why I’d been on their hill that day.
It became very obvious very quickly that I wasn’t going to get any
further than the checkpoint that day, so the game was to avoid
getting arrested and held for more questions at the police force’s
preferred slow rhythm. It took about 30 minutes of careful
explanation and sticking to my story (pro-tip: when you have to lie
to cover your ass, make the lie a simple one and make sure it has
elements of truth in it) before the situation was calm, the SUE people realized I posed no sort
of threat and the police didn’t have reason to hold me further. So with my passport handed
back, me and my biker friend decided that discretion was the better part of valour and made
our way back to Cajabamba town before anyone up there phoned SUE head office and decided
to change their mind about my presence.
[Sidebar: Note to any Rio Alto officers or management reading this: Assuming the
merger is approved and goes ahead, one of the ways in which you can get some cost
synergies and at the same time improve the operations at Shahuindo is to sack the
security manager there as soon as you take control. Not only did he run a very leaky
ship, but as we conversed it became plain that if I’d decided on a different course of
action and simply lied blatantly to one and all, the rules and regulations that they set
down in-house would have seen me through all checkpoints quite simply (if it weren’t
for the way I’d been snooping around at other places on the property or had to answer
to the local cops, at least). He didn’t even have the clarity of mind to ask me if I’d been
taking photographs, which for me is the first thing you’d want to know from your
trespasser, be their motives innocent or otherwise. The guy’s a fool and relies all too
heavily on the gravitas brought to the project site by a couple of hired policemen, so
can him a.s.a.p and get your best guy from La Arena to sort them out and re-write the
regulations book. Seriously, how the HELL does a complete stranger wander into the
core shack area?]
Back at the town I checked into a cheap hotel for the night, but before calling it a day decided
to go on a little hunt and I’m glad I did, because it turned up a very useful little political nugget.
Being a small town, I went on the hunt for the MAS party HQ, the party with our anti-Conga
friend Gregorio Santos at its head who’s going for re-election this year. It didn’t take long and
when I knocked on the door and a lady answered, I explained who I was and wondered if it
would be possible to talk with the local candidate for mayor, Shander Rodríguez, at some
point. “He’s in here, come in!” was the reply and so with a slice of luck served, I got to spend
about ten minutes with the candidate for the mayor of Cajabamba for the “anti-mining” party.
What he told me was more than interesting too, because once we’d got past the standard
politico-spiel, he was adamant in the party line of “Santos is not anti-mining, he is anti-Conga”.
The party and Santos position is that Conga makes no sense and is environmentally damaging
but other mining projects are welcome in the region provided that they adhere to the
environmental rules and that the locals around the project welcome them. When we got the
case of Shahuindo (it’s not known by that name locally, as everybody refers to the project as
“El Sulliden”), Señor Rodríguez said that not only were they good about the project but when
he comes round Cajabamba on the campaign trail he’s going to make actively supportive
statements about the project and how it’s good for the region. This was an unexpected nugget
and worth its own weight in proverbial gold as far as I stand; as all other candidates running for
election this October come from mining supportive parties and it’s only the MAS party that has
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people worried, but even they are good about Shahuindo going ahead! When trying to track
down Shander I thought it unlikely we’d hear something outright anti-project, but i wasn’t
expecting such a strong endorsement of it either. On hearing that political risk dropped as low
as you’d wish for from a gold mine project in Peru.
With that the interesting part of the uninvited visit to Cajabamba and Shahuindo came to a
close. The next morning I arranged a meeting with a local agro bank manager in order to try
and pick one of the local financial brains about the project and its potential consequences, but
that turned out to be a damp squib of a meeting, the man in question didn’t know much about
Shahuindo (or anything else for that matter) and we parted friends without having learned
much. From there it was bus, then bus, then wait in Trujillo, then plane, then hotel in Lima,
then, morning in Lima, then back to Arequipa and home on Thursday evening. End of trip.
Discussion, conclusion, recommendation
The basic bottom line is that last week has convinced me that the Rio Alto purchase of Sulliden
is a smart business move and that Shahuindo is going to become an operating mine under the
auspices of RIO sooner rather than later. But there’s more to just throwing out a conclusion like
like, because for years (quite literally) my personal position has been against this Shahuindo
project because of its perceived high risk and with badly run company on top.
The takeover move of Rio Alto has forced me to re-examine my position and yes, my prejudices
towards Shahuindo and Sulliden Gold. If RIO hadn’t made this move I’d still have the same
opinion, with a big fat “avoid” slapped on the SUE stock because my mind was made up and
wasn’t going to change, no sir. The plain fact is that I was wrong.
One line of thought has come back to me on several occasions these last seven days, and that’s
about the make-up of an entrepreneurial winner. The essence is about risk management and
being able to see an advantage where others see little or nothing. When risk is involved, if
you’re in the position to recognize a risk that’s much lower than perceived by the rest of the
market, you’d be interested in purchasing the underlying asset, proving people wrong and
enjoying the re-rating of said asset higher as the market comes to see what you saw first. That,
i firmly believe, is what we’re seeing here and when it comes right down to it this means that
Alex Black is smarter than I am about business. Now that’s not going to come as much of a a
shock to any of you (it’s certainly no shock to me) but seeing up close and personal how a
smarter, deeper and quicker understanding of a political/community risk scenario can lead to a
great deal has rammed home the difference between the success story business people and the
also-rans.
It’s taken a situation where I was forced to re-examine my own position and get informed as
quickly as I possibly can to see that my previous conclusions about SUE at Shahuindo were no
longer valid. Things are better there than before, SUE has done the right groundwork with
locals, the people that matter are onside, the footprint on the larger Cajabamba community is
small, the project has support at al governmental levels and not only that, but the RIO/SUE
merger fits very well and RIO will be able to use its expertise on the same type of rocks to
make itself a very economically interesting and profitable mine, all at a much lower capex than
the market expects.
The bottom line: After checking out the situation at Shahuindo at ground level via an uninvited
an unannounced visit to the property and talking to local players as well as company
management, The IKN Weekly re-instates Rio Alto Mining (RIO.to) (RIOM) as a Top Pick. I’m
not adding any more to my holding because I have a ton already, but I’m glad to say the issue
of a possible lightening or full sale of the stock is now well and truly off the table. I don’t expect
RIO.to to move up in the next few weeks, not until the deal is closed (around August and on
schedule), but once that’s done I expect “New Rio” will benefit from re-rating due to size and
its shares will go higher as 2014 draws to a close. This isn’t one for the flippers, it’s one to
invest in.
11

Stocks to Follow
Of our 12 open positions last week, four went up (TGD, IRL.to, TGM.v, SCZ.v), three were
unchanged (RIO.to, DNA.to, SRL.v) and five went down (FCV.v, GQC.v, LRA.v, EOM.to, COP.to)
but despite that count it was a good week for the list overall. That’s because the only two
double figure percentage moves were both up, thanks to the action in Timmins Gold (TGD up
18.4%) and Minera IRL (IRL.to up 13.3%).
We currently have 12 open positions on our ‘Stocks to Follow’ list, three less than our self-
imposed maximum. Three are green, nine are red.
Reco Current
Company Ticker this week Avg Price date PPS Gain/Loss% Notes
Top Picks
Rio Alto Mining RIO.to hold C$2.30 07-abr-11 C$1.85 -19.6% Returned to top pick
Recommended long positions (in current order of preference)
Focus Ventures FCV.v str buy C$0.23 01-jul-12 C$0.26 13.0% tgt 50c, added, avged up
Timmins Gold TGD buy U$1.38 09-abr-14 U$1.48 7.2% adding 3rd time, $2 tgt
Minera IRL IRL.to ADDING C$0.30 22-jul-12 C$0.17 -43.3% top pick called 24c, demoted
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$0.28 -5.1% drillplay spec
True Gold TGM.v hold C$0.395 02-feb-14 C$0.385 -2.5% LT hold, takeover play
Santacruz Silver SCZ.v hold C$1.04 26-ene-14 C$0.76 -26.9% silver/M&A spec, rel. small
Lara Expl. LRA.v hold C$1.15 08-abr-12 C$0.72 -37.4% solid biz model, LT hold
Eco Oro Min. EOM.to hold C$0.48 22-sep-13 C$0.26 -45.8% paramo resolution missing
Recommended short positions
None at moment
Smaller/Riskier
Coro Mining COP.to spec buy C$0.125 26-ene-14 C$0.065 -48.0% 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
Now for some notes on a selection of the above stocks.
Minera IRL (MIRL.L) (IRL.to): Adding. I’ve decided to average down a little on this already
large position, but it’s not being put back at Top Pick, not yet at least. The motive for the move
is explained in the longer text found in ‘Market Watching’ below (well, I hope it’s explained) but
suffice to say here that it’s due to the largely positive optimized feasibility study for Ollachea as
reported by the company last week, plus the impending deal to get Ollachea financed and into
construction once and for all, which I fell is now both close and to be a better one than most
are expecting. All the details below, but the idea here is to nibble at this current price (and yes,
the fact I have money on the sidelines helps the decision, accuse me of having a hole burning
in my pocket and I couldn’t deny it) and average down.
12

Timmins Gold (TGD) (TMM.to): Added. Due to the
Monday morning rally I didn’t get the envisaged $1.25-
or-abouts price that I wanted as per the call this time last
week, therefore the cost average only clicked down by a
penny (please note, we’re down to $1.38 from last
week’s $1.39 on the table above). But add a few I did
and the result’s been good...so far at least.
As for the market-moving news, that’s all about an
attempted boardroom takeover. Sentry (2) owns 17.25%
of TGD shares and is unhappy about management
independence and the grievances apparently date back to the time B2Gold came a sniffing and
Timmins refused to hand over the relevant information, something that TMM’s board now
denies (well, they seem to deny in a NR on Friday that has a couple of semantic holes left in it,
unlikely on purpose). The whole episode is good for the stock and rightly so, because the
market views TMM as more likely to find a buyer if the current entrenched management is
replaced.
Goldquest Mining Corp (GQC.v): after being away
from the screen for most of the week and then
checking out and catching up on market matters
Friday, one of the stocks that got a pass mark was
GQC. It traded modestly in a fairly tight range around
the current price and didn’t set anyone’s world on
fire, but it maintained and that’s what we want before
the drill assays arrive. When that might be I do not
know (guessing end June or early July).
True Gold (TGM.v): Pumped by Bob Moriarty in a note I was sent the links to but didn’t read
(really couldn’t be bothered), TGM spent most of the week at 40c or so before fading on Friday
afternoon, as tends to happen to this type of pump
job sooner or later. The commentator who gets off on
moving stocks and (and often sells into the pumps,
thus making it worth their while) is a part of the fabric
of the junior mining promo world, be that good or bad
and Moriarty is just one of many who play the sordid
little game. This time he happens to pick on a stock I
own, it looks good in my port for a few days, his
epheremal influence wears off.
TGM will win the day on its fundamentals and that
means if it’s as attractive as I think it is, it’s eventually
going to be bought out by some company or other (as mentioned previously, put me down for
Nevsun or Endeavour Mining as most likely potential buyers) and the win gets counted in the
tens of percents, not in single pennies. Holding and ignoring the noise.
Eco Oro (EOM.to): On June 2nd, the board awarded themselves the bonus options (3) they so
richly deserve (sadly, irony doesn’t carry well in the written word) which add up to 1.26m
spread between seven people (details here), at a strike price of 27.5c. Apart form that, nothing
else worth reporting in thsi stock that hurts not to hold at its current price and is apparently
asleep.
13

The Copper Basket
After twenty-three weeks of 2014 The Copper Basket is showing a 4.57% gain to level stakes.
company ticker price 1/1/14 Shares out Market Cap current pps gain/loss%
1 Augusta Res AZC.to 1.51 144.41 430.34 2.98 97.4%
2 NGEx Resources NGQ.to 1.43 168.71 344.17 2.04 42.7%
3 Lumina Copper LCC.v 6.29 44.07 325.24 7.38 17.3%
4 Reservoir Min. RMC.v 4.97 47.5 295.93 6.23 25.4%
5 Nevada Copper NCU.to 1.35 80.5 169.05 2.10 55.6%
6 Copper Fox CUU.v 0.375 402.96 94.70 0.235 -37.3%
7 Western Copper WRN.to 0.76 93.68 83.38 0.89 17.1%
8 Panoro Minerals PML.v 0.35 204.71 75.74 0.37 5.7%
9 Hot Chili Ltd HCH.ax 0.425 333.11 71.62 0.215 -49.4%
10 Curis Resources CUV.to 0.57 74.79 62.82 0.84 47.4%
11 NovaCopper NCQ.to 1.60 53.4 54.47 1.02 -36.3%
12 Cordoba Min. CDB.v 0.90 58.81 41.76 0.71 -21.1%
13 AQM Copper AQM.v 0.11 139.05 12.51 0.09 -18.2%
14 Coro Mining* COP.to 0.10 159.37 10.36 0.065 -35.0%
15 Oracle Mining OMN.to 0.27 49.03 7.60 0.155 -37.0%
HCH.ax in AUD$, rest CAD$ //CDB 2x1 split May'14 Portfolio avg 4.57%
Last week our list saw five winners
The Copper basket 2014, weekly evolution
(NGQ.to, RMC.v, CUU.v, NCU.to, CUV.to), 25%
one unchanged stock (CDB.v) and nine
20%
losers (LCC.v, AZC.to, HCH.ax, NCQ.to,
PML.v, WRN.to, COP.to, AQM.v, OMN.to), 15%
with the best move made by Curis (CUV.to
10%
up 12.0%) and the worst ones from Hot
5%
Chili (HCH.ax down 14.0%), AQM Copper
(AQM.v down 10.0%) and Lumina Copper 0%
(LCC.v down 9.4%). So overall a negative
sort of week for the copper junior
explorecos, which matches the action seen
in the underlying metal (and frankly, with
the drop we saw in copper it could have been a lot worse).
Here’s the five day price chart which shows we’re back to just
over U$3.05/lb after edging towards a much healthier $3.20
recently. All last week was pretty much unidirectional on
copper.
The story behind the drop seems to be worries and
investigations into nefarious doings in bonded copper
warehouses in China that lie outside the LME/Shanghai/Comex
systems. For more reading on that this Bloomie note covers
the main points (4) and this segment does the telling well
enough:
China’s Qingdao Port is looking at whether companies offering copper as collateral for loans
counted the same batches more than once. Macquarie Group Ltd. said any lending curbs
stemming from the review may weigh on prices, which lost 2.3 percent this week, the most since
March 14.
Copper has dropped 3.8 percent in four days after the inquiry was reported, extending a decline
this year amid concern that slowing global economic growth would crimp demand. China’s finance
14
ht5naj ht21 ht91 ht62 dn2bef ht9 ht61 dr32 dn2ram ht9 ht61 dr32 ht03 ht6rpa ht31 ht02 ht72 ht4yam ht11 ht81 ht52 ts1nuj ht8
source: IKN calcs

deals use commodities from iron-ore to soybeans to obtain credit and may tie up as much 1
million metric tons of copper, Goldman Sachs Group Inc. estimated in a March report.
“Worries that the slowdown in demand from Chinese financing deals after recent inventory fears
in Qingdao Port are still the driver here,” Steven Scacalossi, head of global metals sales at TD
Securities in Toronto, said in an e-mailed report. “Momentum sellers are joining the fray.”
In other words, you may have thought that less copper than expected in stocks would be a
bullish thing, but in fact it would be a bearish thing because it would crimp the style of those
looking to use the held metal at loan collateral and slow demand for new batches of metal. Or
so the theory goes, as it sounds a little too convoluted to me and one of those “good excuse
for...” stories that are concocted to point the market in the direction certain people would
prefer.
This one from Reuters (5) tells of how a large chunk of the unregulated warehouse stocks is
now on its way to an LME warehouse and we can expect a 10kmt to 20kmt influx into that
system in the weeks to come.
With that in mind we move to our regular inventories section and here are your bullet points:
• Total world stocks dropped by 9,503 metric tonnes (mt), or 3.4%, to stand at
269,339mt.
• Shanghai Futures Exchange copper warehouse inventories dropped by a sharp
6,152mt, or 6.6%, to finish the week at 86,500mt.
• The LME copper warehouse, finished down 3,425mt (2.0%) at 167,925mt.
• The Comex warehouses copper inventories moved up a tiny 73mt to 14,914mt.
So another negative week for stocks, which would normally be bullish news for the metal price
but this week bucked that trend.
Shanghai Futures Exchange Warehouse Stocks, 2014
220000
200000
180000
160000
140000
120000
100000
80000
15
ts13ceD ht5naj ht21 ht91 ht62 dn2bef ht9 ht61 dr32 dn2ram ht9 ht61 dr32 ht03 ht6rpa ht31 ht02 ht72 ht4yam ht11 ht81 ht52 ts1enuj ht8
Mt Cu
source: Cochilco
Now for updates on a few of our featured basket stocks:
NGEx Resources (NGQ.to): Last week NGQ announced an approx CAD$30m equity raise (6)
and almost immediately expanded the financing round (7) to CAD$35m at approx $2.01 per
share. These things fill fast when you have the Lundin group as backers and the ability of this
exploreco to raise cash in order to go play in Argentina, amongst other place, must be the envy
of many a CEO right now.
Lumina Copper (LCC.v): So far at least we’ve had no fundamental news developments from
LCC, which fits the type of pattern we’ve seen previously from this stock when it pops on
rumours. The drop of 9.4% last week also fits in. Not one that I’d hold.
The Low Cost Producer Basket

After 23 weeks, the Low Cost Producer Basket is showing a 3.54% 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 36.33 34.93 -7.4%
2 Goldcorp GG 21.67 812 18.68 23.00 6.1%
3 Barrick ABX 17.63 1000 16.05 16.05 -9.0%
4 Newmont NEM 23.03 497.87 11.51 23.11 0.3%
5 Silver Wheaton SLW 20.19 357.39 7.49 20.96 3.8%
6 Franco Nevada FNV 40.74 147.01 6.82 46.42 13.9%
7 Agnico Eagle AEM 26.38 173.43 5.32 30.70 16.4%
8 Pan American PAAS 11.70 151.41 1.93 12.75 9.0%
9 B2Gold BTG 2.02 651.4 1.49 2.29 13.4%
10 First Majestic AG 9.80 117.02 1.02 8.71 -11.1%
all prices in U$, using NYSE ticker prices Portfolio avg 3.54%
The overall basket average gained The Low Cost Producer Basket: Weekly performance and
comparative to GDX control
0.48% on the week and there were six
35%
gainers (FCX, NEM, SLW, AEM, PAAS,
30%
AG) compared to four losers (ABX, GG,
25%
FNV, BTG), which wasn’t a bad result
20%
in a week where gold remained weak
15%
and only rallied just enough to finish a
10%
dollar or so above this time last
5%
Sunday. Most of the moves were
small, with the biggest being the 5.4% 0%
drop seen in BTG.
B2Gold (BTG): It’s B2Gold again on
the features section here, mainly
because it’s the only company generating news
of worth. Whether that’s a good or a bad thing is
up to you to decide. So let’s start with my
comments from last week just to show you how
little I know. Here’s a line from IKN264 last
week:
Also for what it’s worth I don’t think BTO
is going to buy PIR, so when nothing
happens or when some other company
steps up and reveals itself as the
mystery suitor, BTO stock has a ~7%
rally to offer the nimble amongst you.
Wrong. But at least I can point to this other part of the same segment...
For what it’s worth, if it turns out to be true I’d call BTO buying PIR as far
worse, horrid empire-building at exactly the wrong time (at least RIO.to can
point to synergies and the local advantages it has, as long as said locals let
them build the thing).
...and say that the reaction to BTO’s purchase of PIR fits right into the Empire Building
accusation. The news of course is that BTO was indeed the rumoured buyer behind Papillon (8)
and the two companies have agreed on an all-paper deal with a ticket price for PIR.ax of AUD$
1.72 at the time of announcement (and was much more before the correct rumours started to
fly about), but that’s now down to A$1.62 as BTO has sunk nastily on the news. The other thing
that didn’t help at all was the way in which 20/20 hindsight and the raft of insider sales in BTO
16
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 ht8
source: ikn calcs, NYSE/Nasdaq data

up to and including filings on May 23rd, the very day the formal offer was made by BTO to PIR,
combined to cast a rather suspicious shadow over the greater motives of the people running
B2Gold (by the way, my blog post on that issue last week (9) got a lot of readers as well as
some very interesting feedback from market players). After all, if you’re going to run all-paper
takeover after all-paper takeover, you’re currency (i.e. the stock paper involved) is the
quintessence of fiat currency and is only as good as the trust endowed in it by holders. When
trust in the company’s true motives is eroded, we get exactly the sort of devaluation we see in
this chart, be it a formal monetary currency or a company equity.
What’s more, it’s hardly the first time BTO has pulled this kind of stunt (look back to the selling
in 3q13, immediately followed by its all-paper acquisition of Volta Resources and coming with
the very same “only limited window for insider trades” excuse from the lips of CEO Clive
Johnson that we heard last week at the BTO ConfCall), but until now BTO seems to have been
given a pass. Until now.
I understand the bulls view towards BTO and get that the time to make acquisitions is now,
when the market is depressed and assets are undervalued (hell, it’s exactly why I’m buying
more IRL.to next week and why I’m tracking the newsflow in NovaCopper so closely right now).
However, I am again reminded of that classic golfing joke “two gotchas”, so just for the fun of
it (and it’s not the first time on these pages) let’s repeat the old standard:
Once the club duffer challenged the local golf pro to a match, with a $100 bet on the
side. "But," said the duffer, "since you're obviously much better than I, to even it a bit
you have to spot me two 'gotchas'." The golf pro didn't know what a 'gotcha' was, but
he went along with it. And off they went.
Coming back to the 19th hole, the rest of the club members were amazed to see the
golf pro paying the duffer $100. "What happened?" asked one of the members.
"Well," said the pro, "I was teeing up for the first hole, and as I brought the club down,
that jerk stuck his hand between my legs and grabbed my crotch and yelled 'Gotcha!'.
Have you ever tried to play 18 holes of golf waiting for the second 'gotcha'?"
Due to its actions (and repeated insider sales that at the very least border on the illegal and
may well turn out to be just that) BTO has lost credibility with the people that allow it to do all-
share M&A deals, its preferred (just about only). So BTO could be one to return to once the
market shows signs of an upturn, but until then there’s no reason to sponsor this sort of empire
building, especially when Clive & Co are far keener about selling their stock than buying it to
support their own cute deals.
Regional politics
AP’s important report on Antamina
17

If you haven’t done already (it’s on the blog) stop everything and read this report (10) written
by AP’s chief correspondent in the Andean Region, Frank Bajak, on the community relations
around the Antamina mine (consortium of owners, including Teck) in Peru, because it’s the
untold story from many of these projects and one of the reasons you get so much local
pushback to the new set of projects. It’s an excellent report because it gives voice to the people
whose word is usually drowned out of the conversation. One of the consequences to this is the
confusion and frustration that you guys up there, company/brokerage/analyst/insto/retail or
whoever else, feel when you’re preferred project suddenly hits “unexpected” or “illogical”
opposition, which is then kneeejerk blamed on NGOs and those treehugger enviro people. Sorry
guys, it’s just not as simple as that.
Project risks and NPV discounts
This follows on from the segment on Minera IRL in ‘Market Watching’ below, but as explained
takes a different tack so it’s being separated and presented as an issue better suited to the
‘Regional Politics’ section.
I received a mail on the NR from reader ‘DT’, who kindly relayed a criticism of the numbers
from a post he’d seen on a stock discussion board somewhere (I wasn’t privy to exactly where
and didn’t try to find out either, as bullboards are a 99% waste of time and I never bother with
them). The person who wrote the criticism (who let’s make clear, isn’t DT) obviously had an
agenda and the points made were easy to discount, but I was left thinking about one in
particular that was made. It’s repeated verbatim here:
- NPV7% is not right for Peru, NPV15 being the norm. As an example, the DFS for
Rio Tinto's Tintaya copper mine showed a 20-10% NPV range. MIRL only show 10.0%.
To begin with, the person’s agenda shows in the way they cherrypick a 15% number than
stand it next to an outdated project, rather than choose from dozens of others that use a more
reasonable 7% or 8%. Although it’s always difficult to quantify the nebulous subject of risk in
pure numerical terms, in this specific case for Ollachea I’d agree for project valuation purposes
that a 5% NPV would be too sharp, but as IRL is pitching its economic study using a 7%
discount, that’s reasonable in normal circumstances. However there’s also a subjective
judgement factor and after actually visiting the project, meeting the people and knowing what
the community sentiment is towards Ollachea, I can opine (and quite easily, thanks very much)
that these are not normal circumstances and if anything, IRL has the right to claim a lower than
average risk discount rather than a higher one. One of the main differences in project risk
comes at the community risk level and on that, we know IRL at Ollachea has the community on
board in an exemplary manner, not just best of breed in Peru but comparable to anything out
there in the wider world.
There’s a wider issue in play here, one that’s not about IRL, Ollachea, Puno region or even
Peru. The person who automatically says “Peru is higher risk” and assumes it needs something
like a 15% discount on economic parameters is every bit as ignorant as the person at the other
end of the scale who states, “Peru is a mining friendly country” and then tells you why his
project in an ecologically sensitive jungle area with no history of mining is as safe and cozy as a
project planned for the Central highland area where mining’s been a part of the cultural fabric
for centuries.
The point is that it’s impossible to paint a country like Peru with the same brush, top to bottom,
all areas and corners being one and the same. That’s by no means exclusive to Peru of course,
as most countries in LatAm have their troubled spot and some with plain straight no-go areas
even if they’re billed as pro-mining. Mexico springs to mind on this, and Colombia too though
that one has its own brand of teething problems as it tries to set up a more formal and larger-
scale mining industry. Even Ecuador, as unattractive for foreign direct investment for mining as
they reasonably come, can point to the area around Zaruma as a very traditional mining zone
and if you go there you’ll meet families with generational experience of working underground.
18

What’s the bottom line here? The bottom line is “DYODD” and find out more than the fool on
the bullboard who dismisses a project too quickly and easily. And as I have found out myself
this week, even when the DD is done it’s a mistake to get too entrenched in one’s views
because bad risk can turn to good risk while you’re not watching . Or vice versa, of course.
Brazil Serra Pelada: A meeting tomorrow
Tomorrow (Monday June 9th) sees a meeting (11) between parliamentarian and main proponent
for the move to cancel the Serra Pelada concession held by Colossus (now mainly Sandstorm),
Domingos Dutros, and regional authorities plus those in charge of mediating in the Serra Pelada
affair. Mr Dutros has called the meeting in order to get an item by item report on the work
done by the mediator group, but will also press once again for his main objective, that of
returning Serra Pelada 100% to the local mining cooperative COOMIGASP.
Market Watching
Minera IRL (IRL.to): Adding to the position
The reasons to add to Minera IRL (IRL.to) (MIRL.l), average down my cost price and sink even
more of my net worth into this pit of a trade (so far at least) are three:
1) Last week’s Ollachea Project Optimization news was good, which should help facilitate a
deal
2) The stock is cheap, which allows me to average down meaningfully
3) I believe a financing deal is impending for Ollachea, will work out well enough for the
company, will free it from its current welter burdens and will allow the stock to move
up again and break out of its funk. What’s more, I believe it’s going to be better than
most people expect, with first and foremost among those about to be surprised are a
whole bunch of people sitting in investment houses in Toronto.
So to business and it was a pretty good week for IRL pricewise, with the stock managing to
snap away from the 15c funk it’s been and by the looks of the chart pattern (I wasn’t watching
the market much) with new buyer money, too. Still modest volumes compared to the number
of shares out, but certainly better than the last couple of months of total drudgery. It came on
real news too, as IRL published a NR (12) on Tuesday with the results of its optimization study
for the Ollachea feasibility. Here’s the highlights table and I’m going to throw a comment or two
out about some of the line items below:
Some thoughts on those things:
19

• Regarding total gold production, the 9k oz gold added to the plan doesn’t interest me
much, because a Feas study is one thing and the reality of Ollachea is another. This
feas exists in order to get Ollachea funded and into production (i.e. to interest third
party or parties enough to throw the money at the project) but once it’s there, Ollachea
will grow its resource and stay in operation far longer than nine years. Just looking at
the 0.9m oz of gold under inferred classification at the nearby Concurayoc zone gives
the idea, but the main Minapampa orebody has clear and obvious expansion potential
once the mining starts and the cash is available for further exploration, drilling etc.
• Regarding the faster ramp-up and the new plan that gives 100,000 oz production in the
first two years, this is a definite improvement and helps accelerate capital payback, one
of the things the moneymen like to see.
• Regarding the capex bill of $164.7m, this is a big improvement and one of the two best
bits of news that came from the study.
• Regarding total cash costs clicking up by $4 per ounce, this isn’t great but it’s
acceptable. I haven’t discussed this point much with the IRL team (CEO Chamberlain
wasn’t in Lima last week and he’s the guy to ask about the cost engineering side of
things) but I’m guessing there’s a trade-off here between lower costs than a couple of
years ago (the industry downturn’s silver lining is that many input costs have come
down) and the desire to shave the capex bill to make that initial hurdle as easy as
possible.
• Regarding the NPV and IRR numbers, these are solidly good. More about that below.
• Regarding payback period, this is also good. Getting the principle covered as quickly as
possible is one of the things that people who write large cheques like to see, so 1/3rd of
the initial project mine life to pay for the whole thing (at $1.3k/oz Au) is more than
comfortable. No issue here.
• Regarding the production setback, that’s more about not having secured the financing
as yet than this particular study. Frankly, if IRL manages to get Ollachea’s first pour out
before 2q16 ends I’d consider it a big bonus. I may not like them but I live in the real
world and in Peru, delays and bureaucratic hold-ups are part of the territory.
To sum up, the contents were positive overall too and after shifting through the numbers
offered, two things in particular stood out:
1) Capex is down. Raising the cash to get Ollachea into operation is the single biggest hurdle
faced by IRL, our classic small poor company sitting on an excellent mining asset, so shaving a
goodly chunk from the start-up bill is an important development.
2) The IRR stands up to lower gold prices very well. Even though IRL stuck with U$1,300/oz
gold as its baseline (I was told that was because they wanted to maintain a straight line
comparative with the previous Feas numbers, which makes sense), down at the bottom of the
NR and without much fanfare there’s this table...
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...which shows Ollachea still returns a 20.3% IRR at U$1,100/oz gold on a four year capital
payback. Now that’s the type of dataset I want to see from my gold project these days, one
that puts strong backbone into the economics and says to the world that even if the shitty gold
market gets even shittier, this project works and it works well.
Semi-on-topic and before moving on, please see the “Project risk and NPV discounts” note in
‘Regional Politics’ below today. It uses a comment picked up on about IRL and Ollachea this
week but as that’s only the starting line that’s use to make a more general point, I decided to
separate it from this IRL-specific note here.
Finally, on Thursday I got to talk with a couple of people very close to the negotiations for the
financing deal to fund Ollachea. What I learned is that Macquarie is by far the only game in
town and that IRL is close to a deal. What’s more, we can expect the construction permit for
Ollachea to be granted either next week or the week after and once that official government
paper is in place, things are likely to move quickly. It’s this conversation that made the
difference on the buy/hold balance and it’s why I’m going to buy some more shares next week.
I’m not totally sure that all ducks are in line right now, but there’s more than enough potential
reward to justify the muted risk of adding more at this stage. If gold goes South then I may
regret it, but apart from that angle I don’t see that much potential downside to this stock any
more and with real newsflow catalysts in the pipeline, not least of which being the construction
permit approval coming in the next few days and likely to be a catalyst for greater things all by
itself.
Lachlan Star (LSA.to) (LSA.ax) redux
Those among you who took a risk on last week’s thought about Lachlan Star (LSA.ax) (LSA.to)
and its suddenly overbought status likely did well.
Conclusion
IKN265 is done, we end with bullet points:
• Rio Alto Mining (RIO.to) (RIOM) is back at Top Pick, as I’ve assuaged my doubts over
the risk community and political factors after visiting the place, seeing the sights and
hearing what there was to be heard.
• I’m adding to my underwater position in Minera IRL next week, as I think it’s about
time it came up for a little air.
• I’m glad I don’t own B2Gold.
The top long-term pick is Rio Alto Mining (RIO.to). I thank you in advance for any feedback.
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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://www.sulliden.com/English/Photo-Gallery/Photo-gallery-New/default.aspx
(2) http://finance.yahoo.com/news/timmins-gold-addresses-sentry-investments-133638387.html
(3) http://www.canadianinsider.com/node/7?ticker=EOM
(4) http://www.bloomberg.com/news/2014-06-06/copper-set-for-2nd-weekly-loss-on-metal-warehousing-probe.html
(5) http://www.reuters.com/article/2014/06/06/us-china-qingdao-idUSKBN0EH18A20140606
(6) http://finance.yahoo.com/news/ngex-intends-undertake-cad-30-215754898.html
(7) http://finance.yahoo.com/news/ngex-closes-book-increases-private-123234583.html
(8) http://www.b2gold.com/press-releases/06/2014/b2gold-corp-signs-merger-implementation-
agreement.html/?id=1846009
(9) http://incakolanews.blogspot.com/2014/06/b2gold-btoto-btg-insider-sales.html
(10) http://www.miamiherald.com/2014/06/07/4163714/peru-mining-boom-leaves-highlanders.html
(11) http://domingosdutra.com.br/ministerio-publico-do-para-discute-situacao-dos-garimpeiros-de-serra-pelada/
(12) http://finance.yahoo.com/news/minera-irl-reports-positive-ollachea-060000692.html
Appendix 1: Flash update dated Wednesday June 4th
Good Wednesday morning, this should get out just before the open, though the internet connection here is poor today
so let's see how things go when i hit the send button.By way of a very quick resume, on Monday i spent two hours with
the RIO.to CEO and COO in Lima. Then unbeknown to them and anyone else, got on a plane and a couple of buses for
an uninvited site trip to Cajabamba, in the Cajamarca region of Peru, to check out the Sulliden project for myself as well
as discuss the project with politicos in town. I'm still in Cajabamba this morning and one meeting left in town this
morning before heading out, but it's very unlikely indeed to change today's call.
I've met the people i wanted to meet in Cajabmaba and i've seen 98% of the things to see at Shahuindo without being
invited on site (a near-arrest stopped me from seeing the last 2%, i'll tell you about that Sunday, all good fun though).
You'll get a full report and photoshow in Sunday's edition of the Weekly, but the bottom line is that Shahuindo is in a
much better political and community risk position than i'd previously assumed. I was wrong about this project and it's
taken the takeover situation for me to shake down my assumptions, but now that i have and i've seen and heard the
situation here, this project is one that's going to happen. A little humility is positive for the soul....and in this case the
stock call too.As a consequence, RIO.to is reinstated as a Top Pick stock however, those of you looking for a quick flip
gain have to be clear that the offer situation between RIO.to and SUE.to means that the stock is likely to flatline until the
deal is closed. We may get fluctuations as a function of gold price etc in the meantime, but anyone looking to buy "New
RIO" has a couple of months of time to position themselves, i'd say.Personally I'm not adding any more at this time, as i
have a lot already.
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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
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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.
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