IKN #267Premium

The IKN Weekly
Week 267, June 22nd 2014
Contents
This Week: A roadmap for the near-term.
Fundamental Analysis: Long copper juniors
Stocks to Follow: Overview, Reservoir Minerals (RMC.v), NovaCopper (NCQ.to), Minera IRL
(IRL.to) (MIRL.L), Timmins Gold (TGD) (TMM.to), Rio Alto (RIO.to) (RIOM, GoldQuest (GQC.v),
Focus Ventures (FCV.v), Santacruz Silver (SCZ.v).
Copper Basket: Overview, Lumina (LCC.v), Panoro (PML.v).
Low Cost Producer Basket: Overview.
Regional Politics: Bolivia’s indium mistake, Argentina: The bond ruling, Peru: A tax stability
law proposal, Peru: Lambayeque politics.
Market Watching: Santacruz Silver (SCZ.v) update.
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
A roadmap for the near-term
Not only was last week a cracker for junior miner longs (not to mention the relief of real across-
the-board gains after a long period of drudgery), but we managed to call it on these pages last
week as well. OK, enough of that and you’re only as good as your last trade so here’s a brief
roadmap, the details of which are contained in the sections below (as well as being mapped out
in the previous weeks). I’ve underlined and bold-typed the main takeaways as well, just for fun:
• This is the main point: Copper has a better near/medium-term future than
gold and silver. I have begun to position accordingly with last week’s purchases (see
Appendix 1 for Flash update re-print) and I’m looking to add to this sub-sector. See
‘Fundamentals...’ today for more.
• I’m not buying into the move last week as the brand new dawn for gold and
silver. The last two years have taught the dangers of believing any hype and the
promo boys are already grabbing onto this move with both hands and pumping hard (a
sign in itself of the amount of bagholders they must have round their necks).
However, I’m not discarding it this time either (which kind of surprises myself, to
be honest). Overall I’d call my position modestly bullish even after the decent run of
last week but don’t expect me to start calling gold to Rob McEwen levels either. We are
still in a volatile market and although last week’s action fits right into the IKN baseline
call that the gold market has bottomed and the signposts are pointing up, no way as in
NO Way does this run up on rails. I’m good with a consolidation at these precious
metals price levels, with a move towards U$1,400/oz gold as 2014 draws to a close.
Your scenario may well be different, all I want to do is lay out the way I’m setting my
portfolio exposure.
• I will take profits on two specific PM juniors if the mining complex continues
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higher. Be clear that they will need to go higher in the near-term for profit-taking
purposes and I’m not talking about this weekend’s price deck (repetition used for
emphasis, hope you get the message) but the ones in mind are 1) Timmins Gold
(TGD): If we see $2 I’m taking it ka-ching, thanks for the ride, trade done. Then 2)
GoldQuest (GQC.v): I still say we need fundamental news to drive it further but if
something like 50c comes without a drill assay published, though I’d be surprised I’d
also be good with that and sell. Michael Corleone dixit: “It's not personal, Sonny. It's
strictly business”.
• I will begin to actively consider a return to the short side of the market if the
very-near-term remains strongly bullish. Again, people are right to point me
towards sectorwide short plays such as DUST (the leveraged inverse gold ETF) as
simple catch-all ways of hedging a portfolio. I’d encourage you to investigate them as
well, but for our purposes here we’re going to adhere to the IKN brief and look at
specific stocks that are flashing overbought signals. Overall and with exceptions,
playing the short side over the last 12 months has been a positive addition to the
armoury of The IKN Weekly, no reason to ignore its potential any longer.
• All the above is for near/medium-term consideration only, the long-term (and
more important) position that we’re at a bottom and it’s time to be long is unchanged.
Things like Rio Alto (RIO.to), Minera IRL (IRL.to), True Gold (TGM.v), Lara (LRA.v) as
well as stock you consider to be similar to them that don’t make it to these pages are
ones to have, hold and watch grow in value. Things like Dalradian (DNA.to) and
Santacruz (SCZ.v) are ones to hold for eventual M&A action.
So there you go. In a nutshell I’m good about taking a few shekels off the table if this run
continues, I’m good about holding the more serious, longer-term stuff, I’m good about moving
more into the copper space before it gets popular, I’m good about trading around a newly
active market.
Fundamental Analysis of Mining Stocks
Long copper juniors
With the purchases made last week in Reservoir Minerals (RMC.v) and NovaCopper (NCQ.to)
(see appendix 1) the IKN Weekly now has long positions in three stocks that can be considered
straight, classic, dyed-in-the-wool junior copper explorecos (along with COP.to). Admittedly
they’re not big positions yet (RMC.v though still at starter-stage is the biggest) To the mix, I’d
like to remind all that Rio Alto Mining (RIO.to) (RIOM) still gives us some exposure to copper
via its stage 2 sulphide project at La Arena. I’m aware that RIO’s aspect and market drive is all
about gold, particularly now that it’s looking good to bolt on Shahuindo, but its copper angle
isn’t to be underestimated.
Anyway, today’s note is a strategy type (not a numbercruncher type) that sets out the reasons
to be more enthusiastic about copper vehicles and then explains about the choices (NCQ.to)
(RMC.v) made last week. The trade thesis is based on the most basic of premises:
1) Copper demand is not going away.
2) The worries and potential shocks from main market China are overplayed
3) Copper prices are currently at a cycle low and will improve in the next 12 months
4) Deal-making and M&A activity in the copper sector is picking up, a good sign for the
nearer term.
5) The value assigned to in-ground assets is currently very low and will be the area that
sees most improvement
6) It therefore makes sense to take positions in beaten-down juniors with good (or merely
reasonable) assets.
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The process was started last week with the two small buys, but this isn’t going to be a a one-off
purchase. This is where the portfolio of The IKN Weekly is headed in the weeks and months to
come, as we’ll still cover and hold PM juniors but the opportunities and new money positions
are likely to be in the copper sector.
Overview
In the last few weeks we’ve seen plenty of news stories that strongly suggest that majors are
moving on the copper sector. Here are a few of those, some more topical than others:
• First Quantum buys Lumina
• Hudbay buys Augusta
• Freeport (FCX) makes a big JV move on Quaterra
• Cerro Verde green lights an multi-billion dollar expansion program
• Chinese capitals pay $5.5Bn for Las Bambas
The news last week (1) that First Quantum was buying Lumina (LCC.v) and its Taca Taca
project came just hours after another deal (2) that caught my eye just as much, due to the
large player involved: Freeport (FCX) had agreed with the cash strapped and very small
Quaterra (QTA.v) a earn-in deal for up to 75% of QUA’s Yerington Copper project in Nevada.
But aside from the fresh news of last week (which I admit finally tipped me into buying these
stocks, in true straw-camel-back style) the build-up of cash being moved towards the copper
sector has been undeniable. The investment, especially by Chinese capitals, goes squarely
against all talk that the world’s main customer for the metal is running short on appetite. Quite
the reverse, as it’s obviously keen to secure future supply for its economy by spending big
money for the biggest of world assets (Las Bambas). Meanwhile, political and community risk
issues haven’t put off the Taca Taca deal nor the Augusta (AZC.to) Rosemont deal, as the
buyers presumably feel that change will happen with the passage of time.
Meanwhile, copper market prices have been notably resilient to macro pressure, be it talk of
oversupply or apparent double-count warehouse scandals in China that may undermine
collateral credit for other deals. Away from the chatter, the classic signals from the world
warehouse system (tracked carefully on these pages) has pointed towards ongoing strong
demand for copper no matter what the market winds of any given week told us otherwise and
it seems that message is getting through. With other world economies now in full recovery (led
by an undoubtedly improving USA, no slouch in copper consumption all by itself) it’s reasonable
to assume better times ahead for the industrial metals. Those are led by copper and that’s why
we’re here today.
What comes now are three short sections:
• The rationale behind the purchase of Reservoir Minerals (RMC.v)
• The rationale behind the purchase of NovaCopper (NCQ.to)
• Other stocks that I may add to the ‘Bought Copper Basket’ as the year continues
Today’s is not a fundamentals note on any of the stocks in question. The basics are known
about these stocks already, thanks to ongoing coverage in ‘The Copper Basket’ section last year
of RMC and NCQ, as well as the more detailed look at NCQ in particular that we ran in IKN259
dated April 27th. What I’m more interested in getting across today is the rationale behind each
purchase, because although they both fulfill the brief of “buy copper juniors” their aspects are
different and are meant to cover specific areas of the market move...if all goes well at least.
NovaCopper (NCQ.to)
This is the smaller of the two purchases called last Tuesday and has been made on a simple
premise; that current market valuations for good copper deposits are at rock bottom levels and
once they’re better appreciated, stocks such as NCQ will rebound strongly. I want to ride that
rebound, carried on the back of better copper prices, more market interest in copper companies
etc. NCQ is the modest vehicle chosen.
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Back in IKN259 while taking a closer look at NCQ, I stated that I liked the stock because 1) the
copper sector was beginning to get interesting and 2) NCQ had dropped in price but 3) I was
looking for still lower prices because it was pretty clear that the company was setting up for a
round of financing and that might push the share down further. Cut to today and 1) still applies
but 2) is even better, because the previous $1.40 prices have become $1.00 prices, due mostly
to total lack of interest in the stock and the impending round of financing, still hanging over
NCQ’s head.
NCQ currently has 53.63m shares out, which gives it a current market cap of CAD$55.77m, or
perhaps U$50m in greenback terms. For that you have a company with 7.7Bn lbs of copper
under 43-101 resource if you combine the copper at Bornite (5.7Bn lbs) and Arctic (2Bn lbs)
(see IKN259 for the resource tables), even when ignoring completely the big kick from a host of
by-product metals at Arctic (which really is better described as a polymetallic co-product deposit
than a copper deposit with by-products). The cut off on those resources is high to take into
account the distance from anything approaching civilization and the costs that would therefore
be incurred by any mining operation there, but even after the high cut-off just two targets from
the larger concession area held by NCQ have returned in-situ assets that are priced at a mere
0.65 cents per pound. To give a little context, typical prices for “good in-situ” pounds owned by
explorecos are between 2c and 4c per pound, and buyouts happen in the 3c to 5c per pound
range. Yes there are 43-101 resources out there priced under a penny or even at tenths of
pennies per pound, but those are the ones that are immediately marginal for grade etc reasons
and have been largely discounted as glorified anomalies. When it comes to NCQ, the rocks
make geologists drool, its problems lie elsewhere.for
This brings us to the crux of the pro-NCQ argument, something that I’ve tried to pare down to
the minimum in order to keep as focussed as possible. The minimum is two bullet points:
• The deposits are high grading and contain a lot of metal
• They are currently at heavily discounted prices
It’s the combination of these two that makes NCQ attractive. There are big copper deposits out
there that are cheap because they’re of marginal (or plainly uneconomic) grade. There are
small, high-graders that won’t eventually appeal to the right type of company with the right size
of chequebook. But few indeed are the companies that have big, high-grading and cheap
deposits today, but NCQ is one of them. Not only that, but as a cursory look at the company
literature will show there’s a great deal of exploration potential at its concession from either
current deposit expansion or new target exploration that can raise its in-situ metal count higher,
or even a lot higher. Potential blue sky, you got it.
Which brings the obvious question; Why are these copper pounds so cheap? The answer is
primarily due to its remote location, as I’ve encountered plenty of opposition to this trade (both
pre and post purchase last week) based on that datapoint alone. It’s a fair point too, as we’re
far from anywhere with limited access, no power and no population centres nearby (sidebar:
that may eventually become and advantage, of course). However and if the government of
Canada is to be believed, by 2021 there will be a power line run through this area and a paved
road too (the line as pathfinder), which will open up matters considerably and make for a better
access, capex and overall costs structure without a doubt. In other words, it may be a long way
down the line for many of you (we’re staring at seven years, folks) but there are solutions to
the major problems for NCQ’s deposits and there is light at the end of the tunnel. However,
seven years down the line the 0.2% Cu deposit owned by another beaten down junior will still
be grading exactly the same as before.
So why buy NCQ now? The answer there lies in the current market cycle. We’ve been through
hell and seen juniors priced lower and lower, but the signs of a turnaround are now clear and
when it comes to copper, I make my case. From that case what I’m looking for is those junior
explorecos that don’t just have a bunch of cash at bank any longer, as the upside to come will
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be from what they own under the ground, not what’s in treasury. NCQ has a long timeline but
as we saw only last week from First
Quantum’s (FM.to) move on Lumina
(LCC.v), the major mining companies are
already looking to build their project
pipelines for the long-term (Taca Taca is
2020 minimum, probably longer than that,
assuming it takes its place behind Haquira
in the FM.to queue). Simply put, Copper
assets that are currently being valued at
close to nothing will become valuable again.
That’s what NCQ has, a great looking
deposit or two and lots of exploration
upside as the bonus. The timeline to the
eventual extraction is only a problem for
those looking at the market from a pure
“Where’s the cash flow?” perspective, the latest viewpoint that’s become fashionable in mining
circles as things have become worse in the sector. But fashions pass, cycles resume and
passive assets will come back to the fore. We’re seeing the start of that process now with the
major miners moving to secure big projects and deposits. As copper rises that trend will
accelerate.
NCQ is a risk proposition in the sector because it’s currently unloved and ignored, as well as its
depression based on an upcoming round of financing that everybody knows is about to happen
and are waiting for the shoe to drop. I too was planning to wait until the financing was
announced, but with the drop to $1 and the new round of interest in mining markets, I felt that
a foothold position at the $1-or-abouts price level wasn’t such a bad idea. This position has
started small and is likely to remain that way, but its potential upside is sky-high, more than
enough to assuage the risk factors of buying into a thinly traded stock with a “horrible chart”
(as I’ve been told by more than one person in the last few days). The long timeline to
production doesn’t worry me, because it’s not worrying the mining companies either. The asset
is top class, with great rocks and sparkling further potential. But it’s the price that appeals, as
we’re now at the type of price point I wanted for NCQ in a macro scene that’s turning around
and looking far more optimistically at the industrial metals.
Reservoir Minerals (RMC.v)
This is the larger of the two positions bought last week and I’m going to spend less time on it
than the other sections, because it’s the one that is most easily explained. In fact the rationale
is as straightforward as one line of script:
RMC is going to be bought by Freeport (FCX).
This is the M&A play on copper juniors, it’s the one that I’m buying in order to see the company
taken out by a major. As the copper complex turns and becomes more bullish, the thinking is
that FCX won’t want to wait until RMC is priced higher to make its move and will offer RMC a
share/cash deal that allows it to stay exposed to Timok, get the benefits of FCX’s other assets
and show a healthy premium to today’s share price. We’ve already seen RMC higher than
today’s $6.31 (we touched $7.50) and as noted in more than several issues of The IKN Weekly
I’ve been waiting for a reasonable window to buy this stock. That came last week with the low
$6 prices and the trigger was finally pulled, because that relative low coincided with the
newsflow from the copper space and the upturn in prices and macro pleasantness.
With 47.498m shares out and a price of $6.31m RMC is not a cheap company at a market cap
of just a few thousands short of $300m. Its main justification of that valuation comes from
holding a 25% free ride in the Timok project in Serbia, which it owns and to which Freeport is
currently earning 75% by taking it to a bankable feasibility study level. As the current resource
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there is only in the inferred stage and not only that is technically difficult to explore (being
deep, of more than one type of deposit and often of a very high grade) it means theoretically at
least that RMC is going to get a long free ride at Timok before the Bankable Study comes out
the other end (and in fact, we shouldn’t expect FCX to get anywhere near the point where it
publishes such a 43-101 compliant report, as a company that large will be infinitely keener on
proving Timok’s worth in-company rather than trying to impress the outside world). What
makes Timok and its surroundings so special is that
1) Even at this early stage of exploration it’s big
2) There’s clearly a lot to come.
To that, we can add that the 25% of Timok held by RMC isn’t the only asset it holds, as the
company has plenty of 100% owned concession nearby as well as other JVs in progress in
other places. But our buy thesis here is based on what FCX will do with Timok and for that, let’s
check numbers. So far we’ve had a single 43-101 resource published by the FCX/RMC JV, which
concentrated on the specific Curaki Peki target inside Timok, the zone that saw the discovery
hole and subsequently most of the exploration drilling to date. This is the table from the latest
corporate presentation well worth a read, find it here (3)):
Offered at a 1.0% CuEq cut-off and modest price levels for copper ($6.5k/t) and gold
($1.3k/oz), it gives an idea of the impressive mineralization at Timok (and what’s to come once
the resource starts expanding.
• The overall numbers of 65.3 million metric tonnes (mmt) give 1.7mmt copper (that’s
3.75Bn lbs in old money) and 3.1m oz gold.
• As part of that, the high grading core area is 6.8mmt that hold 0.7mmt Cu (1.54 Bn lbs)
and 1.3m oz gold.
• Combining both metals into a copper equivalent number and using the company’s given
(and reasonable) ratios, the resource comes to 5.3M lbs CuEq. On 25% ownership That
values the RMC.v today at around 5.1 US cents per pound CuEq, which is high
compared to peers but those peers don’t come with a) big size and high grade b)
massive exploration potential to come
and c) a free ride to feas study level that
means RMC will not dilute itself away as
this expensive project advances.
That’s very, but very impressive rock by any
standard and even discounting further
discoveries fully justifies 25% of the resource
being valued at $300m. The CuEq in-situ
valuation at this time indicates its premium
quality, but rock like that will be supremely
profitable when it’s eventually mined, so margins
will easily cover a high initial buyout price for
RMC’s share of the pie. 10c/lb is well within the
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bounds of the possible and that suggests a double from here (again, without any credit given
for the obvious upside potential from further exploration).
As stated above, this isn’t a fundies numbercruncher note today but strategy explanation, so
we’ll leave it at that taster for the underlying numbers at Timok and RMC. The reason to be
long isn’t to watch RMC carry its 25% into production, it’s to be there at the right time when
FCX makes its near-inevitable move and buys out the 25% of Timok it doesn’t already own. It
make no sense for the big company to carry the small company, making it more valuable all the
time. FCX’s decision to buy out RMC is a strategic one and will be based on what the company
believe to be its best timing. That’s where the upcoming bullish copper market comes into the
equation, because if FCX takes the same position as me to this market, it will consider copper’s
future rosy indeed. And as evidence shows, the pick-up in M&A plus the stubborn refusal of
China to do something akin to collapsing, which in turn means that copper has been propped to
over $3/lb to the surprise of the bears, all point in the same direction.
The call to buy RMC is a call on second-guessing FCX., it’s a belief that not only will the major
miner buy RMC, but that purchase comes sooner rather than later. If that assumption turns out
to be true, there’s a quick 50% or 100% to be made in this stock. The nice thing about this
trade is that even if I get the timing wrong and FCX doesn’t buy RMC out during 2014 (which is
my pencilled in timescale), there’s so much mroe happening around this stock that exploration
news or copper’s eventual bullishness can push it higher even without the M&A happening.
Other potential purchases (and how these plays might fit into IKN coverage)
As mentioned already, the thinking behind this more concerted move into copper junior
explorecos is to take advantage of a sectorwide re-rating and rebound, not to limit myself to
one or two names. At present there are three legit copper companies on our ‘Stocks to Follow’
list with other that can lay claim to decent exposure to the metal (RIO.to, LRA.v). However that
number may climb, so one thing I may need to do eventually is separate “the coppers” from the
rest and consider them a single play in the overall list. I’m still not sure as to how that might
operate, but i know there may come a moment when 5 or 7 small copper positions clog up the
rest of the table and cramp style. It’s a potential problem on the horizon.
As for candidates to add, one that comes up the list is AQM Copper (AQM.v). It’s been beaten
down even further recently due to the same type of market neglect, even though it’s in a strong
JV with Teck and its Zafranal project has enough going for it to be likeable (though perhaps not
as loveable as NCQ’s rocks). Another is Panoro (PML.v), which gets a mention in The Copper
Basket today and may turn out to be a stock that I’ve dismissed too easily in the past. We’ll see
on that one. Third suggestion for my shopping list is Curis Resources (CUV.to), which has its
community problems but if it can get the necessary approval has an in-situ project that would
be wonderfully profitable...on paper at least. The final name I have on my preliminary list is
Western Copper & Gold, with the Casino project that suffers from low grade-itis but is a big
deposit and is advanced enough to boast of a reasonably decent economic plan (still not sure
how “optimized” its number are though). Those are four I’m considering to add if a basket of
these companies is indeed the way to go (and I’m open for suggestions on others).
Conclusion
As from this week, copper becomes a major metal target for my cash and it’s going to happen
via investments in exploration stage juniors. The thesis is that copper’s downside is now fully in,
that it’s survived too many piece of negative news too well to ignore and that the sector is
beginning to see the type of consolidation that marks a new upside to come. The combo of
better metals prices and majors eager to snap up assets is the right one and if the timing is
right here, there are good gains to be had just by buying those stocks that have either the true
marks of a M&A target (RMC.v) or those with assets given far less value than is their due
(NCQ.to). Timing of the eventual mines is not our problem, timing of the copper market is far
more important for the future of share prices. Due to the change in circumstances we’re seeing,
I believe the time is now to start buying these small stocks. And therefore buy.
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Stocks to Follow
It wasn’t all positive, so before we go on let’s point a finger at the two weekly losers (TGD,
EOM.to) as well as the two stocks unchanged on the week (IRL.to, COP.to). So with that said
we have ten winners on the week that means we really dialed into the strong rebound move
made in gold and the miners. Not listing them all, but we will highlight the best percentage
moves from GoldQuest (GQC.v up 25.4%), Salazar (SRL.v up 21.2%), Dalradian (DNA.to up
14.9%) the Top Pick Rio Alto (RIO.to up 14.3%), Santacruz (SCZ.v up 12.9%) and Focus
Ventures (FCV.v up 9.4%). A good week to be long juniors, period.
With the addition of Reservoir (RMC.v) and NovaCopper (NCQ.to) we now have 14 open
positions on our ‘Stocks to Follow’ list, one less than our self-imposed maximum. Eight are in
the green, six are still showing red ink.
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-apr-11 C$2.48 7.8% Top pick, $3.30 tgt June 15
Recommended long positions (in current order of preference)
Timmins Gold TGD buy U$1.38 09-apr-14 U$1.57 13.8% adding 3rd time, $2 tgt
Minera IRL IRL.to hold/buy C$0.27 22-jul-12 C$0.18 -33.3% Added, ready for news
Goldquest Min. GQC.v buy C$0.295 27-oct-13 C$0.37 25.4% drillplay spec, good vibes
Dalradian Res DNA.to hold C$0.65 27-oct-13 C$1.00 53.8% Going well, tgt up to $1.70
Focus Ventures FCV.v str buy C$0.23 01-jul-12 C$0.29 26.1% tgt 50c, added, avged up
True Gold TGM.v hold C$0.395 02-feb-14 C$0.43 8.7% LT hold, takeover play
Reservoir Min. RMC.v new buy C$6.18 18-jun-14 C$6.31 2.1% starter position, M&A play
Santacruz Silver SCZ.v hold C$1.04 26-jan-14 C$0.96 -7.7% silver/M&A spec, rel. small
Lara Expl. LRA.v hold C$1.15 08-apr-12 C$0.77 -33.0% solid biz model, LT hold
NovaCopper NCQ.to new buy C$1.00 09-apr-12 C$1.04 4.0% very small start, can add
Eco Oro Min. EOM.to hold C$0.48 22-sep-13 C$0.255 -46.9% paramo resolution missing
Recommended short positions
None at moment
Smaller/Riskier
Coro Mining COP.to spec buy C$0.125 26-jan-14 C$0.08 -36.0% Cu spec play, can add
Salazar Res SRL.v hold C$0.28 02-mar-14 C$0.20 -28.6% small risky spec, vg rocks
Closed in 2014 closed close price
Fortuna Silver FVI.to jan'14 C$2.80 23-dec-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-apr-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-jan-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.
Reservoir Minerals (RMC.v): Position opened. Just a line to tip a formal hat to the new
long, more above in Fundamentals.
NovaCopper (NCQ.to): Position opened. Ditto. In this case, worth commenting that the
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foot in the door position really is still small and I’ll look to pick off a few hundred here and there
in the days to come. It’s tough to buy this one easily, volumes are particularly thin right now
and as there’s no need to rush (especially before the financing is run and done) I will be taking
my time and applying an extra dose of patience to the position build.
Minera IRL (MIRL.L) (IRL.to): Added. I’m now positioned as well as I like and ready for
news on the Ollachea financing, which should be sooner rather than later. For the first time in a
long time, I’m itching to get writing more on this stock but things will wait until solid news is
out there.
Timmins Gold (TGD) (TMM.to): The five day chart for TGD tells you all you need to know.
The stock was whacked for at the Friday close
in no uncertain form to finish down for the
week instead of perhaps 18c higher, which is
what happens to stocks on occasion. Big deal,
next week’s standout positive prospect
methinks, but as mentioned above, I wouldn’t
think twice about selling TGM into higher
prices if things really start to rock in the
mining world in the days to come. The
pencilled-in number here has always been $2
and if we take the ~$1.75 trading number as
our benchmark rather than the silly Friday
close number, that’s not much more than 15%
away. Nothing’s impossible when juniors are our subject.
Rio Alto Mining (RIO.to) (RIOM): And up she went again. It’s pleasant to see a bit of green
ink against our Top Pick’s name and it came on the back of 1) fundies news and 2) continued
sector leadership during the gold/miners rebound, both pleasant to see.
The fundies news came Monday when RIO.to announced (4) the type of deal we’d called just
the day before (luck in timing I’m sure). The company has nailed down a $70m line of credit
inside Peru and at very favourable terms, which will cover the payment for its upcoming
electricity connection to La Arena and provide $50m for working capital purposes on top. With
this deal and with your author’s projection of capex at Shahuindo not to pass $90m, RIO.to has
stated loud and clear it has the wherewithal to pay for its expansion project and second mine.
GoldQuest Mining (GQC.v): Picked out as a strong value trade last week for those who want
to take on risk, GQC paid out
handsomely. The most eyecatching
thing about it was the move Friday,
which bucked the general
consolidation trend of that day and
surged higher on improving
volume...as if good word had started
to spread about Tireo drill results, for
example.
If we step back and consider a
longer time-scale chart, it’s a
reminder that GQC can indeed run
higher technically and what really
stands out for me is the lack of
relative volume compared to the
stock’s heady days of 2012. Although there must still be a lot of bagholders from the time it
spent being overhyped by a whole bunch of brokerages and newsletters, the takeaway here is
9

that even last week’s decent move is only scratching the surface of the interest that can be
generated by some good results.
It’s still as much of an eyes-wide-open risk
position as it was one or four weeks ago.
We’ve seen a basebuilding (without anything
blowout) PEA come along, but the fate of
this trade was always and will be on the drill
assays once they arrive. That means all the
risk that usually associated with exploreco
catalysts (I hope I don’t have to go into too
much detail about those with such an
esteemed and knowledgeable audience), but
the potential for reward is there as well.
Meanwhile, I’ve been keeping an eye on the
political risk situation in Dominican Republic
and there’s a segment on that in ‘Regional Politics’ below.
Focus Ventures (FCV.v): News Monday from FCV (5) with the second batch of drill assays
from Bayovar 12 that have come in smack on target in terms of grades and widths. FCV was
right to talk and get people looking at the consistency of both in the NR, with the quote from
company pres Cass, “...the extraordinary regularity in the geology and grade of the phosphate
beds across these initial two drill sections.” doing it nicely. That’s what this project is all about,
showing the large, long, wide and flat phosphate beds that perform as expected and can be
turned into a large resource of confidence.
However, the trading response to the ongoing confirmatory news was muted. Yes, FCV.v put in
a near 10% pop on the week, but there’s no new ground in those numbers and only on Monday
did we see volume of over 100k. Gold’s (apparently) back in fashion, funny things like
phosphate won’t get market attention all on their own in the rough and tumble of the TSXV, so
we’re likely to see FCV building a base at current levels (let’s say between 25c and 31c) until
the next real catalyst comes along. That for me would be the type of JV deal which allows FCV
to get a free carry and the project gets more cash and acceleration, and the when on that is
likely after the first 43-101 compliant resource, which we should get in 3q14. All that’s a long-
winded way of saying “so far so good, but FCV shares will likely have a quiet summer”.
I’ve put the weekly sentiment comment on the above table back to “hold” from “strong buy”
and dropped it down the order of preference on the table as well, not because FCV is less
attractive now but because there’s no reason to buy/add at the 29c to 31c end of the trading
channel. At 27c or below, that’s where the value is for those who want (more of) this stock.
Santacruz Silver (SCZ.v): It showed a few signs of life the previous week, it did very well on
improved volume this week. My only true silver play at this time (and last week was the first in
many that I’d regretted that) followed its sub-sector well and, importantly, is now enjoying
vastly improved volumes every day. There’s a longer piece on SCZ and why I’m sticking with
this company as a trade despite its (so far) lacklustre share price performance and managerial
shortcomings in ‘Market Watching’ below.
The Copper Basket
After twenty-five weeks of 2014 The Copper Basket is showing a 13.10% gain to level stakes.
10

company ticker price 1/1/14 Shares out Market Cap current pps gain/loss%
1 Augusta Res AZC.to 1.51 144.41 462.11 3.20 111.9%
2 Lumina Copper LCC.v 6.29 44.07 425.28 9.65 53.4%
3 NGEx Resources NGQ.to 1.43 168.71 371.16 2.20 53.8%
4 Reservoir Min. RMC.v 4.97 47.5 299.73 6.31 27.0%
5 Nevada Copper NCU.to 1.35 80.5 209.30 2.60 92.6%
6 Panoro Minerals PML.v 0.35 204.71 99.28 0.485 38.6%
7 Copper Fox CUU.v 0.375 402.96 94.70 0.235 -37.3%
8 Western Copper WRN.to 0.76 93.68 83.38 0.89 17.1%
9 Hot Chili Ltd HCH.ax 0.425 333.11 63.29 0.19 -55.3%
10 NovaCopper NCQ.to 1.60 53.4 55.54 1.04 -35.0%
11 Curis Resources CUV.to 0.57 74.79 55.34 0.74 29.8%
12 Cordoba Min. CDB.v 0.90 58.81 49.99 0.85 -5.6%
13 Coro Mining* COP.to 0.10 159.37 12.75 0.08 -20.0%
14 AQM Copper AQM.v 0.11 139.05 11.82 0.085 -22.7%
15 Oracle Mining OMN.to 0.27 49.03 6.37 0.13 -51.9%
NB: HCH.ax priced in AUD$, rest CAD$ //CDB 2x1 split May'14 Portfolio avg 13.10%
Last week our list saw four losers (HCH.ax, WRN.to, CUV.to, OMN.to) and two unchanged
stocks (COP.to, AQM.v) mean that it wasn’t all one-way traffic, but the week was still strongly
positive for our Copper Basket and the
average jumped by a massive 7.21% as a The Copper basket 2014, weekly evolution
25%
result.
20%
Lets name the best of the winners, which 15%
were in percentage gain order Panoro
10%
(PML.v up 31.1%), Oracle (OMN.to up
23.5%), Lumina (LCC.v up 22.2%), 5%
Cordoba (CDB.v up 19.7%), Augusta
0%
(AZC.to up 11.1%), Nevada (NCU.to up
10.2%).
As well as gold, silver and friends, copper
had a good Thursday and Friday and managed to
climb back into the three-and-teens bracket. Along
with the market’s sudden love for mining names,
this helped tremendously.
As for our regular coverage of world copper
inventories, here are the bullets:
• Total world stocks dropped by 9,119 metric
tonnes (mt), or 3.4%, to stand at
256,277mt.
• Shanghai Futures Exchange copper
warehouse inventories was again the place
with the most action, down 10,971mt, or
12.7%, to finish the week at 75,529mt.
That’s a very big move at a low stocks
level, the warehouses must be looking
pretty thin now.
• The LME copper warehouse also finished down a little, dropping 4,075mt, or 2.4%, to
finish the week at 163,700mt.
• The Comex warehouses copper inventories moved up a bit, by 1,356mt (8.6%) to
17,048mt.
11
ht5naj ht21 ht91 ht62 dn2bef ht9 ht61 dr32 dn2ram ht9 ht61 dr32 ht03 ht6rpa ht31 ht02 ht72 ht4yam ht11 ht81 ht52 ts1nuj ht8 ht51 dn22
source: IKN calcs

Shanghai is the story here and the story remains bullish. The market seems to have got over its
worst thoughts of double-counting in bonded warehouses in other parts of China and a little
more confidence is being seen in the credit market for metals in China.
Last week I wrote,
“I continue to be very interested in taking a larger position in copper juniors,
with RMC.v, NCQ.to and others on the list. However, I’m still not committing
as the copper market is currently rather strange and the last thing I want to
do is be wrong for the right reasons by buying the right stock but still
watching it dive along with the whole sector.”
As it turns out, I finally pulled the trigger on both of those on Wednesday, pushed by the news
catalysts of Lumina/First Quantum as well as the other deal that caught mine and other eyes,
that of the Quaterra/Freeport JV (see above). The whole of the macro scene in the latter part of
last week turned out to be fortunate timing to a certain extent, but it justified my decision to go
long on a couple of junior exploreco copper names on Wednesday (see appendix 1). The fogs
and mists are clearing from the copper sector and what’s left is dropping stocks and the same
voracious appetite for copper in China as always. If you look at a week from now, your guess
on the price of the metal is as good as mine. But the world isn’t buying up copper asset after
copper asset just for the fun of doing deals and giving fat fees to lawyers; down the line the
demand for copper isn’t going to suddenly drop away.
Lumina Copper (LCC.v): News of the week was First Quantum’s (FM.to) friendly bid (6) for
LCC and its Taca Taca asset in Northern Argentina.
The cash/share deal is similar in structure to the one
in which FM.to bought out Antares and its Haquira
property in Peru and values LCC.v at a ticket price of
$470m, though for me the math works out to $428m
or $9.63/share. Here’s how the five day chart looks on
that news and the inference from the trading is that 1)
it’ll go through as stands, with acceptance on both
sides, plus 2) no competing bid is expected and the
only people left to play are the arbitrageurs, which is
why you saw people cashing out in big lumps.
Let’s state three things:
1) I think the deal is a mistake on FM.to’s part, because committing billions (not talking
the half billion purchase price, am talking the capex bill) to Argentina is never going to
be a safe thing, even if the country’s current government gets thrown out or tamed.
2) I therefore think LCC.v has nailed down a good deal for its shareholders (I am not
included in the list) because the simple fact that it’s found a buyer willing to pay a
reasonable price is a good managerial job done.
3) However and on reflection, I understand FM’s position because it fits in with their
longer-term strategy. Not only does FM have its hands more than full with the combo of
its current operations plus the building of its massive (really massive) Panama Cobre
project, but it’s also obviously in no hurry to move forward on its other assets, first and
foremost the aforementioned Haquira. Since buying Antares FM.to has made minimal
progress with the property, bar the usual and necessary community relations programs
it needs in order to keep in good stead with locals. It’s clear FM.to is looking to build a
pipeline of big copper projects that it can feed upon as this decade turns to the next, so
under this context its purchase of Taca Taca viua LCC.v makes sense. FM is in effect
another entity betting on continued strong demand and higher prices for copper; just
like me in fact (though they play with extra zeroes at the end of their numbers).
12

Therefore without being a fan of either large capex Argentina exposure or this deal, I see
where it’s coming from. The bottom bottom line is that LCC.v has been a stock I’ve avoided for
a long time (many moons ago I had a trade in it, made a profit and sold too early) and have
watched it go up, go down and then come back again while remaining firmly on the sidelines.
That’s due to its country location, not because of its rocks.
Panoro (PML.v): A big move from this one, and the likely cause was people looking round for
the next M&A deal in the exploreco copper space. I know that at least one brokerage, namely
Laurentian Bank, mentioned it as the possible “next up” and the ensuing rally zoomed PML
nearly 50% higher before it trimmed the gains.
As you may or may not remember, my two issues with PML’s main Cotabambas project are 1)
the grade, which is thin once you move away from the central core zone and 2) specific
location, as although it’s in one of the ostensible mining friendly regions of Peru, its exact
location means you’d probably have to move a provincial town in order to get at the copper.
During the week the idea has sprung to mind that after having my preconceptions jolted by the
gonzo road trip to Shahuindo, perhaps I shouldn’t be so judgmental about the political and
community risk surrounding PML until having a look for myself. My DD, analysis and instinct on
this company is that it’s a firm avoid (not least for the somewhat iffy grade compared to its
market cap), but perhaps a couple of days on the road are in order to check on what
Cotabambas really thinks of its business neighbours.
The Low Cost Producer Basket
After 25 weeks, the Low Cost Producer Basket is showing a 20.19% 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 36.25 34.86 -7.6%
2 Goldcorp GG 21.67 812 22.14 27.27 25.8%
3 Barrick ABX 17.63 1000 17.82 17.82 1.1%
4 Newmont NEM 23.03 497.87 12.38 24.86 7.9%
5 Silver Wheaton SLW 20.19 357.39 8.88 24.85 23.1%
6 Franco Nevada FNV 40.74 147.01 8.12 55.21 35.5%
7 Agnico Eagle AEM 26.38 173.43 6.47 37.30 41.4%
8 Pan American PAAS 11.70 151.41 2.23 14.71 25.7%
9 B2Gold BTG 2.02 651.4 1.87 2.87 42.1%
10 First Majestic AG 9.80 117.02 1.23 10.47 6.8%
all prices in U$, using NYSE ticker prices Portfolio avg 20.19%
They all went up, and some of them went up a
Percentage change in basket components
lot. The overall basket average put on a Week of 16th June
14%
massive 9.19% gain (beating out its GDX 12.0%
12%
benchmark slightly, too) and rather than list all 10% 10.4% 9.9% 9.5% 9.2%
the big moves, here’s a one-week-only chart 8.2%
that shows how they all did over the last 8% 7.2%
6.2%
trading week: 6% 4.9%
4% 2.6%
Agnico Eagle (AEM 12.0%) ruled the roost, 2%
putting in an exceptional gain. B2Gold (BTG 0%
10.4%) broke into double figures too, with
SLW, FNV and AG all very strong (First Majestic
finally catching a bid on the relative strength of
silver’s gain to gold). The best bigboy was GG, then at the back ABX and FCX can both be
called underperformers, despite the green ink.
13
MEA GTB WLS VNF GA GG SAAP MEN XBA XCF
source: NYSE

The Low Cost Producer Basket: Weekly performance and
comparative to GDX control
35%
30%
25%
20%
15%
10%
5%
0%
14
ts13ceD ht21 ht62 ht9 dr32 ht9 dr32 ht6rpa ht02 ht4yam ht81 ts1nuj ht51
basket
gdx control
source: Yahoo! Finance, IKN calcs
That will do for today, as we have more than enough on our collective plates dealing with the
moves in juniors and this section is for comparative tracking purposes, first and foremost.
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 ht51 dn22
source: ikn calcs, NYSE/Nasdaq data
Regional politics
Bolivia’s indium mistake
We’ve kept an eye on the snail-like slow passage of the Bolivia Mining Law Reform over the
past three (not joking) years and we’re now just about at the end of the process, so it’s
something between ironic and surprising to find that even after all this time the law reform has
gaping holes in it. For example, it was pointed out just last week (7) by a local mining expert
that the country has manager to leave Indium off the list of materials classed as mining
minerals. That’s important, because Bolivia just happens to be one of the top producers of this
metals (it typically comes as part of zinc concentrates from the country) and exports an
approximate 200 tonnes of the stuff every year. The omission of Indium from the list means
that Bolivia will now miss out on approximately U$140m in State royalties from the export and
sale of the metal.
I wanted to point this out here because in its own way, the event underscores just why Bolivia
is untouchable for our mining investment cash. The place is rich with mining tradition and
hands-on experience and in recent years has even got its macro act together and grown well as
a country. But when it comes to legislation, it’s the same FUBAR as it’s always been and best
avoided by FDI.
Argentina: The bond ruling
When it comes to the wider financial world, the story of the week in Latin America (and one of
the world stories of the week for that matter) was the ruling from the US Supreme Court on the
ongoing “Argentina vs Vulture Funds” saga that came down firmly on the side of the bond
holders and against the country. There are a thousand better places to read up on the issue,
but in a nutshell Argentina now has until the end of the month to agree to a deal with the bold

holders else be ruled in default of payments, according to the US law that governs the bonds
deal. Meanwhile, Argentina wants to separate those who it says are profiteering (the so-called
vulture funds) from those with whom it already has a deal and continue paying its revised debt
(only 7% of the original holders of the 2001 defaulted bonds are in disagreement with the
country), but according to the terms of last week’s ruling, as from next month it won’t be able
to do that. The problem Argentina has this time is that the ruling also gives embargo rights to
Argentina assets if they don’t pay, which may mean things it owns outside its borders are
frozen and then handed over to creditors (e.g. shares in YPF).
All that and more, so if you want to read up on the whole issue do so (my little paragraph
above scratches at surfaces and noted a few relevant details, not much more). The real reason
for mentioning the subject here is to answer a mail or three that have floated my way, all
asking in so many words “Will this affect Argentina’s attitude towards foreign investment,
specifically FDI in mining?”. The best answer I have at this moment is “It might be good news”
and as such, I don’t think it coincidence to have seen the FM.to/LCC.v deal for Taca Taca come
at the same time. The basic reasoning is that unless Cristina takes a hard line and absolutely
refuses to deal with the vulture funds (let’s call them that, it’s as good as any other moniker) at
some point in time Argentina is going to feel the need to get dollars entering the country. At
the present time, Argentina has a notoriously sticky relationship with FDI, as many see the
country as a place where dollars can enter but it’s difficult to get them out again (asset sales,
remittances of profits, etc). If we assume a deal is in the offing for at least the first litigated
U$1.3Bn in holdout bonds held by the vulture funds (a sum that Argentina won’t have difficulty
in paying, it’s the other $15Bn and then potentially U$120Bn in dues that the first payment may
imply that has them really worried) and then the CFK government can stall any future payments
for a while (also very likely), then the aspect of “finally paid” will also play to the advantage of
the country as those looking form the outside make approving noises. Finally, if CFK takes the
hardest line of all and decides not to pay, the country won’t suddenly collapse from its inability
to access outside capital markets (despite what you might have heard to the contrary, daily life
isn’t going to see much effect from a full default as liquidity is mostly internal these days and
there would be no need to emit dollars to pay coupons, either) though you can be very sure
that it will enjoy seeing investment dollars coming in, and the mining industry is one of the
classic sectors to do just that.
Overall, if and when this episode comes to a head it’s likely to be far more important to
Argentina politically than economically. You’ll get all the hype you like from it, especially if CFK
chooses the hardest line and simply refuses to pay under any circumstances (I’d put that at
“very possible, not probable” at this point), but once it blows over Argentina will continue. The
plus side here is that once the noise has dropped we may be dealing with a country that’s much
keener on attracting dollars to its shores, that can’t be a bad thing for relations.
Peru: A tax stability law proposal
Most interesting news last week from Peru. The government has proposed sending a bill to
Congress that would set up a new tax stability contract for mining companies. I was going to
use a lot of local Spanish language links to report on this until the moment Reuters came out
with a decent note on the development (8) and here’s how that note kicks off:
(Reuters) - Peru's President Ollanta Humala proposed a new tax stability contract for
mining companies that would lock in taxation rates for 15 years on investments of at
least $500 million, legislation published on Thursday showed.
The measure is part of a package of reforms Humala is asking Congress to pass
urgently to boost private investment in the Andean country as its economy slows on a
drop in mining exports.
The legislation broadens existing tax stability contracts as well to cover additional
investments, such as mining expansions.
Humala's ruling party usually finds support from opposition lawmakers in to push his
economic proposals through Congress.
15

Global mining companies rolling out big projects in Peru in the coming years, such as
Southern Copper, MMG Ltd and Newmont Mining, would likely benefit under the new
tax stability system, said Jose Miguel Morales, the director of Peru's main mining
association.
A couple of things need to be added to that report. Firstly, it’s no coincidence that the law bill
comes just before 2015, the year in which the tax stability deals first signed in 1998 and
enacted in 2001 by the very same band of large mining companies came into effect. Those
deals took quite a bit of bashing in the intervening years (the deal nearly fell 2006 under the
García government) but apart from the big mining companies agreeing to an extra “voluntary”
royalty payment just after Humala came to power (‘voluntary’ in the Michael Corleone sense, to
name that character twice in one edition of the Weekly), they’ve remained in place and have
meant that major mining companies and their major project have enjoyed very good tax breaks
(principally, the ability to offset corp-income tax on profits by asset investment). Now we’re
near the end and lo and behold!, the supposedly left wing Humala administration wants to roll
this big positive to big capital over again.
Secondly, this is a good deal for the miners and they know it. It also smacks of good timing on
their part, because the last tax stability deal came right at the bottom of the metals price cycle
and if I’m correct (and I hope I am, bring long the stocks I’m long) they’re getting to lock in a
tax deal at another bottom for the metals price cycle.
Lastly, the chances are high that this miner-friendly bill will pass without much fuss (or
screaming anti-Humala headlines in the national press) because the amount of money involved
will...well, let’s just say that Peruvian politicians will be keen to see mining money flowing
through all parts of the economy and some more than others. However our interest is not the
cause but the effect and once enacted this law will be a firm positive for the investment
attractiveness of Peru in the future.
Bottom line: Last week brought good news for the Peru mining sector and all who sail in her.
Peru: Lambayeque politics
More Peru and as always, the macro scene (above) may be positive but you have to keep a
close eye on the regional and micro-regional developments to know whether a specific region or
project is in good shape. We’ve done a lot of work on Cajamarca recently and how the
upcoming regional election might shape its mining future (it is after all an important place for
the industry) but this time we look at the neighbouring region of Lambayeque and how that
region’s election is shaping up. Our focus is on the rise of the MAS (left wing party, same group
as Gregorio Santos in Cajamarca) candidate for the region and his declarations last week (9) on
mining, the environment and specifically Lambayeque’s most contentious project, the Cañariaco
copper development owned by Candente (DNT.to, which popped nicely last week). Here’s the
extract:
Q: Does the MAS party haves a policy position in respect to
environmental problems (in the region)?
A: I defend the environment because it’s from where the water we consume
comes from. I wouldn’t like to drink polluted water nor have valleys destroyed
by residues from mining, nor do I want river sources or basins to disappear.
When we talk of the defence of the environment we believe that people have
the right to live in a healthy place and be consulted when a
(business/economic) model is pushed upon them that would affect their lives
and culture.
Q: By which you refer to the people that oppose Cañariaco. Does this
mean that you would also reject the project if elected as regional
president?
16

We are not anti-miners. We are against irresponsible mining that devours and
contaminates. The community of Cañaris has already held a referendum in
which 95% voted against (the Cañariaco project) but the government did not
listen, The local people have a legitimate right that we respect their decision.
If elected as regional president i would ask the national government to
respect the law of prior consultancy, because that cannot only be an empty
promise. It’s the local populations that must decide what model of
development is implemented in their communities.
Q: What do you think of the position taken by the current regional
government towards Cañariaco? The locals have said that Humberto
Acuña [note: current regional pres., also running for re-election] has
turned his back on them
This government has taken the side of the mining companies, it has done
absolutely nothing. When they held their referendum, I was there along with
representatives from the regional government. Despite their statement that
the vote had been democratic, they did not uphold the result. In this way the
current government has indeed turned its back on Cañaris.
IKN back. In short, what we have in Lambayeque is the rise of the same type of left-wing anti
mining (but they’ll never admit it) politics we’ve seen in Cajamarca. With the Peru “biggest
count in round one wins” system, the rise of a populist like this needs to be monitored carefully.
Market Watching
Sticking with Santacruz Silver (SCZ.v)
It’s also focus of plenty of M&A theories, including the abjectly stupid one about it being bought
out by Great Panther (GPR.to) (GPL) that I mentioned on the blog last week (10). You should
really forget about the silly end companies as suitors, but the whole point of buying SCZ in the
first place was that I believe it to be the right type of target for Fortuna (FVI.to) (FSM), First
Majestic (AG) (FR.to) or maybe even Pan American (PAAS), as the assets look fine but the lack
of cash is stopping SCZ from moving forward.
Just about on-topic, I took an interesting mail from subscriber ‘KC’ and I’m going to reprint it
here and use it to reiterate the buy thesis for SCZ, now that it’s showing a pulse. KC wrote:
Decided to buy some IPT.v instead of SCZ.v. It appeared that Santa Cruz was missing
their target dates as far as mill capacity. I knew that IPT is a high cost producer but my
thinking was that silver may breakout here and IPT would be the immediate
beneficiary. Looked fine until late in the day Friday when IPT appeared to turn into a
pump and dump. Lots of selling into what I thought was a stock building in strength.
Just wondering on your reasons for passing on IPT.
Thanks for any help you can provide, KC
First let’s take KC’s lead on the development delays and take a closer look at the situation of
the ramp-up at SCZ commissioned mine, Rosario. First lets check on the latest and most
reasonable throughput target the company set itself, which came on December 2nd 2013 in this
(11) NR. Here’s the excerpt:
Many of the initiatives related to the Rosario Mine development that were implemented
during the second quarter of 2013 continued throughout the third quarter of 2013 and
have begun to show the merits of the decisions. These initiatives were undertaken to
maintain the Company's operational goal of producing 500 tpd by the end of the first
quarter 2014.
17

Cut to March 18th , nearing the end of 1q14, we had this (12):
The main access ramp development has now reached Level 2 and initial stope
development on this level has begun. This work is scheduled to be completed during
the second quarter of 2014 at which point the Rosario Mine will be able to produce at
its targeted rate of 500 tpd.
Therefore, we saw that 500tpd throughput target missed for 1q14 and pushed back to 2q14
On April 17th we had this (13):
At the end of the first quarter, the mine was producing at about 240 tonnes per day
("tpd") driven largely by increased production from the recently accessed Level II of the
Rosario Mine. The main ramp is now advancing towards Level III.
The installation of a third ball mill is proceeding on time and on budget, with
commissioning scheduled for May. Once the third ball mill is commissioned the
Rosario milling facility will have a 700 tpd-installed capacity, thereby providing
opportunity for the Company to custom mill up to 200 tpd of third party ore in addition
to milling ore feed from the Rosario Mine.
In other words, “yes we missed but we’re now promising for 2q14. Which brings us to the last
exhibit, the NR published on June 2nd, just a couple of weeks ago as we draw to the end of
2q14 (14). Here’s the paydirt section
Mill throughput increased throughout the quarter and during May the average mill
through-put was approximately 270 tonnes per day (tpd) with an average silver grade
of 230 g/t, and starting in June through-put is anticipated to be 300 tpd while
maintaining same silver grades.
In other words, way short of the promised 500tpd. But we also had this from the June 2nd
bulletin:
We anticipate significantly reduced costs in the coming quarters as our mill through-put
will increase rapidly in the coming months and we expect a strong 2nd half of 2014."
Yes, more promises for a bright future...and this time they mean it.
Normally, a lagging ramp-up like this would concern me a lot. This time not so much, and
here’s a chunk of prose to explain why. Rosario’s cash flow isn’t why I’m long SCZ (what’s
more, it’s definitely not why i’m long at $20/oz silver). The reason to have taken this position is
for its suite of assets and what they could do in the event that real cash gets thrown at them.
In fact, long before the 2014 ramp-up delays, the master plan at SCZ went badly wrong. The
whole idea of the company was to get Rosario moving quickly and use the cash flow from
$25/oz or $30/oz silver to pay for the next mine build-out (Gavilanes, then San Felipe, probably
in that order). When silver prices sank SCZ’s grand plans sank with it and they’ve since been
aiming their limited resources (plus a round of equity raising) on Rosario, trying to get it
moving, then after that decide what to do on the corporate strategy level. However, this means
that the other mines are still out there, as decent assets and ready to be developed, if only
there was the cash available. This is where the idea of a buyout begins, because a new (and
presumably cash richer) owner would be able to move all three mines forward and make these
deposits into mines. In short SCZ is an asset play, not a bottom line profits play, and it’s been
that way since we bought in and then set out the reasoning formally in the NOBS report of
IKN249. By the way, on looking back and considering the argument put forward in that report
dated February 16th, I think the only mistake I really made was to mis-time the recovery in the
metals market. All the other arguments hold water today, including the ones that put a value on
SCZ.v and say that Rosario, even when fully operational, accounts for about a third of my price
target of $1.80 for the stock.
18

I know this SCZ management team isn’t great shakes at mine-building. I knew that before
buying the stock so the delays we’ve seen in 1q14 and 2q14 have come as no surprise. At all.
But SCZ in (and in order of preference) San Felipe, Rosario and Gavilanes has three solid silver
or silver/polymetal projects that a good mine builder (FVI, FR, name your other) would be able
to make into their next big expansion projects. Even at $20/oz Ag these projects work (for
those who don’t care enough, at $20/oz Ag and 500tpd, only Rosario gives us an 8c EPS) but
they are held by a company that doesn’t have the cash (and maybe not the expertise) to make
them into what they could be. In short, it’s less of a disadvantage (doubly true in the low silver
price period we’re hopefully now leaving) that Rosario hasn’t got to its target 500tpd yet
because 1) Rosario is only a third of this game and 2) even if it were already operating at full
steam, it’s not why we’re long the stock in the first place.
Whereas IMPACT Silver (IPT.v) does not have this main gift. Yes, it’s also a stock that’s been
pummelled by the low silver prices. It needs them to rise in order to be a profitable producer
(which is a clue in itself) but even if they do just that, the reason you’d want to be long IPT is
for its eventual profit-making ability, rather than its M&A potential. That’s because nobody’s
going to buy out this one, not while its main production is based on several small vein systems
that have no 43-101 resource (the Capire deposit does indeed have a resource, but that was
shut down while in commissioning/ramp-up stage because it’s unprofitable at current prices.
The combo of high cost and unknown resource isn’t one that pertains to a buyout candidate
(and we note that IPT sat there all through the last cycle of prices, nobody wanted it then
either). For sure IPT can make money in a silver upturn, but the reason to be long SCZ comes
from a different mindset, that of trying to ride the upsurge of an asset valuation revival.
The bottom line, however, isn’t about IPT but about SCZ. IPT is a comparative, a conduit to
explain my patience with SCZ to date. In effect, my attitude to this trade is very similar to that
of the new copper positions; we’0re in the mining stocks world that’s changing and with return
to giving good and proper (well, perhaps better and somewhat improving) valuations to those
companies with good rocks. Up to today it’s been cash flow or death, it won’t continue like that
forever and once M&A action kicks in, the market will begin to value fixed assets in the way
that the predator mining company with cash to spend do. Santacruz Silver (SCZ.v) may indeed
have a bunch of mediocre managers running the show and be behind on its revised (i.e.
previously delayed) development plans, but it has good rocks that aren’t getting a fair ticket
price at the moment. My bet is that it changes.
Conclusion
IKN267 is done, we end with bullet points:
• Be long the copper miners. Last week we started with two, there’s room for cash
additions to those positions and other stocks as well. Times are changing for the better
in this sub-sector.
• Be long Rio Alto (RIOM) (RIO.to), no better value out there.
• Be flexible in the near-term, because the chances that this is the big breakout move
that changes the game in the gold sector aren’t that high at all. Away from the core
positions and the new-found love of industrial metals (well, just copper really for the
time being), I’m looking to trade through and the first step will be to look for a spike up
from last week’s strong positive market.
• This week my eyes will be on Minera IRL (IRL.to), as news is due and I think it’s going
to be good. After adding a few over the last couple of weeks, I’m ready.
19

• Lots of words, not so many pictures this week. There was a lot to say rather than show
for a change. More charts and visuals next time, promise.
The top long-term pick is Rio Alto Mining (RIO.to). 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
Footnotes, appendices, references, disclaimer
(1) http://finance.yahoo.com/news/first-quantum-minerals-acquire-lumina-153000437.html
(2) http://finance.yahoo.com/news/quaterra-resources-inc-announces-freeport-123000685.html
(3) http://www.reservoirminerals.com/files/doc_presentations/RMC_May2014.pdf
(4) http://finance.yahoo.com/news/rio-alto-secures-usd-70-113000954.html
(5) http://finance.yahoo.com/news/focus-reports-further-phosphate-drill-123000391.html
(6) http://finance.yahoo.com/news/first-quantum-minerals-acquire-lumina-153000437.html
(7) http://www.elmundo.com.bo/elmundo/noticia.php?id=1057
(8) http://www.reuters.com/article/2014/06/20/peru-mining-reform-idUSL2N0P01S220140620
(9) http://www.larepublica.pe/19-06-2014/acuna-le-ha-dado-la-espalda-a-canaris-y-a-toda-la-region
(10) http://incakolanews.blogspot.com/2014/06/warning-more-m-rumours-than-you-can.html
(11) http://www.santacruzsilver.com/s/news_releases.asp?ReportID=613723
(12) http://www.santacruzsilver.com/s/news_releases.asp?ReportID=642755
(13) http://www.santacruzsilver.com/s/news_releases.asp?ReportID=648363
(14) http://www.santacruzsilver.com/s/news_releases.asp?ReportID=656455
Appendix 1: Flash update dated Tuesday June 18th
Good Tuesday morning, just after the opening bell.
A quick note to say that I'm pulling the trigger on a couple of long-proposed ideas. I plan to buy positions in Reservoir
Minerals (RMC.v) and NovaCopper (NCQ.to), with bias in size towards the RMC.v position.
Details this weekend, but it now seems clear that it's time to take a stand and position some cash for a period of M&A or
consolidation in the copper space.
20

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
21

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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