IKN #280Premium

The IKN Weekly
Week 280, September 21st 2014
Contents
This Week: Gold at U$400 an ounce, Rick Rule and Brent Cook deliver the keynote speech at
the Precious Metals Summit, Gary picks up on the gold/silver ratio too.
Fundamental Analysis: B2Gold (BTG) (BTO.to).
Stocks to Follow: Overview, Santacruz Silver (SCZ.v), First Majestic (FR.to) (AG), Rio Alto
(RIOM) (RIO.to), Timmins Gold (TMM.to) (TGD), Coro Mining (COP.to), GoldQuest Resources
(GQC.v), Focus Ventures (FCV.v).
Copper Basket: Overview, Hot Chili (HCH.ax), Nevada Copper (NCU.to).
Low Cost Producer Basket: Overview, Agnico Eagle (AEM).
Regional Politics: Colombia Mining Trade Fair notes, Peru to speed up the environmental
permitting process, Eurasian Group on Argentina, Guatemala: Trouble brewing as Tambo mine
“to start up before year end”, Peru: Updating on the Cajamarca regional election scene,
Argentina: Patagonia’s renewed pro-mining push.
Market Watching: A quick headsup on Gold Reserve (GRZ.v), Bear Creek (BCM.v): The game
changes, Interesting gold news.
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
Gold at U$400 an ounce
Due to several disparate influences, some market related and others far removed from the
world of the screen and the number, there’s been this thought experiment going round my
head for a few days. The basic premise is to assume that gold is worth a lot less and the über-
bear crowd is correct, so I picked out of the air the number $400 for a target price of gold
(which could have been higher or lower, it’s just my personal line in the sand) and tried to
envisage the price there and what it would mean. But however much I try I can’t see it
happening, because to get to what’s best described as “an abnormal price*” we’d need
wholesale dumping of reserve gold by the world’s central banks. This would happen at the
same time as nearly all gold mines around the world closing due to unprofitable operations.
Finally, we’d also see a massive increase in consumer demand for gold jewelry. So, unless our
tastes as consumers dramatically change and humans turn their collective backs on gold the
outright “gold is worthless” brigade want us to suppose that drops and supply dries up while
demand rockets, all at the same time. Expanded thought on those:
1) Most gold mines would close. Unless of course the US Dollar doesn’t get simply
stronger but a LOT stronger than peer and world currencies, operating costs would
soon rise above revenues for gold mining companies. Most businesses can survive a
period of time under such circumstances, but only if balance sheets are in order. But
then, once revenues fail to cover even a small percentage of fixed costs all you’ll hear
from mines around the world is the sound of keys turning and locks snapping shut.
2) But the world would crave supply (see point 3 below), so gold would have to come
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from vaults and suchlike. This would mean banks giving up their solid reserves in
preference for currency (again, most likely the dollar) but as most country central
banks only carry a minor part of reserves in gold and already have a major part in USD
(central bank holdings of the Venezuela type are few and far between) the benefits
would be minimal and the dangers of reducing reserve diversification would quickly be
pointed out by the sober end of the econosphere (not just the goldbug or hard asset
fringe). Unless gold goes suddenly out of favour as a thing worth money by human
beings, a move that would go against thousands of years of human culture and habit,
it’s tough to see gold being swapped for cash on such a scale by the institutional and
country movers.
3) Demand would rocket. To repeat, we’d need human beings to move away from a
historical love for the rare, shiny, long-lasting metal (1) that can be made into very
pretty objects. And as I look around this me-first, fuck you, baby boomer world of self
entitlement and overwhelming consumer greed it’s very difficult indeed to imagine a
situation where gold wouldn’t be bought in ravenous quantities by people with access
to disposable income and buying power on a level previously unknown. Bling would be
made into crass shapes and forms as yet unimaginable (anyone for a 18k twerking
robot model of Miley Cyrus?) as the post-industrial consumer dream is offered in 12,
easy to pay zero interest installments. Karl Marx would look down (up?) upon us and
smile contentedly as the last great bastion of elite wealth is spread among the
proletariat, not just confined to the oligarchs or bourgeoisie
Not gonna happen, folks. Not. Gonna. Happen.
Gold is a circular argument after all. Its critics (and there are many) are the first to point out
that it’s only expensive because it’s precious because it’s sought after because it’s expensive etc
etc and that circular argument may be annoying to the cold and calculating world of the quant,
but like it or not it’s also a long-standing fact (and they don’t like it). But it also means the rich
have a vested interest in keeping the barrier to entry high, because they already own a
heapload of the stuff and if the last 200 years of capitalist economic development has taught us
one thing, it’s that the rich don’t like it when you start messing with the value of their assets.
Play with the currency all you like but don’t discount the value of the things they own, the solid
things that are heavy (house) or pretty (Warhol) or both (gold bar) for which they paid a lot of
money to own.
The argument is loosely scripted and not particularly original or eloquent either, but that’s ok
because I’m not trying to break into the Gold Bullion Expert Commentary Club anytime soon,
merely defending the position of a holder of juniors in the face of the current bear in their main
underlying metal. Gold may drop in price some more in 2014 but it’s not going to drop much
further, because in 2014 it won’t suit the haves to give away ownership to the have-nots so
easily. In dollar terms we’re either at or close to the bottom now, the asset value hasn’t
changed a jot and it won’t do so in the future either. As for upside to bullion, I’m aware that my
preferred “gold to $1.4k by end 2014” has taken several knocks over the last two weeks but I
contend it’s still perfectly possible, which is something that will affect our juniors more positively
than any bullion you might own because (hopefully at least) we’ll reach a price point where
selling the juniors and exchanging shares for cash is the right move.
*For once I make no apology for the inverted commas
Rick Rule and Brent Cook deliver the keynote speech at the Precious Metals Summit
The link to the video is here (2), as well as useful crib notes by JGMS on what’s said over the
one hour presentation. There’s much food for thought here and for everyone interested in the
mining game, from the whizziest company CEOs through to us the bottom feeders. A highly
recommended didactic hour on the junior mining scene from two different but experienced
points of view.
2

Gary picks up on the gold/silver ratio too
I was putting together my thoughts on this subject Saturday afternoon (yesterday) when this
post (3) from Biiwii hit my RSS, with an interesting and slightly unusual chart of the gold/silver
ratio (GSR) along with some semi-cryptic notes on it. When I get round to reading his weekly
report #309 later (it’s going to be Sunday night or early Monday reading for me this weekend)
I’ll be very interested in what he has to say about this spike on the GSR.
Until then I’ll stick with my rather more simplistic chart reading of the GSR and this above.
Either this time it’s different or we’re going to see a reverse in this ratio, as numbers
approaching 70X have shown themselves to be unsustainable.
Fundamental Analysis of Mining Stocks
This week we look at B2Gold (BTO.to) (BTG).
NOBS report dated September 21st, 2014
B2Gold Corp. (BTO.to) (BTG)
Company Overview
B2Gold Corp. (Canada: BTO.to, USA: BTG, Frankfurt 5BG.f) is an producing junior/mid-sized
gold mining company operating in Nicaragua, The Philippines, Namibia, Colombia and (soon to
be) Mali. It has either working mines or late stage ramp-up project in all those countries, but
arguably its current flagship property is the Masbate mine in the Philippines. Current share
structure is as follows:
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Shares out: 948.9m
Options & Warrants: 13.6m
Fully diluted shares: 962.5m
Current share price: U$2.19
Market Cap: $10.36m
Approx cash per S/O: $0.12
All prices are in US dollars unless stated. Forex U$0.90=CAD$1
NB: In the above, we assume the successful closure of the Papillon merger, due very soon, and estimate
shares out and F/D numbers from B TO’s pro-forma statements. Also, as B2Gold reports in US Dollars and
quotes in both the US Dollar via the NYSE (BTG) and the Canadian Dollar via Toronto (BTO), today’s analysis
keeps things simple by staying in US Dollars unless otherwise stated and uses the BTG price as our baseline.
Overview
Last week we covered the very small in the shape of the $10m market cap Coro Mining
(COP.to). This week the very large and at a pro-forma market cap of U$2.08Bn (we assume the
PIR.ax merger is completed) B2Gold (BTO) is a different animal altogether, more a mid-cap
gold producer than a junior these days.
Today we make the case for a BTO that will rebound after some particularly heavy selling seen
during the merger process. Reliable word is that the outsized selling down the the CAD$2.30
/U$2.10 level has been due to holders of Papillon arbitraging out before the closure of the deal
by short selling BTO in both New York and Canada, so along with the dive in gold we now have
a BTO at a considerable discount to just a couple of months ago (YTD chart versus GLD for
your perusal and consideration here).
And now the twist (which comes with some completely unwanted and superfluous background
on how a weekend’s worth of writing goes, which then turns into a rant).
With most of the numbers already done, on Friday and half of Saturday I started putting
together the analysis piece, the charts, things of the ilk. It was going to be a normal type NOBS
report, you know the ones, they show a few charts then look at the assets then run an earnings
model then pop out a target price then make an argument for a long position, throw in a snappy
conclusion, end of story, boilerplate done, hit send, pleasant and relaxing Sunday evening
watching some no-brain TV show on History Channel with the wife. But then I left this part of
IKN280 to go and write up other parts of the edition and come the evening. I didn’t come back
here, even though was needed to be done was fairly straightforward, because of an
uncomfortable feeling about it all.
Come Sunday morning, refreshed after sleep, into the office and time put down a few thousand
words of serious script as per a normal Sunday. The problem was that I couldn’t get going on
the BTO article, not at all, and it was starting to grate hard on me as to why. It took a while for
my dumb brain to catch on but once it did I erased all the chartwork and all the tables and
started all over again. The reason is that I wasn’t being honest, not with myself and not with
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you. What happened in the numberwork wasn’t much more than a reverse engineering of facts,
one of the things I hate most about the type of sellside analyses you get from the rented brains
wearing $800 suits in brokerages. Let’s take a typical example (though from a time when
financing deals were the norm instead of an exception, so let’s imagine it’s 2011 or 2012 again).
• A house agrees on a financing with a junior
• Junior sells shares via the brokered financing, gets cash for treasury
• Brokerage gets 8% fee, plus a bunch of broker’s warrants
• House agrees to write up company via fundamental analysis and formal coverage
• Analyst assigned the case, investigation done, report published.
Take a wild guess as to what that report’s going to say about the stock. Yup, that’s how sellside
ends up with 95% buy recos on its books, ladies and gentlemen. And when it comes to the
analyst chosen to write the totally level-headed, unbiased report that feels no pressure
whatsoever to come to a certain conclusion from a boss sitting in a corner office with glass for
walls, it can of course depend on whether the company under examination has a decent chance
of turning its project into a mine or its operation into a real moneyspinner, but considering the
way the odds are stacked (95% of analyst reports calling buy, at least 95% of mine projects
never making it to production) the chances are you’ll need to reverse engineer your report.
What reverse engineering of a report means is fairly straightforward:
1) Get your subject matter
2) Be instructed upon/Work out what recommendation you are going to give at the end,
including what price target.
3) Work your way backwards from the end to the beginning of the numericals, in order to
justify the target price using the company criteria.
It’s simpler than it might sound too. So easy in fact that (as long as you know what you’re
looking for) you get examples of the genre all the time. And after taking that big detour we finally
arrive at the place I found myself this morning, guilty as charged of reverse-engineering.
There are some simple facts about IKN and BTO version September 2014, so lets state them
simply:
• I’ve bought the stock.
• I consider it a trade with a short or medium term timescale.
• The plan is to ride up a rebound and then sell.
So sat down to down over the last three days and then I stopped and wrote all this rant instead,
because the bottom line is that I was bullshitting both myself and you. Once the BS is stripped
away, here’s the real situation:
1) I’m fortunate in that the vast majority of IKN Weekly readers aren’t newbies and know
how to get around the market.
2) Therefore, most of us know the basics of BTO and know it’s a good operator, profitable,
a growth story.
3) It’s covered in a quantitative manner by a whole bunch of analysts, so if you want to
read a fundies analysis on the stock there are plenty to choose from, they’re all very
much alike and they tend to come to a positive conclusion (if you want an example mail
in, I’ll send you some house report by return.
4) We’ve all watched it drop, with many wondering when the right time is to get on. This
isn’t and never will be a fundamentals decision, it’s market sentiment, momentum, or
seat-of-pants call, call it what you will. It’s a subjective call based on market nous, not a
numbercrunch.
5) That’s what I’ve tried to do on the entry. What’s more, I can fluff up a pretty target price
for you if you want but the plan here isn’t to ride BTO up on a longer term, it’s to ride a
rebound and get off at an appropriate moment. A 12 month target price is so much hot
air when the truth of the matter is that I’m making a subjective call on what I believe to
5

be a rebound set-up for BTO.
To expand on those points, I don’t want to convince you about the validity of my BTO purchase
a few days ago via yet another round of numbercrunching and data collection. I’m not trying to
tell you that BTO is some kind of wunderkind mining company either, as I’m not a member of
the swooning masses that hangs on every word of Clive Johnson. I write things like this about
BTO (4), a post dated March 31st 2014 just after the accident at its Limon mine in Nicaragua
which left two people (eventually) dead, as well as a different accident at its Libertad mine just
two days previously that killed another person (5).
This Thing Is Not Like That Thing, B2Gold ($BTG) (BTO.to) (BTG) edition
Less than a month ago, Clive Johnson of B2Gold (BTO.to) (BTG) proudly stood up
before an invited audience and waxed lyrical on his company's "Commitment to
Corporate Social Responsibility programs (which) continues to gain strength – B2Gold
prides itself on their (sic) programs globally".
However, when something embarrassing happens at one of his mines that doesn't fit
into his personal fantasy of corporate excellence (well, in fact multiple embarrassing
things, as two deaths in one week at one mine isn't exactly indicative of world-class
H&S on display), he's suddenly very keen to keep it out of the world's mining media.
Funny that, innit?
Seriously, what makes Johnson think that multiple deaths at one of his mines isn't a
material event?
But don't start calling The Clive hypocritical, please. No no no, perish the thought.
I don’t think BTO is is the new future and shining horizon of the gold mining industry, as too
many commentators have set it up to be. It has its good points and its bad points as a corporate
entity but that’s all rather secondary to me right now. This is a trade. Buy low, sell high. It’s
capitalism. It’s nothing personal. I’m long past the day when personal tastes and preferences for
people running a company would alter my
attitude towards it and indeed, some of the
nicer and more trustworthy people I’ve
come across in this strange sector have
turned out to be particularly bad advice
givers or company officers (or both).
Seriously, does it really matter to you what I
think about CEO Johnson as a person, or
does it matter more that he really knows
how to run a mining company? This is
another part of cutting the BS away.
Today’s trade in BTO is all about price, the
interest is the point in the cycle at which we
find BTG, that’s to say at a low point after a
triple dose of bad news. After 1) a
disappointing 2q14 production number and then financial report, 2) the persistent selling from
Australia as PIR.ax holders cash and 3) the heavy drop in gold have knocked BTO back to
near-unchanged on the year.
So that’s the bad and why I found a good price to buy at CAD$2.32 just six trading days ago.
The first part is buying low, now for the reasons why I think I’ll be able to sell this high down the
line.
1) The Canadian mining sector loves them. The felling is mutual of course, because CEO
Johnson and Co know where they can get a financing done at any given time. But the love-in for
BTO despite its negative (or at best flatline) share price performance over the last couple of
years shows no sign of coming to an end. As well as smart miners, this board of directors has
the marketing and insto spiel side of this crazy game down to a tee.
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2) The stock’s been beaten down by “them”, rather than “us”. This recent selling episode
has come from a previously unknown source, that of Australian shareholders who (so I’m
reliably told by the people watching this flow) make a habit of arbing out of a merger deal before
its closure and snagging a better price before things spiral down and in on themselves. I
puzzled for a week over the source of the heavy and persistent selling before getting the intel
and my “aah! That’s it” lightbulb went off, one of those nuggets of information that fits and
makes perfect sense but only after hearing it. Anyway, what we have isn’t Canada selling one of
its darling stocks, it’s those swarthy heathen types in Australia so one the last of them has done
selling, we can fully expect the home team to rally round and send this back up.
3) BTO has a track record of delivery. This is one of the strongest points of the company, it’s
what they bring to the table that separates them from most of the pack and even among those
with strong delivery records, they’re second to none. BTO
4) It’s just put out its kitchen sink quarter. As noted in IKN277, that’s when a company
puts...
“...all the potential drags and financial negatives it can reasonably think of and then
puts them all into one quarter, with the plan of shining like a bright and shiny star once
again when the next set of numbers comes around, which in this BTO case will be
3q14 and mid-November. As that’s also 1) almost certainly after BTO’s deal to buy out
Papillon (PIR.ax) closes (that should be September) and 2) just around the day BTO
announces first production or commissioning or first pour from Otjikoto, we have three
prongs to the bullish marketing this company will be able to offer.”
Apart from getting the Papillon final closure slightly wrong (it’s going to be October 3rd) I’m good
with all the above. We’ve already seen the opening bars of the promo push in the last couple of
weeks too, with presentations made by BTO to the Precious Metals Summit and the Denver
Gold Forum last week (that presentation linked here (6)) which got the expected reaction form
the market. In fact, via this link (7) that I stumbled upon a couple of days ago we get a neat little
summary of the most recent changes in brokerage cover of BTO. Here’s a list gleaned from the
link:
• Desjardins has opened coverage of BTO with a buy call (no price target in
report).
• Raymond James cut its BTO price target from CAD$4.00 to CAD$3.75 on
Tuesday, rating ‘outperform’.
• Scotiabank upgraded BTO to “focus stock” status on Tuesday (no price target
given in report).
• Goldman Sachs cut its price target for BTO on Wednesday from CAD$4.20 to
CAD$4.00
• Thirteen different brokerages and analysis houses have a buy rating on BTO,
one has a strong buy rating.
• Current consensus is “buy” (unsurprising), current average target price is
CAD$3.95.
Add on that Brent Cook has bought a few BTO in the last few days and made mention of the
fact to his clients, though notably he considers BTO as a trade for the near term rather than a
formal reco with a high $3s or low $4s price target. As in my (perfect and utterly infallible)
opinion Cook is a better and far more independent judge of miners than the average sellside
brokerage analyst, I’ll take that little snippet as worth more than the list above put together.
Conclusion
No blinding with science or numbers today, this is a subjective call on a stock that, as long as
gold doesn’t fall into oblivion (see today’s intro), has bottomed and will rebound as soon as the
Australian selling dries up and BTO gets into gear with its end-year promotion.
We’re going to see the following from BTO between now and 4q14:
• The Papillon merger closing
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• A 3q14 quarter results that improve on 2q14, both production-wise and financially
• Otjikoto coming on line.
Along with the proven operating quality of the company, which will be quick to promote and talk
up its growth prospects to friendly ears (here’s the only non-price chart I’m keeping in, taken
from BTO’s presentation at the Denver Gold Forum (8)).
The bet here, the seat-of-pants subjective bet, is that the market re-rates BTO back towards
$3Bn market cap, i.e. around 50% of a company like Yamana Gold (AUY) (YRI.to) which is set
to return 1.4m oz gold equivalent this year from a weaker looking balance sheet and lower
growth prospects than BTO. Even on 2015 production and costs it’s justified and that’s before
the greater shadow of the Fekola production bump is considered. But as stated loudly, clearly
and way too rantingly above, this isn’t about the fundamental prospects over the longer term.
BTO is a trade and a position I’ll sell to the next person in a few weeks time at a 20% or 30%
higher price.
End of Report
Stocks to Follow
Of the 15 open positions this time last week, somehow we managed to sneak through four
weekly winners (TGD, BTO.to, RMC.v, GQC.v) and two unchanged stocks (IRL.to, COP.to)
during a week of very nasty and negative sentiment towards gold and all main underlying
metals. It was still a heavy losing week for the portfolio however, with paper losses obviously
headed up by Rio Alto’s two day dive.
As for the bigger percentage moves, losses were headed by Dalradian Resources (DNA.to down
11.8%), Santacruz Silver (SCZ.v down 11.8%), Rio Alto Mining (RIO.to down 9.2%) and First
Majestic (AG down 8.5%). Of the winners, the standout was the big percentage move in
GoldQuest (GQC.v up 25.9%) even though is was really a reaction rebound against heavy
overselling of the previous two weeks.
With the sale of Santacruz Silver on Friday via the Flash update (see Appendix 1) there are now
14 open positions on our ‘Stocks to Follow’ list, one less than our self-imposed maximum. Six
are in positive territory, eight are negative.
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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$2.87 24.8% 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$1.46 5.8% $2 tgt, holding in 3q14
Minera IRL IRL.to spec buy C$0.27 22-jul-12 C$0.155 -42.6% Ready for financing deal
B2Gold BTO.to buy C$2.32 12-sep-14 C$2.38 2.6% new position, value trade
Focus Ventures FCV.v hold C$0.23 01-jul-12 C$0.275 19.6% tgt 50c, added, avged up
Reservoir Min. RMC.v buy C$6.05 18-jun-14 C$5.45 -9.9% Big deposit, M&A, Cu play
First Majestic AG buy U$10.51 10-aug-14 U$8.39 -20.2% Main Ag play, 1st tgt $13.60
Dalradian Res DNA.to hold C$0.65 27-oct-13 C$0.75 15.4% Poss add window, tgt $1.70
Amerigo Res ARG.to buy C$0.445 20-jul-14 C$0.43 -3.4% new position, sm Cu play
NovaCopper NCQ.to spec buy C$1.05 09-apr-14 C$1.11 5.7% small Cu play started well
GoldQuest Min. GQC.v hold C$0.26 27-oct-13 C$0.17 -34.6% key drills results soon
Lara Expl. LRA.v hold C$1.15 08-apr-12 C$0.71 -38.3% solid biz model, LT hold
Recommended short positions
None at moment
Smaller/Riskier
Coro Mining COP.to spec buy C$0.125 26-jan-14 C$0.065 -48.0% Cu spec play, can add
Salazar Res SRL.v spec buy C$0.28 02-mar-14 C$0.195 -30.4% small spec, new China JV
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% took profit
Bear Creek Min BCM.v may'14 C$1.63 23-mar-14 C$2.05 25.8% Took profit, sm near-term win
Eco Oro Min. EOM.to aug'14 C$0.48 22-sep-13 C$0.26 -45.8% sold small loser to make room
True Gold TGM.v sep'14 C$0.395 02-feb-14 C$0.41 3.8% M&A won't happen, sold
Santacruz Silver SCZ.v sep'14 C$1.04 26-jan-14 C$0.86 -17.3% Sold on neg news
2009, 2010, 2011, 2012 and 2013 closed positions in appendices below
Now for some notes on a selection of the above stocks.
Santacruz Silver (SCZ.v): Position sold. It went easily and quickly on Friday morning too,
which was a good thing on considering the
constant selling that PMs and particularly silver
companies went through on Friday afternoon. I
said all that there really is to say about the sell
decision on Friday in the Flash update (see
Appendix 1).
I happened to be travelling on Thursday, so
didn’t see the early morning NR when it hit, nor
did I have the theoretical opportunity to sell into
the Thursday morning strength. On reflection, I
know that my first reaction on reading the SCZ
NR (9) was of the heart-sinking variety (much
the same line as when True Gold (TGM.v)
9

announced its streaming deal) and the out on Thursday was much better than my eventual 86c
Friday (though not quite as bad as the Friday close of 82c) as there was plenty of 93c and 95c
bid, but knowing myself I would have probably waited and reflected on the news before making
the sell decision, so the Friday sale and the eventual out price was hit by the bad luck of weak
silver (I’ll call it luck if I want, argue via mail if desired) more than anything else.
First Majestic Silver (AG) (FR.to): Ouch. The plan of “won’t get much lower than $10” is
now well and truly blown out of the water. Waiting a week, but I may need to reconsider this
silver exposure if things don’t improve.
Rio Alto Mining (RIO.to) (RIOM): Last week’s short comment comes back to haunt me:
The neurosis of the week in my Top Pick stock? That one’s easy, as the theory goes that RIO.to’s
stock price has held up because everyone expects it to re-join the indices e.g. the TSX S&P Gold
miners, as announced Friday and gold miner ETF GDX and the price has held up because of that.
Once the process is over (next week, with the additions officially happening September 19th) the
theory goes that buying pressure evaporates and RIO dumps in order to get back to the type of
poor performance we’ve seen from peers.
Which is fine and as you can see once again in this chart (this time a 10 day timescale) RIO.to
(gold line) has done that much better than gold (GLD, black line) or the GDXJ juniors ETF (blue
line) these last two weeks. In fact, seeing RIO hold over $3 and even add a few pennies while
gold has gone South in a big way has been quite a change, a pleasant one and a portfolio saving
one, but a change all the same.
In short, that played out as you can see on this five day chart:
What I’ll take by way of solace is that RIO.to made my $3.30 price target before it flopped. As it
broke through on Tuesday I actively considered selling at least a tranche of the position at the
target and brought out the sheets as well. My main concern was that a low $1200s gold price
wasn’t enough to justify that price level and (though I only have the Market Gods as witness) I
was tempted to shave a few away and turn them ihnto cash. But I didn’t and that’s a regret.
That was then, this is now and the selling looked particularly overdone on Friday afternoon (the
same can be said of quite a few juniors that were put to the sword). Again, skittishness and
nerves abound among the flippers so there’s no need to make a mistake by doing something.
Timmins Gold (TGD): This was better. The flip-side to socoks such as RIO.to, FVI.to and BCM
(see below) was the resilience seen in a few stocks that had already taken a pummelling in
previous weeks. One example B2Gold, another is Timmins (TGD) that managed to put in a
weekly gain. It’s logical enough having dropped from much higher prices already, but it
wouldn’t have come as a total surprise to see it being sold more in the rather panicky selling we
witnessed Thursday and Friday, so the gain is good and it’s welcomed.
10

Coro Mining (COP.to): Among the feedback from the COP note of last week (thanks are due
to all who wrote in, kind of you even if I was an ignorant wretch and didn’t answer) came a
comment from SB who said the following /excerpted from a longer mail:
There is a lot of local capital in Chile for mines of this price and supposed
quality. Just the fact that it's in the hands of the foreigners makes me wonder
why the locals didn't scoop it up.
It’s a good point and one that’s been in my thoughts over the years, on and off, though I freely
admit I haven’t dwelled on it very much in this case. The simplified story in Chile is that Codelco
got all the good land, then the big private companies came along and snaffled up some big
porphyry deposits using new techniques (eg La Escondida), then the State via exploration arm
Enami (rather than State operators Codelco) got wise and scooped up what was newly
prospective concessions and around and between all those, private smaller players found their
niches. The result is that there’s rather thin pickings for foreigners looking to explore from
scratch in 21st century Chile and though by no means impossible, the limitations are set.
On consideration of SB’s critique, in this case I’m not so worried. There’s plenty of evidence to
suggest local investors are pulling out of mining deals rather than moving into them (2015
projections are for 45% less capex into Chilean mining compared to this year (10)) and that’s
the type of (potentially temporary) vacuum that established and respected foreign player such
as COP can take advantage of.
GoldQuest Mining (GQC.v): The reaction to the
sillycheap sell-off prices finally came last week and
though there’s a long way to go to repair all the
damage, the shape of this five day chart is the right
one. We had lower-to-higher all week, volume kept
up, speculators seemed to be nibbling and making
GQC interesting.
I’m a likely seller and loss-taker at some point in the
near-ish future, this trade has obviously failed, no
beating around the bush on that. But let’s wait a
while longer before leaving to see if GQC repairs
some more and gets back to something akin to a
reasonably small loss.
Focus Ventures (FCV.v): FCV continues to bounce around in this 25c to 29c range, though
there was some reasonably decent volume on Thursday that popped it back up to the higher
range (again, new money needs to pay up to enter, not a bad thing)
11

The Copper Basket
After thirty-eight weeks of 2014 The Copper Basket is showing a 2.64% gain to level stakes.
company ticker price 1/1/14 Shares out Market Cap current pps gain/loss%
1 Augusta Res AZC.to 1.51 144.41 541.54 3.75 148.3%
2 Lumina Copper LCC.v 6.29 44.07 440.70 10.00 59.0%
3 NGEx Resources NGQ.to 1.43 168.71 320.55 1.90 32.9%
4 Reservoir Min. RMC.v 4.97 47.55 259.15 5.45 9.7%
5 Nevada Copper NCU.to 1.35 80.5 168.25 2.09 54.8%
6 Panoro Minerals PML.v 0.35 220.25 92.51 0.42 20.0%
7 Copper Fox CUU.v 0.375 402.96 78.58 0.195 -48.0%
8 Hot Chili Ltd HCH.ax 0.425 333.11 68.29 0.205 -51.8%
9 Curis Resources CUV.to 0.57 74.79 68.06 0.91 59.6%
10 NovaCopper NCQ.to 1.60 60.15 66.77 1.11 -30.6%
11 Western Copper WRN.to 0.76 93.68 63.70 0.68 -10.5%
12 Cordoba Min. CDB.v 0.90 58.81 18.23 0.31 -65.6%
13 AQM Copper AQM.v 0.11 139.24 11.14 0.08 -27.3%
14 Coro Mining* COP.to 0.10 159.37 10.36 0.065 -35.0%
15 Oracle Mining OMN.to 0.27 49.03 3.19 0.065 -75.9%
NB: HCH.ax priced in AUD$, rest CAD$ //CDB 2x1 split May'14 Portfolio avg 2.64%
The basket average dropped 2.6% with just two winners to report (RMC.v, NCU.to) and four
unchanged names (LCC.v, AZC.to, COP.to,
AQM.v). The other nine were all losers (not The Copper basket 2014, weekly evolution
25%
listing them all) with the biggest drops coming
20%
from Cordoba Minerals again (CDB.v down
22.5%), and Hot Chili (HCH.ax down 12.8%). 15%
10%
Copper market prices were basically
unchanged on the week but that’s only half 5%
the story, as we also saw a spike much higher
0%
during overnight Tuesday trading on China
macro move, which was duly met with
persistent selling the rest of the week to drag
it back down again. More of a rollercoaster
than first meets the eye and it has to be said, the action
was overall bearish for prices.
Next, inventories. Here are the regular bullets for your
consideration:
• Overall world stock levels moved slightly lower,
down 608 metric tonnes (mt) to 259,936mt.
• Shanghai Futures Exchange copper warehouse
stocks stayed unchanged at 75,004mt, still at low
levels however.
• The LME copper warehouse inventories shuffled
down by just over a thousand tonnes to
155,400mt. For the second week in a row, not
much of a signal there.
• However, the Comex warehouse stocks moved up
a little, which is a change from them moving up a
lot as we’ve seen in the last few weeks. We finished here at 29,432mt, up 367mt.
Overall a quiet week in the copper stocks world, we mark the numbers and move on.
12
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 ht92 ht6luj ht31 ht02 ht72 dr3gua ht01 ht71 ht42 ts13guA ht7peS ht41 ts12
source: IKN calcs

Hot Chili (HCH.ax): I like the way HCH is dropping from that spike bounce of a month ago,
basically because I called it right (even if I say so myself *slides on cool sunglasses*). Silliness
aside, this is still one that I’m watching and we can expect it to get more active in 4q14 and
1q15. If the macro situation works in favour, it’s one of the small copper stocks that could give
a decent win from its current low (very low) level.
Nevada Copper (NCU.to): Newsflow of the week came from NCU, when the company
announced on Tuesday (11) it had received a long awaited and apparently key environmental
approval from the US House of Representatives.
As this five day chart shows, the stock popped
nicely on the news but couldn’t follow through
and at best consolidated the move for the rest of
the week.
However, this is still one I haven’t changed my
mind about, community enviro approval or not.
Permits are one thing, basic economics are quite
another and ever since NCU came out with its
disappointing economic study for Pumpkin
Hollow in late 2012 this has been a clear avoid.
It’s staying that way.
The Low Cost Producer Basket
After 38 weeks, the Low Cost Producer Basket is showing a 3.82% gain to level stakes
company ticker price 1/1/14 Shares out Mkt Cap (Bn) current pps gain/loss%
1 Freeport FCX 37.74 1040 35.42 34.06 -9.8%
2 Goldcorp GG 21.67 812 19.23 23.68 9.3%
3 Barrick ABX 17.63 1000 15.65 15.65 -11.2%
4 Newmont NEM 23.03 497.87 12.05 24.21 5.1%
5 Silver Wheaton SLW 20.19 357.39 7.64 21.39 5.9%
6 Franco Nevada FNV 40.74 147.01 7.38 50.21 23.2%
7 Agnico Eagle AEM 26.38 173.43 5.39 31.07 17.8%
8 B2Gold BTG 2.02 948.9 2.08 2.19 8.4%
9 Pan American PAAS 11.70 151.41 1.84 12.14 3.8%
10 First Majestic AG 9.80 117.02 0.98 8.39 -14.4%
all prices in U$, using NYSE ticker prices Portfolio avg 3.82%
B2Gold (BTG) managed to put in a weekly win, which was the only relief amongst the list
components as once again the
The Low Cost Producer Basket: Weekly performance and
sinkage was heavy. All others lost
comparative to GDX control
ground, with the biggest loss the 35%
8.6% drop in Agnico Eagle (AEM). Our 30%
tracking graph shows in true picture-
25%
worth-thousand-words style the
20%
precipitous drop we’ve seen in the
15%
basket and in GDX since the end of
10%
August (Aug 31st we were still at
5%
20.96% and in reasonable shape).
0%
13
ts13ceD ht91 ht9 dn2ram dr32 ht31 ht4yam ht52 ht51 ht6luj ht72 ht71 ht7peS
basket
gdx control
source: Yahoo! Finance, IKN calcs

The gap between our basket and the GDX benchmark has dropped slightly again, thanks to the
rebound in BTG and the previously mentioned “FCX factor”.
Low Cost Basket: Percentage difference between
basket and GDX control, 2014
8%
7%
6%
5%
4%
3%
2%
1%
0%
14
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 ht92 ht6luj ht31 ht02 ht72 dr3gua ht01 ht71 ht42 s13guA ht7peS ht41 ts12
source: ikn calcs, NYSE/Nasdaq data
Agnico Eagle (AEM): AEM was hit harder than the rest, perhaps getting targeted for it bold
move to buy Cayden at a premium the week before while all around scuttle for cover. And on
that subject, this chart shows how the dive in AEM has taken away all but 5% of the pop CYD
enjoyed at the time of the (nearly) all-paper takeover announcement.
Along with the price moves Papillon (PIR.ax) has seen since agreeing with B2Gold, there’s
surely some food for thought for future deal participants there.
Regional politics
Colombia Mining Trade Fair notes
This week saw the 10th International Mining Trade Fair (la X Feria Internacional Minera) in

Medellín, Colombia, which attracted bigwigs from both the national and international mining
scene. The three themes and one strong rumour that caught my eyes and ears as an outsider
looking into Colombia for clues about its potencial for FDI and eventual junior investment are
the following:
First up, Colombia’s Vice Minister of Mining, César Díaz Guerrero, made a keynote speech in
which he said (12) that the mining industry could become “the big player in the post-conflict
era”, in reference to the ongoing talks between the Colombian government and the FARC-EP
rebels over a peace settlement between the sides. He made little or no mention of the current
problems faced by mining in Colombia, the lack of movement of the mining law reforms or the
social opposition to large-scale projects such as La Colosa (Anglogold) which has been stuck for
years on end, waiting for legal and moral support in vain. Next up Colombia’s new Minister of
Energy and Mining, who made (13) statements such as (translated) “Without doubt Colombia is
a country with enormous mining potential and Colombia is a country that needs a mining
industry”, or “When we take stock, which is something we do when these trade fairs come
around, we realize that these institutions created just two years ago have helped us to put a
great deal of institutional order into the mining industry”, that either bear little resemblance to
the reality of the bogged-down bureaucratic mess that is mining in Colombia or were merely
throwaway lines for the non-specialist media to pick up and run with. Smooth, promising, totally
empty politico-claptrap. Overall the statements by government officials were yet another case
study of the Santos admin talking the talk without being able to walk the walk.
Second, an op-ed in the regional Santander newspaper Vanguardia (14) over the lack of action
taken by the government in the Paramó de Santurbán situation (Eco Oro, CB Gold et al).
Vanguardia has followed the story closely and has been a good voice for all sides, so its op-ed
last week carries the weight of respectability.
Entitles ‘The Forgotten Santurbán”, it laid into the government for not keeping its word on
development and rule-making on the Páramo mining situation on several fronts and noted that
aside the way in which the Environment Ministry has fudged the whole border issue and now
says the lines they have drawn aren’t legally applicable, the latest government promises have
gone down the toilet as well. The new Minister last month proposed a “manager” for Santurbán
be appointed, but a month later and not even a name has been proposed. Other details in the
Vanguardia report show the government of Colombia foot-dragging in a way that only
government bureaucracies seem capable; one which defies all logic. Vanguardia says that the
area is now being overrun by illegal mining operations as people who were promised jobs in
formal mining companies have lost patience and are mining for themselves, if only to make
some money.
Third and sounding a little more hopeful was a Q&A with the VP of Chile’s Cochilco mining
oversight body, Segio Hernández Nuñez, who said (15) that despite the slack economic
forecasts from China that may affect copper demand in the near term, the State mining
company Codelco is looking to explore in Colombia and to that effect has signed letters of
intent with the government to look for copper in the country. In his words, “We believe that
[Colombia] is stable, with a very interesting growth perspective and a more favourable political
atmosphere than that of a few years ago, better investment and what’s more, leading the
continent in terms of technological innovation which is very important for metals mining. All this
has motivated the interest of my country [Chile] to explore confidently potential Colombian
deposits”.
Finally, the rumour: Two separate Spanish language sources present at the show told this desk
that AngloGold Ashanti (AU) want out of Colombia and both the massive La Colosa and the
51% it owns of Gramalote (49% BTO) are up for sale. The reason is either the company’s wider
liquidity issues or how they’re pig sick of getting nowhere in the country, with the most likely
reason being a combination of both. As for potential buyers of AU assets in Colombia, nobody
could give a strong lead but there’s supposition about “The Chinese” (that amorphous catch-all
answer) and BTO for the Gramalote 51%, but that’s more logic than substance methinks.
15

Peru to speed up the environmental permitting process
According to Peru’s (still there, still under pressure for the chop) Minister for Energy and Mining
Eleodoro Mayorga (16), this week coming Peru will publish its new environmental rulebook for
mining activity which cut by 50% the time required for an Environmental Impact Study (EIS)
and its subsequent approval by the government (EIA). The current organic law dates back to
1993, though there have been many a change to the rules between then and now.
Eurasian Group on Argentina macro
Regional risk commentary house Eurasian Group last week published a macro piece on the
state of Argentina’s economy. I’m going to take the unusual step of re-printing it here in full
because through the keyhole issue of a law reform that went through one successful reading
last week, Eurasian puts together a very useful, succinct and easily accessible note on the
current situation in Argentina’s economy.
The lower house approved a reform to the supply bill that would give the government
ample powers to intervene in markets amidst worsening macroeconomic conditions,
though likely legal challenges mean the law will not be implemented.
• The government's most immediate challenge is to contain pressures on the currency,
but the economic team's reluctance to devalue and allow the Central Bank to increase
interest rates means import controls will remain tight and any devaluation will likely be
disorderly.
• The overall direction of economic policy will likely continue to deteriorate because
the government lacks a coherent plan to deal with worsening macroeconomic
distortions
The lower house approved the government's reform to the so-called supply bill on 18
September. The government's proposal reforms an existing law that gives power to the
Interior Commerce Secretary to take actions in cases where officials believe
companies' actions are affecting markets or supply of goods that could have a negative
impact on the economy. Among other things officials will be allowed to define prices
and force companies to continue to produce and sell if officials believe this is
necessary maintain economic stability. The government will also be able to impose
hefty fines on companies and individuals that officials believe threaten economic
stability. While the government already had plenty of powers to do this under the
current version, and it has refrained from using it in the past, the reformed law will
centralize those efforts in the ministry of economy and make it easier for the
government to intervene in markets.
The law reflects the economic team's belief that the problems currently affecting the
Argentine economy (economic contraction, high inflation, deteriorating fiscal and
external accounts) are mostly a function of lack of effective state intervention, rather
than a product of erroneous policies. Officials are concerned with the current recession
and higher prices, but believe more pressures on companies are necessary to
complement the fiscal and monetary stimulus. These concerns have been aggravated
by the fact that the government's strategy to gain access to financial markets in order
to ease dollar scarcity has been abandoned, for the most part, following the 30 July
default. This has essentially left the economic team with no clear strategy as to how to
deal with worsening macroeconomic distortions, and they are thus trying to gain some
additional tools to pressure the private sector.
Still, the law's impact will probably be limited. Most business associations have said it
is unconstitutional and will likely present legal challenges, which could suspend the
law's implementation for several years, most likely beyond President Cristina
Fernandez de Kirchner's term. As a result, the main impact of the reform will be to
further depress business and investor confidence in the administration.
FX dynamics are most immediate challenge
The government's most immediate challenge now is to manage worsening foreign
exchange pressures. The parallel and blue chip rates continue to weaken (the parallel
16

rate exceeded 15 pesos to the dollar, while the official rate was 8.4) in a context where
the government has tightened import controls. The government remains reluctant to
devalue or allow the central bank to meaningfully raise interest rates again as officials
believe that the government paid a major political cost from last January's devaluation
and interest rate hike, especially in terms of growth and inflation, and that current
pressures are transitory and a result of negative expectations. Given that inflation is
edging close to 40% according to private estimates, fiscal and monetary policy remain
expansionary, import controls are having a major impact on activity, the last quarter of
the year is more challenging from an export revenue perspective and that declining
soybean prices are worsening export revenue expectations for next year, devaluation
expectations will likely remain high absent a change in policy. Thus, it is difficult to see
how the government can avoid another weakening of the currency, though the
economic team's resistance could lead to another disorderly devaluation, as in
January. In the meantime, FX and import controls will likely remain tight.
More broadly, the overall direction of macroeconomic policy will likely continue to
deteriorate as the government lacks a coherent plan to deal with worsening growth,
inflation, fiscal and foreign exchange dynamics.
Guatemala: Trouble brewing as Tambo mine “to start up before year end”
So said Exmingua, owned by USA private company Kappes Cassidy Associates (KCA) last week,
in a statement that caused plenty of reaction in Guatemala, most of it negative (17). There
could be more problems to come on this. Take for example the opinion of Amnesty
International (a name probably unwelcome by most readers of a pro-mining publication, but
hear them out this time folks) who last week published a report on mining in Guatemala and
warned of the potential for “blood to be spilled” (18) due to the heightened tension between
communities vehemently opposed to mining operations and the companies, backed squarely by
the government and its forces of order (police, army). AI notes that communities in which
mining operations have been set up have had meetings, referendums and local votes but any
negative decision made is promptly ignored by the government, despite its membership of the
OIT169 international protocol that specifically states locals affected by any large project have
the right to be consulted before it is developed. The El Tambo project and its long-standing
opposition via the La Puya group is the most likely of all flashpoints.
Peru: Updating on the Cajamarca regional election scene
This is the one in which Gregorio Santos, current regional president, anti-Conga leader and also
on remand in a Lima jail under charges of corruption, is running for re-election. The last time
we looked Santos was in a three-way battle for the win and according to the latest poll
numbers from reasonably reliable company IDICE (19) we’re now down to a two-horse race. In
a poll of 2,640 people run in mid-August and taking in urban and rural areas, Gregorio Santos
got 29.5% of support, followed by Osías Ramirez of the Fujimori party ‘Fuerza Popular’ party on
25.3%. In third place came Absalón Vásquez of the right-leaning Pedro Pablo Kuczynski
supported ‘Cajamarca Siempre Verde’ party, but quite a distance behind on 14.5%.
As regional presidents need to win with at least 30% +1 vote in round one, we’re in a scenario
where either Santos wins straight or will go to a second round run-off with the Fujimori
candidate. At this point his chances of a round one win are good and as a “Fuji” candidate is
every bit as polemic and divisive as Santos (is loved and hated in equal measure), he’d be a
favourite going into round two as well.
Argentina: Patagonia’s renewed pro-mining push
There’s a noticeable renewal of effort to promote mining activity in the South of Argentina, the
area normally lumped together under the name ‘Patagonia’ that covers the provinces of Santa
Cruz, Rio Negro, Chubut, Tierra del Fuego etc. Not so tough in Santa Cruz where formal mining
has a decent foothold but a different story in the anti-mining climate of Chubut, for example.
Last week the secretary of the professional body Argentina College of Mining Engineers (Colegio
Argentino de Ingenieros de Minas) Mario Capello opened the subject further by formally asking
the region to run public audiences and “serious, responsible, respectful debates” between all
parties (20). He continued by saying that “We (the mining professionals) must explain our
17

activity because it’s the only way in which people will understand what mining operations
do...what mining does in environmental cases, how it treats flora and fauna”. This comes at the
same time that a group of locals in the central “meseta” region of Chubut (as opposed to the
East coastal or West mountainous) have started pushing for the development of the Pan
American Silver (PAA.to) (PAAS) owned Navidad mine once again by saying that their case is
different from those in other parts of the province because the mine is their only opportunity for
economic development.
This subject may become an election issue, at least on a regional level, as 2014 turns into 2015
and the presidential election to replace CFK starts to loom in people’s minds. I wouldn’t expect
any logjams to clear in the next 12 months and there’s very little attraction in playing the to-
date miner-unfriendly zones of Argentina at the moment (to be honest, not much even in the
friendly zones as things stand). But in the medium-term it’s worth keeping an eye on how
things go.
Market Watching
A quick headsup on Gold Reserve (GRZ.v)
This isn’t my stock, my story or my reco. However reader ‘JR’ was kind enough to nudge me
this weekend on the development and I think it fair to pass on the information to this audience
to do with as it will. Be clear that
1) ‘JR’ is long GRZ.v
2) I am not, which is a situation that will not change in the days and weeks ahead.
3) I have background knowledge of JR and consider him to be a smart investor. We are allowed
to disagree on things, which is a separate issue.
Here follows the main body of the mail from JR:
On Friday Gold Reserve in a filing with the SEC stated that the company was
notified by ICSID on 9/18 that the arbitration panel’s decision can be expected
during the week of 9/22.
When GRZ gets the decision they will halt trading and then put out a news
release with the results. As a shareholder I expect a nice gain in the share
price will occur but not to the full level of the award amount / shares
outstanding. A discount will exist for a time as the questions of collection and
taxes payable, etc. are sorted out.
Bear Creek (BCM.v): The game changes
I’ve been looking more carefully at the situation in Puno’s political scene as a result of the
selling last week (even before that late Friday dump, the $2.20 or abouts prices were enough to
getrme interested again) as well as casting around my contacts in the zone for opinions and
thoughts on how they see the election unfolding.
The upshot: I think there’s now a potential long trade here. So help me, higher powers.
First a little memory nudge via this chart, which shows how BCM has given us a very volatile
ride in 2014, even by the standards of this whacked out market. The lows were under $1.50 in
April and May, but come July and August the stock traded at and over $3.50. During that time
we managed to snag a reasonable little 25% win on a small, near-term trade (marked on the
chart) but failed miserably to capitalize on the big move by selling out too early. The final scene
is this month of September, which has seen BCM drop very hard and thanks to the outright
panic selling of late Friday closed at $1.88.
[Sidebar: BCM wasn’t the only silver stock to suffer late Friday, for example Fortuna Silver
18

(FVI.to) was dumped late down to CAD$4.44. This is part of my uncertainty that’s voiced further
down in this note as I really don’t know how these stocks, including BCM, will open and trade on
Monday and the days to come]
So that’s the potted history, now for the reasons why there may be a trade here and that starts
with the state of play in voter intention polls for the Puno regional elections. This has been the
object of a couple of recent notes in The IKN Weekly (see IKN278 and IKN279 last week)
because we’ve tracked the rise in the polls of Walter Aduviri, the man behind the Santa Ana
protests of three years ago that royally screwed that BCM owned project.
We left things last week in IKN279 with me half-kicking myself that JP Morgan had picked up on
the scent of the rise of Aduviri too. Here’s a section from last week by way of reminder:
To my dismay and personal regret, I read on Monday (21) that JP Morgan had published a client
alert on the Peru regional elections and had pinpointed Walter Aduviri’s rise as one of the main
problem points of the country. To quote the report (translated),
“The frontrunner candidate for the regional presidency of Puno is Walter
Aduviri, ex-member of the Gregorio Santos team in Cajamarca, which implies
an even more difficult scenario for mining projects in the [Puno] region”.
I strongly suspect that the JP Morgan call of “Aduviri Favourite” on Monday is the reason behind
the share price action in Bear Creek Mining (BCM.v) last week.
IKN280 back and what we saw I the price collapse of BCM in the days since those words
confirms to me that the Aduviri situation is the reason for the sudden weakness. For sure
exacerbated by the heavy plunge in silver, but people are running away from BCM bigtime and
the price has been cut in half in the two weeks since JPM warned its lists. But I think JPM is
calling this one badly and Aduviri is by no means favourite for the the vote come October 5th.
Here’s why:
First we consider the latest opinion polls out of local Puno survey companies. There are two,
(22) both taken during the first week in September, with the De Fondo survey company (23)
putting Juan Luque Mamani of the reasonably moderate PICO (stands for Integration and
Cooperation Project for the Development of Puno) party on 19.0%, with Walter Aduviri on
17.0%. Then in third place Lucio Rojas on 10.7% and fourth Alberto Quintanilla on 6.1%, then
come the also-rans. De Fondo interviewed 1,200 people and call their margin of error at 3.5%.
The second survey company is CIMEC Kipu, who put Juan Luque Mamani on 16.5% and Walter
Aduviri on 14.3% with another chunky gap to 3rd and beyond. In other words, the front two are
clearly ahead of the field, but neither looks likely to break through the 30% barrier needed for a
first round win and that means we’re odds on to get a second round run off between Luque and
Aduviri in November (there’s no fixed date for any run-off yet, aside from the month).
So Aduviri isn’t leading the field in Puno. Not only that, but this radical and outspoken figure is
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in second place to a relatively moderate candidate in Juan Luque Mamani, ex-rector of a local
university (the UANCV, where as it happens one of my sisters in law works as a languages
professor). Luque has been a lower figure in Puno politics previously and is allied with an ex-
mayor of the city, so he has the profile and likely the consolidation power to be able to beat off
Aduviri in an eventual round two run-off. The other aspect to consider is tribal (for want of a
better word) as Aduviri is an Aymara and is heavily identified with the Aymara people to the
South of Puno, rather than the predominately Quechua descended people in the Northern part
of the region. Although there’s very little if any animosity between Quechua and Aymara these
days, there still exists an undercurrent of wariness and from what I have picked up, the
Quechua regions (which comprise perhaps half of the total population) think an eventual
regional president Aduviri would favour development and growth for the Aymara South over
Quechua North Puno. The more moderate Luque would suit them better.
Therefore the most likely scenario today is the following:
• Luque and Aduviri win through to a second round run-off, with neither candidate
reaching 30% of the total vote
• Luque wins in the second round.
• Bear Creek Mining (BCM.v) rallies on the news.
That’s the easy bit, the difficult bit is deciding when BCM might rally and just as importantly,
from what level. First the entry price questions and after the heavy drop of Friday afternoon
literally anything could happen when the markets open tomorrow Monday. BCM might go down
further, it might snap back to the $2.20 level, it may stay under $2. I honestly don’t have a
clue. As for when we might get a rebound on a
relief of political concerns, that’s another one to
guess about and as shown a couple of weeks ago
(with mea culpa last week) I’m not so good at
timing these things.
All the above means that I think there may be a
trade, if silver holds up and if BCM gives a decent
entry window, but it’s going to be a tough one to
call and I don’t know whether there definitely is a
trade. But there is a trade here somewhere,
because the selling now looks overcooked. If I had
to guess (and I suppose I do), the scene is likely
to stay volatile until October 6th minimum and as
anything could happen between now and then I’m pretty sure to stay out on the sidelines,
watching. However come October 6th and the election results, if my likely scenario becomes fact
and it’s Luque vs Aduviri in the November run-off, I may take a long position in BCM in the
expectation that Luque moves ahead and becomes clear favourite quickly. All this of course is
also highly dependent on the price of silver and any new trade exposed to the metal has a lot
of caveat to think over. But given a fair wind on the metals price, a return the $2.50 and above
on a Luque win and Aduviri loss would be an easy target to make. That’s nearly 33% higher
than Friday’s close and that’s not a bad short-term target win.
I’m going to watch BCM next week. My forecasts on its price moves due to political newsflow
have been bad recently, which I might just be identifying the reason why we’re now seeing the
very bottom and it rebounds sharply without me on board as from tomorrow. But it’s way too
volatile for my blood and I’d prefer to see 1) a more settled price (higher or lower) plus 2)
reduced volume and 3) a date much closer to the October 5th election (preferably just after it
with results in hand) before making a move.
Interesting gold news
Rather than make a big blahblah about this (done enough in the intro today) i think I’ll just
paste out the report linked here (24) as stands and let you take your news straight this time.
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BEIJING: China launched a gold exchange open to foreign players for the first
time on Thursday, putting the world’s top bullion buyer on track to win a race to
set the benchmark price in Asia.
The launch of the Shanghai Gold Exchange’s international bourse with yuan-
denominated contracts is the first in a slew of bullion contracts expected in Asia,
including Singapore and Hong Kong, before the end of the year as the region aims to
have pricing power as the top consumer of the metal.
China’s efforts have the best chance of success, say market players, as it has a huge
home market. With imports of over 1,000 tonnes of gold last year and local production
of about 400 tonnes, China consumes over a third of global supply.
A successful take-up of the exchange could see gold priced and paid for in yuan rather
than the US dollar, challenging the traditional dominance of London and New York in
trading.
The exchange’s launch is also a big boost for the free trade zone, where the bourse is
located. Despite being touted as a test bed for financial reforms, the zone has
struggled to show significant progress in its first year.
For further interesting reading, this link (25) takes you to a good English translation of the
speech made by Zhou Xiaochuan, Governor of the People’s Bank of China on Friday, at the
opening ceremony of the Shanghai Gold Exchange. The warmth of official approval for this
initiative is clear.
Conclusion
IKN280 is done, we end with bullet points:
• I think I’m allowed to get away with a rant pretending to a be serious fundies note
once a year. BTO today will prove me otherwise. I think it’s a buy here, with strong
credentials for a rebound in the weeks to come. However, it’s not a quant call.
• Bear Creek (BCM.v) is a little like catnip. It remains to be seen what the price does this
week, but I’d like to see things calmer before considering a long trade. The other factor
is any award it might get from the government of Peru over Santa Ana, that wouldn’t
show up until after the voting is done, most probably.
• Santacruz Silver (SCZ.v) was a disappointing sale last week, but it had to be cut if the
company was flagging a bad 3q14 plus removing blue sky through the “non-dilutive”
deal. These mining CEOs need to get it through their heads that it’s all about the
bottom line these days.
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://myownmarketnarrative.blogspot.com/2014/09/our-daniela-checks-out-those-worthless.html
(2) http://juniorgoldminerseeker.blogspot.com/2014/09/brent-cook-rick-rule-keynote-at.html#more
(3) http://biiwii.com/wordpress/2014/09/20/nftrh-309-1st-draft-done/
(4) http://incakolanews.blogspot.ca/2014/03/this-thing-is-not-like-that-thing.html
(5) http://incakolanews.blogspot.com/2014/03/b2gold-btoto-btg-btg-sees-two-deaths.html
(6) http://www.b2gold.com/wp-content/uploads/2014/09/Denver-Gold-Forum-2014.pdf
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(7) http://www.intercooleronline.com/stocks/b2gold-corp-coverage-initiated-at-desjardins-bto/87295/
(8) http://www.b2gold.com/wp-content/uploads/2014/09/Denver-Gold-Forum-2014.pdf
(9) http://finance.yahoo.com/news/santacruz-silver-announces-us-28-071500223.html
(10) http://www.aminera.com/index.php/component/k2/item/6888-inversiones-en-miner%C3%ADa-en-2015-
ser%C3%ADan-45-m%C3%A1s-bajas-que-este-a%C3%B1o.html
(11) http://finance.yahoo.com/news/u-house-representatives-unanimously-passes-071500609.html
(12) http://noticias.terra.com.co/colombia/gobierno-colombiano-dice-que-mineria-puede-ser-gran-jugador-en-
posconflicto,88d20dcf90a88410VgnCLD200000b2bf46d0RCRD.html
(13) http://www.juliobetancur.com/index.php?option=com_content&view=article&id=4501:colombia-enorme-potencial-
minero-minminas&catid=10:economicas&Itemid=14
(14) http://www.vanguardia.com/opinion/editorial/278825-editorial-el-olvido-de-santurban
(15) http://www.portafolio.co/negocios/inversion-mineria-entrevista
(16) http://www.larepublica.pe/20-09-2014/se-reducira-a-la-mitad-el-tiempo-para-aprobar-los-eia-en-el-pais
(17) http://www.prensalibre.com/opinion/Responsables-del-lio_0_1214278882.html
(18) http://www.elperiodico.com.gt/es/20140919/pais/2114/AI-advierte-sobre-posible-derramamiento-de-sangre-por-
miner%C3%ADa-en-Guatemala.htm
(19) http://radiocoremarca.com/segun-encuesta-goyo-gana-elecciones-regionales/
(20) http://www.elpatagonico.net/nota/255332-reclaman-audiencia-publica-para-discutir-sobre-la-mineria/
(21) http://gestion.pe/politica/jp-morgan-esta-preocupado-elecciones-puno-y-mira-simpatia-futuro-cajamarca-2107865
(22) http://www.noticiasser.pe/10/09/2014/puno/puno-luque-y-aduviri-se-mantienen-en-el-primer-y-segundo-lugar
(23) http://www.defondo.com/
(24) http://www.thenews.com.pk/Todays-News-3-273777-China-set-to-win-gold-pricing-race
(25) http://www.en.sge.com.cn/news-announcement/news/520475.shtml
Appendix 1: Flash update dated Friday September 19th
Good Friday morning, 07:50am local time, 40 minutes before the open.
Selling Santacruz Silver (SCZ.v)Yesterday's news...
http://finance.yahoo.com/news/santacruz-silver-announces-us-28-071500223.html
...that SCZ is raising a little over $28m by entering into a pre-paid silver purchase agreement (with the highly reputable
JMET) is a negative for the near-term prospects of the company and I will therefore reluctantly sell this position today
Friday, taking along the way a small loss.
I notice that the deal is being talked up by both Canaccord and Cormark in their coverage (haven't seen others yet),
which is what sell-side brokerages are always going to do. There are of course positive aspects to the deal, which start
with raising development capital for the San Felipe mine at no equity dilution.
However, the negatives are too much for my blood in this current negative climate for silver.
First and foremost, the deal greatly reduces SCZ's chances of being bought out, which has always been my primary
motive to buy and hold the company. This deal is a weight on the balance sheet and any potential buyer of SCZ (if there
are any left out there in this negative sector atmosphere) will be further deterred from a deal by the thought of taking on
a long-term liability such as this agreement. I'd agree (before you write in and tell me, which would be fair) that the
chances of a takeover in the current market have dropped considerably and the thesis was already starting to look
creaky. Yesterday's news was a clear negative that adds to the burden and with this, there's now even less chance of
seeing FVI, SVL, AG or anybody else stepping up and paying a premium for the assets.
Second and also important, this deal is the signal I feared about Rosario. We went over the treasury position at SCZ in
the NOBS report of two weeks ago (IKN278) and identified it as a potential weak point. Our estimate was treasury at
~$5m which was tight but playable (i.e. without extra raising needed) as long as Rosario was now cash flow positive. If
not, $5m would get swallowed quickly and SCZ would need to raise cash again. I'd assumed that any further raising
would come from an equity financing and as it turns out, yesterday's news shows that not to be the case. But the
implication is the same, that SCZ needs to get more cash into the company at this moment (why else would they do a
deal at such a crappy moment?) and that's not good for the prospects at Rosario in 3q14.
Third, despite SCZ stating in its NR that, "Under the agreement, the Company maintains the upside on the silver price"
this deal obviously reduces the blue sky potential by taking $10/oz from the 4.635m oz Ag it is due to deliver in the re-
payment period (which is five years, but most of the deliveries are in the three year '17 to '19 period). SCZ talks this deal
up as cheap capital, I beg to differ as it's a yoke around its neck in the medium-term and takes away the profit potential
from equity holders (us) and gives it to intermediaries (them). Those 4.635m oz Ag will be sold at market price minus
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$10/oz at time of delivery, so how that "maintains silver upside" in real world terms is a little beyond my ken; with luck
and if silver moves up they may sell the ounces at less of a loss, but that's all.
It's because of the above three points that I'm selling SCZ and taking my loss on the position today. And as brokerages
are spinning the news positively (sidebar; as Cormark has only just opened coverage on SCZ, what else would they
say? These people don't U-turn so quickly) I'm going to take the opportunity to sell to new buyers. Sometimes you have
to take a loss, it's the way it is.
Finally and related, part of my sell decision is also due to having taken on more exposure to silver recently via the
purchase of First Majestic (AG) (FR.to) shares, which have sunk badly. I still like FR (if 'like' is the right word) but I'm
cognizant that less silver exposure at this point is a good idea. I point this out because I want to show
that personal portfolio considerations of the knock-on variety are often part of a buy or sell decision. Port management is
part of today's call and I only run one portfolio; mine. That means, as always, you need to consider the above in the light
of your own position to the market.
I still like SCZ as a longer-term prospect and will actively consider it for re-purchase further down the line. I expect to be
able to buy back in at a lower price come the time.
Have an enjoyable Friday. This weekend's edition will look in detail at B2Gold (BTG) (BTO.to).
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
23

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.
24