why gold and silver? - jefferson companiesjeffersoncompanies.com/...silver-investors-guide.pdf ·...

1

Therersquos an old wivesrsquo talethat says if you put afrog in a pot of cold

water and slowly increase thetemperature to boiling the frogwill die in the water before itrealizes that its environmenthas suddenly gotten very verydangerous

The unfortunate parallel forinvestors in todayrsquos economyare that we are the frogs and thecentral banks and misguidedfiscal policies of western gov-ernments are the chefs slowlyturning up the temperature onan inflationary stew that soon-er or later will become lethal toour financial well-being

Yoursquod be forgiven for notnoticing what with all the eco-nomic calamity wersquove experi-enced in recent years but wellbefore the Great Recession of2008 began the US FederalReserve had been applying everlarger doses of loose money asthe solution for any and all prob-lems

Itrsquos been said that if all youhave is a hammer everythingbegins to look like a nail Andthatrsquos what Ben Bernanke JanetYellen and the rest of their teamhave been doing over the pastseveral years mdash trying to fix abroken economy with ever largerhammers

The problem with this strategyis two-fold

First as we are all painfullyaware it creates asset bubblesFrom the Dot-Com bubble in the1990s to the real estate bubble in

the 2000s to the current equity bub-ble on Wall Street this extendedperiod of easy money has causedone investment sector after anotherto balloon and then burst

The second problem whichIrsquove already alluded to is inflationAnd it is this problem in which our

dilemma is much like the haplessfrog of our anecdote

For well over a decade theFederal Reserve has been pumpingmoney into the economic systemwith reckless abandon During this

(Continued)

Why GoldAnd Silver

SampP 500 vs Fed Total AssetsCorrelation Of 9802 Proves How Fedrsquos Easy-Money

Policies Have Blown Up Another Asset Bubble

Gross Federal DebtAs A Percentage Of Nominal GDP

2

period the governments of theUS and Europe have taken onhuge debt loads Bank bailoutsauto bailouts huge new entitle-ment programshellipall have beenput on credit cards thus puttingin question the full faith andcredit of those governments

Cheap energy and low-costgoods from China have largelykept us from feeling much ofthe inflationary pain from thesereckless monetary and fiscalpolicy decisions So for themost part retail price inflationhas not been on the general pub-licrsquos radar screen

But it sure has been on theminds of the smart money thatsees trends and makes trades to max-imize their return on them And incase you havenrsquot noticed the smartmoney has been one place consis-tently over the past decade gold

The Currency Of Last Resort

As the Westrsquos governments andcentral banks have used cheapmoney and truckloads of debt toprop up an ailing global economythe fiat currencies have weakenedprecipitously when measured againstgold

Gold boasts a millennia-oldtrack record as the only protectionagainst the inevitable corruption ofcurrencies And thus there hasdeveloped an inverse relationshipbetween fiat currencies and the priceof gold Simply put the more dol-lars euros yen and other fiat curren-cies are created the greater the rela-tive worth of gold

For proof of this fact one needonly look at our experience in thisyoung century Since 2000 whengold was trading around $250 anounce the yellow metal has enjoyed

an explosive bull run carrying it to a2011 peak over $1900 an ounce (amore than seven-fold increase)

Along the way seasoned andrecently-minted gold bugs who havesuccessfully played this trend havebecome very wealthy The questionnow of course is where do we gofrom here

Well with gold having recov-ered strongly in early 2016 from itsfour-year bear market the next bigbull market appears just around thecorner

I can say that with confidencebecause all those ldquofrog boilingrdquo poli-cies are very much in place (andlook likely to accelerate)

Of course one could argue thatthe election of Donald Trump sig-nals a change in these policies Andwith a Republican Congress it cer-tainly might But letrsquos not forget thatTrump comes from the world of realestate and has always characterizedhimself as a ldquolow interest rate guyrdquowhorsquos not afraid of debt

In addition his plans for a mas-sive infrastructure plan as well asincreased government spending on

the military seem to herald an era ofrising inflation just ahead The bondmarkets seem to agree

Perhaps more importantly withJanet Yellen still in charge of theFed does anyone really believe sheand her cohorts on the FOMC willever get ahead of the inflationarycurve As long as interest rates arelower than the rate of inflation mdash anegative ldquoreal yieldrdquo mdash the environ-ment is extremely bullish for goldAnd it seems certain wersquoll have neg-ative real yields for years to come

Another factor Therersquos an oceanof liquidity that US banks havebeen holding onto in the form ofexcess reserves As the economyimproves the taps will get turned onfor that money And when it beginsto flow the multiplier effect willturbo-charge retail price inflation

Silver for its part shares a mon-etary history with gold And becauseof this it has historically moved insync with its yellow cousin Mostimportantly for investors it alsomoves to a greater degree mdash up anddown mdash than gold providing lever-age

GoldLondon PM Fix Since April 2001

If the argument for investing ingold and silver is simple thenext step mdash deciding precise-

ly how to do it mdash is anything butThere are a number of broad

classes of precious metals invest-ments from physical metals tooptions to equities and more withmany sub-sectors within eachThey all offer specific advantagesand disadvantages and generallywe advise that investors diversifyby allocating their designatedfunds across a number of areasYou should always howeverkeep your individual risk appetiteand tolerance in consideration

While the array of choicescan be dizzying wersquove tried tosimplify your decision processwith the following informationand guidelines

Physical Gold And Silver

In spite of the huge imbal-ances that have built up in theglobal economy itrsquos still unlikelythat they will result in completefinancial Armageddon But younever know right

Thatrsquos why investors with abias toward hard money need tohave a portion of physical goldand silver at their ready disposalThis type of investment does notoffer any leverage mdash the valueof the physical metal in yourpossession will increase ordecrease in value in accordancewith the spot markets for goldand silver

What it does offer is peace of

mind In the event the globaleconomy does go over the cliffyoursquoll have an ample supply ofhard money to ensure you canprovide for you and your family

There are a number of waysto invest in physical preciousmetals with each offering vary-ing degrees of leverage safetyliquidity accessibility and otherkey attributes

v ldquoBagrdquo Or ldquoJunkrdquo SilverldquoBagrdquo or ldquojunkrdquo silver is

curiously named since it refers tothe denominational coins pro-duced by the US mint in 1964and earlier coins that were 90percent silver by weight Youwould

think therefore that these valu-able coins would have earnedsome respect

But their monikers wereearned for good reason They arecalled bag silver because they aretypically sold in mass quantitiesin canvas bags They are calledjunk because these typically cir-culated coins are well-worn andfrom a numismatistrsquos standpointugly in comparison to uncirculat-ed high-grade rare coins

In any event junk silver is agreat way to buy silver at thelowest premium to melt valueThis silver is typically deliveredin bags of $250 $500 and (mostcommonly) $1000 in face valuedenominations (meaning the facevalues of the quarters dimes andhalf-dollars in the bag add up to$1000)

For coins composed of 90percent silver this equates to asilver bag weighing 795 ouncesSubtract the 10 percent coppercontent of the coins and thatleaves you 723 ounces of silver ina $1000 bag Add in a factor for

wear-and-tear metal loss overthe decades since these coinswere minted and most $1000bags contain around 715ounces of pure silver

Junk silver has a coupleadvantages First in the

event of a complete economiccollapse the smaller denomi-

nations involved in bag silverwould be fungible and readilytradable for goods and services

3

(Continued)

How To InvestIn Gold And Silver

(Try exchanging a one-ouncegold bar for a loaf of bread andasking for change)

Second because the silvercoins in junk silver bags werecreated by the government forcirculation they come with norefining or minting costsattached

Thus although junk silver hassome disadvantages in terms ofthe sheer bulk of the investmentit represents the least expensiveway to buy bullion with the low-est premiums above melt value

v Gold And Silver Bullion Precious metals bullion is

typically sold in coin or bar formand either form offers key advan-tages of portability and relativelylow premiums over melt value

The accompanying tables listsome of the more common andwidely accepted bullion coinsalong with their characteristicsAs you can see the variety isdizzying

The issue gets more confus-ing when you have to considerwhere to store your bullion theoptions run along wide spectrumsof affordability security conve-nience and other factors

For instance you can chooseto store your gold in a storagefacility which are generally quite

secure and designed to store bul-lion In fact you can usually buyand sell bullion from youraccount in a storage facility

One key distinction thatyoursquoll find however is that yourbullion can be either in an allo-cated or an unallocated account

In allocated storage specificbars (or portions thereof) areassigned to your account youhave legal title to your gold Inunallocated storage you are cred-ited with a specific weight of bul-lion included amongst a muchlarger amount held in the vault orvaults All other things beingequal unallocated storage offerslower costs but many investors

4

Coin Name Nation Fineness Gold Weight In Troy Ounces Years Of Mintage Gold Nugget Australia

09999 120 oz 110 oz 14 oz 12 oz 1 oz 2 oz 10 oz 1 kg

1986ndashpresent 1991ndashpresent

Lunar Series I Australia 09999 1 oz 1996ndash2007 Lunar Series II Australia 09999 1 oz 2008ndash2019 Philharmonic Austria 09999 110 oz 14 oz 12 oz 1 oz 1989ndashpresent Maple Leaf Canada 9999 120 oz 115 oz 110 oz 15 oz 14 oz

12 oz 1 oz 100 Kilo 1979ndashpresent

Gold Panda China 0999 120 oz 110 oz 14 oz 12 oz 1 oz 1982ndashpresent 20 Francs Napoleon France 09 01867 oz 1806ndash1914 Libertad Mexico 0999 120 oz 110 oz 14 oz 12 oz 1 oz 1991ndashpresent Libertad Mexico 09 14 oz 12 oz 1 oz 1981ndash1990 Centenario (50 Pesos) Mexico 09 120565 oz 1921 - 1931 George the Victorious Russia 0999 02537 oz 2006ndashpresent Krugerrand South Africa 09167 110 oz 14 oz 12 oz 1 oz 1967ndashpresent Vreneli Switzerland 09 00933 oz 01866 oz 1897 - 1936 1947 1949

Sovereign United Kingdom 09167 02354 oz Various

Britannia United Kingdom 09167 110 oz 14 oz 12 oz 1 oz 1987ndash2012

Britannia United Kingdom 09999 1 oz 2013-

Gold Eagle United States 09167 110 oz 14 oz 12 oz 1 oz 1986ndashpresent American Buffalo United States 09999 1 oz 2006ndashpresent Double Eagle United States 09 09675 oz 1849ndash1933

Common Gold Coins

feel more comfortable with thesecurity of ownership offered byallocated storage

You can also store your bul-lion in a safe deposit box at yourlocal bank This could put yourmetal closer to you but youraccessibility will be limited to thebankrsquos hours

And finally of course youcan choose to store your bullionat home either in a safe or hiddensomehow Generally howeverany substantial amount of gold orsilver should be safely secured ineither a storage facility or a safedeposit box

v Semi-Numismatic AndNumismatic CoinsSemi-numismatic and numis-

matic coins are a viable invest-ment option and knowledgeablecollectorsinvestors can profit asthe premiums over melt andorcollectible values rise and falloften independently of the fluctu-ations in the metals markets

Semi-numismatic coins arethose old US gold or silvercoins with common dates andor

large surviving populations andwhich donrsquot have a high grade(condition) They typically sellfor a greater premium over theirmelt value than bullion coins butfor significantly lower premiumsthan rare (numismatic) coins

So what advantage do semi-numismatic coins offer investorsThe premiums over melt valuefor any particular coin can varysubstantially over time soinvestors buying at the low end ofa trading range can realize addedprofits if they can also sell at thehigh end of the range and metalprices have advanced or at leastheld steady

But the primary potential ben-efit of semi-numismatic coins issafety (or the perception thereof)You see the collectible value ofthese coins is great enough thatmany investors feel they would beexcluded from any US govern-ment gold confiscation

While we believe that a USgold confiscation is highly unlike-ly therersquos no denying that it hashappened before And whenPresident Franklin Roosevelt

issued his Executive Order 6102on April 5 1933 forcingAmerican citizens to sell theirgold to the US government itexcluded ldquogold coins having rec-ognized special value to collectorsof rare and unusual coinsrdquo

So investors in semi-numis-matic coins are hoping to get sig-nificant bullion value along withpremiums that will hopefullyexpand as well as some level ofpotential protection against con-fiscation

Rare or numismatic coinsoffer very little bullion value incomparison to their selling pricebut even better potential protec-tion against confiscation The keydifference is that rare coins can berewarding in ways extendingbeyond potential profits

This is because the value ofrare coins is primarily based notin the value of their containedmetal but in their rarity beautyand collectability For rare coincollectors profits take a back seatto the ongoing pursuit of the elu-sive pieces they desire And in

5

(Continued)

Coin Name Nation Fineness Silver in Troy Ounces Years Of Mintage

Silver Kookaburra Australia 0999 1 oz 2 oz 10 oz 1 kg 1990ndashpresent Lunar Australia 0999 1 oz 2 oz 10 oz 1 kg 1999ndashpresent Philharmonic Austria 0999 1 oz 2008ndashpresent Maple Leaf Canada 09999 12 oz 1 oz 1988ndashpresent Libertad Mexico 0999 120 oz 110 oz 14 oz 12 oz 1 oz

2 oz 5 oz 1 kg 1982ndashpresent

Saint George the Victorious Russia 0999 101 oz 2009ndash2010 Britannia United Kingdom 0958 110 oz 14 oz 12 oz 1 oz 1997ndash2012 Britannia United Kingdom 0999 1 oz 2013- America the Beautiful United States 0999 5 oz 2010ndashpresent Silver Eagle United States 0999 1 oz 1986ndashpresent

Common Silver Bullion Coins

fact those who pursue coins fortheir collector value are those whooften realize the greatest monetaryprofits from their efforts

Rare coin collecting andinvesting is a complicated subjectand too extensive to be adequatelyaddressed in this report The arenacan seem intimidating to thoseinterested in getting involved andthose looking to enjoy the sectorrsquosvaried rewards should educatethemselves before making signifi-cant investments

Another key factor is findingrare coin dealers you can trustand developing relationshipswherein the dealers know whatyoursquore looking for

Fortunately the numismaticmarket has advanced light-yearsover the past 25 years especiallywith the emergence of the inde-pendent coin-grading services ofPCGS and NGC As a result theprimary area where an investorcan get burned is not in counter-feit coins or over-grading but inprice And todayrsquos active rare coinmarket means that the risk herewhile not completely eliminatedhas been minimized

OptionsAnother way to invest in pre-

cious metals is to buy gold or sil-ver options on the COMEX orone of the worldrsquos other com-modities exchanges

v Mechanics Of Options

Options are essentially con-tracts that allow those that engagein them the right but not theobligation to buy or sell aninvestment for a set price on orbefore a date certain

Typically the longer the win-dow of time offered by the optionto hit that set price the more cost-ly the option By the same tokenthe closer the set or ldquostrikerdquo priceis to the current trading price ofthe underlying investment themore expensive an option will be

ldquoBuyrdquo options are referred toas ldquocallsrdquo These securities are abet that the price of an underlyingsecurity will exceed the strike

6

There are myriad bullion brokers and coin dealerswho can handle your bullion purchases mdash a factthat seems obvious from the barrage of gold and

silver dealer ads that have cropped up on television inrecent years

Generally you can assume that expensive advertisingbudgets must be paid for somehow And typically thecompanies running these ads are going to offer low-profitbullion coins just to get you as a customer After your ini-tial purchase (or even before) you can expect to be sub-jected to high-pressure sales pitches offering rare coins ormodern-issue ldquoraritiesrdquo that the dealer can sell at a higherprofit margin

There are many honest reputable and knowledgeablecoin dealers out there though and the secret is in findingthem and developing a relationship

Regardless of where you buy (or sell) itrsquos importantthat you shop around for the best price Of course itrsquos dif-ficult to shop prices for truly rare coins and in these casesitrsquos important that you have developed a trusting relation-ship with two or more dealers so that you can compareadvice

The following are coin and bullion dealers that wehave found to be knowledgeable trustworthy and cus-tomer-friendly

American Gold ExchangeAustin TX bull 800-613-9323infoamergoldcomwwwamergoldcomAnthem VaultLas Vegas NV bull 855-428-2858wwwanthemvaultcomAsset Strategies InternationalRockville MD bull 800-831-0007wwwassetstrategiescom

Camino CoinsBurlingame CA bull 800-348-8001wwwcaminocompanycomDavid Hall Rare CoinsNewport Beach CA bull 949-567-1325katedavidhallcomwwwdavidhallcomDupreacute Coins amp Precious MetalsMandeville LA bull 877-288-4988 reneduprecoinscomwwwduprecoinscom

Independent Living BullionEagle ID bull 800-800-1865wwwindependentlivingbullioncom

Orleans Gold ExchangeDestrehan LA bull 866-671-1776artorleansgoldexcomwwworleansgoldexcom

The Coin AgentJefferson LA bull 888-494-8889thecoinagentgmailcomwwwthecoinagentcom

Where To Buy

price on or before the exercisedate ldquoSellrdquo options are referredto as ldquoputsrdquo Put options are betsthat an underlying investmentwill decline below the set strikeprice before the exercise date

The advantage of options isthat if you guess correctly theycan provide a significant amountof leverage on the price move-ments of gold and silverMoreover if your options expirewithout breaking through their setstrike price you are only out thecost of the option which is typi-cally a fractional amount of thenotional value of the underlyinginvestment

The downside to options isthat unlike investments in physi-cal assets or relatively liquidstocks and bonds you risk losingyour entire investment amount ifyour options donrsquot put you ldquoin themoneyrdquo before the exercise date

Fortunately there are a vari-ety of ways to hedge against thislatter risk that typically involvebuying additional (and often morecomplex) options

v COMEX TradingStill this sort of investing is

not for the faint of heart Unlessyou are a seasoned options traderitrsquos probably best to allocate nomore than 10 percent of your risk

capital to theoptions sectorAlso in order totrade in theseinstruments youhave to workwith a brokerthatrsquos specificallylicensed to tradein commoditiessecurities

v How ToInvest In Options

If yoursquore looking for a sea-soned broker with a strong trackrecord of success in this arena werecommend Sue Rutsen of theRutsen Meier Belmont Group(RMB) in Chicago Sue and herteam have been trading futuresand options successfully for GoldNewsletter subscribers since1984 They know options insideand out and will be happy to helpyou create a winning investmentstrategy for this sector

You can reach Sue at 800-345-7026 or 312-528-3494 directMention this report and she willsend you the RMB Short Coursein Futures and Options free ofcharge

Exchange Traded Funds

Exchange traded funds(ETFs) are a relatively new typeof investment vehicle havingonly arrived in the precious met-als space within the last decade

Designed to be mini-mutualfunds that trade like stocks ETFsallow investors to diversify theirinvestment portfolios withouthaving to pay for the services of abroker or mutual fund managerETFs exist for all sorts of thingsand are particularly popular fortheir ability to sell indexes like

the SampP 500 and the Russell 5000as if they were individual stocks

The ETFs that track theseindexes are designed to mirrortheir performance as closely aspossible And because they aresold like individual stocks theirliquidity in the market is unparal-leled

About 10 years ago the ETFmarket began developing ETFsthat tracked the price of silver andgold by taking physical positionsin the metals and selling fraction-al shares of those positions Goldand silver were bought and soldout of these vehicles to track thespot prices for these two preciousmetals

The most popular gold ETF isGLD which is sold by StateStreetrsquos SPDR division The ETFis available for sale on the openmarket and comes with a tinyexpense ratio of just 040 percentplus the cost of buying and sellingshares To date GLD alone hasabsorbed about 28 million ouncesof the worldrsquos gold supply

The most popular silver ETFtrade under the symbol SLV andis sold by iShares The expensefee for SLV is also low (050 per-cent) To date this ETF alone hasaccumulated over 335 millionounces of physical silver in itstrust

The advantages of the pre-cious metals ETFs are that theyare very liquid and generally do agood job tracking the spot pricesof their underlying metals Theyalso provide a way for smallerinvestors to own a fractionalinterest in gold and silver Theygive investors the benefits ofowning the physical metals with-out the hassles of storage andtransportation

7

(Continued)

The downside of the ETFs isthey are inherently unlevered vehi-cles Your ability to enjoy capitalgains is limited to the upside forthe underlying metals And whileboth gold and silver have donequite well over the past decade(and as you can tell from thisreport we expect them to do quitewell in the future) the road totruly spectacular profits in thissector requires leverage

There are two main ways toleverage this market The optionsstrategy we have already outlinedis one investment in mining equi-ties is the other

This is not to dismiss the ETFsor a few of the other ways toinvest in precious metals thatwersquove detailed We maintain that adiversified and risk-ladderedapproach to this sector makes agreat deal of sense And therersquosroom for all levels of risk aversionwhen developing a precious met-als portfolio

Mining-Themed Mutual Funds

Another way to invest in thegold sector is to buy one of themany gold and precious metal-themed mutual funds that are outthere

These funds collect investormoney and then buy and sellgold- and silver-related equities

in an attempt to maximize returnson this sector In an ideal worldthe mutual fund managersrsquo supe-rior knowledge of the market as awhole and this sector in particularallow these funds to beat thebroader metals tracking indexeslike the HUI and XAU

Of course such outperfor-mance is not very likely giventhat the majors and mid-tier com-panies that generally form thebulk of these mutual fundsrsquo port-folios are the very same compa-nies that comprise the HUI andXAU

This is a matter of simplearithmetic The precious metalssector takes up a minute portionof the overall investment uni-verse Consequently there arenrsquotthat many major and mid-tiergold and silver companies fromwhich to build a portfolio

That being said if you canfind a mutual fund that seems totime the market better than mostwith its purchases and divest-ments thatrsquos probably one to lookat if you want a relatively low-maintenance way to play this sec-tor

Just remember actively trad-ed mutual funds tend to comewith sizable money managementfees and can in certain circum-stances be tax disadvantaged

Individual Mining Stocks

Finally we come to the possi-bility of using your own researchand investing acumen to chooseindividual mining stocks Yourability to do this will dependheavily on your background inand knowledge of this market

But not to worry Even ifyour mining stock investing trackrecord is thin (or non-existent)this report is designed to get youup to speed and looking in theright direction for advice andeducation in this volatile butpotentially lucrative sector

v The Majors

There are only a handful ofmajor mining companies in theworld and even fewer that arefocused primarily on the extrac-tion of gold The worldrsquos largestsilver producers are generallybase-metal miners that generatesilver as a by-product of theircopper gold or zinc-lead opera-tions

Because the reserve andassets bases of major are so largean investment in any one of thesecompanies (as opposed to aninvestment in physical gold andsilver in some form) is essentiallyan investment in their manage-ment talent

8

Moving earth processing orereplacing reserves keeping a lidon labor and fuel costs mdash allthese factors and more make min-ing a challenging business Thatrsquoswhy there tends to be only a fewbig players out there In order tomake money year-in and year-outin the precious metals businessyou need two things high (andideally rising) metals prices andeconomies of scale

The majors (eg NewmontGold Barrick Gold HarmonyGold Goldcorp and AnglogoldAshanti) are companies withenough large metals deposits toconsistently turn a profit in thisoften cut-throat industry

Growth for these companiestends to happen on the marginsand their fates are largely deter-mined by the trajectory of goldand silver prices and the ability of its management teams to makesound operating and financialdecisions

Therersquos not much of a case tobe made for owning an individualmajor as opposed to owning thesector The upside to be gained bychasing the stock of any individ-ual major is pretty minimal (if notoutright non-existent) comparedto the downside of potentiallybeing overinvested in an under-performing player in the market

v The Mid-Tiers

Moving a step down from themajor players are the mid-tierproducers

These are the companies withone two or a handful of operatingmines and 100000 to 500000ounces of gold-equivalent pro-duction annually These compa-nies can provide a modest amountof leverage in times of rising pre-cious metals prices

They can provide leveragebecause unlike their big brothersin the major category mid-tierproducers have more potential forgrowth by growing their existingprofile making an exciting newdiscovery or acquiring anadvanced-stage deposit from ajunior

As it is all along the invest-ment food chain management tal-ent is critical to a mid-tier pro-ducers success Because theyoften operate mines on the mar-gins of profitability operationalskill is critical to their long-termperformance

Of course because they dooperate at the margins explainswhy these stocks become so pop-ular with investors when goldprices begin to pop Their ongo-ing production provides the safetyof cash-flow generation whiletheir sensitivity to rising metalsprices makes them solid ways toleverage a bull market in the pre-cious metals

The leverage that a fast-risingmid-tier company can provideexplains how these companiesoften find their way onto GoldNewsletterrsquos list of recommendedcompanies They provide a levelof downside protection andupside potential thatrsquos often veryattractive

v The JuniorsThat being said to expose

yourself to potentially mind-numbing tax-bracket-alteringreturns in precious metals invest-ing you have to consider allocat-ing a piece of your portfolio in acollection of high-potential juniorexplorers and developers

Make no mistake mdash this isnot a sector for the faint of heartFortunes are often made or lost inthe blink of an eye with thesecompanies Money invested inthis sector should be earmarkedfor speculative purposes only

9

(Continued)

The major mining companies operate the biggest projects but it is thesmaller exploration companies that usually make these world-class dis-coveries in the first place Source Endeavour Mining Corporation

But with that caveat nowhereelse in the market will you find asmuch potential for investments todouble triple (or multiply manymany times over) in a short spanof time When you combine thepower of a ldquodiscovery storyrdquo for ajunior with a tight share structureand an ebullient market for goldand silver you have the makingsof one of the most lucrativeinvestment opportunities outthere

The focus of the followingsection is to increase your knowl-edge level in the junior miningsector so you can trade with con-fidence and carve your own pathto wealth in this high-risk high-reward investment space

v How To TradeMost majors and mid-tier pro-

ducers trade on US stockexchanges If you are a USinvestor you can use pretty muchany sort of broker to trade in thecompanies

However when you startdealing in explorers and small-scale producers yoursquoll find most

of thosestocks onlyactively tradeon TorontoStockExchange andthe TSX-VentureExchangewhich are thetwo majorCanadiansecuritiesexchanges

Becauseof theseexchangesrsquo

long historiesin the miningand explo-ration sector

they have developed regulationsand procedures that make invest-ing in junior mining stocks muchsafer on their exchanges thantheir counterparts in the US

This runs contrary to the per-ceptions of many long-time USinvestors who may remember theldquoold daysrdquo decades ago when theVancouver Stock Exchange was ahotbed of penny mining sharescams But the exchanges began aconcerted effort to clean up theiract in the 1980s and it is precise-ly because the regulators wereintimately aware of every type ofscam and swindle that they wereable to craft a regulatory regimethat avoids the peculiar pitfalls ofmining speculation

Unfortunately the US over-the-counter or ldquobulletin boardrdquomarket enjoys none of the protec-tions that exist on the Canadianexchanges In fact given the easeof listing on the large Canadianstock exchanges we assume thatany company listed only in theUS is simply trying to avoid theCanadian regulatory regimeThus we donrsquot recommend

investing in any junior resourcecompany not listed on theToronto Venture Exchange or theToronto Stock Exchange

It is increasingly easy for USinvestors to buy Canadian-listedstocks Most of the major onlinebrokers allow you to trade thesestocks either directly via theirToronto Stock Exchange orToronto Venture Exchange list-ings or through ldquopink sheetrdquo sur-rogate listings that are eventuallysettled on these exchanges

The important thing toremember is that regardless ofthe stock symbol showing up onyour trading confirmation theunderlying company should havea Toronto Stock Exchange orToronto Venture Exchange listing

You may also want to enlistthe services of a broker specializ-ing in this sector There are manygood brokers out there One thathas produced consistent resultsfor investors over the years isRick Rule and his team at SprottGlobal Resource Investments

Well-versed in the pitfalls andpotential of junior mining invest-ing Rick and his team of brokersat Sprott have the experience andthe market intelligence to giveyou the best chance of pullingwinners from this notoriouslyfickle market (wwwsprottglob-alcom)

v Best NewslettersInvestment information is

readily available for the biggercompanies in the precious metalsspace

If a company is mining goldor silver profitably therersquos a goodchance that a large number ofbuy-side and sell-side analysts arefollowing its story But things gettrickier as we move into the more

10

The Toronto Stock Exchange and the Toronto VentureExchange are the worldrsquos leading venues for resourcestock trading with much more-extensive and relevantregulation than other exchanges

speculative explorers and devel-opers in this sector

To get good informationabout junior mining companiesyoursquoll want to subscribe to anumber of the better-knownnewsletter writers that cover theindustry If we were purely self-serving we would argue thatGold Newsletter is the only pub-lication you need to read to suc-ceed in this sector

But while few newsletters canmatch Gold Newsletters longevi-ty or success at picking winnersthe truth is that this is a broadalbeit thinly-traded sector andthe more information and analy-sis you can bring in to guide yourdecision making the better

In addition to GoldNewsletter some of the morevaluable newsletters in this sectorare written by Eric Coffin (HardRock Analyst) Brent Cook(Exploration Insights) JamesDines (The Dines Letter) LouisJames of Casey Research(International Speculator) andGwen Preston (Resource Maven)All of these gentlemen bring afresh insiderrsquos perspective to thejunior mining game and I wouldencourage all potential and exist-ing Gold Newsletter readers tosubscribe to their publications aswell

By putting together a goodcollection of analysts and writersto guide you on your journeythrough this sector yoursquoll putyourself in the best position toleverage the power of the juniorsand rising precious metals pricesinto substantial personal wealth

The back half of this report isdedicated to showing you how tounderstand the language of juniormining companies and how tomake sound investment decisionsbased on an unbiased synthesis of

available public information be itfrom company websites preciousmetals conferences or newsletterswriters and analysts that followthe sector closely

And so without further adoletrsquos dive into the nuts and boltsof investing in junior gold and sil-ver exploration companies

Components Of Junior Mining

Successv Quality Projects

In some ways junior miningcompanies are no different thanother publicly traded companies

No matter a companyrsquos sizein essence it is a collection of pro-jects Nabisco for example ismade up of Oreos projectsSaltines projects and the like Anoil and gas company is made upof active wells and explorationprojects and each one has anNPV IRR or some other measureof future profitability attached to

itExploration-level mining

companies are similar in that theirmarket capitalization generallyrepresents the marketrsquos estimationof the present value of their assets(which at this end of the sectorare basically exploration pro-jects) the price and price-trendsof those projectsrsquo underlying met-als cash on hand and perhaps amarket premium due to the repu-tation of the companyrsquos manage-ment team and the perceived like-lihood of a discovery

If a large part of a junior min-ing companyrsquos valuation is tied tothe potential value of its projectsthen it stands to reason thatknowing how to assess those pro-jectsrsquo potential value is a criticalcomponent of junior mining stockinvesting

In the pages ahead yoursquolllearn all the basic geological andfinancial jargon yoursquoll need toassess a projectrsquos potential Yoursquoll

11

(Continued)

Finding a concentration of metals or minerals is only the first step mdash acompany must then determine if the resource can be extracted prof-itably Source Luna Gold Corp

learn about terms such are depositsize mineralization resource esti-mates feasibility studies net pre-sent value (NPV) internal rate ofreturn (IRR) and much more

Along the way Irsquoll show youthe factors to consider beforemaking an investment in juniormining company Remember oneof the secrets to profits in thissector is timing With some well-timed and well-placed invest-ments (and a reasonably high tol-erance for risk) you can reap thepower of leverage to rising metalsprices that these stocks can pro-vide

As yoursquore about to see juniormining companies typicallyemploy one of two main strate-gies when exploring for anddeveloping new mineral depositsBut no matter which model acompany chooses at the end ofthe day its valuation will be pri-marily determined by the valuethe market assigns to its projectsa fact which makes having high-potential projects critical to ajunior mining companyrsquos long-term success

v Exploration Strategy

Junior mining companiesmust live within the expenditureconstraints imposed by their abili-ty to raise capital As a resultmost companies follow one oftwo general models of operation

The first is to own a handfulof projects and have one projectthat is the ldquoflagship projectrdquoCompanies that follow this modelspend the vast majority of theiravailable capital exploring anddeveloping their flagship projectAny additional funds are typicallyused to ply its earlier-stage pro-jects with less expensive ldquofirstpassrdquo exploration techniques (asopposed to drilling which tendsto be more capital intensive)

For companies that use theflagship project model most ofthe value of the company obvi-ously comes from the potentialvalue of the flagship project Injunior mining companies this istypically the project that is seeingintensive drilling and already has(or has the potential to have) alarge metal deposit as defined byCanadarsquos geological standards for

publicly traded mining companies(aka National Instrument 43-101standards or NI 43-101) Irsquoll havemore to say about these standardslater

For now itrsquos enough to knowthat the market values not onlydrill results but also the releaseof NI 43-101 compliant resourceestimates With those estimatesanalysts and retail investors canbegin to have some level of confi-dence that a mineral deposit hasthe potential to become a cash-flow generating project

The other basic model forjunior mining companies is theldquoprospect generatorrdquo modelUnder this model a companyuses its geologic expertise toidentify and acquirecontrol alarge portfolio of projects ofmerit It then uses first-passexploration techniques to prep asmany of these projects as possiblefor further exploration by jointventure partners

In the mining game a jointventure is an option agreementwhereby another mining companyearns a majority interest (typical-ly around 70) in another com-panyrsquos project To earn that inter-est the company agrees to spenda specified amount of money onexploration over a specificamount of time or until the pro-ject reaches a specified bench-mark (typically the ldquobankablefeasibility stagerdquo) These JV dealsoften include cash payments tothe vending company as well

In almost every case thecompany optioning the propertyis a larger producer and the vend-ing company is a smaller juniorexploration outfit The largercompany can typically terminatethe agreement at any point if itdetermines that the project wonrsquotyield an economic deposit or

12

Exploration companies venture all across the globe in search of valuabledeposits Source Northern Dynasty Minerals Ltd

really for any reason whatsoeverWhen executed well the

prospect generator model allowsjunior companies to maintain afull treasury a tighter share struc-ture and no-expense stakes in awide variety of exploration pro-jects being advanced by others

Mining exploration is a num-bers game with the odds stackedsolidly against a discovery So theidea of the prospect generatorbusiness model is to advance asmany projects as possible mdash toget as many tickets in the lotteryso to speak mdash to maximize theodds of getting a discovery

The junior retains only aminority stake in any discovery ofcourse but it also doesnrsquot have tobear the vast majority of theexpenses And expenses are thekiller for small companies thatdonrsquot have any revenue other thanperiodic financings from specula-tive investors

Of course some companiesfollow a hybrid of the ldquoflagshipprojectrdquo and ldquoprospect generatorrdquomodels And the terms themselvesare just useful ways to describehow junior mining companiestend to operate They are not hardand fast industry categorizationsper se

v Good Management Is KeyNo matter what model a junior

mining company employs havinga management team that can exe-cute the strategy effectively iscritical to a companyrsquos success

In assessing a companyrsquosmanagement team you need toanswers to two key questions

What is managementrsquos trackrecord While itrsquos undoubtedlytrue that past performance is no

guarantee of futureresults for thinlytraded companieslike those found inthe junior miningspace a manage-ment team with atrack record of suc-cess can be criticalparticularly in theearly going

Teams with rep-utations for deliver-ing for shareholderswill usually win inthe competition forscarce capitalTeams with geologi-cal expertise canattract both capitaland joint venturepartners mdash especial-ly if that expertiseincludes a record ofpast discoveries

How well-con-nected is manage-ment Generallyspeaking manage-ment teams withstrong track records of successand established careers in theindustry have the Rolodexes toprove it Their contacts can provevital to a company trying to getits story heard by institutional andretail investors in a market that isalready very crowded and noisyThose networks are also essentialto raising the funds necessary toadvance the company and theprojects (see below)

v Cash In The BankBecause looking for mineral

deposits requires a substantialoutlay of cash with no guaranteeof success the ability to raisecapital is crucial to an explorationcompanyrsquos viability as a goingconcern

Publicly traded explorationcompanies are funded with seedmoney from private investorsprovided through ldquoprivate place-mentrdquo financings Typically thesefinancings are comprised of unitsconsisting of one common shareof the companyrsquos stock pluseither a full- or a half-warrantThe warrants are essentiallyoptions with a limited term tobuy a corresponding share of thecompanyrsquos stock at a specificstrike price set above the currentprice The units are usually soldat a discount of up to 20 fromthe current share price and theattached share is restricted fromtrading for four months from thetime of closing

13

(Continued)

Geologists log drill core for clues as to the typeextent and trend of mineralization Subsequentassays are necessary to determine the gradesencountered Source Kaminak Gold Corp

Keep in mind that the aboveare general terms and terms willvary from financing to financingIn addition although most financ-ings in Canada are open toaccredited US investors thereare special exemptions that mustbe relied upon for Americans toget the same terms as Canadiansand offshore investors

In other words make sure youget professional advice if youhave the opportunity to partici-pate in a private placement in apublic Canadian company (Andthis publication is most definitelyNOT a replacement for thisadvice)

This money raised throughprivate placements allows a com-pany to acquire projects of meritand (hopefully) to begin explor-ing those projects with at leastfirst-pass exploration techniques

Irsquoll get into the specifics ofthose techniques further on in thisreport right now itrsquos enough toknow that initial cash outlaysoften pay for either explorationpreparatory to drilling or actualdrilling In either case explo-

ration is not without expense andcompanies with stocked treasurieswill always have a better chanceof generating news flow thanthose that are short on funds

Of course issuing equity toraise those funds dilutes a compa-nyrsquos stock so itrsquos critical that acompany be smart with its money(yet another reason why goodmanagement is so important) Thetighter a companyrsquos share struc-ture is before it makes a big dis-covery the more leverage it willprovide investors More on that ina minutev News Flow

First itrsquos important to knowwhat money can buy for juniormining stock investors and oneof the key things is news flow

News flow mdash especiallystrong drill results or a resourceestimate or economic assessmentwith a surprise to the upside mdashhas the potential to move a com-panyrsquos share price significantlyAgain itrsquos a crowded market outthere And just as the squeakywheel gets the grease in somecorporate settings the company

with more news flow tends to gar-ner more of the marketrsquos attentionthan the company that makesnews less frequently

Of course a company canalways crank out news of thenon-market-moving varietyGenerally speaking new appoint-ments to the board of directorsdown-the-food-chain hires andoptions issuances to corporateinsiders fall into this categoryNews that does move marketsincludes unusually good drillresults a maiden resource esti-mate and a preliminary economicassessment with strong econom-ics

And while most quality newsflow depends heavily upon thequality of a companyrsquos projectsconsistent news flow is one indi-cator of well-managed company

v Tight Share StructureAs I alluded to earlier how

tight a companyrsquos share structureis can have a direct relationship tohow much leverage a discovery(or other market-moving news)can give to a junior mining stock

While inherently risky thereason to invest in these compa-nies it to take advantage of theleverage they can provideinvestors who want to maximizetheir returns on rising markets forgold silver and other metals

The tighter a companyrsquos sharestructure (ie the fewer shares ithas outstanding) the more likelyit is to deliver a robust price gainwhen the company delivers goodnews to the market This is not tosay that companies with moreshares outstanding (eg 100 mil-lion or more) cannot be goodinvestments also The key is trad-ing volume As long as more-diluted companies are beingactively traded with significant

14

Trenching is one of the most effective and accurate means of soil sam-pling Source Kaminak Gold Corp

trading volume therersquos no reasonwhy they canrsquot deliver strongupside gains as well

All in all though the fewershares a company has out thebetter your chances of achievingthe money-multiplying gains forwhich this sector is famous

v Warrant And Option OverhangA related issue to tight share

structures is warrant and optionoverhang The private placementsthat often fund the first fewrounds of exploration for a min-ing junior usually come with war-rants to entice risk capital to placea bet on the company

Both warrants and options areissued with an expiration dateusually varying between one yearand five years with a two-yearterm being the most commonWarrants allow participants in pri-vate placements to buy additionalshares of the company at a priceset above the offering price of thecommon shares issued in theplacement

Most warrants issued underthese circumstances come with afour-month hold period wherethey cannot be traded A companythat has been through a few pri-vate placements may have severaltranches of warrants overhangingits stock

The word overhang appliesbecause any stock that tradesabove the exercise price of itswarrants for a significant lengthof times will see them cashed infor additional shares And whilewarrant exercises help raise addi-tional funds for companies (andare usually an indicator of corpo-rate health) they also increase thenumber of shares outstanding

In addition shareholders will

often sell the common shares theyown to raise the funds necessaryto exercise the warrants and buythe stock at the strike price

As a result warrant overhangcan provide a headwind that willimpede a stockrsquos ability to climbas quickly as it would absent allthat outstanding paper Warrantoverhang isnrsquot by any means adeal-breaker in terms of a deci-sion to buy a stock but it is animportant factor to consider whentiming your trades

v Trading VolumeAs I mentioned in my discus-

sion of share structures tradingvolume is another critical compo-nent to determining whether acompany is a good value

Companies in this sector havenowhere near the trading volumeof your typical Fortune 500 firmThis fact leads to wider bid-askspreads and periods where liquid-ity in certain companies can moreor less dry up

Itrsquos a truism but profit-takingin this sector generally requiresselling into volume Thatrsquos whyyou want to be as early into agood story as your risk tolerancewill allow because when the bignews hits (eg a big drill result)yoursquoll be able to cash in on yourinitial investment

Depending on the companyrsquosstory and the state of the broadermarket you may want to sell justenough to recapture your initial

investment and then watch howhigh the stock moves with ldquohousemoneyrdquo

In any event keep a close eyeon trading volumes for yourselected stocks as that data canprovide important cues on whenand how to trade on your posi-tions

Gauging AProjectrsquosPotential

If a junior mining company isa collection of projects then itstands to reason that the ability tocorrectly evaluate those projectsand their potential to grow will becritical to an investorrsquos success inthis sector

What follows are the key fac-tors to consider when assessingwhere a project can add value acompanyrsquos market cap

v LocationOne of the best ways to gauge

a projectrsquos potential is to look atits location which has a varietyof meanings in this context

First therersquos a projectrsquos loca-tion in the world South AfricaWest Africa and the UnitedStates for example are amongthe many regions known for goldproduction Chile Peru and theislands of the southern Pacific areknown for large deposits of cop-

15

(Continued)

ldquoIf a junior mining company is a collection ofprojects then it stands to reason that the abili-ty to correctly evaluate those projects andtheir potential to grow will be critical to aninvestorrsquos success in this sectorrdquo

per and gold as well Mexico has awealth of silver and gold The listfor other metals goes on and on(Itrsquos important to understand thatthere can be good locations geo-logically that are also bad loca-tions for political risk as wersquolldiscuss later)

Second a projectrsquos locationadjacent to an existing mine ormajor deposit can be another goodsign And while ldquocloseologyrdquo is aquestionable science at best whenit comes to assessing projects itrsquosequally true that most new minesget found near where a majordeposit has already been discov-ered The mineralizing events thatcaused the initial deposit oftentrend elsewhere onto other pro-jectsrsquo property boundaries

Third and finally location canbe important in terms of a pro-jectrsquos remoteness Generallyspeaking the farther off the beat-en path a project is the moreexpensive itrsquos going to be to mineany deposit found there This getsinto the infrastructure issue whichIrsquoll highlight shortly For now itrsquosenough to know that as yoursquorelooking at what part of the world aproject is in pay attention to itslocation relative to other minesand infrastructure

v GradeAs you scan the press releases

of the companies in this sectoryoursquoll want to pay attention to thegrades involved

For the uninitiated grade is ameasure of how much of a givenmetal exists within a set amountof rock Typically grades are sitedin either grams per metric tonne orounces per English ton Grams pertonne is the predominant industrystandard however US projectsparticularly those in Nevada oftenget quoted in ounces per ton

With gold and other metalsstill trading at historically highlevels it doesnrsquot take a very highgrade to make a deposit economi-cally viable Still there are somepractical limits to what is mine-able

In general an open-pittabledeposit that can be mined usingsurface mining techniques shouldhave an average gold grade of 10gt or better or a copper grade of10 copper per tonne of materi-al Zinc and lead which are oftenfound together (along with silver)typically need to be available inpercentages above 5 to makeopen-pit mining worthwhile

For underground mines thethresholds are higher because theoperating costs to extract the oreare higher A mineable under-ground mine generally needs agrade of 3 gt or more and anunderground copper mine needs agrade of at least 2 copper andprobably closer to 3 copper

Itrsquos important to rememberthat these are the average gradesthat are needed over an entiredeposit One or two ldquohoney holesrdquofrom a drilling program can makethe market take notice but they donot make a deposit

You should also keep in mindthat these are very general guide-lines There are very large goldmines that are profitable at aver-age grades below 1 gt gold Andone needs to consider the contri-butions that other metals willmake to a deposit For examplean open-pittable deposit running05 gt gold and 05 copper has achance of being very profitable ifit size metallurgy and logisticscheck out

And finally things change asthe global economy changesInflation which would typicallydrive up the prices of gold silver

and copper will also increase theprices of diesel and other costsnecessary to run a mine This iswhy even as gold prices surgedover $1000 in recent years theprofit margins of big miners com-pressed severely

So just keep these roughgrade thresholds in mind as yousift through the press releases ofthe companies you follow andrealize that many other factorsalso come into play

v Past ExplorationDataSuccessThe world is full of ldquobrown-

fieldrdquo projects that have beenexplored by other mining compa-nies in the past In many casesthese exploration programs turnedup sizable deposits They were leftto lie fallow however because upuntil the turn of the 21st centurymetals prices had been severelydepressed What would normallybe an economic mine had to bemothballed due to poor economicsgiven then-current metals prices

In todayrsquos bull market for pre-cious metals one of the surestways for a junior explorer to hitthe ground running is to snap upone of these brownfield projectsIn many cases a historical (butnon 43-101 compliant) resourcehas already been established byprevious operators and with amodicum of drilling a new ownercan bring that resource up to NI43-101 standards and have a sub-stantial deposit on its hands

Even projects that do not comewith a historical resource oftencome with a wealth of historicaldata both from drilling and fromother exploration techniques Thisdata can prove invaluable in acompanyrsquos ability to quickly iden-tify the trend of potential mineral-ization as well as areas that wereuntested by previous operators

16

Itrsquos a fact that many of themost profitable miningexplo-ration plays in recent yearswerenrsquot so much ldquodiscoveriesrdquo asldquore-discoveriesrdquo

v Size Of Anomalies

There are two main types ofanomalies geochemical anom-alies and geophysical anomalies

Geochemical anomalies aregenerally mapped by taking soilsamples over a wide swath ofground The amounts of goldcopper or other metals found inthe soil are mapped providinggeologists with a first-pass look athow strong the surface expressionof mineralization is on a property

As a rule the larger the anom-aly the larger the potentialdeposit provided that the surfacemineralization coincides with sig-nificant mineralization at depthThe presence of such mineraliza-tion can only be determined by anextensive drilling program whichis why the drill is often referred toas the ldquotruth machinerdquo in this sec-tor

Geophysical anomalies aredetermined by running magneticgravity or resistivity studies(either from the ground or by air)Large areas of either high- orlow-resistivity or high- or low-magnetics for example can sig-nal the presence of a significantmineralization-hosting anomalybelow surface Again only adrilling program can verify thatthis is the case

Still if a project has a largegeochemical anomaly that isunderlain by a large geophysicalanomaly that can be a sign thatthe company has stumbled onto ahigh-value target

v Continuity OfMineralizationContinuity

describes how well adeposit hangs togeth-er

A drilling pro-gram can turn inexcellent grades andwidths from relative-ly small depositareas But if the min-eralization outside ofthose areas is eitherdiscontinuous ornon-existent thenthose small areasprobably wonrsquot belarge enough to justi-fy a working mine

This is particu-larly true for poten-tial open-pit minesWithout ore bodycontinuity a compa-ny cannot justify all the cost-intensive earth-moving needed toextract the ore from the ground

The need for this type of con-tinuity explains why companiesengage in infill drilling programsafter they identify the overallboundaries of the mineralizationwith step-out drilling For the pur-poses of running economic stud-ies companies need to know witha fairly high degree of confidencethat the mineralization that itsmapping software is assumingexists between drill holes actuallydoes exist

The need for this level of cer-tainty before committing to adevelopment program on a givenproject explains the need for thevarious categories of mineraliza-tion as defined by Canadarsquos NI43-101 requirements

Irsquoll go into the particulars ofthose categories in another sec-tion of this report The main point

here is similar to my commentearlier about ldquohoney holesrdquo Justbecause a company reports a cou-ple of eye-popping drill resultsdoesnrsquot necessarily mean it has adeposit on its hands It well maybut more drilling will be neededto determine the size scope andcontinuity of that deposit

v Infrastructure

Infrastructure came up in ourdiscussion about location

Simply put a mining compa-ny needs power water laborroads and (perhaps) port access toeffectively turn a potential depositinto an operating mine The moreof these components that arealready in place when a companydiscovers a deposit the better thatdepositrsquos chances of gettingdeveloped

Having existing mining and

17

Geophysical surveys such as this map of varyingchargeability help identify anomalous zones thatmay host mineral resources Source TinkaResources Ltd

(Continued)

processing infrastructure nearby(courtesy of an already operatingmine) is a huge bonus for juniorexplorers Not only will they nothave to wait for power and roadaccess to get put in before devel-oping their projects but they maywell have the option of simplyselling their ore to the nearbymine for processing

Such a situation can dramati-cally lower the capital expendi-ture bar to get a deposit devel-oped If a company no longerneeds to pay for a milling opera-tion or a leach pad to separate theeconomic metals from the hostrock then the potential profitabil-ity of a deposit goes way up

v Barriers ToDevelopmentComprised of factors as dis-

parate as political risk environ-mental risk and labor risk barri-ers to development are thoseitems that can prevent a potential-ly lucrative deposit from becom-ing a mine

Political risk can involveeither the red tape of a givencountryrsquos mining bureaucracies orthe alarming tendency of somethird world countries to national-ize deposits once foreign capitalhas established their presence

Environmental risk runs thegamut from bureaucratic red tapeto activist Non-GovernmentalOrganizations (NGOs) No matterwhat the cause itrsquos a fact thatarguments over environmentalassessments and other environ-

mental restrictions can hamstringa project Predicting when thesesituations will arise is often amugrsquos game but the best indica-tor is a past history of NGOactivism or bureaucratic foot-dragging in an area

Labor risk comes in twoforms as well There is the riskthat the location of the deposit isnot close enough to seasonedmining teams to make extractionfeasible There is also the risk thatunion activity will upset mineconstruction andor productiononce a project gets the greenlight While it can be fairly appar-ent if therersquos a lack of availablelabor determining whether a pro-ject will experience labor unrestcan be more challenging

Our best advice is to do yourdue diligence on other active pro-jects in a given region and makeyour best determination as towhich of these barriers to devel-opment (if any) may arise Forsome of the riskier political juris-dictions this analysis is fairlysimple to do

v MetallurgyHow easily can the payable

metal be extracted from the hostrock that comprises the bulk of adepositrsquos ore

The answer to that questioncan go a long way toward deter-mining if a deposit can be eco-nomically mined Simply put ifrecoveries are much below 70it becomes increasingly difficultfor a mine to be profitable And

ideally recoveries for the primarymetal in a deposit shouldapproach 90 or more

How much effort it will taketo reach those recovery thresholdsis also a key consideration If orehas to be subjected to two or threeprocesses to maximize extractionthe power and input costsrequired by those processes maymake the cost of extraction pro-hibitively high

The importance of metallurgyexplains why companies are anx-ious to get their first metallurgicalresults back from the lab evenafter drilling has clearly outlineda major deposit Poor metallurgycan stop development on even thelargest potential projects in itstracks

v Open Pit OrUndergroundOne final consideration when

assessing a projectrsquos potential iswhether it will host an open-pit orunderground mine The deeper acompany has to drill before hit-ting mineralization the more like-ly it is that it will have to extractthe ore using underground miningdevelopment

Because these methods aremore expensive on a per-tonnebasis than open-pit methods thegrades for underground depositshave to be appreciably higherthan open pit deposits to justifythe additional cost of tunnelingdown to access that depositrsquosmineralization

Open-pit mines can run intochallenges if the property isnrsquotlarge enough to contain a largeopen-pit mine a heap-leach pada processing facility and tailingsinfrastructure Of course if theunderlying deposit is large andlucrative enough then the

18

ldquoOur best advice is to do your due diligence onother active projects in a given region and makeyour best determination as to which of thesebarriers to development (if any) may ariserdquo

expense of buying additional landto accommodate this infrastruc-ture is usually justified

Still a company will be wellserved if it expands its propertyboundaries quickly as soon it getsa whiff that a large open-pitdeposit might be a possibilityOtherwise adjacent land ownerswill extract a high ransom for theright to put a potential minersquosinfrastructure on their property

v Stages Of ExplorationAnd Development

The goal of a junior explo-ration company is to find a pro-ject that ideally will justifyadvancement along all of the fol-lowing stages of exploration anddevelopment until it become aprofitable mine

It is not necessarily the goalof the company to be around forall of those stages

You see at any point alongthe exploration and developmentspectrum that we are about todetail a company may be fortu-nate enough to have deliveredresults so positive that a muchlarger company comes in andbuys the project or the entirecompany

Also the junior company maychoose if it can to joint venturethe project to a larger company atany point in the process The fur-ther along the process that it goesthe more money it will have tospend and shares it will have toissue

Thus if a major companyopts to buy in early the juniormay get less money than if it tookan offer later in the process But itwill ideally have a much lowernumber of shares outstanding sothe priceshare could be greater

And therersquos always the chancemdash even likelihood mdash that subse-quent results will be disappoint-ing and the value will drop oreven disappear

Itrsquos a balancing act andtherersquos definitely a ldquosweet spotrdquowhere the value is optimizedSmart management teams willaim directly for that bullrsquos eye asthey progress along the followingexploration and developmentprocess

v First PassCompanies typically take con-

trol of properties by stakingunclaimed land within a countryrsquospublic lands or they take an inter-est in the land of a private holdervia a contract or option agree-ment

In either case once a propertyhas been claimed the real workof exploration begins Companygeologists fan out over the prop-erty collecting rock samples

(called ldquograbrdquo and ldquochiprdquo sam-ples) and soil samples Thesesamples are typically sent to athird party for assay

Assaying measures thepayable metal content of the sam-ples and is generically referred toas geochemical analysis Whereasgrab and chip samples tend to beldquocherry-pickedrdquo samples based onpromising looking rocks identi-fied by the field geologists soilsampling tends to be more sys-tematic Large areas of the prop-ertyrsquos surface are tested withfences or lines of soil samples

Those grids of soil samplesare used to determine if the sur-face of the property contains con-sistently anomalous amounts ofpayable metals While not defini-tive proof of an economicdeposit the existence of largeareas of soil samples with anom-alous metals grades can mark the

19

Geological mapping as well as soil and rock-chip sampling are key toidentifying mineralized zones as well as their extent and strengthSource Cayden Resources Inc

(Continued)

presence at surface of a signifi-cant deposit below

Another form of first-passexploration involves magneticsand resistivity surveys These sur-veys are conducted either on theground or by air Their purpose isto identify the presence of signifi-cant areas of magnetics and resis-tivity Both unusually high andunusually low areas of magneticsand resistivity can indicate thepresence of a significant deposit

This is particularly true if forinstance a significant magneticanomaly underlays a large geo-chemical anomaly identified bysoil sampling The data collectedin with these first-pass techniqueshas one primary purpose to helpgeologists develop likely targetsfor trenching and eventualdrilling

v TrenchingWhile a company is analyzing

the data from the first-pass ofexploration it may elect to take

the intermediate step of trenchinga select group of the morepromising areas established bythis initial work

Trenching usually involvescutting one or more reasonablylong trenches on a surface anom-aly identified by mapping andsampling The goal is to see if thesurface expressions of mineraliza-tion extend to the ground immedi-ately below and if so gauge thecontinuity of that mineralization

Results from trenching arealso sent back to the lab wherethey are assayed usually in one-meter sections Like high gradesin rock and soil sampling evengreat trenching results are not cer-tain indicators of a viable depositbut if they are impressive enoughthey can begin to attract investorattention to the drilling programfor a property

v DrillingAs I said all this preliminary

work lays the ground for a

drilling program to see if a signif-icant deposit lies below the sur-face Because drilling begins toprovide geologists with hard dataabout the size and grade of anymetal resource that may exist on aproject the drill is known inindustry circles as the ldquotruthmachinerdquo

Given that this processrequires diesel-powered drills todrill as much as 400 meters intothe ground and given that a largenumber of holes must be drilledto determine size and scope of adeposit drilling is far and awaythe most expensive part of pro-jectrsquos exploration phase

The two most common typesof drilling are reverse circulation(RC) and diamond core

RC drilling is the typicallyless expensive of the two Theresults it produces usually are notas definitive as results from dia-mond drilling however becauseonly rock chips (rather than sub-stantially solid core samples) arerecovered This makes it moredifficult to interpret structures inthe rock and increases thechances of under-sampling due tosmall chips and dust getting lostor washed out in the drillingprocess

In contrast diamond coredrilling as the name suggestsuses diamond-tipped drill bits andhollow drill rods to remove asolid core of material This allowsfor much more detailed analysisand optimum sample recovery

RC drilling is often usedwhen a company wants to quicklyand inexpensively determine theoverall scope of a project If asignificant deposit is outlined thecompany may follow up with dia-mond drilling to raise the confi-dence level and better understandthe geologic structures

20

Detailed sampling results from trenches is perhaps the most valuableexploration data next to drill results Source Eurasian Minerals Inc

21

T he term ldquoresource estimaterdquo is acritical one in the junior miningworld With that term companies

begin to answer the question of howmuch goldsilvercopperetc is in theground on a given project

Around the world there are a varietyof sets of standards for estimating howmuch metal a project contains and forestablishing the degree of confidence acompany has in that estimate The globalnature of the mining and investmentindustries is putting pressure on countriesto bring these various standards intoalignment However for now the twomain countries whose standards we willfocus on are the US and Canada

Differences Between US AndCanadian Reporting Rules

The United States and Canada havesimilar rules governing when a resourcecan be labeled an economic deposit Bothuse the categories of ldquoprovenrdquo and ldquoprob-ablerdquo reserves to describe deposits thatare proven up to a standard where theycan get financed

According to the US Securities ampExchange Commissionrsquos ldquoIndustry Guide 7rdquo a proven reserve has two character-istics

A quantity and grade for the reservehas been computed by detailed sampling

The sites for inspection samplingand measurement are spaced so closelyand the geologic character is so welldefined that size shape depth and miner-al content of reserves are well-estab-lished

ldquoProbable reservesrdquo are computedfrom information similar to that used forproven reserves but there is less certain-ty about their continuity because ldquothe sitesfor inspection sampling and measure-ment are farther apart or are otherwiseless adequately spacedrdquo

For the purposes of generating abankable (ie financeable) feasibilitystudy on a project the degree of assur-ance on probable reserves is high enoughto add them to the proven reserves for thestudy

Where US and Canadian rules differ

is that the US does not allow resourcesproven up below the standards requiredto be reported as potential economicassets While the US and Canadian defi-nitions and standards for proven andprobable reserves are essentially thesame Canadian rules allow for explo-ration companies to demonstrate viabilityat the resource level as well

NI 43-101 StandardsThe Canadian Institute of Mining

Metallurgy amp Petroleum (ldquoCIMrdquo) codifiedthe standards for resource estimation inthe late 1990s at the behest of a taskforce formed by the Ontario SecuritiesCommission and the Toronto StockExchange

The intent of these new standardswas to restore investor confidence in thequality and veracity of data generated byexploration mining companies A series ofincidents in the mid-1990s topped off bythe Bre-X fiasco had made it extremelydifficult for Canadian-listed mining compa-nies to find financing for exploration

The result of the CIMrsquos efforts wasthe CIM Definition of Standards onMineral Resources and Mineral ReservesThis set of standards not only createdcarefully defined categories by whichresources could be labeled but it alsoestablished third-party and geologist-levelverification practices to ensure that esti-mates were presented to the investmentcommunity in a uniform and verifiableway

National Instrument 43-101 (ldquoNI 43-101rdquo) is a series of rules implemented bythe Canadian Securities Administrators(ldquoCSArdquo) that incorporates the standardsestablished by the CIM As investors weneed to know these terms because com-panies that want to talk about theresources that have proven up on theirprojects must use the categories detailedby the CIMrsquos standards

In addition to proven and probablereserves NI 43-101 also allowsCanadian-listed companies to reportresources proven up to the ldquomeasuredrdquoldquoindicatedrdquo and ldquoinferredrdquo levels of confi-dence

A measured resource is a potential

deposit that has been drilled to the pointwhere a companyrsquos level of confidence ishigh and the tonnage and grade of theresource can be established within closelimits As a result there remains littledoubt about the potential economic viabili-ty of the mineralization within a measuredresource

An indicated resource is a potentialdeposit that has been proven up to thepoint where technical and economic para-meters can be applied Mineralization cat-egorized at the indicated level or abovecan be used to generate either a PEA or aprefeasibility study on a potential deposit

Exploration data generated for anindicated resource must be sufficient for areasonable assumption of grade and con-tinuity Like the SEC standards for proba-ble reserves a portion of indicatedresources can clear the CIM standard forprobable reserves if a company has pro-vided sufficient information about miningprocessing metallurgy and economics forthe resource

An inferred resource is an estimategenerated on geological evidence andlimited sampling The level uncertainty forinferred estimates is higher than the lev-els of uncertain for indicated and mea-sured estimates Companies can issuesinferred estimates in press releases butthey cannot use them for economics esti-mates Only measured and indicatedresources can be used to project thepotential economic viability of deposits inprefeasibility and feasibility studies

As investors itrsquos important to keepthe distinctions between all these cate-gories in mind The establishment of asignificant inferred resource can begin astockrsquos upward trajectory When furtherdrilling proves up that inferred resourceinto the indicated and measured cate-gories investor excitement usuallymounts

This is the level at which explorationcompanies begin to attract potential buy-ers from mid-tier and major producers Itrsquosalso the point at which analysts and theinvestment community at large can beginto guesstimate how much money an oper-ating mine would generate

A Bit More On Resource Estimates

This is just a partial explana-tion Depending on the type ofground a company is drilling intodata from an RC campaign maybe more than sufficient Many ofthe near-surface gold depositsfound in West Africa fall into thiscategory for example In otherareas underlying soil and rockconditions make diamond drillinga must for certainty

v Analyzing DataOnce the drill holes from a

program have generated sectionsof core that core must be ana-lyzed by a third-party lab to deter-mine its metal content This workis typically done in phases anddepending on the state of back-upat the lab it can be a significantbottle-neck in the news flow for aproject

Canadian securities rulesrequire a neutral third-party firmto analyze and assay core as acheck against any managementincentive to doctor the results ofdrilling While this sort of chi-canery is not common in the

industry major fiascos like theBre-X scandal of the late 1990sconvinced regulators to insert thisstep into the data validationprocess

As batches of assays get sentback from the lab the companypreps them for public announce-ment via press release Assayreleases are usually the mosthighly-anticipated form of newsthat junior mining companiesgenerate If a batch of assaysshows the potential for a projectto host a significant deposit theseldquodiscoveryrdquo holes can send acompanyrsquos share price skyrocket-ing

As more data comes backfrom the lab and ldquostep-outrdquo holesfrom the initial discovery aredrilled market enthusiasm for astory can grow dramatically Sizeand continuity are the key compo-nents here

Look for step out holes withintersections that match or exceedthe grades and widths identifiedin the initial discovery area Lookfor infill holes that confirm that

the deposit is continuous withinthe bounds of mineralizationestablished by the depositrsquos outly-ing holes

Make sure to peruse thedeposit and drilling maps thatcompanies typically provide ontheir websites These maps cangive you a sense of how thedeposit is growing in all threedimensions

To give you a sense of theprocess letrsquos assume a deposithas been discovered within a hillThe goal of drilling is to deter-mine what chunk of that hill isworth excavating via either open-pit or underground techniquesGeochemical results can give youidea of the length (strike) andwidth of the overall area Drillingdata gives you a wealth of infor-mation about the size continuityand proximity to surface of theinitially outlined target area

As data from the lab accumu-lates companies and theirinvestors get a better and betteridea of the nature of the discov-ery Once enough data has beenanalyzed a resource estimate willbe commissioned to gauge thepotential size and metal contentof the deposit (assuming thegrades and widths of mineralizedintersections warrant this step)

v Resource EstimationResource estimates give the

market an opportunity to beginprojecting how profitable a givendeposit might be

Irsquoll go into the particular cate-gories for resource estimatesshortly For now itrsquos enough toknow that the requirements set byCanadarsquos National Instrument 43-101 (NI 43-101) are the standardsby which deposits are catego-rized

22

Drill rigs are known as the ldquotruth machinesrdquo in the exploration industryas only assays of drill core can accurately define the size and grade ofa mineral resource Source Endeavour Silver

23

A Preliminary EconomicAssessment or PEA as it is usual-ly abbreviated gives investors a

window into the potential for a given projectto turn into a money generator

The PEA is an initial rough-cut esti-mate of a projectrsquos potential As a companymoves a deposit along the developmentcurve more finely tuned estimates arereleased Those estimates are eitherprefeasibility studies or feasibility studiesAgain the main distinction between a PEAa prefeasibility study and a feasibility studyis the level of confidence in the inputs andthe amount of data collected to create thestudy

A PEA gives the market a first look atwhat a project might be worth A prefeasibil-ity study applies more estimates about met-allurgy environments concerns and engi-neering A prefeasibility study will typicallybe used to attract capital to finance thework needed to bring a project to a produc-tion decision

Production decisions get made basedon the ability of a company to get a minefinanced and built Hence the feasibilitystudy that companies present to potentialfinanciers of a project is often called a bank-able feasibility study In a feasibility studyall the ldquoIsrdquo are dotted the ldquoTsrdquo are crossedand the confidence level in a projectrsquosdeposit and economics is high

In spite of these differences the basicmetrics that investors focus on in thesereports is the same across all three Themarket wants to know how much cash flowdiscounted at some level of risk-adjustedinterest a project will generate They wantto know what kind of potential return theproject will deliver relative to other availableinvestments Additionally they also want toknow how long it will take for the project topay for itself and what ongoing operatingcosts will be

Herersquos a look at some of those metricsNPV

Investopedia defines net present value(ldquoNPVrdquo) as ldquothe difference between the pre-sent value of cash inflows and the presentvalue of cash outflowsrdquo

For the purposes of mining projectsthe cash outflows are the initial capitalexpenditure necessary to build a mine and

the costs of ongoing production The cashinflows are the revenues provided by theprojectrsquos metal sales less the operatingcosts and overhead required to dig up andprocess the projectrsquos ore

Wersquoll discuss the various componentsof the cash outputs in a minute The cashinputs obviously will be heavily related tothe market price for the metal being minedFor this reason assumptions about long-term metals prices are critical to estimatinga projectrsquos potential to generate positivecash flow Many projects especially thelarger lower-grade ones have NPVs thatare extremely sensitive to metals prices

In a period of rising metals prices likethe one we have been living through thatsensitivity is one of the key sources ofleverage that exploration level mining com-panies and their projects provide toinvestors

As long as the base-case price andinput assumptions are reasonable (and anappropriate discount rate is applied to arriveat a projectrsquos NPV) then this metric cangive us a pretty good idea of a companyrsquosgrowth potential

IRRInternal Rate of Return (ldquoIRRrdquo) gives

investors a sense of a projectrsquos attractive-ness as an investment versus other poten-tial investments The higher a project inter-nal rate of return the more tempting it is forinvestors and company management totake on the risk of building and operating amine

Like NPV IRR is calculated based onthe cash outflows and inflows for a projectThe IRR number is the discount (or percent-age rate) at which outflows and inflows bal-ance Like all major financial metrics IRRtakes the time value of money into account

While NPV is usually the primary num-ber on which analysts and other marketobservers base their target prices for acompanyrsquos share price a high IRR can giveinvestors a sense of how motivated man-agement will be to move the project throughdevelopment Generally speaking the high-er a projectrsquos IRR and NPV the more likelyit is that a given project will see its way toproduction

CapexA projectrsquos initial capital expenditure (or

ldquocapexrdquo) is an important input to look atWhile a large profitable mining operationcan justify a large initial investment therisks and uncertainties inherent in miningmean that projects that require a large up-front investment can sometimes go beggingfor financing

One potential solution to this dilemmafor junior explorers and developers is to getbought out by a mid-tier producer or a majorproducer Players nearer to the top of theindustryrsquos food chain are always on thelookout for projects that can make a differ-ence in their large reserve bases and pro-duction profiles

Of course a minersquos grades and ton-nage may be so tempting that a largeinvestment financed by key sources of debtfinancing seems worth it to the junior Notall exploration companies have manage-ment teams with the skill sets needed tobuild and operate a mine but some do

In a rising market for a projectrsquos under-lying metals a large capex is not necessari-ly the obstacle it would be in a less vibrantenvironment Even absent a suitor from thelarger companies in the sector a companymay elect to move forward with develop-ment on its own (and provide investors witha substantial payoff along the way)

Payback Period

No matter how large or small a pro-jectrsquos capex the amount of time it will takefor the projectrsquos operations to payback thatinitial investment figures into the marketrsquosassessment of a projectrsquos value and risk

With a shorter payback period oftenmade possible by a high-grade ldquostarter pitrdquocompanies can more easily attract thefinancing needed to get a project up andrunning Longer payback periods are notnecessarily ldquodeal killersrdquo but investors usu-ally need a higher-than-average NPV andIRR to justify fronting the initial capex costsfor a project

Operating Costs

Finally investors need to keep a closeeye on the estimates for ongoing operatingcosts Fuel costs grade dilution from non-ore material labor costs weather-relatedissues and more can impact the projectedprofitability of a mine

Breaking Down A PEA

These standards allow for abit more inference in terms ofdeposit size and drill data than thestandards set for mining compa-nies that list on US exchangesThe SEC only allows companiesto call something a deposit (andan asset) once that deposit hasestablished at the proven andprobable reserve level

Canadian listed companiescan begin speaking about conjec-tural deposits once they pass thethreshold for inferred resourcesFrom there more systematic andclosely spaced drilling can ldquoproveuprdquo a resource from inferred intothe more rigorous indicated andmeasured categories

From that point proven andprobable reserves are determinedby how much of the measuredand indicated resources will getmined under the conditions posit-ed by a feasibility study for theproject (more on these in aminute)

Resource estimates are com-piled by third-parties to ensurebias is removed from the estimateto every extent possible Therelease of the first NI-43 101compliant resource for a projectcan have a major impact on acompanyrsquos share price If theresource exceeds the expectationsthat the initial drilling data haveset for the market then a compa-nyrsquos share price can quickly takeoff

Just as often however sectoranalysts will over-project the sizeof a resource based on the pre-estimate drilling data When thisoccurs share prices may climb in

anticipation of the studyrsquos releaseand then fall once the disappoint-ing results actually hit the market

Knowing which way a com-panyrsquos stock is going to movepost-release is a major reasonwhy you need to stay tuned to acompanyrsquos news releases andread widely among the manyavailable newsletters that coverthis sector

v PEAPrefeasibilityStudyUsually once a project has a

significant resource in the mea-sured and indicated categoriescompanies will attempt to esti-mate how much the resourcewould be worth if it became anoperating mine

This guesstimate is called aPreliminary EconomicAssessment (ldquoPEArdquo) In order toproduce this report companiesgenerally want to get at least apreliminary metallurgical studydone on the potential ore from theresource The percentage ofpayable metal that can be gleanedfrom the ore (known as theldquorecovery raterdquo or ldquorecoveryrdquo) isthen plugged into a financialmodel that also estimates costsneeded to develop the mine bringin infrastructure build the plantand mine and process the ore

The two key numbers gener-ated by a PEA are the Net PresentValue (ldquoNPVrdquo) and the InternalRate of Return (ldquoIRRrdquo) These arestandard terms used by financialanalysts to measure the value ofprojects

NPV is a measure that sets the

cash outflows to build the projectagainst the net cash inflows oncethe project is up and running Inthe case of a mine an outflowallowance is also made for theminersquos end-of-life condemnationand remediation process NPV iscomputed using various cash dis-count rates The larger the dis-count rate the more conservativethe market considers the resultingestimate to be

Internal Rate of Return givesa rough number on a projectrsquosprofitability potential Generallyspeaking the higher a projectrsquosIRR the more attractive it is rela-tive to less risky forms of invest-ment

As an example if a PEAestablishes an NPV for a projectthat is worth many multiples ofthe companyrsquos current marketcap that can be a good gauge of acompanyrsquos potential as an invest-ment And if that NPV is dis-counted at a relatively high-rate(say 8 percent or 10 percent) andthe project is still worth multiplesof a companyrsquos market cap that istypically the sign of an excellentbuying opportunity in this sector

In regard to IRR a very gen-eral rule of thumb is that an IRRunder 20 is unattractive whileIRRs over 30 can get the mar-ket excited Broadly speakinglarger projects can justify smallerrates of return while smaller pro-jects can often yield (and need)higher returns

The next level up for thesesorts of reports is a prefeasibilitystudy These studies are more rig-orous than PEAs and incorporatehard data gathered from fairlyintensive environmental engi-neering and metallurgical analy-ses

In a good market for gold andother commodities the produc-

24

ldquoThe two key numbers generated by a PEA arethe Net Present Value (lsquoNPVrsquo) and the InternalRate of Return (lsquoIRRrsquo)rdquo

tion of a positive prefeasibilitystudy will usually allow the com-pany to raise the funds to gener-ate the more labor time andresource intensive feasibilitystudy for a project

v Feasibility StudyHaving a bankable feasibility

study in hand is absolutely essen-tial for companies that want tosecure the financing to put pro-jects into production

These studies generate finalbest-estimate NPVs and IRRs forthe project using a variety of sce-narios conservative base-caseand optimistic Those scenariosare usually very sensitive to theaverage price of the minersquos under-lying metals over the life of thepotential mine This is why mar-ginal projects can offer such greatleverage during an extended peri-od of rising metals prices

As I alluded to in my discus-sion of prefeasibility studies fea-sibility studies are more costlyand require more time and data togenerate It can take a year or two(or more) for a company to gener-ate a feasibility study that isbankable or sufficient to attractdebt financing to whatever degreenecessary

The process requires engage-ment with local communities aswell as provincial and country-level authorities AnEnvironmental Impact Statement(EIS) must usually be submittedand approved in advance of therelease of the feasibility study

During the process the com-pany begins to engage equipmentand engineering firms to estimatethe costs of equipment and plantconstruction A definitive mineplan that attempts to create themost economical way to mine theproject is produced as is a moreextensive metallurgical report anda process flow sheet

The relatively long-lead timeinvolved in the generation of afeasibility study usually makes ita slack-tide period for the compa-nyrsquos share price As the feasibilitystudy gets closer to release (andas other factors look to be liningup in a projectrsquos favor) a compa-nyrsquos share price will often start togather steam

If the economics still lookgood upon release of the finalfeasibility study the next step forthe company is to determinewhether to sell the project to amajor or mid-tier producer or tobecome a producer itself

v Development OptionsProduce or sell If the compa-

ny or the project hasnrsquot beenacquired by a larger company upto this point then this is theremaining question once a pro-ject has reached the bankable fea-sibility stage

Companies that are good atexploring for and defining sizablemetal resources are not necessari-ly good at building and operatingmines Selling a project to amajor with the economies of scaleand the talent pool to run a mineis often the best solution

However there are timeswhen a management team comesto a project with the expertise toboth prove up a deposit and tobuild and run a mine In that casethe companyrsquos decision willdepend upon how hot the marketcurrently is for new metals pro-jects

As a rule the larger and moreprofitable a project the morelikely it is that a bidding waramong majors and marquee mid-tier producers will develop forthat project In that case the bestinterests of shareholders usuallydictate that a project be sold

For more marginal projects ifa company has the managementteam to make construction andoperation a go keeping the pro-duction ldquoin-houserdquo will often bethe better decision

v Valuation Methods For JuniorsBecause the vast majority of

junior explorers have no cash-flow producing assets valuationof these companies is a combina-tion of analysis and guessworkbased on publicly available infor-mation

Here are some ldquoquick anddirtyrdquo ways to gauge whether acompanyrsquos current market capand trading price accuratelyreflect the long-term potential ofthe company and its major pro-ject(s)

v Value Per Unit Of MetalIn the past many rule-of-

thumb methods of valuing a com-pany have been employed basedon the ldquoin siturdquo value of the metalin a deposit or the companyrsquosmarket cap divided by the amount

25

(Continued)

ldquoIf the economics still look good upon releaseof the final feasibility study the next step forthe company is to determine whether to sellthe project to a major or mid-tier producer orto become a producer itselfrdquo

of gold- or silver-equivalentounces in a resource

However these methods varywidely depending upon currentmarket sentiment And in somecases as we saw in the depths ofthe spring 2013 market correctionit really didnrsquot matter how muchmetal a company could boast ofNo one was going to write a checkfor anything

For example during a hotmarket it wasnrsquot surprising to seea project bought for $100ounceof indicated resource During thedepths of a correction a compa-nyrsquos market cap can imply a valueof $10ounce or even less

Of course these examplesshow how cyclical the market canbe and how patient long-terminvestors can play such cycles forgreat profit

Still to take into account thecurrent market sentiment at anypoint in time itrsquos best to use com-parables with similar companiesin that market environment Andfor longer-term views of valuewhen some economic assessmentshave been made of a project itrsquosbest to use net present value met-rics

v Industry ComparablesAs we noted one of the best

ways to assess a companyrsquos poten-tial value at any given point intime is to do an apples to applescomparison with its peers

Letrsquos assume you are analyz-ing five gold exploration compa-

nies each with gold resources ofvarying sizes One way of com-paring these companies is todivide their market capitalizationby their overall in situ goldresources

If four of the companies aretrading at roughly the same level(say $3000 per ounce of in situgold) and one is trading at $1000per ounce of situ gold thatimplies that all things beingequal the $1000an ounce com-pany could multiply three timesover and still be fairly valued rel-ative to its peers

Again this is a very roughcomparison and assumes that allfactors are equal The juniorresource markets are not perfectlyefficient but they arenrsquot haphaz-ard either Discounts are appliedto many projects and companiesfor good reasons including theeconomic viability of a projectand the political risk in its loca-tion

At its extremes a multi-mil-lion-ounce gold project in Nevadamight be worth hundreds of mil-lions of dollars That same projectlocated in Venezuela would beworth nearly zero in the publicmarkets

v Cash PositionLess a valuation exercise than

an assessment of how muchpotential the market sees in acompanyrsquos projects the cash posi-tion valuation method assumesthat a companyrsquos market capshould at least be equal to theamount of cash it has in the bank

Barring having some trulyunsalable assets in its portfoliomost companyrsquos market caps willclear this bar with ease If most ofthe companyrsquos projects are early-stage any premium the marketapplies over the companyrsquos cashposition may well reflect the mar-ketrsquos opinion of its managementteam

This can be useful informa-tion particularly in the absence ofmore tangible assets with which toassess a companyrsquos value

v Projected NPV vsMarket CapAs noted this valuation

method is more analysis and lessguesswork than the others but itrequires that the company hasdeveloped a project enough to havegenerated at least a PEA on it ThePEA will usually provide a rangeof NPVs on the project based on aset of estimates about capex oper-ating costs metallurgical recover-ies long-term metals prices andimplied discount rates

If even when applying themost conservative estimates forthese inputs a project has an NPVthat is a considerable multiple ofits current market cap that impliesthat the companyrsquos share price hasroom to grow

Often that growth will come inchunks as the company steadilyde-risks the project by moving italong the development curve toprefeasibility to feasibility and theninto production

Regardless of which valuationmethodology you apply to a com-panyrsquos market cap remember thatperception is often reality in thismarket A company with a millionounce gold deposit in a red-hotgold market is going to appreciatemuch more quickly than the samecompany in a tepid or lukewarmmarket for gold

26

ldquoAt its extremes a multi-million-ounce goldproject in Nevada might be worth hundreds ofmillions of dollars That same project locatedin Venezuela would be worth nearly zero in thepublic marketsrdquo

In order to feel comfortablewith investing in this sectoras a whole itrsquos important to

revisit the argument for preciousmetals as an investment class

The Case For Gold And

CommoditiesGold and silver have both

been associated with money andtrue wealth for all of recordedhuman history

And throughout that historythese metals have always mdashrepeat always mdash protected theirholders from economic misman-agement and currency devalua-tion

Continuing on the topic ofabsolute truths it is also worthnoting that in the long history ofhuman economic endeavorevery fiat currency (defined as acurrency unbacked by gold orsilver whose value is derivedsolely by the authority of thestate) has eventually been sub-jected to significant devaluation

Of course most Americans

would assume that the US dol-lar is an exception to this ruleHowever on April 5 1933President Franklin Rooseveltsigned Executive Order 6102forcing citizens to hand overtheir gold to the US govern-ment in exchange for 2067 USdollars per troy ounce

After the gold was turned inRoosevelt then raised the officialprice of gold used in internation-al transactions to $35 an ounceeffectively and instantly devalu-ing the US dollar by 69

Perhaps this isnrsquot the bestexample since from 1933 untilPresident Richard Nixon endedthe dollarrsquos international con-vertibility into gold in 1971 thedollar was still technicallybacked by gold

But consider this The USstopped minting dimes quartershalf-dollar and dollar coins in90 silver after 1964 Using thegovernmentrsquos own ConsumerPrice Index calculations fromthat point on the US dollar haslost 87 of its value

Again thatrsquos what the gov-

ernment admits to The reality isprobably much worse

So when someone argues thatthe US dollar will never bedevalued like wersquove seen happento other fiat currencies one cancounter that itrsquos already hap-pened Twice

And itrsquos in the process ofhappening again As the intro-duction to this report made clearthe profligate spending ways ofthe US and Europe show nosigns of abating As new entitle-ment programs come on onlineand older entitlement programsgrow beyond governmentsrsquocapacity to fund them themounting debt problems in theWest will only accelerate

We have already reached thepoint where it is economicallyand mathematically impossibleto address these massive andgrowing debt issues throughgrowth or budget cuts And it hasproven politically impossible tofundamentally reform the entitle-ment programs that eat up mostof government spending

27

A Recommended Investment Strategy

(Continued)

This report is being written dur-ing a slack tide period for the goldand precious metals markets Andwhile that might make for someshort-term headaches for thoseheavily invested in this sector his-tory has shown that market dol-

drums can turn out to be spectacu-lar profit opportunities over thelong term as the market cycles playout

So how do you take advantageof this buying opportunity Well if

yoursquove read this far you shouldhave a pretty good idea Howeverto further clarify things I wouldlike to close this report with GoldNewsletterrsquos recommended strategyfor making money in the preciousmetals bull market still to come

So the only realistic optionleft is to depreciate the value ofthose debts by depreciating thefiat currencies in which they aredenominated In other wordsprint much more money to payback the debts in cheaper curren-cies

This is why regardless ofwhat the US Federal Reservemay say long-term money cre-ation and accommodative mone-tary policies will continue Thelong-term debt levels willabsolutely demand ongoing dol-lar devaluation relative to goldand other tangible assets

In this environment gold andsilver should of course continueto generate impressive profit per-formance But most importantlythey will act as protectors ofinvestor wealth as paper curren-cies continue to be created anddevalued

In short the prospects forboth gold and silver lookextremely bright in the comingyears

v Invest To YourIndividual Comfort LevelWhile I make no representa-

tions as an investment adviser(and indeed encourage you toseek the advice of an investmentprofessional before making anytrading or portfolio allocationpositions) I can safely say thatyou should build your portfoliobased on your personal circum-stances and risk tolerance

Importantly regardless ofhow much you allocate into thehigh-risk high-reward portionsof this sector be sure to leavesome room for physical gold andsilver in your portfolio as insur-ance against not only the expect-ed currency devaluations butalso any sort of unexpected eco-nomic turmoil

Recommendations For Research

Whatever investment strate-gy you settle on make sure youdo your due diligence on yourinvestments particularly theindividual equities Here are

some key sources of informationon companies

v Company WebsitesIf they have a website and

every publicly-traded companyworth is salt does you shouldstart you research by poring overthat site

It will contain all relevantpublic data including the mostrecent news releases as well asmaps and descriptions of itsmajor projects One good placeto start is by perusing the compa-nyrsquos most current corporate pre-sentation Most sites give youthe ability to view and downloadthese presentations

Virtually every publicly trad-ed resource company clearly pre-sents its share structure mdash basicshares outstanding shares out-standing fully diluted and usual-ly details on outstanding war-

28

ldquoWhatever investment strategy you settle on make sure you do your due diligence onyour investments particularly the individualequitiesrdquo

Attendees at the New Orleans Investment Conference have the oppor-tunity to hear from todayrsquos most celebrated figures in an up-close andintimate setting Here Cong Ron Paul participates in a lively question-and-answer session at a recent event

rants and options mdash on its web-site If you canrsquot find this infor-mation easily on a website italmost assuredly means that thecompany is hiding the fact that ithas an awful lot of shares out-standing

Finally while a sharp-look-ing website isnrsquot necessarily asure-fire sign of success a shod-dy website can tell you a lotabout a companyrsquos marketingsavvy and its ability to raisefunds in a difficult financingenvironment

v ConferencesThe precious metals sector

offers retail investors numerousopportunities throughout the yearto meet with and hear the storiesof the companies that yoursquoreconsidering investing in

The New Orleans InvestmentConference stands as the sectorrsquoslongest-running and most presti-gious event for hard-money ori-ented investors having servedinvestors for four decades Theevent happens every fall in theCrescent City and is known forfeaturing celebrated figures ofmodern history as well asdozens of other experts ongeopolitics economics and everyarea of investing

The Conference also featurespresentations and exhibits bysome of the most promisingcompanies in the junior sector Itseems like every year the

biggest winners in the sectorwere featured at the NewOrleans Investment Conference

Other conferences take placethroughout the US and Canadathroughout the year The mostprominent organization hostingthese events is MoneyShow(MoneyShowcom) Other orga-nizations producing conferencesinclude the Prospectors andDevelopers Association ofCanada (pdacca) andCambridge House International(cambridgehousecom)

The information you canglean from a face-to-faceencounter with management andthe industry scuttlebutt that

yoursquoll pick up along the waymake attending these sorts ofconferences a must for any seri-ous hard assets investor

v Financial Websites

If yoursquove spent any timeinvesting yoursquore undoubtedlyfamiliar with the more main-stream financial news sites

The Wall Street JournalMarketwatchcom The StreetReuters Bloomberg FoxBusiness News Yahoo Financemdash all will provide you withneeded stock and economicinformation

Some sector-specific sites toconsider include EquitiescomKitcocom MinewebcomStockwatchcom StockhousecomBNNca GATAorgLeMetropolecom andZeroHedgecom

The New Orleans Conference is famed for not only providing valuableinvestment intelligence but also for showing attendees a great time

ldquoAs the worldrsquos oldest and most respected pre-cious metals advisory Gold Newsletter has afour-decade track record of providing its read-ers with solid market intelligence and lucrativeinvestment ideasrdquo

29

(Continued)

v NewslettersAs the worldrsquos oldest and

most respected precious metalsadvisory Gold Newsletter has afour-decade track record of pro-viding its readers with solid mar-ket intelligence and lucrativeinvestment ideas

Gold Newsletter was found-ed in 1971 by James UBlanchard III a legendaryinvestor entrepreneur and advo-cate for liberty

Most investors today donrsquotrealize that it was illegal for pri-vate US citizens to own goldbullion since FDR outlawed it in1933 Once President RichardNixon ended the US dollarrsquosinternational convertibility intogold in 1971 Jim Blanchardknew that the dollar was headedfor a dramatic devaluation overthe succeeding years

He knew that gold could pro-tect American citizens from theinflation that was to come butowning gold was illegal So hedecided to do something aboutit He began a nation-wide seriesof protests and founded GoldNewsletter as the mouthpiece forhis National Committee toLegalize Gold

As it turns out GoldNewsletter became Jimrsquos princi-pal weapon in that fight It was aweapon that proved unusuallyeffective mdash three years after itsinception President Gerald Fordsigned a bill that restoredAmericansrsquo gold ownershiprights Over the next fourdecades the publication has

gone on to feature some of mod-ern historyrsquos greatest free marketeconomists and investment ana-lysts

Edited by noted investmentexpert Brien Lundin since 1993Gold Newsletter continues to pro-vide its readers with timely andprofitable analysis of the preciousmetals and mining share marketsand the economic and geopoliti-cal issues that impact them

Subscribing to GoldNewsletter ensures that yoursquoll keepyour finger on the pulse of the goldand precious metals markets andthat yoursquoll be among the first todiscover the highest-potentialjunior mining opportunities Formore-active traders GoldNewsletter also offers a weeklyAlert Service

With an iron-clad money-backguarantee a subscription to GoldNewsletter represents a low-riskextremely-high-reward proposition

For details or to subscribevisit wwwgoldnewslettercom orcall toll free at 800-648-8411

As noted at the beginning ofthis report we also recommendthat you consider newslettersfrom some of the other top pro-fessionals in the industry Ourrecommendations includebull Asset Strategies

Internationalassetstrategiescom(Information Line and AlwaysSomething Interesting alertsby Michael Checkan RichCheckan and staff)

bull Casey Research caseyresearchcom (DougCasey Louis James andteam)

bull Exploration Insights explorationinsightscom (fea-turing the musings of explo-ration geologist Brent Cook)

bull Gold Newslettergoldnewslettercom (foundedby James U Blanchard III in1971 and largely responsiblefor returning right of goldownership to US citizens)

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copy2017 Jefferson Financial Inc All rights reserved Published by Jefferson Financial Inc 111 Veterans Memorial Boulevard Suite 1555 MetairieLA70005 Subscription Price $198 per year Single issues available for $20 each New subscribers may cancel their order anytime and receive a fullrefund on all unfulfilled issues Make checks payable to Jefferson Financial Gold Newsletter was founded by James U Blanchard III Editor Brien LundinArt Director Kevin PiletFor subscription details please call 800-648-8411 or send E-Mail to gnlmailjeffersoncompaniescom The publisher and its affiliates officers directorsand owner actively trade in investments discussed in this newsletter They may have positions in the securities recommended and may increase ordecrease such positions without notice The publisher is not a registered investment advisor Subscribers should not view this publication as offering per-sonalized legal tax accounting or investment-related advice The news and editorial viewpoints and other information on the investments discussedherein are obtained from sources deemed reliable but their accuracy is not guaranteed Authors of articles or special reports are sometimes compensat-ed for their services

NewsletterGold

In Our46th Year

JF317

2

period the governments of theUS and Europe have taken onhuge debt loads Bank bailoutsauto bailouts huge new entitle-ment programshellipall have beenput on credit cards thus puttingin question the full faith andcredit of those governments

Cheap energy and low-costgoods from China have largelykept us from feeling much ofthe inflationary pain from thesereckless monetary and fiscalpolicy decisions So for themost part retail price inflationhas not been on the general pub-licrsquos radar screen

But it sure has been on theminds of the smart money thatsees trends and makes trades to max-imize their return on them And incase you havenrsquot noticed the smartmoney has been one place consis-tently over the past decade gold

The Currency Of Last Resort

As the Westrsquos governments andcentral banks have used cheapmoney and truckloads of debt toprop up an ailing global economythe fiat currencies have weakenedprecipitously when measured againstgold

Gold boasts a millennia-oldtrack record as the only protectionagainst the inevitable corruption ofcurrencies And thus there hasdeveloped an inverse relationshipbetween fiat currencies and the priceof gold Simply put the more dol-lars euros yen and other fiat curren-cies are created the greater the rela-tive worth of gold

For proof of this fact one needonly look at our experience in thisyoung century Since 2000 whengold was trading around $250 anounce the yellow metal has enjoyed

an explosive bull run carrying it to a2011 peak over $1900 an ounce (amore than seven-fold increase)

Along the way seasoned andrecently-minted gold bugs who havesuccessfully played this trend havebecome very wealthy The questionnow of course is where do we gofrom here

Well with gold having recov-ered strongly in early 2016 from itsfour-year bear market the next bigbull market appears just around thecorner

I can say that with confidencebecause all those ldquofrog boilingrdquo poli-cies are very much in place (andlook likely to accelerate)

Of course one could argue thatthe election of Donald Trump sig-nals a change in these policies Andwith a Republican Congress it cer-tainly might But letrsquos not forget thatTrump comes from the world of realestate and has always characterizedhimself as a ldquolow interest rate guyrdquowhorsquos not afraid of debt

In addition his plans for a mas-sive infrastructure plan as well asincreased government spending on

the military seem to herald an era ofrising inflation just ahead The bondmarkets seem to agree

Perhaps more importantly withJanet Yellen still in charge of theFed does anyone really believe sheand her cohorts on the FOMC willever get ahead of the inflationarycurve As long as interest rates arelower than the rate of inflation mdash anegative ldquoreal yieldrdquo mdash the environ-ment is extremely bullish for goldAnd it seems certain wersquoll have neg-ative real yields for years to come

Another factor Therersquos an oceanof liquidity that US banks havebeen holding onto in the form ofexcess reserves As the economyimproves the taps will get turned onfor that money And when it beginsto flow the multiplier effect willturbo-charge retail price inflation

Silver for its part shares a mon-etary history with gold And becauseof this it has historically moved insync with its yellow cousin Mostimportantly for investors it alsomoves to a greater degree mdash up anddown mdash than gold providing lever-age

GoldLondon PM Fix Since April 2001





















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JF317

why gold and silver? - jefferson companiesjeffersoncompanies.com/...silver-investors-guide.pdf ·...

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