From the November 2011 issue of Research Magazine • Subscribe!

October 26, 2011

Solid Prospects

Mining stocks are poised to benefit from metals’ high prices

Metals mining stocks are an option for investors who want to combine exposure to the metals’ price movements with an equity position in an underlying business, experts say. One of the world’s top gold experts, Frank Holmes of US Global Investors recently stressed current opportunities for such a strategy in his weekly investment commentary of September 30.

“Don Coxe, a global portfolio strategist, highlighted as his investment recommendations to maintain heavy weighting in precious metals, particularly through gold-mining companies,” shares Holmes. “He pointed out that gold mines are the cheapest relative to bullion that the market has ever seen.”

According to Holmes, other experts like Jeff Nichols, managing director of American Precious Metals Advisors, have said that fundamentals still support much higher prices for gold ahead. “Gold now appears to be returning to the upward pattern that we have seen steadily over the past five years,” Holmes explains. “In light of the fact that the European and U.S. debt problems are not going to be sorted out [in early October], gold should find renewed support at these levels.”

Adam P. Graf, CFA and director of equity research for precious metals and emerging miners with Dahlman, Rose & Co., LLC., believes the current environment of monetary debasement and financial difficulties is bullish for precious metals, particularly smaller-cap firms. “It’s the smaller-cap names where there are projects that are going to increase in value with the price of gold but are also going to increase in value as they bring projects forward and/or get purchased or benefit from multiple expansion as there is a wave of asset purchases,” he said.

In early October, Bank of America-Merrill Lynch reiterated its stance that gold prices are set to reach $2,000 an ounce over the next 12 months. The investment group noted that assets under management within some investment products, like physical ETFs, have been relatively steady.

“This is one reason we believe that the recent correction did not reflect a general reassessment of gold’s fundamentals. Given continued debt issues in advanced nations and both structural and cyclical headwinds to growth with all the implications these have for foreign exchange and interest rates, we maintain our 12-month gold price target at $2,000 an ounce,” said the commodity note.

“Despite the correction, we note that assets under management at vehicles like physically backed exchange traded funds (ETFs) have held up reasonably well. ETFs have actually seen inflows as prices collapsed in the past few days,” continued the report. “This suggests in our view that the recent correction does not indicate a broad-based reassessment of gold’s fundamentals.”

Christopher Ecclestone
Hallgarten & Co.
cecclestone@hallgartenco.com

Entrée Gold (EGI) is a Canadian mineral-exploration company focused on the exploration and development of copper and gold prospects. Its flagship Lookout Hill property in Mongolia completely surrounds the 8,500-hectare (21,000 acres) Oyu Tolgoi project of Ivanhoe Mines. A portion of the Lookout Hill property is subject to a joint venture with Ivanhoe Mines, through its subsidiary Oyu Tolgoi LLC.

The joint-venture property hosts the Hugo North Extension copper-gold deposit and the Heruga copper-gold-molybendum deposit. There appears to be substantial exploration potential on both the joint venture property, for the discovery of additional mineralized zones, and on territory to the west that Entrée owns 100 percent in its own right.

Meanwhile, in North America, it is exploring for porphyry-related copper systems in Nevada, Arizona and New Mexico. The primary asset in Nevada is the Ann Mason property, which contains an inferred mineral resource and considerable potential for additional targets.

Entrée optioned two contiguous properties to Ann Mason, Blackjack and Roulette, through agreements with HoneyBadger Exploration Ltd., and Bronco Creek Exploration Inc. This property adjoins several past-producing copper properties of substantial size, so consolidation of the district is a theme the company espouses. It is also seeking additional opportunities to utilize its expertise in exploring for deep and/or concealed ore deposits and recently added a prospect in Peru to those that it had inherited from its 2010 takeover of the Australian miner, PacMag.

Trevor Turnbull
Scotia Capital Inc.
416-863-7427
trevor_turnbull@scotiacapital.com

Minefinders (MFN) reported Q2/11 EPS of $0.33, in line with consensus and based on record revenues of $73 million. In July, Minefinders pre-reported gold equivalent sales at Dolores of 49,000 ounces, and [recently] announced total cash costs of $497 per ounce.

The company maintained guidance of 65,000-70,000 ounces of gold production and about 3.4 million ounces of silver output. We believe it is on track to exceed its silver forecast slightly based on current run rates.

We believe operations are running well and we continue to rate Minefinders as Outperform with a one-year target price of $20.00 per share.

Chris Thompson
Haywood Securities Inc.
604-697-7433
cthompson@haywood.com

Haywood looks for aggressive resource-to-reserve conversion for Endeavour Silver (EXK) in the near term, with improvements in grade (silver and gold) and metal recoveries to support the company’s aggressive 33-percent production growth plans over the next 2 years.

Haywood estimates 3.7 million ounces of silver, 19,900 ounces of gold at a cash cost of about $6.00 an ounce of silver after credits for 2011, and 4.2 million ounces of silver, 22,700 ounces of gold at a cash cost of roughly $5.00 an ounce of silver for 2012 after credits.

Based on reserves, mine lives of roughly 3.5 years at Guanacevi and less than one year at Guanajuato are justified. A global resource inventory of 18.6 million ounces of silver resources plus gold credits at Guanacevi and 14.2 million ounces of silver plus gold credits at Guanajuato supports additional mine life at both operations.

Haywood currently models mine lives of 8.0 years at Guanacevi and 6.5 years at Guanajuato, significantly more than both mines’ reserve life. (Haywood had reviewed the lead projects of Endeavour Silver and has managed or co-managed or participated as selling group in a public offering of securities for this company in the past 12 months.)

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