Gold-MiningStocks.com
December 2005

Gold prices may achieve historic highs in the coming months, aided by a decline in the United States dollar, only marginal increases in mine production and a steady deregulation of gold buying in the major Asian countries. This puts an estimated 2,000 junior gold exploration companies in an excellent position to attract increasing investment dollars from the major gold producers.
 
Martin Murenbeeld, chief economist of the Dundee Group of Companies with a specialty in gold, has no trouble believing the price of gold will reach $850.
 
“We’re probably in a period of time,” he said recently, “that is a little bit like 1934, when President Franklin D. Roosevelt revalued the gold price from $20.67 to $35 an ounce and a little bit like 1971, when President Richard M. Nixon took the dollar off the gold standard, which allowed the gold price to float freely. We’re in what I believe what could possibly be a fundamental shift in the gold market, which makes a particular price target very difficult to anticipate. The best one can say is that the gold price is going to go higher on an irregular basis.”
 
Murenbeeld said five broad reasons convince him of a gold price rise ahead. The first is a longstanding relationship between the U.S. dollar and the gold price.
 
“The U.S. dollar must inevitably decline against many of the overseas currencies,” he said. “It should also decline against the Euro, which is tough to argue because in France they may charge $10 for a cup of coffee, leaving you to wonder why the Euro is so expensive.  The reality, however, is we don’t trade cups of coffee; what the U.S. and Europe actually trade leaves the US with a $120 billion trade deficit with Europe. The dollar is accordingly overvalued against the Euro, and it has to go down a lot against the Asian currencies as well.”
 
Next, the impending retirement of the baby boom generation will aggravate the huge budget deficits of governments. Murenbeeld believes governments will have to decide how to deal with past promises they made to the boomers in their youth – particularly regarding pension and health. Great Britain currently is dealing with a proposal that its national retirement age be pushed back to 68.
 
“The governments could renege on these promises and they could raise taxes. But this will have the net effect of slowing economic growth. And that brings the monetary authorities into play: if economic growth is slow, the monetary authorities are likely to keep interest rates low. In other words, we’re likely to see easier monetary policies. And that raises the specter of monetary authorities directly or indirectly validating these promises through the printing press. And this would be a huge development for gold.”
 
Murenbeeld said that mine supply is unlikely to rise in the near future. “Our models show that there is a huge lag between the price of gold and mine output, because of permitting and the red tape, the finding of gold, etc. It takes a long time for high gold prices to stimulate actual output. Furthermore, the gold price at the moment is, believe it or not, still below the average gold price since 1970, in today’s dollars. The price from 1970 to now is about $540 in today’s currency. So miners are not yet getting the average gold price, but they’re certainly feeling it on the cost side. So the margins in the mining industry are still fairly narrow and this is one of the things that is holding up rallies in gold equities. From a miner’s perspective, the gold price really isn’t that high yet; so all of that argues for no significant increase in mine supply.”
 
With respect to the demand side, he added that new commodity exchanges are opening up.  Probably the most noteworthy one is the Dubai commodity exchange, just opened on Nov. 22, 2005. “Dubai postures itself as ‘the city of gold’. It was historically the staging centre of gold smuggled to India, so Dubai has a long history in the gold market. Dubai wants again to become a major gold centre in the world, serving the Middle and Far East. The largest bullion traders live in the Middle East, furthermore, and a Dubai commodity exchange is more efficient for them. The commodity exchange is also in a time zone that is more attractive for Asian traders.” he said.
 
All of this argues that the demand curve is shifting outward.  Asian countries are also getting richer. Murenbeeld says the two countries that are very interested in gold, India and China, are growing by leaps and bounds.
 
“When you make it easier for consumers and investors to buy gold, when there are better channels of distribution, like advertising, it helps gold demand at any given price level.“
 
Analyst Lawrence Roulston pointed out in an InvestorIdeas.com interview recently that the gold mining industry in general is producing about 80 million ounces of gold a year and it’s a challenge for the large mining companies to replace that many ounces.
 
“The small companies,” Roulston said, “have always been the most successful explorers and generally, in any industry, it’s the small companies, the entrepreneurs, that make the discoveries and the innovations. A lot of the best mine-finding talent in the industry is in the hands of the juniors and there was a big move, from the majors to the juniors, back in that quiet period when the gold price was down and the big companies cut their exploration budgets.
 
“A lot of talented people who were cut loose by the majors ended up in the juniors and once they became shareholders in the companies and realized the extent of the rewards they could achieve as shareholders as opposed to collecting a salary, it was difficult to get those people back into the larger companies. So the juniors are way out in front in terms of exploration potential. They’ve got a lot of good projects and they are moving those projects along, so a lot of discoveries have been made.”
 
Roulston suggested that people thinking of investing in resource companies develop a knack for patience. He said too many investors look for a major news release that announces a massive discovery.
 
“But discovery is really more a process than it is an event. It’s not a single drill hole, but it’s a long process that can extend along for months or even for a couple of years,” he stated. “There are many companies right now that have very substantial discoveries that are evolving through that exploration cycle and even after a discovery has been made and quantified at the first level of quantification (what we call an inferred resource) there’s still tremendous potential to enhance value for shareholders to make value out of that process. Typically, an inferred resource is valued at about $10 per ounce of gold in the ground. Goldfields recently bid for Bolivar and that deal involves a purchase price that works out to US$94 per total ounce of resource – a mix of measured, indicated and inferred – so you can see a tenfold potential even after a discovery is made and quantified at the first level.”
 
With the rise in gold prices, mining major Goldcorp Inc. (TSX: G, NYSE: GG)  has increased dramatically in size and importance over the past four years.
 
“The gold market has been extremely good to all of us over the past 12 months. It’s gone up $80 or $90 from a year ago. So that part’s been terrific. Of course, in a situation like ours, when you’re trying to grow by acquisition, as the price of gold goes up, the asking price for assets also goes up. It gets more challenging to be able to find acquisition opportunities that are going to really create value for you and your shareholders,” said Goldcorp president Ian Telfer.
 
“The second challenge is certainly true that with the mining industry booming all over the world and really having gone through 25 years of middling to poor prices, less people went into it and therefore there is a shortage of people of skilled technical experience across the board.”
 
Telfer said the mining boom not only caught the industry but also the equipment makers a bit off balance, causing delays when ordering equipment. “In our particular case, we haven’t been hit by the equipment one but we can certainly feel wage pressures when you’re looking for qualified people. In the past, basically mining engineers and geologists really didn’t have a lot of choices job-wise or career-wise and that kept the salaries under control. But now, they do have a lot of choices. You can pick mines that are closer to civilization or mines or climates where they want to work, so if you have an operation in a remote location with a difficult climate, with four meters of rain or 40 below in the arctic, you’re going to have a challenge filling all of your spots with the kind of people you’d like to get.”
 
He added, “I’m very optimistic.  The Wheaton-Goldcorp story has been one of rapid acquisition of assets and the reason we were in such a hurry was because we were pretty confident that the price of gold was going to go up to $500 and so now we’re very glad we’ve built the company to the size we have, so quickly, because here comes the price. We’re very pleased. Four years ago, Wheaton River had no reserves and no production and now the same management team is running Goldcorp and assuming the Placer transaction goes through as planned, our production next year will be two million ounces. To do all that in four years has been fantastic.”
 
Newmont Mining Corp. (NYSE: NEM) (T: NMC), in Denver, is the world’s largest gold producer. Its director of public affairs and communications, Heatheryn Higgins, commented, “We believe current account and budget deficits will continue to weigh on the dollar over time. We continue to believe that a weaker trade-weighted dollar will likely support a rising gold price…we expect to produce 8.6 million consolidated ounces of gold this year. Therefore, on an annualized basis, our consolidated gold revenues increase by $215 million for each $25 increase in the gold price.
 
“Higher sustained gold prices in turn lead to a more robust portfolio of exploration and development projects.”
 
Terry Tucker is President and CEO of StrataGold Corporation (TSX: SGV) a gold development company that spent over Cdn $8 million in 2005, exploring two advanced gold projects - Dublin Gulch, Yukon, Canada and Tassawini, Guyana. He said the company’s exploration results were good and its market capitalization has doubled since May. Yet even success comes with its challenges.
 
Tucker noted, “The real challenge facing a company like StrataGold is a shortage of qualified labor, for example, getting the attention of independent consultants to do our resource estimates. That’s a real problem; engineering groups around the world are extremely busy and to get their attention is very difficult. There is no problem for them to be working with the majors on billion-dollar projects, but now, I need a resource done and I can’t get a person to do it. I cannot get out a news release because it’s difficult to get someone to do a resource estimate for us in a timely manner.”
 
“It’s definitely a healthy situation in the market for all the industry, with gold doing what it’s doing. I feel that it’s going to become even more difficult to advance projects.”
 
Tucker said that it’s also very difficult to find drilling equipment and the drillers to operate them. “With regards to professional staff, such as geologists, there’s a real shortage of quality people out there. We’ve had to hire people away from other companies. But with our share price and the success StrataGold has achieved, we have been able to attract good talent. It’s been a challenge, but it’s been one that we’ve been able to overcome.”
 
For Montreal-based Cambior Inc. (TSX, AMEX: CBJ), the gold market in the past few months has had its share of challenges and achievements. Spokesman Martin Amyot said a previous upward trend in the gold price was offset by costs that increased just as much: “The impact of both the Canadian dollar and the price of gold in the summer months has affected the increase in the price of gold. With the Canadian dollar and the price of gold more stable, the company should be in a better position to benefit from the recent increase in the fold price.”
 
Amyot said Cambior is moving forward with a new project in French Guyana, called Camp Cayman, and its Rosebel plant in Suriname is delivering to the firm’s expectations. Its Canadian operations should now benefit from the rise in gold prices.
 
“So, that’s good news,” he said.  

Lori McClenahan, president of Vancouver-based St. Elias Mines (TSX.V: SLI), said her company has stayed with the gold market all along, despite its downturns. 

“We came public in March, 1997,” she said. “And if you remember, Bre-X was exposed as a scam just then. Gold went down and then the dot.coms took over and no one wanted to touch the mining juniors. And then, all the mining juniors were doing deals with dot.coms. But we stuck it out and stayed the whole time and put together a great bunch of properties. We even raised money when no one else could and certainly have great properties because of it.” 

John Hurst 

John Hurst has focused on marketing and communications for public and private companies in the United States and Canada. 

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