The upside of a down mining market

When the instinct is strongest to curl up in a ball and wait out the ravages of the down market is also when smart companies snap up distressed projects and get to work while capital costs are low.

In this interview with The Gold Report, veteran investors Bob Moriarty of 321gold.com and Adrian Day of Adrian Day Asset Management share their messages to mining company CEOs and investors about advancing frugally to avoid being left in the dark. To make investing in teams doing the right things even easier, they identify a dozen companies that have already taken the contrarian advice to heart.

Bob Moriarty, founder of 321gold.com, has some advice for CEOs of mining companies: "Hoard your money when the market is bubbling, and spend your money when the market is dying." It seems obvious, but in his words, the majority of investors are "sheep who will lose their money." Pressure from conservative investors can make it difficult for resource managements to make smart decisions. That is why he focuses on the companies that already got the message about the importance of adding value when everything is on sale.
Adrian Day, founder of Adrian Day Asset Management, wants to see companies move forward while still conserving cash. "It's not easy. But a joint venture can help offset work expenses. If a company is constantly raising money in a depressed market, the stock can just collapse," he warns.

Movers and Shakers
A classic example of a CEO who understands the cyclical opportunities in the resource markets, according to Moriarty, was Rob McEwen at Goldcorp Inc. circa 2000. "He issued the Goldcorp challenge to find the next 5 million ounces of gold at Red Lake. It wasn't anything but a promotional gesture, but it made everybody in the business view Rob McEwen as a leader moving the industry forward. In that situation, illusion became the reality," Moriarty says.

Day points to Goldcorp as a producing company that is still advancing new projects during this downturn. "It takes a long time to develop a major mine, decide to go ahead, and then bring it into production. Despite that, this company has three new mines ramping up this year, hopefully just in time for a recovery in the market. But even without that, these are operating mines making money at today's prices. That is an example of a company continuing to advance and position for upside," he says.

Another company that Moriarty thinks gets the "buy low, sell high" idea is NOVAGOLD. "This was a $0.09 stock in the summer of 2001. The company did a joint venture deal in Alaska with Placer Dome that required it to spend $6 million ($6M) in eight years. NOVAGOLD did all the work in 18 months and ended with a $20 stock. That's exactly the kind of aggressive company you want to look for right now," Moriarty says.

Moriarty recently visited California Gold Mining Inc., which is in the midst of a major drill program in California on the mine that made John Fremont rich in 1850. "The company had to issue a lot of shares to raise the money, but the drill costs were half of what it was two years ago. That is a smart move," he says.

Almaden Minerals Ltd. would be an absolutely perfect example of this value-added thinking, Moriarty says. "I happen to like the father/son management team of Duane and Morgan Poliquin. I have been to the project and love it. The company is moving toward production on the Tuligtic project in Puebla, Mexico. It spun the other assets off as Almadex Minerals Inc. in a 2-for-1 special for shareholders.

"That's a perfect example of what you need to do in a market bottom. Investors tend to forget that commodities move up and down and you can't kill a project because today's price is too low. You have to weather through it. Is Almaden going to be able to produce silver and gold at a profit at a 5-year/10-year trading average? My belief is absolutely yes, so I don't care what the price is today. I want to see it move forward. The cost of diesel is cheap. The cost of iron is cheap. The cost of labor is cheap. It's a tremendous opportunity to take advantage of that.

"If you go down to your local Corvette dealer and a brand new Corvette was quoted to you six months ago at $70M, but today the same red sports car is on special for $6M, that sounds like a hell of a deal to me." Almaden applied that logic to its recent purchase of the barely used 7,000 ton-per-day capacity Rock Creek mill, a move that could reduce the initial capital cost estimate of ramp-up for Ixtaca by $70M. "It was an absolutely brilliant move on Almaden's part," Moriarty says.

Day also sees Almaden's purchase of the discounted mill as a plus, particularly because of the structure of the sale as an option to purchase with payments spread out over three years. "For less than $1M, it has locked up this key piece of infrastructure. That is a wonderful example of taking advantage of a downturn," he says.

Among juniors, Day sees a lot of companies doing good work in this market. "Pretium Resources Inc. is advancing the Valley of the Kings project. The company had to raise new equity, but if a company has a good asset and is demonstrating that it's advancing the project without being wasteful, the market should give it credit for adding value."

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