4/09/07 - A Nice Penney stock long-term play: Freegold Ventures

How about this outfit for a nice penny stock gold exploration play: Freegold Ventures

Take a look at the price movement on this one over the last year. It’s been pretty darn strong. I would have like to have put some significant money in this company 18 months ago – I’d have had a good return on my money. The grades on their Idaho property are a bit low, but I think it can be profitable and as the price of gold increases, the project begins to look more and more attractive. The Alaska property also seems to hold some very good promise. No properties in countries likely to seize their assets.

Heap leaching is very inexpensive on a cost per ton basis. Most mines will put anything that grades .01 oz/ton or better on the heap. All a heap consists of is a large area covered with a heavy duty, thick plastic sheet, graded to drain to a central point. Gold bearing rock is stacked in a big heap on the sheet 50 to 100 feet deep and sprinkled with a weak solution of cyanide. The cyanide dissolves gold and silver and the liquid drains down to a central point where it is pumped to a recovery plant and the gold and silver are extracted, and the solution is then recycled back onto the heap to dissolve more PMs. I actually set up and ran a small heap leach project in central Nevada in the early 1980s.

Making money with $20 per ton rock is borderline – it depends on how much waste you have to strip off to get the ore. If you have to strip lots of waste you wont make any money. If you have little waste to strip and get a good percentage recovery on your heap, you can make a profit with $20 rock. Of course .04 is a lot better ore than .025, but it still depends how much waste you have to strip. I guess in many ways, Freegold is a wager on the increasing price of gold – at $650 gold it may be marginally profitable, but at $800/ounce gold it’s a no-brainer.

Years ago, Kinross had proposed a mine in Nevada at Goldbanks that was going to run around .025 in the 1990s, they got all the permits, but never did the project as gold slumped to around $280 and stayed there for several years. At $280 gold, .025 is only $7 rock. The other thing about Freegold is the potential for deeper feeder veins with a higher grade material that could be mined underground. This is similar to the deposit at the Hollister project of Great Basin Gold, which was also an old Mercury mine. I am interested in this stock, although I own none of it. However I think the company has excellent prospects and I will keep an eye out to see how it does in the future.

You can find more information on their home page at:
http://www.freegoldventures.com/s/Home.asp

(I have no ownership in this company)
Chris

4/16/07 - Investing in Companies with assets and resources in risky nations

I have a few comments about investing in risky locations. This was brought up by a recent news article I saw which sated:
Ecuador votes to rewrite constitution

Leftist Ecuadorian President Rafael Correa celebrated victory Monday after voters apparently approved his plan to rewrite the country's constitution, by a larger than three to one margin. According to unofficial national exit polls, 78.1 percent of voters, in a national referendum held Sunday, backed his plan for convening an assembly to draft a new constitution. He added that his government "will never allow the imposition of a foreign development model" on the country.

President Correa's remark appeared to confirm that he wants to take Ecuador down the path of his ally, Venezuela's firebrand socialist president, Hugo Chavez. Correa has set out a sweeping reform program for his five-year mandate that would include reversing free-market measures, renegotiating foreign oil contracts and cutting ties with the International Monetary Fund.

The opposition, conceding defeat in the referendum, warned that Correa's plan threatens democracy and the economy. "The Ecuadoran economy will be pigeonholed by all the organizations as the worst bet in Latin America. As for democracy, there is not doubt it  is in grave danger," said Osvaldo Hurtado, former president in 1981-1984 and head of the Christian Democratic Union.

This brings up an important point. It’s amazing to me the number of junior and mid cap mining companies that are heavily invested in some of these little leftist countries in South America and around the world. They should not be surprised when their mines and oil wells are nationalized and the dictators won’t even bother to say thanks for all the money when they seize their property.

This is how the process begins: In general, these countries don’t have the money to develop their own resources. So they invite development companies in with the idea that the company develops the resources, the local workers get good jobs, the countries get tax money and the company makes a buck as well. Seems like a win-win situation for everyone, and all the necessary agreements are signed. Well after the companies get things all built and fully in operation, senior mad dictator decides his cut should be 100% and takes over. He kicks out the company that paid for everything and all the money goes into his pockets - the country and workers don’t get an additional 2 cents. Soon the mine is run down, workers aren’t getting paid, and senior crazy has his pockets all full of big $$$$. This all happened before in the 1960s and 1970s, but somehow all these junior companies don’t remember and think it will be different this time. Isn’t one of the definitions of being crazy the fact that you do the same thing over and over and expect a different outcome each time? It’s obviously a case of short memory syndrome. 

Some political leftists in this country object to such a characterization, saying that these countries are paying fair market value for the assets they have been nationalizing. Well, at least that’s the party line. However, that “fair market value” is what good old senior dictator says the company assets are worth, no negotiation, and no alternatives. You can take their price or walk with nothing. I think the companies are figuring they are typically getting paid 20 cents on the dollar. If I were the greedy dictator of some South American nation, I'd be happy to force purchase of all the assets I could get my hands on for 20 cents on the dollar too.

If you are invested in these companies, you can expect full cooperation of the government and approval of all permits, but once you have the mine operational, then they lower the boom. These governments would be stupid not to approve the permits - far better to approve them, then have the company pay to build the plant and get the mine fully operational, THEN YOU NATIONALIZE THE MINE AND TAKE OVER. If it were me, I would sell before the mines become operational.

Hugo Chavez and his cohorts now in charge in South America are not stupid, only the folks who run the companies that are developing the resources of these countries - they are stupid. Chavez and his friends will get their share soon - and their percentage is 100%. Ask the folks who developed the oil infrastructure in Venezuela - they know how it works from experience.

There are some big gold miners out there with these types of problems, including Newmont - be sure to check your holdings carefully. Some of them include:

Chris