Eagle Hill Exploration
Quebec’s Newest Gold Resource
Winter 2011
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Volume 14 | Number 4 | Winter 2011 Vancouver, British Columbia www.ReportOnMining.com Planning for Profits - Report on Mining edition is published four times a year by Fusion Publishing Inc. All rights reserved. Any reproduction or duplication without prior written consent of Fusion Publishing Inc. is strictly prohibited. Published by Fusion Publishing Inc. Canadian Office Fusion Publishing Inc. #317 – 1489 Marine Dr. West Vancouver, BC Canada V7T 1B8 1.888.925.0313 (Toll Free) USA Office Fusion Publishing Inc. 145 Tyee Dr. Pt. Roberts, WA USA 98281-9602 1.888.925.0313 (Toll Free) Publisher Terry Tremaine Associate Publisher & Editor Connie Ekelund Production Manager Christie Smith Contributing Editors Elvis Picardo Greg McCall Metals Economic Group Account Managers 1.888.925.0313 Terry Tremaine Maureen O’Brien Marie Richards Garry Ferris Robert Setter
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The volatility of the summer months has continued unabated into the fall. The never-ending headlines depicting the fall of Europe have no doubt had an enormous impact. But as this is being written both Italy and Greece would appear to be solving their political issues. With any luck this will bring some stability; leaving the headlines to then fixate on the U.S. presidential election. I wonder if part of the volatility is as a direct result of how well the world is now connected. A single e-mail from the Adbuster group in Vancouver results in Occupy protest groups springing up in cities all around the world. Information, not always accurate, spreads so much more rapidly and through so many different channels. No wonder people are uneasy simply with the overload. When this magazine was launched not so long ago, digital publishing was unheard of. Now the digital edition of Report on Mining has a larger audience than the hard copy edition and that audience is worldwide and not restricted to investors in Canada. By the way, a free subscription to the digital edition is available simply by inserting your e-mail address in the box provided on the home page of the web site. There is no doubt globalization is not simply occurring it has already happened. People are simply trying to adapt to it. Through it all gold and other commodities continue to rise in value. But to date, the share prices of junior miners has yet to reflect these increases. Our cover story is a case in point. I suspect as we all adapt to the endless information being thrown at us we will all come to adjust to the impact and react less emotionally. When that happens I would suggest the share prices of quality juniors trading on the TSX will quickly reflect a more realistic value.
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Commodities Outlook by Elvis Picardo
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Cover Story 8 Eagle Hill Exploration Corporation 14
The Monopoly Method by Greg McCall
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Eagle Hill camp
Winter 2011 | Planning for Profits | Report on Mining 3
S I H S U R E H T
! N O
www.solidGOLDcorp.com TSX.V: SLD
4 Planning for Profits | Report on Mining | Winter 2011
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Divergent Prospects for Gold and Copper in 2012 By Elvis Picardo, CFA
T
wo metals that are widely regarded as proxies for risk appetite—albeit at opposite ends of the spectrum—are gold and copper. Gold’s appeal as a safe-haven remains intact, in our opinion, despite a steep correction in September that drove it down by almost U.S. $400 or 20% within three weeks. At the other end of the spectrum, copper is a reliable proxy for the “risk on” trade, or the willingness of investors to take on risk. In fact, because of copper’s strong correlation with global growth expectations, it is often referred to as “the metal with a Ph.D. in economics.” Worst quarter since 2008 Market volatility has exploded to the upside since our previous commodity update in August. The volatility surge can be attributed to escalating investor concerns about the potential for the European sovereign debt situation to turn into a repeat of the 2008 global credit crisis. In an unexpected reversal of market sentiment, the rampant bullishness witnessed in the first four months of 2011 had turned into outright bearishness by the third quarter of the year, leading to the worst drop for commodities and equities since the catastrophic fourth quarter of 2008. One measure of investors’ recent disdain for resourcebased equities can be gauged by the fact that the TSX Venture index slumped 23% in the third quarter. There were few safe-havens amid a broad-based selloff that affected most asset classes in the third quarter. But in a striking parallel to the 2008 crisis, U.S. Treasuries once again emerged as the safe-haven of choice, as investors disregarded the U.S. credit rating downgrade by Standard & Poor’s on August 5. The stampede for the dubious safety of U.S. Treasuries led to 30-year Treasury yields plunging by 140 basis points in the third quarter, the biggest quarterly drop since Q4 of 2008, while yields on three-month U.S. Treasury bills briefly went negative. Demand for U.S. Treasuries won the besieged U.S. dollar some respite, which gained against most major currencies. Separate ways Another safe-haven that held up during the selloff was gold, which at its peak was up a stunning 30% in Canadian dollar terms in the third quarter, but after its September slide finished up 12%. www.ReportOnMining.com
Gold’s advance had turned parabolic in the month before it peaked on September 9, propelled by the growing European debt crisis, the U.S. rating downgrade and the Federal Reserve’s explicit commitment to keep the federal funds rate at exceptionally low levels until at least mid-2013. As gold surged, investors finally woke up to the massive valuation gap between gold producers and the underlying commodity, as we had anticipated in our August update. The TSX Global Gold index soared as much as 25% for the quarter, peaking in conjunction with gold on September 9, before giving up two-thirds of its quarterly gain. But it was a far different story with other commodities, which were hit by worries that Europe’s woes would put a dampener on global growth prospects. Crude oil tumbled 17% in the third quarter, while copper plunged 26%, its worst quarterly performance since a 52% freefall in Q4 of 2008. We expect gold and copper to continue on their separate ways in 2012, although the divergence in performance is unlikely to be as marked as that seen in the third quarter (Figure 1). Figure 1: Spot gold vs. copper (1st month futures)—2007 to 2011 (Weekly)
Source: Bloomberg
Slowing global growth Our prognosis is based on expectations for slower global growth next year, as well as rising risks for the outlook in China, the biggest driver for commodity prices.
Winter 2011 | Planning for Profits | Report on Mining 5
In its World Economic Outlook published last month, the International Monetary Fund (IMF) noted that the global economic recovery had become much more uncertain since April due to the convergence of two adverse events—a much slower recovery in advanced economies since the beginning of this year, and a large increase in fiscal and financial uncertainty, especially since August. As a result, the IMF scaled back its expectations for global growth for 2011 and 2012 to 4.0%, down from a forecast of 4.3% and 4.5% respectively as recently as June, and significantly slower than the 5.1% global growth pace of 2010. The IMF notes that risks are clearly to the downside; two specific risks that it identifies as needing particular attention from policymakers are a worsening of the Euro crisis and slowing growth in the U.S. Either of these adverse scenarios could have severe repercussions for global growth; if the Euro area and U.S. tip into recession, global output could be as much as three percentage points lower in 2012 than the IMF forecast, or barely above stall speed. China syndrome A third risk factor that we would call attention to is China, given that over-reliance on Chinese demand remains a major risk for commodity markets, as we had stated at the beginning of 2011. While China accounts for about 40% of global metal consumption, the IMF reports that its contribution fell to unusually low levels in the first half of 2011 (Figure 2). This was caused by slower activity in metal-intensive sectors, which was in turn the result of policy tightening measures in China over the past year. In addition, China’s base metal inventory cycle has gone from being bullish to bearish for metal prices this year. Recall that China’s massive contribution to worldwide growth in metal demand was due to its inventory build-up in base metals in 2009 and early 2010. But slowing demand and restrictive policies have led to inventory drawdowns in recent months. However, the IMF notes that on a global basis, holdings of metal inventories remain at relatively high levels based on stock-to-use ratios (Figure 3). Overall, the IMF expects base metal consumption growth in China to remain stable around the rates seen in the first half of this year, given that the economy is expected to slow down only marginally to 9.0% in 2012 from an expected 9.5% in 2011. But should the Chinese economy slow down at a faster rate than presently anticipated, the impact on commodity prices would be quite adverse, given that the rest of the world is already on shaky ground in terms of economic growth.
Figure 2: Global demand growth for base metals Figure 3: Stock-to-use ratios for base metals
Source: IMF World Economic Outlook, September 2011
Gold charting its own course Gold, meanwhile, is charting its own course, as it displays little correlation with the U.S. dollar and Euro (Figure 4), or other financial assets. The precious metal has a near-zero correlation with the Euro year-to-date, and a marginal negative correlation with the U.S. dollar (using the Dollar Index as a proxy). These correlations were little changed even during the markets’ volatile phase that commenced from the first week of August. Figure 5, which shows the price ratio of spot gold to 100 pounds of copper (for convenience), reveals that this ratio is currently at its highest since late 2008 / early 2009, when financial markets bottomed out in unison. Gold is currently trading close to U.S. $1,700/oz, and we believe it could easily attain U.S. $2,000 in 2012 if uncertainty continues to roil financial markets. Copper, on the other hand, is at U.S. $3.42 per pound, down 27% from its record high of U.S. $4.6575 reached in February. A test of the key U.S. $3.00/lb support level, or an approximate 10% decline from present levels, is quite conceivable in 2012. Unless global growth expectations see a dramatic turnaround from current dismal forecasts, we believe the ratio of gold to copper could well approach six next year. Figure 4: Spot gold vs Dollar Index (DXY) and Euro— One year
Source: Bloomberg 6 Planning for Profits | Report on Mining | Winter 2011
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Figure 5: Price ratio of spot gold to copper (100 lbs.)— Weekly
Source: Bloomberg
Barbell strategy to play the resource theme In our opinion, gold stocks may again find favour with investors after their recent sell-off. We expect mergers and acquisition activity in the gold producers sector to increase in the months ahead, as prospective bidders are enticed by the sector’s attractive valuations—especially in relation to bullion prices (Figure 6)—and a bullish long-term outlook for gold. Despite our less-than-rosy outlook for copper and base metal prices next year, we believe there may be opportunity in equities of base metal producers for patient investors with a long-term investment horizon. Our assessment is based on the fact that stocks of some high-quality producers have plunged as much 40% to 50% during the recent correction. A pullback of this magnitude indicates that investors may be unduly pessimistic in terms of their outlook for this sector over the year ahead.
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One strategy that we have been vigorously advocating for equity portfolios in recent months is a barbell strategy, which involves offsetting core positions in conservative, dividendpaying stocks with trading positions in high-beta, cyclical equities that are heavily levered to the economic cycle. This strategy is based on our observation that investors tend to be overweight in cyclical stocks during market peaks and underweight in them during market troughs. We believe gold equities and base metal stocks may be particularly suitable for inclusion in the high-beta portion of a portfolio constructed on the basis of the barbell strategy. Depending on how the global economy fares in 2012, either gold stocks or base metal producers (perhaps even both) may help to do the heavy lifting for diversified portfolios in another challenging year. Figure 6: TSX Global Gold Index vs. spot gold (in C$)
Source: Bloomberg
Elvis Picardo is Vice President-Research, and a strategist & analyst at Global Securities Corporation in Vancouver. The opinions expressed herein are his own.
Winter 2011 | Planning for Profits | Report on Mining 7
E
agle Hill Exploration Corporation is a Canadian mineral exploration company focussed on the exploration and development of gold and precious metal prospects. The Company is set to become an advanced stage gold and precious metal exploration company with the advancing development of the Windfall Lake high grade gold property, located in Urban Township, Quebec, between Val-D’Or and Chibougamau. Eagle Hill focuses on projects that contain or indicate the existence of a large resource potential. Brad Kitchen has been CEO of Eagle Hill since its inception in 2006. Prior to coming to Eagle Hill he was Vice President of CIBC World Markets. Mr. Kitchen is excited about the Company’s progress saying, “There is a buzz within the Company itself as we are moving forward and seeing the rewards of our efforts to date.” History Eagle Hill has owned the Windfall Lake Property for two years. According to Mr. Kitchen, “The challenge and focus has been to breathe new life into a project that deserved resurrection. The property came to be ignored by previous ownership as they were focussed on narrow veins of highgrade gold, some as high as 52.3 ounces per tonne over 4.8 metres. With this strategy, it was impossible to put together a model and related resource for the Windfall Lake Property.” Mr. Kitchen and his team realized that the gold mineralization of the property was more conducive to bulk mining, incorporating the higher grades. This new hypothesis provided continuity and increased the resourced size. He said, “Our goal all along was to finally solve the puzzle. We put together the right team with the technical expertise and now we have finally done it.” 8 Planning for Profits | Report on Mining | Winter 2011
Windfall Lake The Windfall Lake Property is just over 12,000 hectares, located in the Abitibi mineralization belt in Northern Quebec and is comprised of 362 contiguous claims. This region between Val-d’Or and Chibougamau is renowned for both gold and copper resources and has advanced infrastructure supportive of exploration, mine development and resource extraction. Eagle Hill signed options with Murgor Resources Inc., Cliffs Natural Resources Inc. and Noront Resources Ltd. to acquire the property. Activity in 2011 Last spring, Eagle Hill announced new results from eight drill holes that confirmed the extension of two of the Company’s gold zones to the west and east. This served to prove the continuation of gold mineralization on the Windfall Lake Property. Some highlights included drill hole EAG-11-258 that contained an intersection of 20.82g/t gold over 2.0 metres just 85 metres below the surface. Also, drill hole EAG-11-262 returned 8.97 g/t gold over 8.0 metres and tested a 150 metre previously undrilled area. The new intersection suggests the W3 zone to the east and the Caribou zone to the west may in fact be connected, however, more work is required to confirm that possibility. www.facebook.com/reportonmining
In July Eagle Hill announced results based on initial metallurgical testing from the Windfall Lake Property that demonstrated gold recoveries up to 97%. This testing shows that gold can be recovered through conventional processing methods with 17% recovered through gravity and 80% recovered in gold bearing sulphide flotation concentrate. In early August Eagle Hill also announced a purchase agreement with Murgor Resources Inc. for the remaining 50% interest of the Urban-Berry claims that comprise the remainder of Windfall Lake East. The property is adjacent to and located beside the Windfall Lake Property. A cash payment of $5,000 along with 200,000 common shares was made to Murgor for the concessions. In late August Eagle Hill’s string of news releases continued with the completion of the scheduled 16,400-metre drill programme aimed to more clearly define the gold zones and test their extensions. Some highlights were confirmation of a new gold zone south of Windfall Lake’s existing gold zones with a potential strike length in excess of seven kilometres. In addition, Hole EAG-11-288 intersected 7.47 g/t gold over 14.20 metres in the new gold bearing shear zone and Hole EAG-11-283 intersected the extension of Zone 27 with an impressive 20.8 g/t gold over one metre.
www.ReportOnMining.com
Winter 2011 | Planning for Profits | Report on Mining 9
On the corporate front, Eagle Hill filed an Annual Information Form, qualifying the Company so that it could, if desired, file a short form prospectus for future financings. In addition, Eagle Hill has applied for a listing on the OTCQX stock exchange in the United States. It is expected the administrative requirements to become listed will be completed before year-end 2011. Eagle Hill’s intention with this new listing is to make the purchase of Eagle Hill shares easier for buyers residing in the United States. This adds to the availability of share purchase globally as Eagle Hill already trades on the TSX Venture exchange in Canada, and on the Frankfurt exchange in Germany.
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Recent News In early November, Eagle Hill announced the first resource calculation on the Windfall Lake Property. The Company is reporting an initial resource of 699,000 ounces of gold at a grade of 7.61 grams per tonne of gold. Nearly half, or 48%, of this resource is in the strong “Indicated” category at a grade of 9.1 grams per tonne of gold. This resource number was calculated with a very conservative cut-off grade of 3.0 grams per tonne, typically used in narrow vein underground mining. When a cut-off grade consistent with bulk underground mining is employed, (1.4 grams per tonne for example), then there are approximately 1.0 million ounces at an average grade of 4.17 grams per tonne of gold. Over 90 percent of the mineral resource lies within an area of 600 metres by 900 metres and is less than 500 metres from the surface. Mr. Kitchen believes, “This is a significant number within the context of the Canadian mining landscape and this announcement will reflect positively on the Company’s asset and we hope ultimately on the share price.” Mr. Kitchen went on to say, “SRK, the consulting firm that prepared the report, has a very conservative but strong reputation. These numbers show that Eagle Hill Exploration has a very strong foundation in which to add many more ounces of gold. In addition, the high grade indicated number of 9.1 grams per tonne of gold is far more robust than other bulk underground mining operations.”
Mr. Kitchen elaborated, “This is just a good start for us as we know SRK is a very conservative company and we have a good opportunity within the next year to increase the resource by 30 to 40% based on our 25,000 metre drill programme currently running.” Some of the gold zones are reported to be 25 metres in width at grades of 9.1 g/t. Mr. Kitchen explained that initially they thought the project may define more ounces, but of a lower grade, so this is especially great news. Not lost in all of the positive news is that Eagle Hill still has a 7.5 km gold bearing zone that is untouched. Eagle Hill’s management is expecting more new drill results by early December with the next six months likely determining the potential for expansion of the overall resource.
12 Planning for Profits | Report on Mining | Winter 2011
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Financing Mr. Kitchen stated, “Eagle Hill is in pretty good shape right now. We are well financed to begin our current drill programme of 25,000 metres that commenced in early October of this year.” He went on to say that by Christmas they should have already drilled 8,000 metres and intend to add another drill rig in January 2012. Mr. Kitchen added, “There is a great deal of interest right now so future financing is not an issue.” As of November 2011, Eagle Hill had $2 million cash on hand and expects to receive an additional $1.2 million from the Quebec government early in the new year. Future Plans Eagle Hill’s main goal in the immediate future is to add further ounces to the current resource by expanding the current gold zones. Some of the blue sky potential will also be tested in the current drill programme. In addition the management team has yet to determine the best methods for resource extraction but will be considering and reviewing all possible options during the next two quarters. Eagle Hill has much going for it on this count considering the existing infrastructure around the property. Mr. Kitchen articulated, “We are keen to understand the potential economics around extraction and it is an important follow up for us.” When queried on the topic of becoming a takeover target Mr. Kitchen suggested, “We will maintain our existing management philosophy; to focus on the strengths of the asset and to enhance share holder value wherever possible. Perhaps when we show significant expansion potential is when a major mining company may look at us more closely, especially when we get up to the three million ounce level.” www.ReportOnMining.com
Summary Given the backdrop of a decade long price rise in gold, with the $2,000 dollar level clearly in sight, it is a bit surprising this stock was trading below $0.20 Canadian immediately following the announcement. With a book value of $0.10 per share prior to the news and most certainly set to rise in light of the 700,000 to 1,000,000 ounces of gold announced, one can’t help but believe this company is a bargain under $0.30 and a steal under $0.20 cents per share. The management team is focussed on increasing shareholder value and has just done so. As Mr. Kitchen said, Eagle Hill is off to a good start indeed. Eagle Hill trades on the TSX Venture exchange under the symbol EAG. For more information visit their website at www.eaglehillexploration.com .
Eagle Hill Exploration Corporation Suite 601, 999 Canada Place Vancouver, BC, Canada V6C 3E1 Phone: 1.604.697-5791 info@eaglehillexploration.com www.eaglehillexploration.com TSX.V: EAG.V Year Hi/Low: $0.19/0.19
Winter 2011 | Planning for Profits | Report on Mining 13
The Monopoly Method A Better Way to Invest By Greg McCall
W
e live in extraordinary times. Traditionally held beliefs toward the stock markets and the investment process have completely broken down. Whether the risk is outright fraud by previously respected “professionals” such as Bernie Madoff; a collapsing global financial system, or unstable nations (Greece, Libya, etc.), the result is the same: extreme risk, many times leading to large losses. Investing has never been tougher, and we can no longer blindly put our faith in other investment professionals as we once did. It has never been more important to be in control of your own destiny. As a partner in two billion-dollar funds and a founder of a third fund, I have experienced firsthand, multiple investment climates. Throughout this time, the simple and powerful investment strategy that I am briefly introducing has led to strong returns for my clients for over twenty years. In July of 2011, The Monopoly Method: An Insider’s Guide to Navigating Wall Street and Becoming a Better Investor was published, bringing Jumbo drill inside Porvenir Mine. this opportunity to all investors. The Monopoly Method is available on Amazon, at www.monopolymethod.com and www.facebook.com/monopolymethod .
Everyone has heard the phrase: “He was in the right place at the right time.” In one way or another, most of us are seeking this result each day, both personally and professionally. Occasionally, you come across someone about whom you hear it said far more often than the rest of us. Hockey great Wayne Gretzky was said to be able to anticipate where the puck would be, not just where it was, and that put him a step ahead of everyone else on the rink. Being in the right place at the right time is what The Monopoly Method is all about. While simple and easy to understand, it is also comprehensive and powerful; changing the way you think and act while investing. Finding the right place and the right time is not as hard as one might think when it comes to investing. The right place is a company that exhibits monopolistic tendencies, such as Potash Corporation or Research in Motion—when the Blackberry was in its heyday. The right time is matching these companies with an investment theme that gives you the confidence the company can grow consistently over time. Again, Potash Corporation is a perfect example, which we will dive into later.
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Another key part of the “right time” is investment timing and feedback. Stocks are volatile, and timing your investment—both your purchase and eventual sale—is critical to long-term success. This is The Monopoly Method process system at its core: eleven variables and a simple, yet powerful scoring system, which gives you higher probabilities of investment success. A key element of the process is its ability to adapt to change, meaning scores will change with new data and price movement. If the company releases significant information or new information is uncovered, investors need to be prepared to change the variables at any time. Scores will change daily with stock price movement as well. The Monopoly Method provides the individual with the three traits that define successful professional investors: • A strong philosophy built upon identifying monopolies, • A rigorous discipline built on the most valuable tools and knowledge professionals use to implement the strategy, and • A consistent and defined process using 11 variables to select, manage, and measure investments. www.ReportOnMining.com
A sound philosophy is useless without rigorous discipline. Discipline is a systematic approach to learning as much as is reasonably possible about a potential investment, and staying informed about that investment once you own it. The Monopoly Method discusses a disciplined approach to information gathering, targeting the five major touch-points of any company’s business. Let’s take a look at an example. We will use a company that you may be familiar with: Potash Corporation. There are five levels of discipline, and briefly, let’s look at each one: 1. Financial Analyst Views: What do both bullish and bearish analysts think? 2. Company Information: Reviewing the latest financial quarter, listening to Internet webcasts, and reviewing any transcripts that are available. 3. Expert Networks: What do industry experts think? 4. Supply Chain Analysis: What is happening to the companies they buy from? 5. Customer: What does customer behaviour tell you?
Winter 2011 | Planning for Profits | Report on Mining 15
Before we get started, make sure to use the best research services possible. As an individual, the advancement of the Internet has brought professional investment tools to the individual investor. A few sites worth mentioning as tools for data collection—in the fertilizer industry—during your due diligence include www.greenmarkets.pf.com , www.fertilizerweek.com , www.agweb.com , www.agriculture.com and www.usda.gov . Appendix 1 of The Monopoly Method includes other interesting due diligence websites. Case Study: Potash Corporation Business Description: Potash Corporation of Saskatchewan Inc. (Potash) produces potash, phosphate, and nitrogen to the agricultural and industrial industries worldwide. The Company conducts operations in Canada, Chile, the United States, Brazil, and Trinidad.
Margin Growth: With demand increasing, prices should continue to move higher, and margins should continue to move higher as well. Prices, especially in 2010-2011, have moved considerably higher, which should lead to a strong 2012. A score of +1.0 is appropriate. It should be noted that margins are double weighted in the model, since they are crucial to growth. Should you become concerned about margin growth, re-score at www.monopolymethod.com . Financial Visibility: Fertilizer demand and Potash Corporation in particular should have good visibility into their future earnings, since fertilizer prices are widely disseminated. For this reason, a score of +0.5 is appropriate. Track Record: If we look past 2008, when many companies had a hard time forecasting their earnings, Potash has historically done a great job. A score of +1.0 is appropriate. Management Quality: A bit enthusiastic for sure, but strong operators over time. A score of +1.0.
Potash Corp. (POT: $46)
(Source: StockCharts.com)
The Eleven Variables Of Investment Selection: Monopoly Factor: Potash is the largest global producer of Potash fertilizer in the world (approximately 20% of global volume), the lowest cost producer, and the key member of Canpotex, the largest global exporting consortium. Potash has many of the characteristics of a company with monopolistic tendencies. For this reason, the company merits the highest score of +1.0. Revenue Growth: After a difficult 2008, global economic growth and fertilizer fundamentals have improved. Thematically, the world continues to be in short supply of key grains, such as corn (high fertilizer content), while emerging markets are placing ever increasing levels of demand. Growth will slow, but should be much higher than the global economy. A middle of the road score of +0.5 is appropriate.
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Financial Health: Very strong balance sheet and low cost operators. A score of +1.0. Timing Catalyst: In Potash’s case, there isn’t anything significant that we are expecting, so the score is a zero. Price Target: In Potash’s case, we can look in the past to gauge our upside price target. Historically, the company has traded in the range of 15x forward price/earnings (P/E). Applying this level to 2012 earnings of approximately $4.50 (we could argue to apply this to 2013, since it is a forward estimate), we arrive at approximately $67. On the downside, since it has broken all technical levels, we have to look back at history and also at how much money we are willing lose. Another way is to look back at how low the P/E has been in the past. A P/E of 10x looks to be a good level. To be conservative, let’s use $40. The next step is easy: Divide the points of upside ($67 - $46 = $21) by the points of downside ($46 - $40 = $6) or $21 / $6 and our score it +3.5.
Technical Strength: From a technical perspective, the news is pretty grim. Potash has broken all moving averages. One can certainly suggest that it is oversold based on other indicators, such as RSI and MACD, but a score of -1.0 is appropriate. Expectations: Potash is trading at the low end of historic P/E levels and from the technical section, we can infer that it is in oversold territory. All of this information suggests that expectations are generally low so a score of +1.0 is appropriate.
Scoring Methodology 1. Scores greater than 10 are considered attractive ideas with high return probabilities. 2. Scores from 8 to 10 are considered holds, meaning that there is likely upside over time, but it is close to being fairly valued. 3. Scores below 8 could be a candidate for a sale or short sale. In other words, too much risk, given the level of return. Monopoly Method Score
11.5
Monopoly Factor
+1.0
Revenue Growth
+0.5
Margin Growth
+1.0
Financial Visibility
+0.5
Track Record
+1.0
Management Quality
+1.0
Financial Health
+1.0
Timing Catalyst
+0.5
Price Target
+3.5
Technical Strength
-1.0
Expectations
+1.0
Total
11.5
From the score above, we see that Potash Corporation, at $46 per share, is attractive for an investor with a one-year timeframe. The calculator also helps investors isolate the specific variables to focus on to track whether their investment is on the right path. In this case, we know that margin growth and our price target is important, so tracking this each quarter (and re-scoring when we have new information) will help us increase our probabilities of a successful investment. The Monopoly Method, will help you make better and quicker decisions, make those decisions more profitable and importantly, you will be taking less risk. www.ReportOnMining.com
Winter 2011 | Planning for Profits | Report on Mining 17
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Metals Economics Group Pipeline Activity Index, September 2011 PAI slides as difficult market conditions outweigh record-breaking drilling activity
P
ipeline Activity Index (PAI) decreased for the second consecutive month in July, then slightly improved in August on the back of a record number of significant drill results. Both months remained below the PAI’s 2011 yearto-date average and well short of the March 2011 high, as the increased exploration activity was not enough to counteract uneasy markets that are making capital raisings difficult, particularly for base metals companies.
The industry’s aggregate market cap increased slightly to $2.35 billion in July, before fears of stagnant global economic growth and a potential double-dip recession dragged market caps down to $2.19 billion in August—the lowest level since November 2010.
MEG Pipeline Activity Index (PAI), September 2011
Source: MEG Industry Monitor; MineSearch; Exploration Activity Services © Copyright 2011 Metals Economics Group 20 Planning for Profits | Report on Mining | Winter 2011 www.facebook.com/reportonmining
Significant Drill Results Announced
Source: MEG Industry Monitor; Exploration Activity Services © Copyright 2011 Metals Economics Group
The number of significant drill results announced hit a record high in August, increasing for the fourth consecutive month. Gold explorers continue to be motivated by record-breaking bullion prices, while copper- and silver-focused exploration has helped drive the number of base metals results to their highest levels since before the 2008-09 recession. As has been the case throughout most of 2011, North America and Latin America continue to be the dominant regions for successful drilling, with Africa also contributing significantly to gold results and Australia–Pacific accounting for 25% of the base metals announcements in July and August. The number of initial resource announcements made in July and August is the lowest two-month total since July–August 2010. This may be partly explained by seasonal factors, such as a focus on summertime exploration programs. Probe Mines’ Borden Lake project in Ontario with 4.06 million ounces of contained gold and Atacama Pacific Gold’s Cerro Maricunga project in Chile with 3.56 million ounces were the two largest initial resources announced in the period. The number of significant financings (U.S. $2 million minimum) completed remained relatively steady in July, before market tumult resulted in only 56 financings closing in August— the lowest one-month total in more than a year. www.ReportOnMining.com
The two-month total was 10% higher than the May–June total, but included $438 million raised by Detour Gold for development of its 20-million-ounces Detour Lake gold project in Ontario. Difficult market conditions had an even stronger impact on base metals companies, as the amount raised in July– August failed to top $1 billion for the first time since January– February 2010. The MEG Pipeline Activity Index (PAI) measures the level and direction of overall activity in the supply pipeline, incorporating significant drill results, initial resource announcements, project development milestones, and significant financings into a single comparable index. The PAI is featured in the MEG Industry Monitor—a series of comprehensive graphs and charts, with related commentary, illustrating MEG’s analysis of monthly changes and emerging trends in the base and precious metals pipeline. Using information only available from MEG through MineSearch, Exploration Activity Services, and Acquisitions Services, the Industry Monitor tracks developments based on announcements over the past 26 months of significant drill results, initial new resources, project development milestones, significant financings, and acquisitions.
Winter 2011 | Planning for Profits | Report on Mining 21
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