Resource World Magazine

S P E C U L AT I O N S L eon ard M e lma n Golden Fundamentals A nyone who is a participant in the junior mining share markets, particularly relating to those companies involved in precious metals exploration and mining, will likely have their share of horror stories to relate. Share values are generally lower, gold and silver metals prices are lower and anxieties regarding the difficulties of raising capital for future exploration and development have reached a high level, to put things mildly. It is worth noting that similar conditions have existed in the past with the deepest nadirs often occurring in the period immediately following some of mining's histories great rallies. Examples might include the dramatic and stunning sell-off from January 1975 through August 1976 which took place directly after the amazing runs of gold and silver from 1969 through 1974. Another and often cited such period was the sharp and potent decline of late 1980 through 1982 following the famous 1976-80 bull market. Later, we saw a major correction in 2008 and now, most recently, the rally to gold`s highest price in history, attained in summer 2011, has been followed by the ongoing two-year decline. In many ways this recent sell-off has been one of the most punishing of all, as share quotes on many junior mining companies have been driven down to the point where further exploration and development programs have been suspended, leaving those companies without an important source of encouraging news while others may be facing actual failure. This leaves us with two important questions. First, are there special negative conditions which are having a particularly severe impact within this downturn which were not evident during the previously mentioned sell-offs? Second, is there light at the end of the tunnel, in the form of a precious metals price rally, which could 30 www.resourceworld.com favourably impact the entire sector? In my opinion, there have indeed been a special series of events and impacts which have resulted in negative consequences for the industry. Among the more obvious is the US $600 per ounce decline in gold from its 2011 peak combined with a general pattern of rising costs. But there have been others as well, including an array of government regulatory requirements involving environmental law, aboriginal 'meaningful consultation' requirements, unprecedented exchange filing fees and ultra-expensive reporting requirements as well as frequent permitting approval delays which cause additional and unproductive expenditures. The combination of all these and other factors have served to put great strain on the balance sheets of many juniors while eating up available cash on hand on their balance sheets. Perhaps of even greater importance, the number of regulatory and financial impediments has served to alter (toward the pessimistic side) the public perception of potential mining venture success, leading to lower participation by the general investment community. With all that gloom and doom in mind, is there another side to the junior mining equation? I believe there is as several factors could indeed be pointing to a rally in the prices of both gold and silver, a rally which might truly be of sufficient strength to lead to an upward revaluation of assets in the ground, thereby positively impacting the share quotes of many junior shares. Some of these reasons include a sudden burst of reports indicating that the world's general level of economic strength may be on the rise including substantial gains for residential housing sales and construction; auto and light truck sales and manufacturing figures; recent substantial job gains in the US and Canada; improvement in consumer confidence numbers and recent gains in order books for durable and nondurable goods. There is an old economic equation that tells us that visible inflation results from too much money chasing too few goods. Part of my optimism is based on the combination of apparent current economic growth combined with past and ongoing efforts by the world's economic superpowers and their central banks to steadily – and dramatically – increase the world's monetary aggregates which, in many cases, have risen spectacularly during the past few years and which continue to rise based on the relentless nature of central banks' desires to stimulate additional economic activity in several important regions such as Southern Europe. I entitled a recent presentation in Vancouver, Precious Metals – short term risky; long term positive, and that continues to be my view. The short term does indeed appear to hold some substantial risk, but there are two forces underway which could truly help the junior shares down the road. First, strong efforts are underway to combat and hopefully reverse the flood of governmental interferences in mining activities. Second, upward long term price pressure for the metals does truly appear to be positive. We shall see. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@ shaw.ca JULY 2013

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