Resource World Magazine

INSIGHTS & INVESTMENTS E r ic H oe sg e n & D e nnis H oe s g e n Gold hits bottom amidst major write-downs T he price of gold has suffered a significant pullback since last fall which has had a profoundly negative impact on share prices of gold miners, developers and explorers. While explorers and developers have seen their valuations deteriorate and the financing window close, the reduced earnings and cash flows have also forced the larger cap producers to reevaluate development projects and re-assess the value of some of their acquisitions. Large cap producers use a number of forecasts and assumptions during the decision making process when making acquisitions. Development timelines, tax regimes, operating cost estimates, reserve expansions, geopolitical risk and, of course, capital requirements are among those considerations. In recent years, for many companies that made large acquisitions, those assumptions and forecasts have been overly optimistic. The net result has been a significant surge of write-downs from the acquirers including write-downs from the larger gold producers. Transactions were executed on the premise that large producers need to make large acquisitions in order to advance their companies with respect to a meaningful impact on reserve repletion and future production. This strategy has since been replaced with a focus on free cash flow and higher returns. This strategy change is difficult to reconcile, in the current environment, because projects need to be large enough to impact news results. Recently we have seen write-downs from some of the larger gold producers such as: Barrick Gold [ABX-TSX] wrote down US $8.7 billion, primarily associated with its acquisition of Equinox Minerals and the Pascua-Lama development project while 22 www.resourceworld.com reducing their dividend by 75%. Kinross Gold [K-TSX] has written down US $5.5 billion, associated with the acquisition of Red Back Mining and its Tasiast mine/project, while eliminating its dividend. Newcrest Mining [NCM-ASX] wrote down AUS $5.6 billion, primarily associated with its acquisition of Lihir Gold and its interest in Evolution Mining, while eliminating their dividend. Goldcorp [G-TSX] wrote down US$1.9 billion, associated with its Penasquito Mine. Newmont Mining [NEM-NYSE] wrote down US $1.8 billion, primarily associated with its stockpiles and two of its Australian mines. The figure would be US $3.4 billion if we included the write-down of Hope Bay in late 2011. The price of gold appears to have hit a short term bottom in June and has been in a steady uptrend since then. The gold equities, generally speaking, have outperformed the metal for a change and have recovered some of their share price. We would caution investors to continue to focus on companies with proven management, strong balance sheets, and projects with low technical risk in established mining jurisdictions. We will leave you with one junior gold pick to consider for your speculative portfolio: SANTACRUZ SILVER MINING LTD. [SCZ-TSXV] Santacruz Silver Mining is a junior silver developer focused on the advancement of the Rosario Project (100%, Mexico), the San Felipe Project (100%, Mexico) and the Gavilanes Project (100%, Mexico). Through the development of the Rosario Project, we forecast production of 1.3 million ounces of silver-equivalent in 2013, growing to 4.7 million ounces of silver-equivalent in 2015 through the development of the San Felipe Project. Santacruz recently announced that it has successfully renegotiated the terms to acquire a 100% interest in the San Felipe Project and the nearby El Gachi property with Minera Hochschild. The original agreement had a final US $18 million payment due to Hochschild by October 31, 2014, with an additional US $5 million for the El Gachi property. Under the terms of the Amending Agreement, SCZ is to immediately pay US $700,000 in cash and issue 1.25 million common shares to Hochschild. SCZ will then make a US $1 million cash payment on June 15, 2014, a US $5 million cash payment on October 31, 2014, a US $15 million cash payment on October 31, 2015, and pay the final restructuring fee of US $1 million in cash or US $1.5 million at the election of SCZ by October 31, 2015. With the bulk of the remaining San Felipe payments pushed back to October 2015, SCZ has significantly improved its financial flexibility to bring the San Felipe Mine into production. With the free cash flows generated from the Rosario Mine and potential for initial cash flows to be generated in early 2015 from San Felipe, our Canaccord Genuity analyst Nicholas Campbell believes that SCZ should be able to finance any potential funding shortfalls with a small credit facility. After updating Campbell's model for the restructured San Felipe and El Gachi earn-in and reduced potential dilution, his estimate of Net Asset Value Per Share (NAVPS) (7.5-10%, US $23/oz Ag) has increased to CDN $3.28, from CDN $3.19. SEPTEMBER 2013

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