The BarkerLetter

Greetings investors

Don’t you love the doublespeak we get from Washington?

Last year President Bush made a scarcely publicised trip to South America, visiting Brazil and Colombia while studiously avoiding Venezuela. We were told he was there to talk about ethanol production, remember?

Yeah, and another purple cow just flew by!

We haven’t heard much about ethanol, but Brazil announced this week it was establishing a  sovereign fund in U.S. dollars.

Isn’t that nice?

Finance minister Guido Mantega said the move would stem a five-year rally in the Brazilian real and help rein in the country’s galloping GDP, now the highest in the Americas after the United States. He called it a piggybank of indeterminate size.

The decision surprised investors, who fear the fiscal impact will be huge and unpredictable because the government hasn’t said how it plans to buy dollars.

But it should crank up demand for the greenback — just in time for the U.S. elections, I’ll wager.

Oh, and here’s another little thing …

On the heels of that, Brazil’s state owned oil company, Petrobras, announced it has tied up 80 percent of the world’s deepest-drilling offshore rigs, ostensibly to explore the Tupi discovery, which has been described as the Western Hemisphere’s biggest potential offshore oil field.

Well whaddya know?

That puts the backs of the majors like Exxon Mobil up against the wall, and Petrobras is still negotiating for as many as 17 more vessels.

The company said it began signing multi year leases as far back as 2004, because it foresaw a shortage of deepwater vessels.

That’s some crystal ball they have over there at Petrobras, wouldn’t you say?

No word so far on the ethanol deal, though.

I wonder how that’s going?

The following is the popular explanation for rising oil prices and a falling dollar:

… the dollar became the easiest currency to spend in the global market after World War II, when America’s runaway wartime production capacity supplied Europe and Japan. However, oversupply of dollars in the ’50s led the Central Bankers to redeem them for gold under the terms of the 1944 Bretton Woods treaty. When gold reserves in the U.S. declined, President Nixon abandoned the gold standard.

It was thought the dollar’s influence would decline as traders relied more on emerging European and Asian currencies. Instead, it grew because OPEC quadrupled the price of oil and accepted U.S. dollars in payment. Demand for dollars soared.

From then on, the dollar was effectively backed by oil instead of gold. Because dollars can buy oil, countries that need to import it - which is just about everybody - will accept dollars for their exports. So America can export dollars, which cost nothing to produce, and receive real goods and services in return. That also ensures a continuous inflow of foreign investment to balance the trade deficit.

In the late 1970s, falling oil prices reduced the demand for dollars so an oil-price shock was manufactured, which raised demand again.

However, there is a bigger threat to dollar hegemony now. The Euro Zone has a bigger share of world trade than the USA, and it imports more oil. It offers higher interest rates without a huge foreign debt or trade deficit. OPEC members have began converting reserves to Euros, which has fueled demand and created a handsome increase in the value of their euro reserves.

The first OPEC member to show serious disloyalty to the dollar was Iran, which converted most of its currency reserves to euros during 2002. The second offender was Venezuela, which has proposed a barter system to trade oil for goods without the use of currency at all. The third and most blatant offender was Iraq, which converted its $10 billion “oil for food” reserve fund.

America subsequently occupied Iraq, and immediately stepped up its rhetoric against neighboring Iran, and also Syria, which coincidentally would also like to sell oil for euros because most of its imports are purchased with them …

That’s the popular dollar/oil/war conspiracy theory, and like most theories there is some truth to it. However, there are extenuating circumstances: For one, demand for oil has grown while the infrastructure for refining and delivering it has aged. This creates additional stresses which affect supply/demand, and hence pricing. Oil has also attracted speculators bent on driving the price even further.

I suppose most people think eventually the dollar will strengthen and oil prices will come down. I don’t see that happening unless the Eurozone’s influence diminishes, which is unlikely. The former Soviet Bloc nations will probably end up joining it, or would like to, along with Eurasian countries like Turkey. Imagine all of them trading in Euros!

Also, without petrodollars the only thing that keeps foreign investment humming along is a competitively priced currency. A cheap dollar is about the only thing America has going for it at the moment, so why would they want a stronger dollar?

Many experts believe America needs to reduce its dependance on oil, export more goods and services, service its foreign debt, and accumulate reserves of Euros. A cheaper dollar may be the first step towards that goal. Sure, it’s more expensive for New Yorkers to visit Paris. So let them stay a home!

Personally I like the Ameridollar idea, comprising the U.S., Canada and Mexico.

Be careful out there.
Kb

Greetings investors.

Here’s the odd thing — I think that Aurelian Resources (ARU.TSX) was actually going to try and mine their Fruta Del Norte gold discovery down on the Ecuador/Peru border.

Imagine that!

Oh sure, every junior intends to mine their own discoveries. But most don’t. That’s just window dressing, playing hard to get for the majors.

I’m not suggesting that exploration firms can’t be good miners. However, the exploitation of what I call ‘mineral discoveries of size’ in third world countries generally falls to major mining companies, and with good reason. The Newmonts, the Barricks, the Rio Tintos of the world have experience in working in ecologically sensitive countries populated by indigenous peoples and governed by populist leaders.

Does little Aurelian have the resources and experience - and perhaps most importantly, the time - for endless negotiations with multi levels of government, lobby groups, artesanial miners, indigenous peoples, environmentalists from near and far, guerillas, and anyone else who comes along and claims to be a stakeholder in the region? Perhaps they do. But I kind of doubt it. These projects take years to come to fruition. Does Aurelian have the wherewithal to go the distance? If I were a shareholder I’d be asking those hard questions.

The recent events in Ecuador were entirely predictable. The Ecuadorans weren’t going to let a junior miner walk away with billions of dollars in gold. It was inconceivable from the start.

There’s a very good reason why Newmont Gold’s 32.6 million ounce Yanacocha gold project is steaming ahead in nearby Peru. Actually several reasons: They have billions of dollars, they’ve been in the country for generations, and they could afford to wait 20 years to do it. Even so, they’ve had to undertake the very complex balancing act of guarding their operations from guerillas without alienating the local population. It’s no cakewalk.

Whoever gets to exploit Fruta Del Norte will find themselves in a similar role. They’ll be expected to provide many of the services traditionally administered by government, and probably for years to come. They’ll have to deliver power to villages, construct roads and schools and hospitals, maybe even arbitrate land disputes and/or provide law enforcement. Is Aurelian up for that?

Last year I wrote in this space that the company would never mine that project, that it would fall into stronger hands. That was speculation on my part, but I’m sticking by it.

Unfortunately, Aurelian is in the hard place now of having a rapidly escalating project to administer and pay for, while the political risk throughout Latin America grows daily.

I think they should have put themselves on the block last fall. Perhaps they did and nobody stepped up to the plate. Perhaps they were merely waiting to develop the project a little more to drive the price up. Perhaps they were waiting for a top in the gold price. Perhaps they were naive, or maybe they’d gotten a little high on themselves (hubris happens!)
But it’s a little late now, in any case.
I don’t mean to heap scorn on the company or its board of directors. It must be very difficult to let go of a project that was built from scratch into an exciting discovery with world class potential. They may have an entire gold district there that will eventually rival Yanacocha. Most exploration companies go through their entire life cycle without knowing what that feels like.
But I think they should have - for the sake of the shareholders.
Careful out there.

Kb

Greetings investors

I wish people would stop talking about how stupid Nixon was to take the US dollar off the gold standard.  It was the smartest thing he ever did.

Yes, yes … I know the likes of Jim Dines will call me a cretin and go on and on about recent currency debasement and how the folks who run the printing presses will eventually come to ruin, etc. etc. 

But has anyone really thought this thing through?

I mean, gold is a small commodity compared with copper or pork bellies. In fact, the entire world’s supply would fit neatly into a small warehouse.  The U.S. owns a mere quarter of that.

Wouldn’t a gold backed dollar essentially hand over control of the currency to whoever owns the rest?

Do we even know who those people are?

The central banks? The EU?

The gnomes of Zurich? George Soros? King Faisal? Newmont? The Oxford Group?

The antedeluvians always point to the historic stability of gold, which is intended to prove their point that attaching the dollar’s value to it would have a stabilizing effect. Well, sure gold was stable — back in 1870!

Currently, the value of the dollar is controlled by the folks who run the printing presses, people who are appointed by duly elected representatives.  Sure, they’re insufferable fools. But I’d rather have them determining U.S. fiscal policy than a handful of speculators in London and Brussels. Hey, if they screw up you can fire them.

Anyway, I happen to think the U.S. dollar is exactly where it is intended to be. Washington doesn’t leave these things up to fate, or kismet, or the Arabs, or a kind and loving God. The dollar is controlled by supply and demand, like any other commodity. As long as the U.S. Federal Reserve controls the supply, they’ve got the edge.

I don’t think they’re going to surrender that trump card to appease some gun-toting survivalist in Montana with a handful of Krugeraands stashed under the floorboards, or a few wise guys who aren’t fit to carry Paul Bernanke’s briefcase.

Careful out there.

Kb

Greetings investors.

I’ve had a look at Ecuador’s new manifesto regarding ongoing stewardship of its mineral resources.

First, the back story: Virtually all of these ownership issues in Latin America are basically two-fold: One the one hand you have an existing community of artesanal miners who fear the insiders in the judiciary and government will sell the land out from under them to a handful of multinationals. They may look like simpletons out there with their donkeys and pick axes, but they’re really not. Some of them are very good miners as well. 

Second, many of these countries have had experiences with undercapitalized juniors who got ahold of mining projects back in the 90s when gold prices were low and subsequently went under, leaving the promises of schools, hospitals, and infrastructure unfulfilled.  I think after a decade of false starts they’re all a bit wary.

I don’t really believe the political rhetoric coming out of Quito over this proposed new mining code. I think it’s shrill and overdone.

However, this new president, Correa, is an agriculturalist — which doesn’t bode well for the likes of us. He’s also a crook. Last month the Colombians staged a daring commando raid on the FARC’s jungle camp in Ecuador and recovered a laptop that detailed cash payments made to Correa by the guerrillas. So that’s what we’re dealing with here.

Yes, it’s true that Aurelian will have some more hoops to go through, and the company’s net worth will diminish, and their mining costs will go up. That transborder region with Peru is spitting distance from the headwaters of the Amazon, where the Peruvians have just finished making an unusually large nature preserve. But it’s far from over.

What investors have to fear is world opinion rather than new mining codes. Chavez, Correa, and Morales (Boliva) have made so much political hay from their quasi nationalization programs that they’ve managed to frighten investors half out of their wits. It’s why the stock prices for companies like Crystallex (KRY.TSX), which sailed through the new mining and environmental regulations in Venezuela and is busily mining gold in Kilometer 88, is still trending down a year after it all happened.

Greetings investors.

Here’s our current fave, a real sleeper called Fortuna Silver Mines Inc. (FVI.TSXV), with silver/polymetal assets in Mexico and Peru.

Shares of FVI spiked 25% yesterday on news from its 76% owned San Jose silver-gold deposit in southwest Mexico. It released the best intercepts from drilling that ranged to 4.36 grams gold and 302  grams silver per tonne over 7.1 meters.

That’s the first of many such media releases to be expected in the coming weeks. The company drilled a total of 43 holes in the project’s Trinidad zone and 23 in the San Ignacio during 2007, and assays for all are in the pipeline now.

Fortuna plans to use the data to update its mineral inventory at San Jose by the end of the next quarter. That currently stands at an indicated resource of 17.7 million ounces silver equivalent, with another 49.1 million inferred ounces.

That’s not bad for a deal with $46 million in the bank and a market capitalization of $195 million. In fact it’s among the best silver deals I’ve seen.

They even have some ‘elephant country’ stories from Peru, where the company’s wholly-owned, silver-lead-zinc Caylloma Mine is situated, in Arequipa Province. How does 6,231 grams per tonne silver over 7.35 meters grab you? That intercept was made along the eastern extension of the Bateas Vein, located more or less in the center of the concession area.

Caylloma has proven reserves of 3.6 million ounces silver, and about another 13 million ounces in the inferred resource category. The mill there currently processes approximately 850 tonnes per day.

If you’re looking for a silver deal with home run potential, this is as good as it gets!

Kb
 

Greetings investors.

Shares of Ivanhoe Mines (TSX:IVN) are in the tank after the company reported steepening losses from last year. The stock is in a firm downtrend after reaching its high of $18 Cdn per share last July, and now trades under $12 Cdn per share.

The real problem for Ivanhoe stock appears to be the lack of a definitive agreement with the Mongolian government over its Oyu Tolgoi copper project, despite all the mightly efforts from last year to close a deal. The matter is reportedly pending amendments to the country’s mineral laws which are now before its parliament.

Oyu Tolgoi has a projected mine life of 40 years and peak annual production of 1.6 billion pounds of copper. Virtually all of that is destined for China.

Typically, projects of this scale require substantially more lobbying efforts to get into production, and Oyu Tolgoi is no exception. However, I believe it will be permitted eventually and Ivanhoe stock will return to its highs. I just hope it happens during the current peak in copper and gold pricing.

It’s worth noting that mineral giant Rio Tinto PLC, which has a 9.95 per cent stake in Ivanhoe, is in China at this moment promoting good will and the need for infrastructure projects. My bet is they’re pushing the Chinese to built the transportation nexus needed to bring mineral production from Oyu Tolgoi in the east to markets in the west. I wouldn’t be surprised to see Rio Tinto involved in some of those capital projects, as a joint venture partner.

An announcement of that nature couldn’t help but assist Ivanhoe’s efforts to get the green light in Mongolia.

So watch for that!

Kb

March 27, 2008

Greetings investors!

The U.S. government revealed its gross domestic product figures for the 4th Qtr today … growth was pegged at 0.06 %.

That follows previous rates of 4.9% and 3.8% for the third and second quarters of this year, respectively.  

Plus, we’ve been told that the economic growth going forward will be an identical 0.06% for the next three quarters.

So — where’s this much feared recession? The customary pair of negative growth quarters? Where’s the beef?

Do you suppose all the dire predictions were just a clever ruse by Bear Stearns to get some cheap money, help it close a few difficult positions, handle some excess redemptions? If so, then it worked like a charm! With the Fed’s discount window open to broker dealers, we may see the entire stock market become monetized.  Say, that’s not a bad idea, and I’m sure it would even work for awhile.

Or maybe it’s a cyber recession. I think in America it’s possible to have such a thing, plus the subsequent ‘recovery’ of course, without actually having to endure it in real time. Perhaps we’ll just pole vault directly to the next period of untrammeled growth.

Actually I’m beginning to sense a political motive. I think the Republicans would rather have a recession now, when they can do something about it, than several months down the road when they’re out hustling votes. It’s why they’ve been pushing the economy onto the agenda in recent months.

I suppose it’s possible that the subject of the economy — and the prospect of a recession actually peaking during the upcoming presidential campaign – just hasn’t come up during the conversation in their little smoke-filled backroom. But I kind of doubt it. I think it’s more likely that the subject has come up repeatedly and there has been concensus in favour of conducting a preemptive strike.

Hey, if we don’t have a recession at all then so much the better — they’ll say quick action by the Fed prevented it.

I think there must be some softer, gentler people in the U.S. government these days. After all, they’ve manufactured a way to save the country without creating massive, collateral damage, like the last time.

Careful out there!

Kb