The BarkerLetter

Greetings investors!

I’ve revised my top down investment strategy recently, in view of changing market conditions.

Over the last few years while the metals were travelling individually to their unprecedented highs - silver, gold, copper, nickel and lead and zinc – I put commodity at the top of the list. Now that metals appear to be moving together as a pack, and given the relative instability in the far flung regions of the world where mining occurs, I’ve put safety in the top rung. It´s broken down into four sub categories: Right locale, right environment, right exchange, and right share structure.

From the locale perspective, Chile is my hands down favourite, and in fact the only safe location for mineral exploration and development in Latin America. You can make excuses for other countries with arguably better precious metals geology (such as Peru!) but it’s hard to sell me mining - as opposed to exploration - projects in them because I simply do not trust their governments or the large populations of artesanial miners who seem to be wandering the land with torches and pitchforks looking for multinationals to kick out.

For all its picaresque seaside villages, Chile was founded as a mining nation and remains one to this day, exporting 48% of the world’s supply of copper. The industry has almost single-handedly sustained the nation’s breakaway economic growth over the past 10 years.

Given all that, one may think the country has been pretty well picked over by the majors in recent years but that’s not the case at all. In fact one of my favourite firms is an aggressive $0.50 junior called Apoquindo Minerals Inc. with a very good project there. It trades as AQM on the Venture board of the Toronto Stock Exchange (TSX-V). In a nutshell, they’re a Chilean managed deal with an impressive set of copper reserves located within a highly prospective but largely untested mineral district in Northern Chile. They have a tight share structure (i.e. no institutional investors ), and the stock is thinly traded, which is a good thing in this day and age.

Apoquindo is a bit of a rarity in that they have an almost exclusively Chilean board, which includes Juan Villarzu, the former President and CEO of the $15 billion state-owned Codelco. Moreover, they’ve optioned and drilled a going concern located near the port city of Antofagasta, which is definitely on my list of top 10 projects worldwide from a safety perspective. Here’s why: First, the project lands comprise two known copper deposits in the middle of the Atacama Desert, so there are no local townspeople with a misguided sense of entitlement to the mine, though a ready workforce is available from nearby Antofagasta; there is no overburden or local flora or fauna, and hence no environmental concerns or long term, expensive site reclamation responsibilities; there is ample power and infrastrucure, including a railway and road network; and finally, the project lands are shoehorned into a largely undeveloped copper producing district called Sierra Valenzuela, with neighboring projects owned by the likes of Rayrock, Codelco, Anglo American, BHP, and Antofagasta Minerals.

The thing to bear in mind with this deal is that they’ve already found the minerals within a working project area, which to me represents the very thing everyone should be seeking in this market: Namely R.B.I., or ‘return before investment’. Yes, they have yet to encounter the feasibility stage and those resources are not reserves, at least not yet. But I believe they will be in short order.

I had a chance to visit the so-called Apoquindo Copper Project (comprising the Elenita and Madrugador deposits 18 kilometers apart) in late September, and was impressed mostly with the efficacy and speed of the drilling which has occured under the direction of Exploration Manager Alfredo Garcia. Many penny stock investors are happy just to know their companies are drilling, but there is definitely a right and a wrong way to it. To date the company has drilled 41 thousand meters over 259 holes, almost half of that completed in the 2nd Quarter of ‘08 alone. Granted, reverse circulation drilling is much easier in the desert than the jungle or the Canadian Arctic but there is still a lot that can go wrong and didn´t. Moreover, they got better than expected results, increasing the resource from the original non standard calculation by 32 percent (It is NI-43-101 compliant now). The deposit remains open in several directions and at depth.

In fact the company has had an incredibly busy year, drilling wise. In addition to proving up the Apoquindo Project - which included the discovery of two new zones - they picked up a prospective gold, silver, lead, zinc property in neighbouring Peru (Huarman) where they cut 110 meters of 0.77 grams per tonne gold with a limited drilling program, plus 52 meters of 1 gram per tonne.  They also lassoed an option for a wholly-owned interest in a leachable copper property called Pachagon and drilled into 68 meters of 3.93% copper there.

I was very impressed with the workings at Elenita, which are at surface, and look like a giant sinkhole in the ground. In fact they’re a labyrinth of caves originally dug by artesanial miners and expanded over generations. The minerals below appear as glittering black and grey traces within a nexus of veins in the rock, the copper oxides are a bright jade: It’s the colour of money, and Elenita has a lot of it, in grades ranging to 6% Cu per tonne.

Apoquindo has delineated total resources of 25 million tonnes of 0.8% Cu measured and indicated, and 3.6 million tonnes of 0.7% inferred both at Elenita and the sister Madrugador deposit a stone´s throw away. The company says it has the right data set now for a scoping study, so we have that to look forward to. Also, drilling is ongoing.

I’m curious to find out just have they have below the 300 meter depth where they stopped drilling in mineralization. I’m always very keen on potential company making projects, and given the relatively unexplored status of the Sierra Valenzuela District (there was only limited copper mining during the 20th century, with no historical production reported) that potential is definitely there. I’m less keen on deals with near-term mine start ups from the investing point of view because they´re messy and fraught with bugs and often missed early stage production targets. Apoquindo wants to have a mining plan in place by next year, and has already accomplished a lot of the ground work on the back end by acquiring an option to acquire a local heap leach solution facility (they don’t plan to produce copper cathode but merely sell the solution to the local SXEW plants). Frankly, I think that may get pushed up a little given the current prices of leaching acid, but it could happen on schedule if the economics line up well.

In any case, I´m at least as interested in what they´ve got cooking in neighbouring Peru. Certainly, the company wants to start getting cash flow from operations as soon as possible. That´s only natural. But I´m always more excited about pure exploration projects because, well - because they´re exciting. I´m a prospector at heart.

Indeed, it´s a challenging environment right now for any junior firm at their stage of development. Whether you park your nickels here or not depends on if you believe the company can go the distance. I think they can, given the advanced stage of their projects in the Atacama and the brain trust running the show. In that respect, it is worth mentioning Tom Hendricksen, the company´s consulting geolgist, who is extremely well connnected in that part of the world. He´s been very busy in Peru on behalf of Apoquindo of late and if there´s anyone with a shot at finding an Arequipa Minerals type project there, it’s him (Arequipa, a Vancouver junior, sold to Barrick Gold for $30 per share in 1996 valued chiefly on a copper gold porphyry discovery called Pierina).

As mentioned earlier, the company has a couple of less advanced, but no less interesting, gold and copper projects underway there, plus one they plan to JV with a major but won´t discuss publicly. It´s all rather exciting, actually.

These are challenging times for investors too. But the returns are definitely there, and big ones, for those who pick companies with the wherewithal not only to survive, but prosper. There´s not much middle ground in the game we´re in now! These companies will have the right stuff, or find it pretty quickly, or they´ll vanish. So it means picking management with good projects and lots of character and hanging in there for as long as it takes.

Be careful out there.

Kb

Greetings Investors.

I’m answering some reader mail today…

First, my apologies for not posting for months. I haven´t been very interested in buying of late, owing to the ‘pending recession’ and lack of liquidity on the junior exchanges.  In fact, I´ve been telling subscribers to sell - and sell hard - on the rallies since last spring. However, prices have come down somewhat and I’m getting interested again.

Hayden writes: ‘What the heck is up with Rochester Resources lately?´ The short answer is, I don´t really know. I was told some weeks ago that they encountered issues trying to get their production up but that the mill is back on track and silver recoveries are improving.

Company share prices often have volatility during a start up phase, owing to the inevitable bugs that have to be worked out, immediate targets not being met, etc.  Plus general market conditions have been poor. I’m hanging in there but not accumulating at the current price.

Bill Schooler asks: I am interested in more information on the Ameridollar and its effect on our dollar. What plans are afoot? Well, I suggest that any plans for an Ameridollar involving Canada and Mexico - if there were any - have been shelved.  Some time ago I speculated that North America might go to a single currency, but I have never believed it will happen over the short term. Canadian manufacturers enjoy too many benefits from the spread between the Loonie and the greenback. I believe the Canadian banks surreptitiously control the rate of exchange to their own advantage, Mexico too, though they will tell you there is no central bank intervention in the currency exchange markets and hasn´t been for decades.  I find it very hard to believe, especially in view of recent events, that central bankers leave the pricing of their currencies up to fate, kismet, or the free market. They just don´t.

Janice Kimball writes: My husband is a Mexican National. He has title to a new mine in Jalisco and as we are both retired we would like to sell it or find a partner who speaks English as I do not speak Spanish but have a half interest.  We had laboratory tests done by ALS Chemex on 2 samples. It is very rich in many metals including gold and silver.  We live in a rural area and I need to talk with someone that speaks English .  Sure Janice  … send me a private message.  I´m very interested in helping you, and by the way anyone who knows anything about a mineral project at any stage of development anywhere in the world is welcome to contact me.  I may even finance it.

Frank Macius muses: I have shares of GOLDSPRING (GSPG). This shares will have a value of 20 dollars each one.  Is this the best company at this moment.  Hmmm, well GSPG is an OTC gold company and those have had a lot of trouble getting investment capital of late.  The stock plummeted in mid September on some aggressive short term selling.  It looks to me like someone wanted to take an early payday. Tsk, not nice. Can´t speculate on their prospects since I haven´t analysed them. I`ll try to get around to that in the near future.  The stock has a seven cent per share high though, which is encouraging - that`s a 300 percent premium to the current market.

Taxi driver opines: I agree that everyone should read up on their history before expounding on the merits (or lack thereof) of the Gold Standard. I also agree that everyone should stop ragging on Nixon for abolishing it. The reason for both of my positions is simple: Nixon DID NOT abolish the Gold Standard, F D Roosevelt did in 1933 by outlawing the private ownership of gold. Thereafter, the US government kept the ostensibly gold backing “reserve” in Fort Knox, but only a fraction of the amount that would be required to redeem the entire dollar money supply.

The notion of a gold standard when private ownership of gold itself is criminalized is a joke at best and a fraudulent charade at worst. Nixon merely ended the pretense of a de facto non-gold standard, in an economy where it was becoming increasingly a sword of Damoclese over the government’s head, as the actual gold reserves as a fraction of the money supply continued to spiral in the downward direction.

So, the US only had a “real” gold standard for 33 years, from 1900 (with the adoption of the gold standard act), to 1933, with Roosevelt’s outlawing of gold ownership. Coincidentally, those were pretty lean years for the US economy. I say coincidentally because I do not wish anyone to infer that I mean causally. Thanks for putting it in a nutshell for us, Taxi Driver. Thanks for sharing and stay in touch….

Kb

Greetings investors.

The following was distributed to my subscribers on October 6, so it’s not new but still current.

I’ve lived through recessions where prices fell through the floor and business dried up. But this is a banking sector meltdown, which is different. The critics say moving a few decimals around is like rearranging the deck chairs on the Titantic, that reality will have to be faced. What reality is that I wonder? That they don´t really have our money in their vaults? They never did.

Banking is the biggest confidence game in the world. There is no ultimate truth behind the curtain.

I’m not saying that losses for others won’t be tangible, that people won’t lose their homes and incomes, or default on debt, or that a huge consolidation won’t leave only a few super banks standing, or there won’t be margin calls or a prolonged liquidity crisis.

What I’m wondering is whether the banks will have the brass to leave us twisting in the wind after the wave breaks.

Banks typically exacerbate rough times by restricting credit and kicking people off their farms and out of their homes. I believe we could see higher interest rates as well after the U.S election. But how will they justify that to Joe Taxpayer who is already annoyed at having to buy all their junk at a premium?

And the controversial $700 billion bail-out isn’t the only special favour bestowed on banks of late by government. Last month the feds basically drove a truck through Wall Street with a surprise ban on shorting. They blatantly manipulated the market a day before options expiration. Consider this: As of 1pm on 18th September, the ETF which tracks the S&P 500, the so-called SPY, was trading at $113.80. The maximum pain on the SPY was $127.06 (maximum pain is the price point at which the majority of options expire worthless). The net in-the-money put premium totaled $1.95 billion.

After the rally Thursday afternoon and the massive gap up on Friday morning, the SPY opened at $126.70. Kachiing … $1.95 billion saved!

That little bit of info comes from my eagle-eyed pal at Chartwatchers, Chip Anderson. He said there were many more examples, including Goldman Sachs (GS), which hit a low Thursday of $86.85, and rallied at the open Friday morning to $142.51. The maximum pain index was near $141.00. Lots of do-re-mi saved there too! Says Chip, “Imagine the impact this had across all stock, ETF and index options. Rest assured it saved key financial institutions billions and billions of dollars.”

I’m not expecting any mercy from these guys. Oh sure, some token mortgages will be saved, but that’s window dressing. It’s their game and the rest of us just have to play it. And don’t think for a moment we shouldn’t give them what they want. After all, haven’t we all done very well by them of late? In real estate, the carry trade, the triple digit gains in the stock market? It’s a bit hypocritical to suddenly start talking like Noam Chomski.

And if the government is betraying the principles of a market economy by nationalizing mortgage lending in all but name, so what? Recent events have shown it’s all rigged anyway — the money markets, lending, the stock markets. What’s the difference?

Governments and central bankers don’t care about free market principles or fairness or Main street. Not in the game we’re in now. They care about survival. Ethics are for the good times. When the herd heads for the exits, the elephants don’t worry about the mice under their feet. That’s called collateral damage.

As for our little milieu, mining, I’m wondering what will actually happen if everything goes back to zero and paper assets become worthless and the Euro and the greenback and the pound and the franc go soft. Could that actually enhance the value of tangible assets? Sure, the hedge funds and sovereign funds may have to get out of the game, the same ones who have created obscene profits from speculating in commodities, and that will definitely affect pricing for awhile. Selling always does. But I say good riddance to them. The futures market is designed to allow producers and manufacturers to sell and buy forward, to protect themselves from price swings. It’s not a plaything for the boys running the printing presses.

And if we do have lower metals prices going forward? Well, ok, that will hurt. But the companies I know, the good ones, have based their revenue projections on historial averages, not last week’s high. Prices would have to go to historic lows and stay there for the companies I follow to go out of business.

So I’m still bullish on mining, in spite of it all, and especially gold. I think the lunatic predictions of $2,000 per ounce are well within the realm of the possible.

However the market defines ‘value’ in the weeks and months to come, there has to be a proxy for it. And if it’s not the greenback or the Euro, so much the better for the gold longs!

Be careful out there.

Kb

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.