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November 6, 2010
Issue 121  -  QE2 and Gold Stocks
 
 
 
 
The Fed has now continued a process, that not only won't work, can't work.  They are going to give money (that doesn't currently exist) to banks, so they can buy bonds.  Here is a clip from GATA this past week that succinctly explains the flaw:
 

Buying $600 Billion in Debt with Debt

By James West
MidasLetter.com
November 5, 2010

 

Here is the glaring hole in the United States Federal Reserve’s approach to what it calls stimulus, and what history will one day categorize as fraud: You can’t use your own debt to purchase more debt when you can’t repay the original debt. The crime is compounded when you know you’re never going to repay the debt. It amounts to treason to intentionally destroy the integrity of the nation’s money. The Federal Reserve’s ability to “purchase” U.S. Treasury Bills is completely dependent on the fact that there is no overseer above the Board of Governors of the U.S. Federal Reserve to call an end to such self-destructive, immoral, and just plain criminal behavior.

That stock markets rise in reaction to the news is no surprise: that $600 billion will find its way into the pockets of major financial institutions, and will go nowhere near the vast majority of bank accounts owned by people who are out on the street thanks to the collusion, or rather, the subjugation of the government of the United States to the Financial Service Industry. The rise will be temporary, and as this most recent mutation of the disease engulfing certain nations right now, debt addiction is going to suffocate future generations for decades.

The motivation for anointing the Federal Reserve with all the autonomy, secrecy and criminal immunity is completely understandable at this juncture of the collapse of the United States as the leader of the free world. It becomes possible to divorce the culpability of such a group from the history of the nation when such a status is enjoyed. At least, that’s the delusion under which the United States elite seem to operate, given the unilateral destruction and callous disregard for integrity of the world’s financial system emblematic of their conduct.

I feel compassion, to some degree, for the families of such master fraudsters as Ben Bernanke, Larry Summers, Robert Rubin, Timothy Geithner, Hank Paulson, and the rest of the perennial button men who surround them and aid and abet the defrauding of Americans and everybody they do business with through the offices of the Financial Services and Insurance industries. The actions of these criminals will taint the names of their families for many generations as well. The problem with crime on such a huge scale is that it destroys so many lives across generations.

The question is not whether a Republican or Democrat can lead the U.S. out of economic penury. The question is, “who will have the temerity and force of character and intellect to identify the fraud as such, incarcerate the fraudsters, and rebuild the system from the ground up?

Why, even Bill Gross, who heads the world’s largest bond fund, Pimco, has suggested that the United States government is running a ‘Ponzi’ scheme.

“Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic,” he said in his November correspondence to investors.

 
So this "effort", or as Bill Gross calls it a Ponzi scheme, will do nothing but fan the flames of inflation.  This is bad for the U.S., but excellent for commodity investors.  Fortunately, we are invested in gold and silver stocks.  (you are, aren't you?)
 
GORO Annual Stockholder Meeting
 
Since this news corresponded so perfectly with the stockholders meeting for GORO, this is a perfect time to relay what happened there.  I know many of you have bought GORO and this meeting gave me no reason to sell and many reasons to buy.  I had never attended a meeting of this type and didn't know quite what to expect.  The meeting was in Denver Colorado at the Westin Center.  The private Yahoo GORO message board, which consists of over 100 members holding 3-4 million shares of GORO, organized a reception the night before the meeting.  The best part of the reception was the attendance of GORO president, Jason Reid.  He stayed for well over an hour answering questions.  When I first saw him, I was a little surprised how young he looked, but his demeanor and responses to questions quickly allayed any fears I had of him.  Very impressed.  Jason's Dad and Uncle are also on the board of directors and are slowly passing the baton to younger blood.  Luckily this isn't nepotism as they are all very talented and knowledgeable.  I will cover what they said below.
 
The official meeting lasted about 2 hours and almost the entire board of directors attended.  This is a very professionally run company and the behavior and composure of them gave me a nice warm and fuzzy.  There were broad smiles and lots of laughing going on here and no hint of trouble.  This is one happy bunch of people and they know what they are doing.  I gathered a lot of information in the roughly 4 hours of time I spent with these people so I thought I'd share. 
 
Since the meeting was overwhelmingly positive, I wanted to start with the negatives.  The number one issue for me is the violence in Mexico, where their property is located.  Mexico is involved in a deadly battle with drug cartels.  The cartels have killed numerous politicians and police over the last year.  This is troubling and could potentially affect GORO.  This news released Saturday is hopefully the beginning of getting things under control:
 
Mexico Kills Drug Cartel Leader
 
06 November 2010
 
 

  • Mexican security forces have killed a leader of the country's powerful Gulf drug cartel.

    The forces killed Ezequiel Cardenas Guillen, also known as Tony Storm, in an hours-long gunbattle Friday in the border city of Matamoros, across from the U.S. city of Brownsville, Texas.

     
    This is great news.  The only way to get this under wraps is to take out the king pins.  Jason Reid, relayed that he is not concerned about operating in Mexico and said that he would rather operate there than the U.S.  As a last backstop here, I don't believe there is any way in the world that the U.S. will let Mexico degrade into chaos.  They are too close.  Were things to get too crazy, we would step in.
     
    The second negative was a possible lessening of the amount of ounces processed in 2010.  Originally, they had forecast 35,000 of gold equivalent in 2010 and the same in 2011 from their open pit.  They are now saying 15-20,000 in 2010 and the remainder in 2011.  In the grand scheme of things this is not important, but the stock was sold off Friday, possibly in response to this news.  I am trying to get the number of ounces clarified.
     
    Well, that's about it for the negatives, now onto the overwhelmingly positive news. 
     
    I must say that I am totally pumped about this company.  I came out of this meeting smiling ear to ear.  The most exciting thing released was this news:
     
    Gold Resource Corporation Intercepts Baja Vein
     
     
    Press Release Source: Gold Resource Corporation On Wednesday November 3, 2010, 6:39 pm EDT
     
     
    DENVER, CO--(Marketwire - 11/03/10) - Gold Resource Corporation (GORO) (AMEX:GORO - News) is pleased to update shareholders that underground development work at its La Arista vein system deposit has reached and intercepted the Baja vein. Gold Resource Corporation is a low-cost gold producer with operations in the southern state of Oaxaca, Mexico.

    Gold Resource Corporation commenced development of its Arista deposit's underground mine on February 22, 2010. La Arista is a polymetallic deposit with high-grade gold and silver with by-product credits of copper, lead and zinc. The Arista Vein system is made up of multiple en echelon veins with the two predominant veins being the Baja and the Arista veins.

    Gold Resource Corporation's President, Mr. Jason Reid, stated, "This first cross-cut and look at the Baja vein exceeded our expectations. We expected a two to three meter wide vein at this level, but were quite pleased to have revealed a solidly mineralized structure six (6) meters wide at the point of interception (see photo). Several samples were rushed to the Company's lab with the highest returning 14.6 grams per tonne gold and 2,300 grams per tonne silver, plus base metals, over 1.5 meters. Though these are just preliminary samples and not an anticipated average grade, we are extremely pleased with the indication of such high-grade. The vein is now in the process of being sampled systematically and in detail."

     
    What this means is that it is possible that the veins are up to three times as thick as originally believed.  Obviously, the more ore, the more profit.  Here is a picture of the vein:
     
     
    There were two samples of this rock on display at the meeting and they were beautiful.  There was visible copper, zinc and lead.  Lots of metal here.  
     
    I want to just detail some of the juicier things I heard from Jason and others:
     
    1.  This property has a chance to not only be world class, which they already believe, but "generational."
    2.  The first three holes they drilled on the property were "hits", so either they are "the luckiest guys in the world", or there is more metal to be found.
    3.  They have only drilled out 1% of the property, which is over 100 square miles.
    4.  The cut through the Baja vein was a "monster" and it a "Eureka" moment.
    5.  A world class geologist visited the property and told them that he usually takes about 3 days to say anything so don't take his silence the wrong way.  After 30 minutes he became very excited and told them they "need" to drill deeper.
    6.  They want to be "investable" for the large firms on Wall Street.  To do this they must check off some boxes.  The first was a New York Stock Exchange listing.  The second was coverage by a major firm.  The third is proven and probable reserves.  They have one and number two is coming.  They are working on number 3.  They hope to have that completed within 1 year.  Once that happens, the doors will be wide open for ALL investing entities.
    6.  They have more drills coming to the property which will help prove their resource.  They fully expect their current 1.5 million ounces of gold equivalent ounces to double.  If the veins get thicker and richer as they go deeper, which is often the case, the resource could triple or even quadruple.
    7.  They are trying to go mainstream and want to be the "go to" gold stock. 
    8.  Their coverage by John Doody was brought about by their efforts to get his attention.  He broke his guidelines when he put them in his top ten best gold stocks.  Jason emailed Doody (I just love saying that name) every time they announced a dividend.  He finally relented. 
    9.  They don't anticipate diluting the stock any further.  
    10.  50% of their revenue will be gold and 50% silver.  Since I believe silver will outperform gold in the coming years, this is excellent news. 
    11.  Jason Reid was asked hypothetically if he had a "price."  After much prodding he basically said that if someone didn't come in with an offer of $100 a share, don't bother.  This is by no means his official position but showed me they won't sell out cheap.
     
    Overall this was an outstanding meeting and I would fully consider buying more GORO stock at anything under $28.
     
    Mexus
     
    There was also news on my other large investment, Mexus Gold:
     
    Mexus Gold U.S. Announces Operating Equipment Arrives at Ketchikan, Alaska
     
     
    CARSON CITY, Nev., Nov. 2, 2010 (GLOBE NEWSWIRE) -- Mexus Gold U.S. (OTCBB:MXSG - News), a mining company engaged in the evaluation, acquisition, exploration, salvage and recovery of gold, silver and copper projects, is pleased to announce that the Mexus tugboat "Caleb" and its 230 foot barge arrived in Ketchikan, Alaska on October 29th 2010. It is equipped with automated cable pulling equipment and underwater electrical equipment, magtonetor, underwater cable identifier, remote cameras and a high definition scanning sensor, and a cable left buoy marking system.

    CEO Paul Thompson stated, "The transport and setup of our operating equipment is an extremely essential part of our project, and now that it is accomplished, although late in the season, Mexus Gold will start to pull cable while fine-tuning our equipment and crew. We expect our project should be 100% operational by spring."

    Paul Thompson will be in Alaska on Tuesday, November 2, 2010. By the next Tuesday, November 9, 2010, Mexus expects to have cable on barge deck. Mexus will work as long as weather permits in the Alaskan waters and then move tug and barge to Washington State. Mexus will be ready in early spring to start pulling cable again in the Alaskan waters and intends to pull cable 24 hours a day with two crews until we have 4 million pounds of cable or a safe load for weather conditions. At that point, the barge will be off loaded, during which time the crew will have four days off. Mexus expects to average two barge loads per month beginning in early spring.

     
    As we confirmed previously, the ship did arrive in Alaska.  I have also been able to confirm that the ship is now moving and in all likelihood pulling cable.  (thanks to Tim, who procured the software to track ships in Alaska)    Based on the information in the release, I think it is fair to say that they don't plan to pull long, but the weather is actually favorable in Southern Alaska for the next 10 days, so they should keep pulling.
     
    I ran some numbers based on 4 million pounds of cable per 11 days statement.  I had previously estimated the weight of the cable at 22 pounds a foot.  Dividing into the 4 million gives 181,818 feet pulled per 11 days.  That is 34.5 miles of cable or 69 miles per month.  (22 days pulling, 8 days off)  My previous calculations have the cable being $415,000 per mile or $28,635,000 per month.
     
    Assuming 60% of metal from buyer gives $17,181,000 in gross income.  23% to VTCC and that leaves us with $13,229,370 per month.  Assuming $200,000 a month in labor ($10,000 per man per 11 day shift) and fuel at $5,000, leaves over $13,000,000 in profit.  Amazing.  Multiply by 8 (assuming they shut down 4 months a year) and that subtracting another $100,000 a month in other expenses, means they will make, are you ready...$103,200,000.  That is a crazy number for a stock selling for about $49,000,000.
     
    Let's play the always fun "hypothetical price game."  Assigning an average price to earnings ration of 15 gives a stock price of right around $5.  Keep in mind that they estimate that there is 400,000,000 pounds of copper.  Just using that number, and the cable has the other metals, they can pull cable for more than 5 years.  Whatever metric you use, if they can pull this cable caper off, the stock is still way underpriced.  I believe this stock may trade lower during the winter, once the cable pulling stops and that would be an ideal time to buy.
     
    Positions
     
    Goro  (closed at $23.17, up $2.07, average price paid, $6.10) 
      
    Mexus Gold  (closed .34, up 1.5 cents, average price paid, $0.20)  
     
    GORO June 11, call options, strike $20 (closed at $5.70, up $1.00, average price paid, $5.60)
     
    I closed out these positions due to a poor quarterly report.  As a note, anytime a company releases their earnings at 9:00 at night, it's never a good thing.  Luckily, the stock had shot up the previous couple days with the rising price of silver. 
     
    Silver Standard Call options, 3 strikes, all jan 2011,
          $22.50 closed at $3.10, up $.0.90, paid $2.60  (sold at $3.90 profit of 50%)
          $25.00 closed $1.90, up $0.50, paid $1.65  (sold at $2.50, profit of 51%)
          $30.00 closed at $0.65, up $0.15, paid $0.65  (sold at $0.925, profit of 42%)
     
    New Positions -  I replaced my Silver Standard options with Silver Wheaton options
    Silver Wheaton Call options, 2 strikes, both March 2011,
          $35 options bought at $3.25
          $40 options bought at $1.75
     
    This week I'm closing with a long, full length video.  It's long and I don't agree with everything in it, but some of the things are mind numbing.  The continual loss of rights in this country is truly scary.  If you get the time, check it out.  Have a great week!