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Cohan Says U.S. Bank `Black Box' Hides Europe Risk
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Europe Exposure to US Banks   

 

Only the inside guys know exactly how much exposure the US banks have to Europe's debt crisis. If Europe fails, there's a good chance that all of the major US banks will come crumbling down with it. That means a complete collapse in the American financial system.   

 

Watch the video as William Cohan, author of "Money and Power" talks about the exposure of U.S. banks to Europe's sovereign-debt crisis.   

 

 


December 4, 2011
Dear Readers,

 

The world's central banks have come together to help with the severity of Europe's problems. Unemployment in the US fell to 8.6% - the lowest level in more than two and a half years. Markets soared with the biggest 3-day gain since 2009. Things are looking good. Or are they?

 

It's getting closer to the Christmas holidays and that means 2011 is coming to an end. At the end of the day, the market will react to positive news just as it does to negative. And over this past year, we have been struggling to find solid ground.

 

As Canadians, we are lucky to have a strong banking system and natural resources that can easily support our small population. However, that does not shield our economy and our investments from the American and European policies that have created a near-impossible mess to clean up.

 

The outlook is simple: The US and Europe will have no choice but to print more money. As I have mentioned many times over, more QE will happen. More money will be printed. There is no way out of this mess but to inflate the world with more un-backed currency. Heck, that's why the Federal Reserve was created in the first place, right? To prevent economic and financial disaster?

 

Trying to time the market in its current state is extremely difficult. Politics and economic blunders have taken full control of our investments. But predicting the short term market should no longer be the primary drive for investments.

 

Money will be printed endlessly. It's inevitable. Even as the US economy is struggling to deal with a housing crisis, inflation will eventually happen. It will take time and we may deflate before it happens, but it will happen. When it does it won't be a slow and gradual rise - it will be explosive. If you're smart with your money over the next year or two and invest in gold and gold-related investments, as well as real estate and other tangible assets, you'll look at our current situation as the opportunity of a lifetime five years from now. In the short term, hang onto cash for fire sales.

 

A few weeks ago, I wrote a piece on the basics of mining valuations titled, "It's Not that Simple: Mining 101." This week I am going more in-depth on this subject as part of a mini-series of letters that will focus on evaluating mining and resource stocks. This week's topic will be "cut-off" grade - a term you have heard many times before, but is often overlooked or misrepresented. Yet, it is an extremely important factor in mining valuations.  

 

Cut-off Grade Theory and Practice

 

Consider a block of ore that weighs 1 tonne and contains 3 grams of gold. At a gold price of US$1000 per ounce the value of the gold in the block of ore is just under $96 ($1000/31 X 3 or
$1000 per ounce/ 31 grams (troy ounce) X 3 grams of gold)

 

Simply put, if it were to cost more than $96 to mine, treat, and extract the gold from that tonne of ore, it would be uneconomic to mine. Conversely , if the cost were less than $96, it could be economic to mine.

 

But it's not that simple.

 

If all the tonnes of ore in a deposit contained the exact same grade of gold, it would be easy to calculate. But not all the tonnes of ore that make an orebody contain the same grade of gold. As a matter of fact, gold deposits may vary the most in terms of consistency due to its "nuggetty" nature.

 

Take a look at this chart:

 

Gold Ore Grade Chart
Figure 1

 

As you can see in Figure 1, in this particular orebody, roughly 30 per cent of the total tonnage has an average grade of 3 grams per tonne, 20 per cent has 2.5 grams per tonne, and so on.

 

Making the Initial Estimate

 

Let's assume that a preliminary feasibility study provides the costs for recovering gold:

 

 

US$/tonne of ore treated

Overburden removal

12.0

Mining Cost

4.0

Treatment Charge

21.0

Administration and Refining

9.0

Total Cost

46.0

 

Metallurgical tests also show that only 95 per cent of the gold can be recovered from the ore.

 

So the question is, what is the minimum amount of gold the project needs in one tonne of ore to make it economically recoverable?

 

As the table shows, there has to be enough gold to provide US$46 of revenue to cover the costs. In other words, the grade that provides the US$46 is the cut-off grade. Let's once again assume that the gold price is $1000 per ounce, which is equal to $32 per gram (US$1000/31.1 grams)

 

The formula is simple:

 

total cost/recovery/price per unit of metal = Cut-off grade

 

Therefore, in our example:

 

46/0.95/32 = 1.5 grams per tonne

 

Now, if we go back to the original tonnage grade distribution as shown in our graph, we can see that roughly 6 per cent of our orebody has a grade of less than 1.5 grams per tonne. Obviously when we mine the orebody, we would try and stay away from mining and certainly would not treat the 6 percent of tonnage below the cut-off grade.

 

That means, for reserve reporting purposes (see It's Not that Simple: Mining 101), we have reduced the size of our economic ore down to 94% of our original tonnage. While we have reduced the tonnage above the cut-off by removing the uneconomical 6% of ore, the remaining average grade will have increased as the lower grade is no longer included.  

 

That means that increasing the cut-off grade reduces economic tonnage, but increases the overall grade.

Now here is where its gets complicated in assessing the NPV (net present value) of a project. A whole textbook can be dedicated to cut-off grade and assessing the NPV, but I will simplify as much as possible for all intents and purposes.

 

First of all, we determine the mine life.

 

Let's assume that the annual treatment capacity can process 10 percent of the original total reserve. That means, with a zero cut-off grade, the original mine life would be 10 years (100%/10%). If you increase the cut-off grade, you decrease the life of the mine due to diminishing reserves (reserves are ore in a deposit that is economical to extract, see Mining 101: It's Not that Simple), but you would increase gold production due to the higher grade.

 

Now if we assume that capital cost is relatively fixed, it is possible to estimate the NPV for each cut-off grade because we know the operating cost, the mine life, the gold price, and therefore revenue.

 

Take a look:

 

Cut-off Grade

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Mine Life (yrs)

9.9

9.5

8.7

6.7

3.7

2.3

1.5

Relative NPV

1.0

1.04

1.07

1.08

0.9

0.7

0.6

 

Looking at the table, you can see that as the cut-off grade increases, so does the NPV. This is due to the greater benefit of a higher annual cash flow from the higher annual average grade outweighing the shorter mine life.

 

However, eventually, the shorter mine life becomes too significant and the NPV declines. Looking at the table, you can clearly see that a cut-off grade of 4.0 reduces the relative NPV down to 0.6. Again, remember that increasing cut-off grade reduces your mine life as you "throw away" the lower grade ore in your calculations. That means that the higher the cut-off grade, there is even a possibility that the NPV would be negative as the mine life and recoverable ore becomes too small.

 

The important factor is selecting the cut-off grade that yields the highest NPV. In our table, that means selecting the 2.5 grams per tonne cut-off grade. Of course, this is an extremely simplified example using an extremely simplified calculation of NPV we used previously. With the advent of new technology and computing software, the optimum economic recovery of an ore deposit can be fine tuned even further. That means it is quite possible that the optimum cut-off grade in our example is somewhere between 2.0 and 2.5 grams per tonne, before the NPV drops.

 

In our example, the higher NPV was achieved using a higher cut-off grade, as a result of increased annual revenue outweighing the shorter mine life. However, cut-off grade will vary significantly from one project to another as many factor such as mine capacity, mill capacity, and commodity prices can all affect the NPV.

 

The next time you hear about a project that is comparable to another successful mine, remember that no deposits are ever the same. A minor gram per tonne variation in cut-off grade can have significant effects on a project's NPV and calculations in NPV can vary dramatically from one source to another. That's why larger projects often have to go through numerous calculations from different sources before proceeding.  

 

When calculating NPV, there are obviously conflicting factors. For example, your capital costs will increase when you increase production, but you need to keep it to a minimum for a given production rate. An increase in annual mine production will generate higher revenue, but it's subject to available reserves and must be enough to satisfy the capital expenditures. The list of conflicting factors go on so its imperative that calculations are correct to optimize the NPV of a project.

 

There you have it, the basics of cut-off grade.  

 

   

 

Until next week,

 

Ivan Lo

Equedia Weekly  

 

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Casey Research  

What 'To The Moon' Will Look Like      

 

By Jeff Clark, Big Gold      

  

Crescent Mine This may sound sensationalistic, but I think the odds are very high that, on average, gold producers will sell in the $200 range before this bull market is over. With most of them trading between $20 and $40, the returns could be tremendous. And while the typical junior won't reach the same price level, their percentage returns will be much greater and potentially life-changing, as you're about to see.

  

The timing of this article may seem incongruous, given the recent weak performance of gold and gold stocks. But that was the identical situation in each of the past manias: both the metal and the equities didn't excel until the frenzy kicked in. The following documentation is actually a fresh reminder of why we think you should hold on to your positions - or start accumulating them, if you haven't already.

  

So, are my projections based on some fantastical gold price, or a complex formula for gold stock valuations? Nope. I base my projections simply on what gold stocks have done in the past. And to the surprise of many investors, it's a performance they've logged several times, making the following prices very believable if you're bullish on gold.

  

It comes with a warning, though:

  

Caution: the following tables may cause excitement, drooling, or the temptation to go all in. Read and invest at your own risk.

  

You've undoubtedly read about gold's spectacular climb in 1979-'80. And you've likely heard how well gold stocks performed in general. But most researchers haven't identified exact returns from specific companies during this era.

  

The reason? Digging up hard data prior to the mid 1980s, especially for the junior explorers, is difficult because it hasn't been computerized. So we sent a couple of researchers to the library to view the Wall Street Journal on microfiche. We also relied on Scott Hunter of Haywood Securities; Larry Page, president of the Manex Resource Group; and the dusty archives at the Northern Miner. (This means our tables, while accurate, are not necessarily comprehensive.)

  

Let's get started...

  

The Quintessential Bull Market: 1979-1980

  

The granddaddy of gold bull markets occurred during the 1970s decade, one culminating in an unabashed mania in 1979 and 1980. Gold peaked at $850 an ounce on January 21, 1980, rising 276% from the beginning of 1979. Yes, the price of gold on the last trading day of 1978 was a mere $226 an ounce.

  

Here's a sampling of gold producers from this era. What you'll notice in addition to the mouthwatering returns is that gold stocks peaked not until nine months after gold.

  

Returns of Producers in 1979-1980 Mania
CompanyPrice on
12/29/1978
Sept. 1980
Peak
Return
Campbell Lake Mines$28.25$94.75235.4%
Dome Mines$78.25$154.0096.8%
Hecla Mining$5.12$53.00935.2%
Homestake Mining$30.00$107.50258.3%
Newmont Mining$21.50$60.62182.0%
Dickinson Mines$6.88$27.50299.7%
Sigma Mines$36.00$57.0058.3%
Giant Yellowknife Mines$11.13$39.00250.4%
AVERAGE  289.5%

  

You'll see there was great variability among the returns of these companies. That's why, even if you believe we're destined for an "all-boats-rise" scenario, you still want to own the better companies.

  

Today, Barrick is selling for $47.59 (as of November 25). If our mania started now and mimicked the average 289.5% return, ABX would reach $185.36 at its peak. GDX at $54.79 today would hit $213.40.

  

Keep in mind, though, that our data measure the exact top of each company's price. Most investors, of course, don't sell at the very peak. If we were to able to grab, say, the middle 80% of the climb, that's a return of 231.6%. Barrick would hit $157.80 and GDX $181.68 in that scenario... still tantalizing returns.

  

And with all due respect to Barrick management, there are gold stocks we're convinced will far outperform the largest gold company in the world in the coming mania.

  

Here's a sampling of how junior gold stocks performed in the same period, along with the month each peaked.

  

Returns of Juniors in 1979-1980 Mania
CompanyPrice on
12/29/1978
Price
Peak
Date
of Peak
Return
Carolin Mines$3.10$57.00Oct. 801,738.7%
Mosquito Creek Gold$0.70$7.50Oct. 80971.4%
Northair Mines$3.00$10.00Oct. 80233.3%
Silver Standard$0.58$2.51Mar. 80332.8%
Lincoln Resources$0.78$20.00Oct. 802,464.1%
Lornex$15.00$85.00Oct. 80466.7%
Imperial Metals$0.36$1.95Mar. 80441.7%
Anglo-Bomarc Mines$1.80$6.85Oct. 80280.6%
Avino Mines0.335.5Dec. 801,566.7%
Copper Lake$0.08$10.50Sep. 8013,025.0%
David Minerals$1.15$21.00Oct. 801,726.1%
Eagle River Mines$0.19$6.80Dec. 803,478.9%
Meston Lake Resources$0.80$10.50Oct. 801,212.5%
Silverado Mines$0.26$10.63Oct. 803,988.5%
Wharf Resources$0.33$9.50Nov. 802,778.8%
AVERAGE   2,313.7%
 

If you bought a reasonably diversified portfolio of top-performing gold juniors prior to 1979, your initial investment could've grown 23 times in just two years. If you managed to grab 80% of that move, your account balance still would've grown 1,850%.

 

This means a junior priced at $0.50 today that goes on to become a Mania Phase winner could sell for $12 at the top, or $9.75 at 1,850%. If you own ten juniors, imagine just one of them matching Copper Lake's return.

  

Here's what returns of this magnitude could mean to you. Let's say you have $10,000 to devote to a portfolio of the best-of-the-best gold juniors. If our mania someday matches the classic 1980 blow-off top, your portfolio could be worth $241,370 at its peak... or about $195,000 if you manage to grab the middle 80%.

 

This all assumes, of course, that you sell to realize the profit. If you don't take the money and run at some point, you may end up with little more than tears to fill an empty beer mug. Consider this: many junior gold stocks, including some in the above list, dried up and blew away after October 1980. Investors who held to the bitter end not only saw all their gains evaporate but lost their entire investments as well. Keep that in mind, because all bull markets eventually come to an end - even golden ones.

 

Returns from that era have been written about before. So I can hear some investors saying, "Yeah, but that only happened once."   

 

Au contraire. Read on...

 

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More Casey Research Articles

 

> Putting a Gleam in Your IRA 

> Is Gold Still the Answer for Investors?

> Don't Sweat the Correction in Gold

> Is It a Good Time to Invest in Pipeline Companies?

> Why Gold Should Set New Highs for the Holidays 

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Conglomerates and Export Opportunities Stock Picking Strategy     


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In spite of the problems in the US and in Europe, US exports are running at record levels. And US companies with strong export markets are benefitting tremendously.

While it's true that US exports to Europe are expected to slow down next year, the Asian-Pacific region is expected to fully make up for that and more.

 

And one of the best sectors to capitalize on this is the Conglomerates sector.

 

Since many conglomerates are large-cap stocks, we're going to tailor our screen to be accommodating of this, yet strict enough so as to only select the best ones from this group.

  

Watch the video as Kevin Matras screens for stocks in one of the top performing groups, the conglomerates sector, in an effort to take advantage of growing US exports.

.   

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> AMR Stock Plunges After Bankruptcy Filing 

> Germany Controls the Endgame 

> What Drove Monday's 3% Rally? 

> This Week's Stock Picks 

> Aggressive Growth Stock Picks with Analyst Research on Brunswick Corp. (BC) and Allot Communications (ALLT) Video - November 29, 2011

> Value Stock Picks with analyst research on Harman International (HAR) and Barrick Gold (ABX) Video - November 30, 2011 

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Peter Schiff: Whose Fuse is Shorter? 

 

By Peter Schiff

November 23, 2011 

 

Peter Schiff

With fiscal time bombs ticking in both Europe and the United States, the pertinent question for now seems to be which will explode first. For much of the past few months, it looked as if Europe was set to blow.  

 

But Angela Merkel's refusal to support a Federal Reserve-style bailout of European sovereigns, as well as her recent statement that she had no Hank Paulson-style fiscal bazooka in her handbag, has lowered the heat. In contrast, the utter failure of the Congressional Super Committee in the United States to come up with any shred of success in addressing America's fiscal problems has sparked a renewed realization that America's fuse is dangerously short.  

 

Chancellor Merkel has been emphatic that European politicians not be given a monetary crutch similar to the one relied on by their American counterparts. Her laudable goal, much derided on the editorial pages of the New York Times, is to defuse Europe's debt bomb with substantive budget reforms and, as a result, to make the euro "the strongest currency in the world." Much has been made of the poorly received auction today of German government bonds, with some saying the lack of demand (which pushed yields on 10-year German bunds past 2% - hardly indicative of panic selling) is evidence of investor unease with Merkel's economic policies. I would argue the opposite: that many investors still think that Merkel is bluffing and that eventually Germany will print and stimulate like everyone else. It is likely for this reason that yields on German debt have increased modestly.

 

In contrast, the US is crystal clear in its intention to ignore its debt problems. With the failure of the Super Committee this week, it actually became official. American politicians will not, under any circumstances, willingly confront our underlying debt crisis. While the outcome of the Super Committee shouldn't have come as a great surprise, the sheer dysfunction displayed should serve as a wakeup call for those who still harbor any desperate illusions. Some members of Congress, such as John McCain, have even come out against the $1.2 trillion in automatic spending cuts that would go into effect in January 2013. Expect more politicians of both parties to cravenly follow suit.

 

Over the next decade, the US government expects to spend more than $40 trillion. Even if the $1.2 trillion in automatic cuts are allowed to go through, the amount totals just 3% of the expected outlays. In a masterstroke of hypocritical accounting, $216 billion of these proposed "cuts" merely represent the expected reductions in interest payments that would result from $984 billion of actual cuts. These cuts won't make a noticeable dent in our projected deficits, which, if history can be any guide, will likely rise by much more as economic reality proves far gloomier than government statisticians predict. Finally, the cuts are not cuts in the ordinary sense of the word, where spending is actually reduced. They are cuts in the baseline, which means spending merely increases less than what was previously budgeted.

 

In the meantime, the prospect of sovereign default in Europe is driving "safe haven" demand for the dollar. So, contrary to the political blame game, Europe's problems are actually providing a temporary boost to America's bubble economy. However, a resolution to the crisis in Europe could reverse those flows. And given the discipline emanating from Berlin, a real solution is not out of the question. If confidence can be restored there, each episodic flight to safety may be less focused on the US dollar. Instead, risk-averse investors may prefer a basket of other, higher-yielding, more fiscally sustainable currencies.

 

The irony is that Europe is...

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Forward-Looking Statements

Except for the statements of historical fact, the information contained herein is of a forward-looking nature. Such forward-looking information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement of the Company to be materially different from any future results, performance or achievements expressed or implied by statements containing forward-looking information.

 

Although the Company has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that statements containing forward looking information will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on statements containing forward looking information. Readers should review the risk factors set out in the Company's prospectus and the documents incorporated by reference.

 

Cautionary Note to U.S. Investors Concerning Estimates of Inferred Resources

 

This presentation uses the term "Inferred Resources". U.S. investors are advised that while this term is recognized and required by Canadian regulations, the Securities and Exchange Commission does not recognize it. "Inferred Resources" have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of "Inferred Resources" may not form the basis of feasibility or other economic studies. U.S. investors are also cautioned not to assume that all or any part of an "Inferred Mineral Resource" exists, or is economically or legally mineable.


In This Issue
Kiska Continues to Expand Gold Zones at Island Mountain Prospect, Whistler Project
What 'To The Moon' Will Look Like
Kiska Releases 2011 Drilling Results from the Whistler Orbit area, Whistler Project
Conglomerates and Export Opportunities Stock Picking Strategy
BNN Clip: Canada's Biggest Gold Mine
Peter Schiff: Whose Fuse is Shorter?
Morningstar: ob Market Improving, but Is It Enough?
Technical Trading with Harry Boxer
Upload Your Own Videos
Equedia Tips- Markets Tab
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Rants and Raves...Inside the mind of Equedia's editor

 

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If you're watching Europe - and you must be if you got money in the markets - then put December 9 on your calendar.

That's when EU leaders meet for their next big summit in Brussels. Watch it with close eyes.

Also, I just read an interview with Jacques Delors, the man who infamously created the plan for the euro.

With euro in shambles and tumbling like an avalanche, Jacques Delors comments on why the euro is failing.

To sum it up: The Western way of life.

Reading between the lines: leverage, the federal reserve, and greed. Go figure. If that's the case and always has been, how was the euro supposed to help?

Here's the link to the interview:

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