Quarterly Update
Economic Outlook: There is good news and there is bad news
THE BAD NEWS… A BEAR MARKET IS UPON US
Even though the markets are off 20% and look very cheap on an earnings basis, there is still a lot more risk in this market and chances are the trend is still lower over the next several months. What is significant, this is now an OFFICIAL BEAR MARKET. It first showed up as a correction this spring in risk assets on the $TSX and other commodities markets. It has now entered into full blown BEAR territory on all markets. Since August, there has been no relief with global indices breaking down. Copper is off more than 30% confirming what many were beginning to fear, that Chinese demand is fading. This is indicating that that while growth is stalling in North America and recession problems throughout Europe, China the great driver of commodities is stalling at the same time as well.
Even the luster of gold has been lost over the last month and has joined the broad based selling that has crept into all markets. As panic about the global deleveraging process has taken hold and no more QE in sight over the short term, there is no reason to hold gold at such lofty levels. Ben has said markets need to get much worse for more QE. If Ben announced QE measures right now, they would not have the desired effect and would be burning up good money as Euro fears would overshadow everything else. Even helicopter Ben knows when to pull in the reigns. Let the bugs that are still in the system get washed out before passing Go and collecting another $600B.
With the deleveraging process putting global markets into a sinkhole, there is no real threat of inflation and deflationary pressures are appearing worldwide putting more imminent pressure to the downside on equities markets.
The Debt Death Spiral
Countries in Europe are dangerously close to entering into the ‘Debt Death Spiral’. This is a negative feedback loop that compounds debt problems into much bigger problems. Higher borrowing costs eat into profits which eat into a company’s ability to added value. In turn this inability to add value creates less confidence which increases borrowing costs and further eats into profits. Company then makes cuts which further hamper ability to make profit. Thus further impairment increases borrowing costs and the whole cycle repeats.
The Debt Death Spiral is not happening to companies… it is happening to entire countries! Greece is the prime example of what will eventually happening to Italy, Spain, Portugal, and maybe even France if Europe does not get its house in order. If European nations do nothing to act to intervene in this negative feedback cycle… this will be the course that many of these countries may have to take down the road to eventual default. Tough austerity measures further hasten this cycle as a huge economic void is been create through the deleveraging process. The public sector needs to be deleveraged, but it cannot be just in itself as this void that is left needs to be filled or deflationary pressures will exist for extended periods even after default. In order to achieve a smooth balance, leverage needs to be transferred from government to the private sector where it can be managed by professionals, not politicians who promise the sky on the backs of our kids. The leverage needs to be transferred to the private sector.
When people talk about the debt crisis being much worse than the subprime crisis, it is this void that is created by the deleveraging process. This is just a theoretical void… the system will not be allowed to fail, so when markets trade under such stress and fear that the system is falling apart… you need to step back, have some patience and pick your moments to invest. Markets will recover and trade much higher than they are now years on out.
At this point in time, in the exploration sector especially, there is real value appearing if you think markets are going to bottom over the next 6 – 12 months.
The world is not going to end, credit will not seize up, exploration and development companies will still get financed and citizens around the world will still go to work. Credit may potentially seize up for a moment, but it won’t over an extended period of time. The world just doesn’t stop turning and neither will its inhabitants drop the tools of the trade and not go work. The markets are trading on an irrational fear that is made worse from the seemingly arrogance to the nature of the problem by politicians around the world. It is a fear that is magnified throughout the economy in confidence and spending while this problem exists. In the end, no matter how divisive and bi-partisan politics get, no one wants the system to come to a crashing halt on their watch so 11 hour deals to patch the problem are always made.
China’s dependence on Europe as a trading partner cannot be overstated. If Europe goes, China goes.
China’s emerging consumer economy is not strong enough to take the place of European demand. If Europe fades into recession, it over-exaggerates China’s pause which puts further pressure on global markets. Copper tanking indicates to me the slowdown in China is going to be harder than originally thought. Usually when a metal breaks down like this, there is more downside expected. All signals on China are slightly bearish at best with many analysts starting to call for a harder landing there. At the very least, China will remain subdued until Europe fixes its problems or the Chinese consumer comes to the rescue. That will only happen if Europe comes online again or China pursues a policy of wealth creation for their own citizens through dollar appreciation if they feel they have sucked every last dollar they can out of the global economy.
China took us out of recession last time, and it will have the opposite effect if China slows down more than anticipated during this downturn with the deleveraging process going on. There is no way to tell how far this downturn will go because there is systemic risk at the core of the system for which leaders still cannot agree on a solution. This amplifies the risk in the system and magnifies the swings in economic data and confidence in the markets and ultimately on a business decision to spend.
7 STEPS FOR EUROPEAN STABILITY
1. Give Greece the money
2. Negotiate a Greek default
3. Capitalize European Banks – Euro Tarp
4. Protect borrowing costs of peripherals with Euro bonds
a. Buy peripheral debt
b. Sell Euro bonds
5. Duel Pronged Austerity/Growth Package
a. Deleverage public sector (austerity)
b. Leverage the private sector (stimulus)
6. Work on economic uniformity to eliminate inequalities
7. Confidence comes back to Europe
The GOOD NEWS…
We are now closing in on an influx point where momentum traders and swing traders can make some money!!!
The DOW is bumping up on a key downtrend line initially established in August. If markets can break this trend line, we could be in for a nice 1000 point rally on the DOW and TSX alike. Last week’s rally started on a rumor that European officials were talking about a TARP style recapitalization effort of European banks. If European officials can still confidence that TARP will happen, it will alleviate concerns about the system falling apart over the short term. TARP is the easiest way to allow for stability in the system. The US Treasury’s TARP program was initially estimated at greater than $300B in losses, but by the time the markets recovered and banks paid back the interest, the cost to US taxpayers was $25B and Geithner still contest that the cost in the end will be much less once real estate assets in the US have recovered. That is less than 10% of what was originally estimated. TARP saved the system once; there is no reason why it wouldn’t perform the same function again in Europe. TARP was signed in October of 2008, if markets react the same and take the same amount of time for the European Banks to access TARP and work the troubled assets out of the system, you might expect the a 5 or 6 months to really take effect and instill confidences system and for markets to recover. Certainly at that point you can expect another V like recovering with projects on the shelf come back to construction. Markets are not done bottoming but you may get some short term relief.
TARP RUMORS CONFIRMED
Merkel and Sarkozy have made a joint statement saying that they have agreed to strengthen the banks by the end of the month. So far not many details are known, but it now looks like there is a united front for a TARP like program to save the European banks. If you combine that with a Q3 earnings season next week that should keep yield at the forefront, you have the fundamentals in place for ‘hope and optimism.’ This is an emotionally charged market. You have to look for what might break the change in sentiment. This just might be it. Greece getting the money, a Euro style recapitalization effort, an earnings season that isn’t so bad; might be the basis for a sustained bear rally in all asset classes.
The keystone to this change in sentiment lies in Europe and a concerted effort for a TARP program and eventually a EURO BOND to stop the debt death spiral. This is fundamental in saving the European banking system and allowing the system to function.
If European banks go under… a double dip is likely.
Beat the Market Featured Company Update
This is a great time to update some of Beat the Markets Features we are still following. If markets go on a run, many of these oversold companies have made significant progress since featured and present good trading opportunities and very good bang for the buck.
Strike Gold Corp SRK-V $0.21
Shares Out… 32M
Market Cap $6.7M
Strike Gold Corp was our most recent feature. Not much has transpired since the feature was published. SRK-V has seen very limited selling in the low $0.20’s and high teens. Any downswing is an excellent time to acquire SRK shares as they have extreme value in its recent aquistions waiting to be unlocked. For the investor with a 2 year time horizon, SRK offer’s excellent leverage and downside share price protection. Strike Gold not only developing the world class graphite projects that rival NGC’s Bisset Creek, they are exploring their bulk tonnage porphry gold system at the Satterly Lake Gold Project near Gold Canyon Resources in Red Lake, Ontario.
Satterly Lake has Springpole Lake potential and could be another early GCU type story.
Historical work is pointing to a large low grade bulk tonnage type potential with historical work and ~10,000 meters drilled at Satterly yielding an impressive intersection of 117 meters grading 1.37 g/t au.
A GCU type intercept
SRK has defined 4 large targets in addition to the historical deposit at Satterly Lake following up on historical IP survey that defined targets which were never followed up on. Re-interpretation of ground and airborne geophysical data has led to the discovery of these targets at Satterly Lake.
SRK-V is a very comfortable risk adjusted buy at current prices. The company has very little retail and is selling right at its lows since the initial acquisition of Satterly Lake this spring which drove the share price well above $0.60.
CuOro Resources Corp CUA-V $1.44
Shares Out… 30.2M
Market Cap… $43M
CUA aims on being Columbia’s first major copper producer.
CuOro looks like it is going to go run after bottoming hard at $1. It is making a violent ‘V’ shape recovery which should give it momentum to at least the $1.80 to $2 range if the current rally relief taht is appearing remains intact. This is the copper stock to own if you want an project that is drill ready, close to infrastructure and has government support. With supply chain dynamics tight for the copper market and large high grade projects at a premium, Santa Elena is one of the largest untested high grade copper systems with buried porphyry potential.
Drilling at Santa Elena is progressing with the initial 25,000 meter phase 1 drill program well underway with 2 drill rigs in operation on site. CUA has secured a third rig which while arrive in the coming months. CUA announced initial drill results from Santa Elena that are starting to confirm a promising copper discovery. Recent ground IP work also suggest that the initial holes were drilled on the outer edge of the main conductor zones giving room for improvement in grade which is already fairly significant with three 40 meter intervals between 1.10 and 2.26% copper.
Results of the first 6 holes…
· 40.0 meters @ 2.28% Cu
· 46.8 meters @ 1.76% Cu
· 40.0 meters @ 1.10% Cu
· 10.3 meters @ 1.52% Cu
· 9.0 meters @ 3.14% Cu
· 30.5 meters @ 0.54% Cu
CuOro has been extremely busy this summer…
1. Added Columbian national Mr. Uribe the former Colombian Minister of Defense
2. Completed acquisition of Barranco De Loba in Sergovia
3. Secured 3rd drill rig for Santa Elena
Cap Ex Ventures CEV-V $0.35
Shares Out… 43.7M
Market Cap… $15.3M
Since the Cap-Ex feature in June, the company went on an good run and then got hammered in August with the rest of the market. Iron Ore has been hit harder than the rest given its economic sensitivity and the long lead times and intensive capital that many of these projects require. CEV remains my top iron ore penny stock and have made significant progress on their projects in Labrador.
So far drilling on block 103 has defined the 7km long Green Bush Zone hitting 100 meter plus interval at ~30% iron content. The zone is at surface is up to 1000 meters wide and has been defined up to 7 kilometers making CEV’s Green Bush Zone very large target with potential well in excess of 1Bt resource at 30%.
Drilling at Block 103… These are Alderon-like numbers…
· 125.13 meters @ 30.4% Fe
· 159.9 meters @ 31.30% Fe
· 87.37 meters @ 29.92% Fe
· 127.11 meters @ 29.61% Fe
Cap-Ex has is awaiting assays on 5 holes across the 7 km defined strike with mineralized horizons of…
· 178.62 meters
· 79.88 meters
· 100.28 meters
· 192.03 meters
· 195.08 meters
Cap-Ex has been successful in initial DSO exploration at Lac Connelly and Porly Lake
They have defined 3.7km of hematite formation at Lac Connelly and trenched 62% and 54% Fe in channel samples at Porky Lake. At $0.30 this is one of the best buys in the iron ore sector with projects that are already showing the potential. CEV’s projects have already become significantly de-risked with a major discovery in the making on Block 103.
Commerce Resources $0.375
Shares Out… 130.5M
Market Cap… $48.9M
Commerce Resources is another company that is extremely oversold is ain the process of making a V like recovery. At current prices CCE-V has a great chance of recovery back to the $0.55 to $0.70 cent range. Drilling at CCE’s Ashram Zone is defining a very large deposit that makes most other rare earth deposits insignificant. The rare earth deposits which will be considered for production in the future will have the largest compliment of all the rare earths from the light rare earths to the heavy rare earths.
CCE has successfully taken a grassroots discovery and turned it into one of the largest rare earth deposits in the world 12 months which is a huge feat in itself. The company has 2 drill rigs on site and plans to complete 7,500 meters by the end of the year with the bulk of that upgrading the confidence of resource from inferred to indicated and expanding the Ashram Zones boundaries which is still open in most directions and at depth to 600 meters. Commerce is creating exteme value at he Ashram Zone.
The Ashram Zone is shaping up to be one of the highest grading bulk tonnage REE deposits with Commerce consistently hitting grades in excess of 2% and even 3% towards the bottom of the holes. CCE’s Ashram zone stands out out as a significant heavy rare earth deposit on a contained metal basis. With consistent grades of neodymium at 17%-20% and large quantities of dysprosium and terbium, Ashram has all the qulatiies for eventual production. Neodymium, Terbium and Dysprosium are vital elements for the elctric and hybrid vehicles markets.
The supply of Neodymium is so tight that some magnet manufactures outside of China are considering reengineering cobalt magnets as an alternative to neodymium. These magnets are heavier and less effective giving an advantage to a manufacturer using neodymium magnets vs. cobalt magnets.
Drilling results from Ashram include…
· 236.99 meters @ 1.67% TREO
· 344.49 meters @ 2.06% TREO
· 243.54 meters @ 1.99% TREO
· 586.92 meters @ 2.10% TREO
· 316.03 meters @ 1.06% TREO
· 588.46 meters @ 1.42% TREO
· 554.46 meters @ 1.86% TREO
Niogold Mining Corp NOX-V $0.355
Shares Out… 96.8M
Market Cap… $34.4
NioGold Mining continues to deliver impressive results from their Marban Block jv with Aurizon. Drilling over the past 6 months has led to the discovery of two high grade zones including an intersection of 906.2 g/t over 2.9 meters in the High Grade Western Zone and 179.5 g/t over 1.2 meters in the Eastern Down Dip Zone. These results demonstrate the robust nature of the high grade system at Marban Block and the multimillion ounce resource potential.
Best results from the ‘High Grade Western Zone’ include…
· 35.2 g/t Au over 1.2m
· 5.9 g/t Au over 15.7m
· 26.4 g/t Au over 1m
· 19.8 g/t Au over 1.9m
· 81.1 g/t Au over 0.8m
Best results from the ‘Eastern Down Dip Zone’ include…
· 5.3 g/t Au over 12.8m
· 5.1 g/t Au over 6.1m
· 7.0 g/t Au over 10.9m
· 179.5 g/t Au over 1.2m
· 6.1 g/t Au over 12.6m
The discovery of these two zones of higher grade mineralization adds significant exploration potential to depth at the Marban Block. A new resource estimate is due out on Marban block by the end of the year which will add significant ounces to the project. NioGold is a safe bet in the $0.30 range with very little downside risk.
Augen Gold received an improved offer from Trelawney to which they accepted. Augen mgmt could have held out for a better offer, but considering how markets have crashed in the meantime, Augen shareholders who sold out after the revised offer in the $0.40’s have walked away with cash in the pockets while gold prices crashed during the last half of September.
Happy Trading
Christopher Skidmore
Beat the Market Stock Picks
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