Volume XXIII, No. 1 www.dougcasey.com $25

This Month

Most of this letter is taken up in a discussion of one company, Vannessa Ventures, and its many prospects. I spent a week running around the boondocks of Central and South America with management; it takes a while to tell a complex story. Let me re-emphasize that not only is the bear market in resource stocks over, but the bull market is now actually beginning. You'll be seeing a lot more company analysis in these pages in the months to come. What's coming up is a once-in-a-generation opportunity to make a genuine killing. I'm not kidding. And 30 years of watching these markets gives me a pretty fair degree of certainty that I'm right.

Vannessa Ventures: A Junior With 20 million Ounces?

Vannessa Ventures has the potential be a 10 to 1 shot, or even better, over the next few years. It embodies everything that makes speculation in junior gold stocks an addiction. That's the good news. The bad news is that it's a complex story. But the bright side is that the complexity has made it a cheap stock.

In essence, Vannessa is in a position to capture Venezuela's 15 million ounce, fully proven and fully permitted Las Cristinas deposit (see XIX/3 & XVII/8), and do so for next to nothing. And produce their 100% owned 2.4 million ounce Cerro Crucitas in Costa Rica. And net upwards of US$3 million annually from the Maple Creek operation in Guyana. And they've got other properties, any of which could be worth Vannessa's current market cap in a bull market. And, perhaps equally good from a market point of view, few people know the story, and fewer care.

You may know that for several years I've been saying the mining stocks have bottomed, and it was time to back up the

truck. That was a correct assessment. But just because a bear market has died doesn't mean a new bull market has begun. We've been in that twilight zone, betwixt and between, for the last couple of years. But now I'm here to say that's changed, and we're in the very early stages of a new bull market in mining stocks. More than that, I think we're now entering into what will be the most spectacular bull run in history, possibly even including what happened during the 70s, when gold moved from $35 to over $800.

I think the mining stocks, which have been such dogs that few people even know they exist anymore, are not just about to go into another cyclical upturn. That would be fine, since each of their cyclical upturns over the last 20 years has rewarded speculators who got in early with 1,000%+ returns.

What I'm saying is that we're likely at the beginning of a new secular bull market, which will dwarf anything we've seen in the past. It's truly going to be something to behold. But, in order to capitalize on it, there are several things to bear in mind. One is to be in early, because in percentage terms, the early moves are the biggestand the lowest risk. Two, larger companies like Newmont and Harmony will draw in the big money, so your core portfolio should consist of these unhedged majors. But for long ball home run leverage, it means juniors. And, although they've always had a place in these pages, they're going to be a real area of concentration for the foreseeable future. Vannessa Ventures deserves your attention in that context.

Vannessa Ventures (VNVNF, OTC BB: $0.62; VVV.V, C$0.95)

How does Vannessa fit into this picture? Of course each of the several hundred viable (I use that word advisedly at

Prices as of:

February 7, 2002

Gold: $298

Silver: $4.36

Oil: $19.78

DJIA: 9691

30-yr Bond: 5.38%

Nikkei: 9420

Yen: US$0.0074

133.88/$

Canadian $: US$0.62

1.59/$

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ment, and put yourself in a position to join in private financings). At this stage, however, they're going to need to raise really serious money, considering the size of the projects they've got. Institutions are loathe to take positions because the stock is too illiquid for them to do so; some days the stock doesn't even trade. This the first time the story has really been told. Since the 1996 peak, good news only fell on deaf ears in the mining game anyway.

Their current burn rate is about US$150,000 a month, and with US$1.5 million in the till the time is right. So far, the C$18 million they've raised has taken them a long way. I expect there will be some significant efforts to get the story out, simply because that's critical to raising cash. And, of course, that means new buying in the stock.

The company's strategy is straightforward and, in my opinion, highly intelligent: Use the weakness in the gold price and the complete lack of interest in mining to acquire very large, but currently uneconomic properties for pennies on the dollar and await the inevitable turn.

I've spent a lot of time in all three of the countries Vannessa is currently involved in. Guyana, Venezuela, and Costa Rica are geographically almost peas in a pod. But they're miles apart in the way they've developedalthough that word has to be used advisedly in some ways.

Property 1: The Las Cristinas
in Venezuela

Vannessa's Las Cristinas project is, in fact, one of the highest profile gold projects in the world, with a known resource of at least 15 million ounces of gold, plus substantial copper values. Originally developed in the 90s by Placer Dome (PDG, US$12, market cap US$4.1 billion) at a cost of over US$170 million, Vannessa acquired the property from Placer last year for $100, which is to say, for free. Obviously, there's something here that doesn't meet the eye.

There are essentially two issues to consider when looking at the Las Cristinas: the legal situation and the economics. We'll look at them both, but it's the legal situation that's the truly problematic element from my viewpoint.

The legal situation, or: Who really owns it?

Gold was first discovered, in the form of large nuggets, in this part of Venezuela in 1910 (now called Kilometer 88, based on its location on the main highway), and sporadic efforts to mine it have occurred ever since. Most notably, during the early 1980s, a time of high gold prices, there were over 5,000 garimpieros working parts of the Las Cristinas at any one time. The garimpieros (as informal miners are called in South America) worked only the saprolite, or cap rock, using primitive methods.

The mining rights are owned by the Corporacion

the bottom of a bear market) mining companies out there is a unique situation. Vannessa definitely qualifies when it comes to the word unique. What we have here is a company that owns three quite interesting properties, none of which are getting the recognition they deserve. Most important is the Las Cristinas in Venezuela, which is one of the largest fully explored and proven gold resources/reserves in the worldbut it's subject to a serious legal and political dispute. Second is the Las Crucitas in Costa Rica, which is also a world class fully proven property but it's subject to environmental wrangling. Third is the Maple Creek, in Guyana, a potentially very profitable gold/diamond placer property.

If Vannessa gets lucky on either the Las Cristinas or the Las Crucitas then shareholders should be rewarded big time, certainly if gold does what I expect. What do I think the shares could be worth? In the kind of environment I expect, that's pure crystal ball gazing. When you look at the insane valuations mining stocks have gone to in the five bull runs since 1970 (cresting in 1973, 1980, 1983, 1987 and 1996), then it's certainly got 10- or 20-1 potential over the full cycle. Will that potential be realized? If I knew that, then it would be the only stock I owned. But it's certainly one that will get plenty of attention as the cycle goes on. And, equally important, it's got relatively little downside risk for reasons I'll explain.

Management as a group owns over 65% of the company's 47 million shares, which is the way I like it. Ron Mannix, who effectively controls the company, owns 40% of the total shares. All of the principals' 32 million shares are pooled; the remaining 15 million are spread among 580 shareholders, a very small base. The Mannix's have long been one of Canada's wealthiest families, and have considerable familiarity with oil and mining. I'm personally familiar with them mainly because we all play polo, and they're well liked in that community, for what it's worth. Strike that. It's actually worth a lot, since many in that sport have egos as inflated as their bank accounts, which is not a good thing.

Ron Mannix wasn't with me on this trip, nor was Fred Peschke, the CEO. I spent a week with Eric Rauguth, Chief Operations Manager, and Exploration Manager Paul Matysek. Rauguth is typical of the type of Germans you find in Third World countries. Hands on, practical. Eric has spent many years in the Yukon mining placer gold, and I don't believe there's much he doesn't know about placer mining or machinery, among many other things. Paul impresses me as a highly competent geo. Like most geologists, he can be briefly described as an outdoorsy intellectual.

Promotion has never been a strong suit with Vannessa. They never saw the point of promotion in that the C$18 million raised so far has all been done among the principals and their friends. (Word to the Wise: This is one reason you want to attend mining shows, AGMs, and the like, to get to know manage

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Venezolana de Guayana (the CVG), a state-owned company with numerous interests in Venezuela's boondocks. In 1991 they inked a deal with Placer Dome to explore and exploit the property. PDG started work on the property in Nov 1991, and over the next six years Placer exhaustively explored the property, putting in, among other things, 1,167 drill holes totaling over 155,000 meters. Placer has invested over $170 million on this property.

The initial deal was fairly straightforward. The CVG entered into a joint venture with Placer whereby Placer would own 95% of MINCA, the joint venture (JV) company that owned Las Cristinas, and the CVG would own 5%. The CVG retained a back-in right for 30%, which they can exercise by posting their share of expenditures, or about $40-odd million at the moment. The deal made sense for the government (CVG) in that, for no initial capital outlay, they'd get major development, employment and tax revenues. Regrettably, personal relations soured between the Placer execs and the various Venezuelan bureaucrats they dealt with. And this was greatly compounded by the election of Chavez as El Presidente in 1998.

Chavez is, like so many Latin politicians before him, a military man innocent of either economic knowledge or business acumen. He has, however, populist instincts, a propensity to surround himself with cronies he likes (but who have no other qualifications), and a tendency to mistake precipitous action for decisiveness. It's a notoriously bad combination.

Placer suspended the operation in 1999 in the face of weak gold and copper prices; Chavez and company were bitterly disappointed and reacted by asserting breach of the contract to place Las Cristinas in production. At that point, Placer decided to lay off their interest to another group, while maintaining a back-in right, since just maintaining the property was costing them hundreds of thousands per month. The CVG (headed by a friend of Chavez, another ex-General named Francisco Rangel Gómez) accuses Placer of selling its interest in Cristinas without CVG approval, which Placer claims wasn't necessary.

In any event, after Placer announced the sale of their interest in MINCA to Vannessa on July 13, 2001, Gomez gave Placer 90 days to correct "incomplete aspects" of the contract, or he would tear up the agreement and find another partner, stating that the CVG was actively entertaining suitors such as Canada's Gold Reserve, Crystallex International Corp., and "other Canadian gold companies." On November 16th, in a fit of pique, the CVG unilaterally took over the property, asserting 100% ownership. This complicated the situation and led to a Mexican standoff, so to speak, where neither party can do anything until the courts settle the matter of who really owns the Las Cristinas.

CVG, in near bankruptcy itself and typical of parastatals the world over, certainly doesn't have the

capital to do anything with the property. The bright side is that the CVG is now footing an approximately $40,000 monthly bill to maintain and police the Las Cristinas, while Vannessa is relieved of maintaining the property.

Further, the two companies named as potential partners by CVG are essentially non-starters.

Crystallex (KRY.T, CAD$3.14, 72 million shares out), once claimed roughly half of the Las Cristinas through a title dispute, but had its case thrown out by the Supreme Court in June 1998. Crystallex, which owns the nearby Tome, Albino and Lo Increible properties, is still pursuing the issue, mostly by politicking, but I discount their chances because they no longer have any legal claim to the Las Cristinas. And CVG doesn't have authority to grant them such.

Gold Reserve (GLDR, $0.88, 22 million shares out), owns the Las Brisas deposit adjacent to the Las Cristinas. Las Brisas is a large (200 million tonnes) gold and copper resource hosting about 6 million ounces of gold. It's an extremely low-grade deposit that, to be mined by itself, probably needs $400 an ounce gold. Their pitch to the CVG is that, combined with the Las Cristinas, the resulting mine would be just that much bigger and more efficient. This is entirely apart from the fact that they'll never get the Las Brisas into production without the Las Cristinas anyway. Of course this argument nonetheless has appeal for the CVG, since the combined operation would result in the second largest mine in Latin America and the sixth largest in the world, with over 21 million ounces of resources. In fact, Gold Reserve was reportedly approached by Placer to take over the Las Cristinas for an asking price of $6 million, but Gold Reserve backed off in view of the dispute with the CVG. Fact is, however, GLDR doesn't have a viable, stand alone property.

Actually, the CVG appears to have acted throughout the entire episode exactly the way you might expect a parastatal corporation to act. First, when asked to make a decision as to whether it would like to buy Placer's interest, it acted like a deer in the headlights and didn't respond. Next, to switch metaphors, when Placer found a partner, it acted like a chicken with its head cut off. This is, of course, predictable behavior for any state corporation because neither the institution, nor any of the people in it, has any incentive to act productively. That's entirely apart from the fact that it's usually only political hacks, and those with no better options, that go to work for an arm of the government in the first place.

The conclusion I glean trying to be objective but recognizing that it's very hard to read all the elements at play in a country where you don't live is that is an emotional guy who wanted this mine in production ASAP, current economics be damned, simply because he wants to be seen as "doing something" to get the economy going. Venezuela has chronic unemployment,

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a huge and growing underclass and a lot of political and social unrest. He came into office promising the moon and he's failed miserably because, like almost all men on a white horse, he simply doesn't understand the structure of production and the nature of progress. The day after I left there was a nationwide strike protesting the deep malaise of the economy. Chances are that he'll be out of office soon and the next regime will want to get this mess off their plate, simply because neither the government, nor the CVG, has the technical, intellectual or financial capacity to deal with it.

In Caracas I spoke to, and read opinions by, several lawyers familiar with the legal situation I've described. The general sentiment was that Vannessa and Placer should win the case. Of course, these were people I met through Vannessa and there are obviously lawyers on the other side of the issue, but here's how I read it

The actions of the CVG are illegal and in violation of the contract they signed with Placer. If the CVG's actions aren't overturned, it would compromise the judicial integrity of the country, bringing into question whether the rule of law even exists in Venezuela. When the issue goes to court, either Vannessa (MINCA) or the CVG may win, although from the layman's viewpoint of simple justice, I don't see how MINCA can lose.

Will the Supreme Court validate the sale of Placer's shares of MINCA to Vanessa? Will other companies that lust after the Las Cristinas, particularly Crystallex and Gold Reserve, somehow find a way to scoop the deal? Will the whole mess go to an international tribunal? Will the possible departure of result in a more cool-headed approach from the government? These are imponderables. Yet it would certainly appear, to any impartial observer, that Vannessa will come away with all of Las Cristinas

Fortunately, the economics of mining the Las Cristinas are more straightforward.

The economics, or: Can it be
produced profitably?

The real reason Placer got itself into this whole imbroglio is because the answer to that question is "No, based on the current gold price, and the way Placer was planning to produce." The feasibility study, done in 1997, concluded the total proven and probable reserves at Las Cristinas equaled 326 million tonnes of ore, grading, on average, 1.1 grams of gold, for a total of 11.8 million ounces. In addition, Cristinas has an inferred resource of another 85 million tonnes grading 1.3 grams, for a total resource of 15.2 million ounces, making it one of the largest near-economic deposits in the world.

The purpose of a feasibility study, which is typically performed by an independent outside contractor, is to examine all the details technical, financial, legal, environmental, what-have-you surrounding a project

and draw a conclusion as to whether the operation makes sense.

Placer's feasibility from the fall of 1998 suggests annual production of 470,000 ounces of gold and 16,000 tonnes of copper over a 20 year mine life. The study showed a minimal return when calculated at $375 gold and included capital costs of $600 million.

Placer had started construction of the mine in August 1997, but the operation was suspended in January 1998 because of the lawsuit with Crystallex. The Supreme Court decided in the favor of MINCA in June 1998 but construction was again stopped in mid-July 1999, this time for economic reasons. What made sense in August 1997, with gold at $360 and copper at $0.90, made no sense two years later with gold at $260 and copper at $0.65. But, when prices inevitably rise, this project will be a barn burner.

Vannessa's Plan

The company has, however, come up with a plan that makes sense, and money, at today's prices.

In the meantime, Vannessa plans on producing the property on a much smaller scale, on which they will pay Placer a royalty of from 2-5% depending on the gold price. The surface of Las Cristinas, roughly the first ten meters, is a rock known as saprolite. Saprolite is extremely common in tropical environments; in essence, it's an extremely weathered and oxidized version of deeper rocks. The material is, essentially, half-way between soil and rock, typically red in color. Saprolite is a favorite for mining by the garimpieros because it's soft, easily processed, doesn't necessitate blasting, and often has higher than average concentrations of value.

It's clear that there are well over a million ounces in the saprolite. Vannessa believes a reasonable estimate of capital costs might be $50 million, with operating costs of $150 an ounce that would result in a total cost of around $210 per ounce of gold produced. Such an operation could process 100,000 ounces per year for about 10 years.

I didn't visit Las Cristinas on this trip, going only to Caracas. But I was in K88 several times in the 90s. The area used to be the middle of nowhere, but many of the people that came in over the last couple of decades have stayed, which also makes the project easier. My guess is that Vannessa's plan to produce the saprolite cap will work.

Anything can happen in Venezuela in this matter. But you have to play the odds. And, in my view entirely apart from the fact that Vannessa and Placer aren't about to roll over and play dead is that they're probably going to wind up with most or all of what they expect.

As a practical matter, once reality sinks in, the generals and bureaucrats are likely to see they're better off sticking to the existing deal with MINCA, if only be

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cause it's going to take years of wrangling in the domestic courts before they could even hope to get a decision that would "legally" allow them to exploit the property. And even then, it's most unlikely they'd be able to get any financing for such a clouded project. Or any other project in a country where the property rights, contracts, and the rule of law is so arbitrary. And that's not counting steps MINCA, Placer, and Vannessa would take with international courts.

Las Cristinas alone, regardless of the legal issues described above, is reason enough to own Vannessa. However, the company has several irons in the fire.

Property 2: The Cerro Crucitas
in Costa Rica

Cerro Crucitas lies about five hour's drive north of San Jose, right on the Nicaraguan border. The initial discovery was made in 1992 by some independent geologists, who then optioned it to Placer Dome. Placer then proceeded to explore it in depth with the usual methodology stream sediment sampling, soil geochemistry, trenching, and geological mapping to define drill targets, since drilling is the only way to be sure what really lies under the surface. Drilling commenced in October 1993, and by 1996 roughly US$20 million was spent on over 36,000 meters of drilling, camp construction and the like.

After doing an in-house pre-feasibility study, Placer Dome decided the project did not meet its corporate hurdle of 5 million ounces and sold it to Lyon Lake Mines in November 1998 for $3 million in cash and 500,000 shares. Lyon Lake then proceeded to fund the cost of a full feasibility study, which in this case takes up about 5 feet of shelf space. Feasibility studies are not trivial matters. Regrettably, by the time the study was done, it could only show that the project was uneconomic at prevailing gold prices.

In the final analysis, however, whether what you pay for something is a good deal or not is mostly a matter of timing. And I believe that Vannessa's timing in buying Crucitas was excellent. In effect, they acquired a 2.4 million ounce resource for about a dollar an ounce, with little of that paid up front. In the bargain they got a fully developed camp, all the data $32 million can acquire, and considerable exploration potential on the large property. To put that in perspective, recall that large gold properties typically changed hands for $50-100 an ounce of gold in the ground during the last bull market. I expect it'll happen again.

The Cerro Crucitas deposit is much smaller than the Las Cristinas; 28 million tonnes grading 1.68 grams of gold and 2.25 grams of silver, for a total of 1.6 million ounces of gold equivalent. At present prices, of course, it's just a resource. The feasibility study suggests production of 175,000 ounces per year at a cash cost of $181 an ounce and with an upfront capital cost of US$100 million. That makes the total cost around $275

an ounce. The deposit is, like the Las Cristinas, highly leveraged to the gold price. And it fits perfectly into Vannessa's strategy of buying marginal deposits cheaply in anticipation of a higher gold price.

The Revised Plan

Like Cristinas, Vannessa isn't planning on simply holding Crucitas in inventory against a rise in the gold price. I think the price of gold is going to take off, but that assumption can't be used as the basis of a business. So, like Cristinas, the plan is to produce the saprolite in the meantime. A scoping study (read: back of the envelope feasibility study) indicates there are 7.8 million tonnes of saprolite grading 2.15 grams, for a total resource of 544,000 ounces, which can be produced at the rate of 90,000 ounces per year for a cash cost of only $115 per, and a capital cost of $27 million. That means the total cost is on the order of $165, which is quite profitable at current gold prices. And shouldn't compromise the remaining 1.5 million ounce resource.

There are always technical things that could go wrong, of course. But the main worry is Costa Rican politics.

Politics in Costa Rica

I've spent a lot of time in Costa Rica over the last 25 years, including one stint of living there for three months. The country has changed immensely in that time, and all for the good. After WW II, Costa Rica was probably the poorest Central American country, lacking any natural resources beyond a benign climate for growing fruit.

The only "problem" with Costa Rica is that it's become wealthy enough to be able to afford a conscience when it comes to ecology. That's not a bad thing, of course, but it often has perverse consequences. Today permitting for any major project is required, and enforced, in every country in the world; but some places are tougher than others, and that certainly includes Costa Rica. One of the hesitations the market has with Vannessa, therefore, is a fear it won't get its environmental permits here. And it's a valid concern. When I was at the camp, for instance, half of the people on site were archaeological students, scraping about looking for arrowheads and evidence of primitive Indian campgrounds, at the expense of the company.

The fact is, however, that with today's technology, an efficient, profitable operation is almost inevitably a clean and environmentally friendly one. And that's not because there are laws and permits enforcing it, although they would be largely unnecessary if the property rights of all concerned were properly enforced.

In any event, Vannessa completed a feasibility study for the mining of the saprolite in November 2000, and it was approved by the relevant government agency in August 2001. At this point the only hurdle is the approval of the environmental impact study by a different

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agency, whose answer is expected by June 2002. If granted, mine construction should begin the next month.

Property 3: Maple Creek, in Guyana

I flew about an hour and a half south of Georgetown, about 1/3 the way down the country, to what are known as the Potaro River concessions. Guyana, like all its neighbors along the Caribbean coast of South America, is basically a rain forest, drained by dozens of rivers, which are fed by hundreds of streams, which are in turn fed by thousands of creeks. The all flow into the sea from the highlands in the southtapui countrygranite benches with vertical sides rising many hundreds of feet straight off the jungle floor. You read about them in Sir Arthur Conan Doyle's The Lost World.

Once you get off the narrow coastal strip where almost all the people live (and there aren't many, only 771,000), there are only two practical ways to get around: plane and boat. There are roads, of sorts, but when it rains they turn into mud bogs; and when they get to a river, you're generally at the end of the line. That means if you want to go mining you have to set up a more-or-less self sufficient camp in the jungle, mostly supplied by boat, with critical things (like your Editor) coming in by plane to a landing strip of your own manufacture.

Starting in 1996, as the last exploration boom was going bust, Vannessa bought the rights to explore and produce on about 40,000 acres of ground in the area, generally by putting down a small annual retainer against possible future royalties. Even though it's about as close to the middle of nowhere as you can get, the Potaro River area has been a producer of alluvial gold and diamonds for decades, and it's by far the most prolific in Guyana.

The Maple Creek Mine in particular

Most placer mining that passes for commercial today is done by dredges mounted on flat-bottomed boats that moor themselves in a river and gradually make their way upstream, processing gravel for nuggets as they go. In fact, two small dredges were working a section of the Potaro River as I went by them in a small boat to get to a different part of Vannessa's property. How much money do the dredges make? That's hard to say for a number of reasons, not least being that the miners are famously secretive. But, working two shifts, they probably average 3-15 ounces a day, depending on whether they come across an unpredictable sweet spot. Their returns would be vastly higher if they could recover the diamonds in the gravel, but except for the rare stone sighted visually, it's beyond their technology. Remember that all placer values are recovered by gravity. Gold is easy to recover, with a Specific Gravity of 19. Diamonds, however, only have an SG of 4.5, making

them only slightly heavier than waste material. The Maple Creek Mine, however, isn't going to use river dredges.

Vannessa constructed their camp in the jungle, from scratch, starting March 2001. I've been in dozens of mining camps the world over, and this one was intelligently put together bunk rooms for the 20 workers it will take to run it, mess hall, offices, generators that was all standard. The wood to build them was milled on site from felled trees. Two of the kitchen staff double up to grow veggies in a garden, raise chickens and catch fish from the river. What I liked most was the machine shop; when something breaks, you'd better be able to fix it on site, and have the tools to do so. They fabricated a good part of the processing equipment on the spot, from steel sheets and beams. Altogether a professional operation.

As you read this, in February, full production should be getting under way. I find two areas here that should be brought to your attention (well, there are lots of interesting things, but this is an article, not a book): The method of mining, and the method of financing.

Diamond Placer Mining Most diamond mines around the world are located at kimberlite deposits. When diamonds are formed under intense heat and pressure over 50 miles underground, they surface in narrow pipes (typically only a few hundred meters in diameter at the surface) embedded in kimberlite, a mineral first encountered in South Africa at the famous Kimberly deposit. I won't go into more details here, except to say that a good diamond mine dwarfs even the best gold mine in economics. Long-time readers know that I don't favor diamonds as an investment, partly because it's an artificially maintained market, partially because the valuation of diamonds is a game for experts, and mainly because with the advent of nanotech over the next generation, people are going to find that diamonds really aren't worth much more than the carbon they're made from. But that's a different subject, not directly related to the economics of mining the stones today.

Alluvial diamonds are deposited much the same way alluvial gold is: erosion wears away one or more hard rock deposits, settling values where wind and water dictate. What Vannessa has done at Maple Creek is use hand held ground penetrating radar to determine the course of an ancient river bed, now under cover, and sample it extensively for values. The value-bearing paleochannel has been traced for 4.2 kilometers so far, and is open in both directions; on average, it's 327 meters wide and 19 meters deep. Total resources in just the first 2.2 km of the channel that has been sampled are 9.08 million cubic meters. Mining will start at 1,000 cubic meters a day, and soon ramp up to 3,000.

A D-8 Cat and a backhoe load the dirt, from whence it goes to a washing plant to separate the gold. Then on to a DMS (Dense Media Separator) machine.

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Finally, onto a Sortex machine where the diamonds are made to flouresce for further concentration, then to a glove box enclosing a grease table for final separation. It's a small factory in the jungle.

In mining in general, and most particularly in alluvial mining, there's a lot of uncertainty. Part of it is caused by theft of the final product when management is slack. All I can tell you is that I was impressed by numerous well thought out layers of security that were evident, all supervised by a South African engineer on site. We talked about the problem of theft in Namibia and SA, swapping anecdotes. Management there is noted for a skewed sense of humor about these things, and one group liked to weld thieves into 55 gallon drums before rolling them down long hills, or maybe floating them down rapids, for an object lesson. I asked if he thought the miscreants were ever the same after the experience. He replied, completely deadpan, with a heavy Afrikaner accent, "I don't believe they are." But that's South Africa, of course, not Guyana.

South African alluvial projects are economic at around .5 carat per 100 tonnes. Sampling at Maple Creek indicates they should get about 7 carats per 100 tonnes. Alluvial diamonds tend to be very high quality, simply because flawed stones are usually destroyed by years of tumbling. Vannessa's initial bulk samples averaged US$140 per carat so, back of envelope, the project could generate revenues of up to $14,000 a day initially, rising to $45,000 a day, or nearly $1.5 million a month within a year. Management anticipates that the project could return $3 million a year, or more, in cash flow.

But the best part is there shouldn't be any losses, even if things go wrong, because of how the project was financed.

Financing Maple Creek There are (theoretically, anyway) lots of ways for small companies to finance their projects. Debt is a non-starter, since the odds are it will leave both the borrower and the lender unhappy. Unless it's done at the top of a market, selling shares is dilutionary. The best method is to find a major who's willing to co-venture a property, earning an interest in exchange for expenditure. The rationale is simple: It's better to have 30-50% of a proven prospect for no cost, than 100% of a risky, unproven venture and having to foot the entire bill. It makes sense for the buyer because good prospects don't grow on trees, and they're usually all found by juniors that specialize in exploration.

In 1999 Vannessa signed an agreement with Rohani & Associates, of Qatar, UAE, to develop the Maple Creek Mine. Vannessa and Rohani formed a 60/40 JV company, with Vannessa putting up its Potaro properties and expertise for its 60%, and Rohani putting up to US$2.2 million, all of which has been paid, to build the mine for its 40%. Rohani also has the right (and the obligation) to buy the diamonds from the joint venture at market prices.

Vannessa, being interested in vertical integration, will also profit from the resale of the rough diamonds, as well the finished product marketing, by virtue of a shareholding in the marketing company. The structure of the deal makes me quite optimistic.

The Bottom Line

This has been a long and complex story, which is one reason it hasn't been told in the past. People, understandably, prefer short and simple ones. (By the way, I've produced a much longer report on VVV, available at www.dougcasey.com.) Right now, you're probably saying to yourself: OK, that's all great. But what can I expect from the stock? Well, as you should know, junior gold stocks don't readily lend themselves to Graham-Dodd style analysis. So picking a number what any of them "should" be worth is really a guessing game. And, except for the Maple Creek Mine (and the market doesn't give placer operations much of a premium), all of Vannessa's properties are currently sub-economic, apart from the legal issues. Still, let's crunch the numbers.

I believe they'll actually succeed on Cristinas and Crucitas, which will give them 200,000 ounces a year of profitable production, apart from Maple Creek. That alone is probably worth US$100 million in this market. Heck, Crystallex has a US$226 million market cap. The company owns and operates the San Gregorio Mine in Uruguay's Rivera Crystalline Island and the Tomi Mine, and controls the Lo Increible Project in the El Callao gold district of Venezuela. They only produced about 96,000 ounces of gold last year. And both the Uruguay and Tomi mines have very short lives.

The value of ounces in the ground is harder to compute, because their value is highly leveraged to the price of gold so they're not worth much right now. Plus, should gold skyrocket, Placer will exercise its back-in right, leaving Vannessa, after return of 110% of expenditures, with only a royalty but at $500 gold, that amounts to US$5 million a year, and royalties are the best possible interest in a mine.

Right now the company has a market cap of about US$30 million. I think it's under priced significantly, and could easily triple. If gold does anything like what I expect, it should easily triple again. What's the risk? I think the downside is covered by the cash flow from Maple Creek, the other properties they now own, and the fact management is actively working on tying up other elephant properties while the prices are right.

The last cyclical peak in the resource markets was 1996, followed by possibly the worst cyclical bear market in the history of these stocks. Which is saying something, in that they typically run up 1,000% during bull markets, and fall 90-95% during subsequent bear markets. But bull markets follow bear marketsjust like bear markets follow bull markets. It's just that people forget the inevitability of that sequence.

Volume XXIII, No. 1 www.dougcasey.com

This is a good outfit, with limited risk and major potential. You should own it. But be careful. It's a thin trader, and you don't want to create your own private bull market.

The broker to talk to about Vannessa in the US is Paul Van Eeden, of Global Resource Investments, 760-943-3939 or 800-477-7853. In Canada, I suggest you contact Stu Vorberg of Yorkton Securities, 604-640-0555 or 800-283-8575. Call the company for a care package at 604-689-8927 or 888-339-6339, or access their website at www.vannessa.com. n

* * * * *

Here's a follow-up (along with the Endquotes below) of last month's thoughts on the Meaning of Life. At a minimum, I don't want to disappoint those who think I know the price of everything, but the value of nothing. Late in December a 24-year-old Internet entrepreneur (President of TAMBA Internet) named Kay Hammond from Birmingham, England, auctioned herself on E-Bay as a wife, and says she was shocked that bids reached £10 million, even though the reserve price was only £250,000.

Regrettably, Ebay withdrew her advert less than 24 hours after it appeared, saying: "It's a grey area, but there are certain things that aren't considered appropriate, like people selling their virginity or their soul." That impresses me as a pretty humorless response, in addition to being inaccurate. People sell those things, and more, all the time, and for vastly less money. Ms. Hammond says: "I'm not selling my body and I'm not selling sex - I'm selling the whole thing."

Why not? Marriage, which is basically a Neolithic institution, has historically been first and foremost about economics, not love. Love has always been an ideal, or a bonus, or a come-on. But, as even relatively recent institutions like the dowry and the arranged marriage, as well as practices like polygamy and polyandry would indicate, it's not all about love.

Part of the problematical status of marriage lies in the fact that life expectancies in pre-industrial times were something like 30 years, children had to become economically productive at about seven, and everyone was mated and reproducing by 15. Technology has skewed that timetable in some ways; mainly, it's already extended a person's active life by decades, and will eventually extend it by centuries. Tech makes the relationship between the sexes, like all areas of life, more fluid, interesting, and higher potential. The creation of Church and State has skewed it in other ways, mainly trying to solidify and artificially extend an institution that originally only had something like a seven year half-life. This is, incidentally, the origin of the phrase "the seven year itch." After seven years, once the offspring have reached economic viability, there seems to be an urge to go onto something new in life.

Anyway, these are just a few random thoughts. It

would be interesting to follow the career path of Ms. Hammond, however. I suspect she's not only smart and fun, but likely riding the wave of the future.

Endquotes

I've been accused of being too highbrow in my selection of commentary from the likes of Gibbon, Mencken, and Bakunin. So I decided to reach out to the Internet for the opinions of some contemporary luminaries on the subjects discussed in The Value of Human Life. First, I give you Miss Alabama, obviously a budding bioethicist, from the 1994 Miss USA contest.

Question: "If you could live forever, would you, and why?"

Answer: "I would not live forever, because we should not live forever, because, then we would live forever, but we cannot live forever, which is why I would not live forever."

With further observations on bioethical issues, singer Mariah Carey was quoted as saying: "Whenever I watch TV and see all those poor starving kids all over the world, I can't help but cry. I mean, I'd love to be skinny like that, but not with all those flies, and death and stuff."

Will either of these fine-looking ladies make their ova available to the broad public? The thought gives one somewhat more sympathy for issues bioethicists must confront although not much more.

I think I know, however, what Gibbon would have to say about these girls' thoughts:

"...the use of letters is the principal circumstance that distinguishes a civilized people from a herd of savages incapable of knowledge or reflection."

Edward Gibbon, Decline and Fall of the
Roman Empire, Chap 9

Douglas R. Casey's International Speculator is published monthly by Douglas Casey. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. Publisher, editors and officers, including Douglas Casey may from time to time have positions, either long or short, in securities or commodities recommended by or referred to in this newsletter. No more than 250 words of this newsletter may be extracted or reproduced in context without permission of the publisher. ©2002 by Douglas Casey.

EDITOR/PUBLISHER: Douglas R. Casey; GROUP PUBLISHER: Laura Davis; PRODUCTION: Marketing Solutions Unlimited; LIST SALES MANAGER: Beth Ketzner

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