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stocks, to make a real killing. The last time it was this good was Jan 1993. I'm only surprised the bottom has been in place so long. I attribute a lot of that to the gold market.

As long-term subscribers know, I write elements of this feature in a bit of a formulaic manner. It may seem as if I'm repeating myself. The reason is not entirely laziness on my part, but a genuine belief that you've got to keep your eye on certain balls, constantly. Consider it like a "Post-it" note stuck to your investment refrigerator, acting as a constant reminder.

The last gold bull market crested in January 1980 at over $800, and it's been all downhill since then; at the same time, the world's economy and common stocks have been in a truly historic bull market (recently ended). Since all this has been going on for over 21 years now, a full generation, everyone believes it's going to go on forever. Even gold miners believe it and most of them have been shorting their production years into the future.

The problem, however, is all that gold which has been borrowed from vaults has been made into jewelry and such and is owned by millions of individuals. If the lenders of the gold, the central banks, want it back, the bullion dealers and mining companies aren't going to be in a position to deliver. What appears to be developing, in other words, is a classic short squeeze, but one of gigantic proportions. The X-factor, however, is that central banks still have maybe 15-20% of all the gold in existence left in their vaults, and if things started getting dicey-say some New York bank getting in trouble because of its bullion dealingthey could sell a lot to keep its price down. But the short position is going to have to be covered at some point.

I'm super-bullish on gold for lots of reasons detailed here, and in CI90s, that are unrelated to the alleged short position. But it sounds credible to me, and it's just one more good reason the metal isn't just going through the roof, it's going to the moon. I just wish I knew the timingbut I sure wouldn't want to be short right now.

Gold mining stocks are an extremely leveraged way to play the gold price. As a business, mining is about the worst enterprise in the world. Economic deposits are very hard to find and very expensive to prove up. Then it costs up to a billion dollars to actually build the mine, a huge up-front investment. Even then, you can't be completely sure the thing will perform as hoped; maybe the metallurgy will turn out to be troublesome, maybe metal prices will collapse, maybe the political system will act up, maybe any of a hundred equally serious things will go wrong. The more I've learned about the mining busi

· It is also no small coincidence that: 1) 1998 = 666 x 3, worse yet 2) 1999 is in fact 666, the beast turned upside down! Add to this, the seven seals have been broken: we have witnessed the slaughtering of lambs on Wall St., the burning of lambs on British television, and the gunning down of the defenseless by US sanctioned narco's in the jungles of Brasil. These facts, I am told (I am not making this up), are building toward the final blow out scheduled for 2007. For those of you in Utah it's quite simple, keep a close eye on Moroni and his horn.

"Non-believers would say, there are more fundamental economic forces at work that portent gold's return from the dead. Dry data such as, decreased worker productivity, massive increases in M-3 money supply, even more massive corporate and consumer debt, a bursting bubble and negative wealth effect, dropping interest rates, an energy crisis, mad cows and angry Muslims ransacking McDonalds, yada, yada, yada.

"Yes it's really the collusion of the stars and heaven, with admittedly a little help from Easy Al, that will bring gold back to its rightful position."

You've got to appreciate a geo who can keep his sense of humor at the bottom of the ugliest bear market for gold (and, indeed, most commodity-related) stocks in at least the last thirty years. (If you want to discuss the fundamentals of most any junior, don't be afraid to call Brent at 800-477-7853). But then, I don't think we're really at the bottom any more. At least as far as most of the stocks we've examined here are concerned. n

Junior Gold Review

This feature on these volatile junior stocks appears about semi-annually at the moment, most recently in January; when the gold share market heats up it will go quarterly. I consider all these companies "buys" based on their fundamentals. And not just in relative terms, as has been the case since my sell advice in May 1996, but now in absolute terms. In December 1998 I stated that gold and the mining stocks had bottomed. And I put it in bold caps, so that there'd be no mistake about the call. Gold and the junior gold shares have basically gone nowhere since then. This doesn't necessarily bother me; the end of a bear market doesn't automatically signal the start of a bull market. Some are still selling for close to cash, although cash is dwindling since few want to finance at these low levels.

Junior gold stocks are the most volatile securities on the planet, with the possible exception of lately minted Internet stocks, and the market is still off about 95% from its previous peak. THIS CONTINUES TO BE THE TIME TO BACK UP THE TRUCK. If I could call your broker for you, I would. What we're looking at is a rare opportunity, perhaps twice a decade in the resource

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ness, the less I want to be in it. It's a lousy business. Among other things, a good business is one that isn't overly capital intensive, isn't fixed to one locale, is not overly subject to commodity price swings, is not regulation intensive, doesn't have to rely on hourly labor, doesn't have potential environmental problems and, most importantly, can be grown consistently. The mining business violates all of these things. It's a 19th century business, intended for a choo-choo train economy, and that kind of economy is on its way to the scrap heap. Entirely apart from that, the long-term history of commodity prices has been to fall, and that trend is going to accelerate radically with the development of nanotechnology over the next decade or so.

The way to make money investing, as Warren Buffett has demonstrated, is to put your money into great businesses for the long term, not lousy businesses in hope of getting lucky. You cannot, therefore, "invest" in mining stocks; it is only possible to speculate in them. I know this sounds like bottom of the market talk, but it's just reality; I was saying this at the top of the market as well.

So why do I even bother with mining stocks in general and gold stocks in particular? In my case it's partly because I've taken an academic interest in the questions of geology and engineering intrinsic to the whole enterprise and feel I might as well amortize my investment in this knowledge. Partly because although I'm not always a gold bull, I'm definitely a philosophical gold bug. But mainly because they're the most volatile stocks on the face of the planet and that volatility can be a very good thing if you have the nerve to take advantage of it. Hopefully, when we dump the mining shares again in a few years, we'll be able to buy into high tech for the kind of value now available in resource issues.

Very, very few of even the best mining companies should even be considered as long-term holdings. True, the majors sometimes show earnings, but most sell at absurd P/E ratios, making them chronically overpriced even if they were good businesses. But they're terrible businesses, deserving low P/Es regardless of whether times are fat or lean.

Frankly, I have a lot of misgivings about recommending people own mining stocks because I'm afraid that, for whatever reason, many view gold stocks as heirlooms. They emphatically are not. These things are burning matches or, at best, trading sardines. But the prospect of seeing them run 1,000% every cycle makes them worth following at all times and sometimes owning in size if you're a speculator.

Cash positions are especially critical at this point in the market since all these companies are actively spending money, and when it's gone they're either going out of business or will have to finance on extortionate terms.

There's a lot more financial data worth knowing than

I have listed in this table like how many warrants and options are outstanding at what prices and when private placements become free trading. That's entirely apart from fundamentals, like the nature and size of deposits in question, how much work has been done on them and what it might cost to place them into production. Refer back to earlier articles, which have been done on most of these companies; I urge you to call them for a care package of information; that's what the telephone numbers in articles on companies are for. Talk to brokers who specialize in them. If you have an account with some "discount broker," you're almost certainly being hosed on bid/asked spreads, currency conversion and possibly even the actual commissions (since these are mostly Canadian stocks), while you'll get no information. Surprisingly, a lot of people don't follow this advice; I have no sympathy for them. And remember the Six P's (People, Property, Phinancing, Paper, Promotion, Politics).

Since this list is supposed to be practical, I'll endeavor to drop at least one stock for every one added; unless you do the same you'll wind up with a bunch of cats and dogs you can't keep track of. You should treat any stock portfolio like a string of horses: you want to always keep upgrading, losing the nags for potential winners. That doesn't mean a dropped company should (necessarily) be sold, only that the companies remaining on the list have more upside and less risk in my opinion. If you can't remember the rationale for each of the companies (or make up your mind which you like best), this is a time when you can simply put $5,000 into every third one, randomly, on the list.

Quality will lead the way into the bull market; this is an excellent time to own the majors. Most juniors fluctuate only indirectly with gold simply because most don't have any gold, although the companies on the list below are exceptions to that statement. If you have some money to buy juniors with, buy these. They're the best I know of.

Notwithstanding all these caveats, the market as a whole could easily go up 1,000% in the next couple of years. In fact, if it doesn't, it will be the first time in history after a 90%+ meltdown. That doesn't mean the market is going to turn around and head north tomorrow morning, of course. Just as stocks often sell for far more than anyone would have guessed, they often sell for far less as well. And for a long time.

What is the one thing I really worry about now? I've remarked in past months that if the bear market in New York really gets vicious, and gold doesn't start heading up at the same time, these stocks could get totally creamed, and many would sell for half the cash they have in the bank. But the good news is that gold has bottomed, and the next step is likely up. The risk of a meltdown in New York remains, however, a huge risk.

In the past I've put a lot of emphasis on stop losses. The rationale, you'll recall, is that if you have a 20% loss, you can make it back with a 25% gain on the re

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maining capitalvery quickly doable with stocks this volatile. With an 80% loss, however, you need a 500% gain on the remainder to break even-and that's not easy. At this point in the market, however, stops are somewhat academic. It's the bottom. Stops are much more important when you're dealing with a $5 stock that's risen from $.50, than a $.50 stock (with $.50 of cash) that's already fallen from $5.

As an aside, it must be said that using stops in a market as dead and illiquid as this one is often problematical; if you try to sell there often just aren't any buyers nearby. Many of these stocks are only trading a few thousand shares a day. Plus, many brokers just don't offer stops. Regardless, it's good discipline.

Dayton Mining (DAY) is up 150% this year, despite an increase in cash operating costs to $241. The company closed its Andacollo mine in Chile.

Glamis (GLG) earned $1 million in the second quarter on gold production of 51,369 oz. The company has expanded its San Martin output to 110,000 oz. annually, and increased reserves at Marigold by 60%. Shares are up 138% this year.

Crew Development (CRU.T) raised C$28 million in June via private placement at C$1.13.

Gabriel (GBU.T) has raised C$10.5 mil at C$3.50. The company's Rosia Montana feasibility study defined a 10.5 mil oz. gold and 54.6 mil oz. silver deposit with a mine life of 11.2 years, average annual production of 775,000 oz. and production costs of US$158.

European Goldfields (EGU.CV) just announced plans to raise C$4 mil via private placement at C$4. The company will use the proceeds to fund exploration on its concessions in Romania's Golden Quadrangle.

Farallon (FAN.T) has been the subject of much talk lately. The company is still mired in a lawsuit stemming from ownership questions surrounding its Campo Morado concessions in Mexico. The action has been dismissed in both the US and Canada, and the evidence was dismissed by a judge in Mexico, but the suit still stands. Suffice it to say that the wheels of justice turn slowly in Mexico, and need lots of grease. It's not my preference to get involved in lawsuit plays, but FAN is an exception. It's an excellent deposit, and remains an excellent speculation.

Radius (RDU.CV) has traded down on heavy volume in the past few weeks. The company released some good drill results from its El Tambor project, but apparently not good enough for the market, as the news was greeted by heavy selling. However, they're now drilling the high-grade Bridge zone, and results should be out in a few weeks. Management is still buying stock, so take that as a hint.

What the Disappeance of Homestake Means...

Among Other Things

Since the last gold edition, the big news, such as it is, is the announcement late in June that Barrick (ABX, US$16) would be acquiring Homestake (HM, US$9).

The fact Homestake, the oldest publicly traded miner, is synonymous with gold and is a household name (well, maybe not in polite households) makes it special. That, and the fact it was one of the few that it is lightly hedged, made it a good leveraged play for a move in gold. But, by year-end, Homestake will disappear. Its shareholders will get newly issued Barrick shares, worth an aggregate of US$2.3 billion.

Corporate mergers and acquisitions happen all the time. Since 1996, the last peak in resource stocks, there have been at least 40 mining deals in which the target was worth over US$100 million, including the acquisition of Billiton by BHP in a deal worth US$28 billion. But the Homestake deal made me wonder about a few things, not least why the deal was done in the first place.

Does the acquisition make sense? I'm not personally acquainted with Barrick's current management but, considering the company's relative success, they're probably smarter than most, for what that's worth. Speculation is that they did it because HM has only about a year's production hedged, and that's at a fairly attractive $330. They think the price of gold is going up, and they want to increase their exposure to it. That, and today's institutional market tends to reward companies simply for being big. The augmented Barrick will be, after Anglogold, the world's second largest gold producer with an estimated pro-forma production of 6 mil oz/yr, 18 mil sold forward at an average of $345/oz, and a stated reserve base of 79 mil oz.

The deal makes a lot of sense for Barrick if gold goes up; it makes little sense if it stays the same. Barrick paid about $152/oz. for Homestake's 21 mil oz of reserves. Assuming cash production costs of $174 over the entire 21 mil oz. (highly unlikely), in rough terms that means ABX needs to see a minimum of $326 ($152+$174) gold to just break even on this purchase.

Homestake is illustrative of the sorry state of the industry. After 125 years in business, it goes away with net negative retained earnings of $550 mil and $225 mil in debt. It lost US$104 mil in 2000 (US$30 mil in regular losses, plus $74 mil in write-downs). Although it produced about 2.2 mil oz. in 2000, that number will drop to 1.9 mil by 2003. Commenting on the deal, Homestake CEO Jack Thompson drew a moronic happy face on the sorry tale: "Our great legacy will be carried on in the combined company that will reinforce Homestake's

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	Symbol	Price	52 week low/high	Div Yield	Shares Millions	MktCap $Millions
Barrick	ABX	15.86	12.31/19.38	1.37	396.1	6240
Durban	DROOY	0.89	0.56/1.46	N/A	61.7	56
Franco-Nevada	FN.T	C$20.20	12.40/22.00	1.49	158.6	3260
Harmony	HGMCY	4.68	3.46/6.50	3.57	102.8	481
Newmont	NEM	20.62	12.75/24.60	0.58	195.8	4038
Placer	PDG	10.96	7.25/12.48	0.90	327.8	3593

Producing	Symbol	Price	52 week low/high	Div Yield	Shares Millions	MktCap $Millions
Dayton	DAY	0.31	0.12-0.93	32.00	31.0	9.61
Eldorado	ELD.T	0.30	0.22-0.81	2.29	126.6	37.98
Glamis	GLG	3.10	1.25-5.00	12.93	70.6	218.85
Miramar	MAE.T	0.95	0.85-1.75	8.38	59.9	56.91
Moydow	MOY.T	0.36	0.33-1.45	2.53	30.5	10.98
Repadre Capital	RPD.T	3.35	1.65-3.50	1.82	33.6	112.56
Rio Narcea	RNG.T	0.55	0.40-1.21	1.73	64.9	35.69

Developmental	Symbol	Price	52 week low/high	Div Yield	Shares Millions	MktCap $Millions
Conquistador	CMG.CV	0.02	0.01-0.25	N/A	45.6	0.91
Crew	CRU.T	0.75	0.69-1.29	13.65	146.5	109.88
Cumberland	CBD.T	0.90	0.59-1.29	N/A	26.2	23.58
Farallon	FAN.T	0.53	0.40-0.90	N/A	25.6	13.57
Francisco	FGX.CV	6.41	4.00-6.79	21.10	17.4	111.53
Gabriel	GBU.T	3.75	2.34-4.68	5.50	90.4	339.00
Golden Queen	GQM.T	0.15	0.12-0.37	N/A	48.0	7.20
Hope Bay	HGC.T	0.29	0.26-0.59	1.62	179.0	51.93
Madison	MNP.CV	0.09	0.06-0.37	0.84	60.3	5.43
Metallica	MR.T	1.18	0.18-1.29	1.68	30.2	35.64
Minco	MMM.T	0.25	0.11-0.79	0.95	17.7	4.43
Minefinders	MFL.T	1.14	1.14-1.32	0.71	25.1	28.62
Nevsun	NSU.T	0.29	0.12-0.46	0.51	28.5	8.27
SW Gold	SWG.T	2.80	2.50-4.50	8.25	19.2	53.76
Vannessa	VVV.CV	0.72	0.64-1.15	3.82	47.5	34.20

Exploration	Symbol	Price	52 week low/high	Div Yield	Shares Millions	MktCap $Millions
Altius	ALS.CV	0.51	0.29-0.80	N/A	11.9	6.07
Anatolia	YMC/U.CV	0.48	0.15-0.69	1.65	23.4	11.23
Corriente	CTQ.T	1.02	0.76-1.59	3.20	25.2	25.70
Euro Goldfields	EGU.CV	3.70	1.04-5.00	N/A	15.1	55.87
Great Basin	GBG.CV	0.59	0.56-2.09	5.70	44.1	26.02
Minera Andes	MAI.CV	0.08	0.07-0.20	0.31	35.8	2.86
Nevada Pacific	NPG.CV	0.24	0.09-0.35	0.30	16.9	4.06
Pacific Wildcat	PAW.CV	0.22	0.07-0.26	N/A	9.0	1.98
Radius	RDU.CV	0.66	0.48-1.30	5.00	17.9	11.81
Rimfire	RFM.CV	0.35	0.20-0.66	0.59	12.6	4.41
Queenstake	QRL.T	0.07	0.06-0.18	2.90	47.0	3.29
Solitario	SLR.T	0.54	0.50-1.54	4.51	25.5	13.77
Virginia Gold	VIA.T	0.60	0.52-0.89	7.15	31.9	19.14

Silver	Symbol	Price	52 week low/high	Div Yield	Shares Millions	MktCap $Millions
Apex	SIL	9.15	7.20-11.48	47.70	34.7	317.50
Freeport Pref "D"	FCX-D	8.35	6.75-10.27	14.90	144.0	1202.39
Pan American	PAA.T	5.60	3.65-6.09	8.61	41.5	232.39
Silver Standard	SSO.CV	2.36	1.65-3.15	3.12	28.1	66.32

1 troy ounce = 31.1 grams		1 kilogram =32.15 troy ounces
1 tonne = 1000 kilograms = 2204.6 pounds		1 gram/tonne = 0.02917 ounces/ton

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long-held tradition of operating excellence, technical innovation and financial strength." Was he under the influence of a hallucinogen when he said that? Or is he incapable of reading his own company's annual reports? This may well serve as fair warning to Barrick investors.

Barrick claims the deal will produce US$55 mil in savings through "synergies" ($20 mil in administration costs, $20 mil in tax savings and $15 mil exploration cuts plus up to $15 mil through accounting differences between US and Canadian GAAP.) Severance and transaction costs of up to $40 mil related to shutting down HM will have to be added back in. Here's the math: $55 mil savings minus $30 mil operating loss = $25 mil earnings (less the $40 mil transaction costs in year one).

More on this shortly.

I admit to never following Homestake closely, because big mining companies, like big companies of any description, tend to be run by brain-dead suits, not by entrepreneurs. Indeed, the suits running mining companies are probably worse than most, in that they're not even smart enough to be in a business where the tide is coming in to float their boats.

The fact HM, the company most associated with being a pure play on the gold price, is selling out to ABX, the company most associated with hedging, is, to me, a major bell ringing at the bottom at the bottom of the market. Clearly, HM's management don't believe their options on the stock are ever going to be worth anything. They're probably right, insofar as they know the management.

Certainly, Barrick's offer holds far more appeal to management than to shareholders. I don't think adequate consideration is given to what actually goes on in the minds of the suits when their employer becomes an acquisition target. They see their salaries and benefits disappearing as new managers come in to replace them. So their natural response to a takeover attempt is to fend it off. That's almost never because they're trying to get a higher price for shareholders; management generally couldn't care less about shareholders, because they rarely own a meaningful number of shares themselves (apart from options). Indeed, not only are management and shareholders a totally different class of people, but management tends to view shareholders as a nuisance.

When managements fend off takeover attempts, it's not for the sanctimonious reasons given in full-page ads they cause the company to buy, talking about shareholder value. It's because they're looking for a payoff to go away, what's generally known as a golden parachute. It's rather perverse, in that if they'd been doing their jobs, the stock price would be high enough to not make the company an attractive target in the first place.

Management of the acquiring company has a differ

ent set of motives. The larger the asset pool they control, the more in the way of salary and benefits they can collect, and the easier it is to justify the G5 they want to fly about in.

I know this sounds cynical, but it's realistic. And, to some, it may sound like an indictment of capitalism, and an invitation to the government to cure what seems like an abusebut it's neither. The solution, I believe, is to have a board populated by contrary, hard-nosed independent directors, who see their job as forwarding the shareholders interests and keeping management in line. Unfortunately, most directors are friends of the chairman who serve at his pleasure. And if they want to collect their fees and options, they rubber stamp plans that accrue to management's interest. As far as the government solving the problem, that's a complete non-starter. But now isn't the time to go off on that tangent.

But it may be an excellent time to revisit the subject of hedging.

Other than what's in it for Barrick's management, the advantage to buying Homestake is that it mitigates their hedge book. Barrick, you'll recall, was the originator of hedging during the 80s. The extra margins it gave them allowed them to explore and acquire to a degree their competitors couldn't, so they became known as that rarest of creatures, a "growth gold." But that was when Barrick was young, and still run by its founding entrepreneurs. At this point, however, if Barrick really is bullish on gold, they're probably right in believing that buying more production is smarter than closing out their hedges.

The only reason to own gold stocks is to get leverage to the gold price; if you're not bullish on gold, you should forget about the companies that mine it, because it's a risky, non-growth business. Hedging (basically the sale of gold in the future for a higher-than-current price) de-risks the business to some degree. But it does so at the cost of most of the speculative upside which alone makes these stocks worth owning. That's a heavy price to just transform a really lousy business into a marginal business. Which leaves the investor with a marginal business in a sunset industry, but without the cyclical upside.

Why, then, do gold companies hedge? Partly because it actually can make economic sense. After all, that extra $30-60 an ounce might make the difference between keeping the doors open and going bankrupt. And that, management reasons, is in the interests of shareholders. But it's even more in the interests of management, because it helps insure there's money to pay their salaries. One can't overemphasize the fact that the interests of management, and those of shareholders, are often only indirectly correlated. And often they're at complete odds.

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In any event, although hedging has been the correct policy since Barrick basically originated the practice during the early 80s, it subverts the whole purpose of owning shares of a company that does it. Furthermore, although hedging can take a lot of the risk out of mining, it has its own set of risks (as Ashanti and Cambior found last year).

This gets us back to the issues we discussed in IS XXII/1: mergers and acquisitions will not supply or replace the core deposits needed for the major gold producers to maintain current production levels, or even survive. The majors are increasingly desperate for low cost ounces, and more of them. But the accountants and engineers running these companies continue to slash exploration budgets in their efforts to contain costs.

Barrick's cost "savings" will include a further $20 mil cut to exploration from the Homestake side plus the 34% cut they had already planned for their own exploration operations in 2001. The gold industry as a whole has cut exploration by two-thirds since 1997 and focused the majority of the remaining exploration dollars on areas immediately adjacent to existing operations. Very little goes to searching out new grassroots discoveries.

As I pointed out in XXII/1 for the mining industry, and XXII/5 for oil, resources are in process of being consumed faster than new ones are being discovered, and that's been the case for some time. Companies are solving that by buying other companies, so the reserves of majors may stay about the same from year to year. But the aggregate available industry-wide continues to drop.

As I'm always at pains to point out, the reason for that has absolutely nothing to do with the rubbish being ladled out by Al Gore, the Club of Rome and all manner of Green Hysterics. There are more resources of every type available than mankind can ever possibly use; and their real costs are going to continue dropping. With the advent of nanotechnology availability will go hyperbolic and costs will become negligible, but that's some years in the future. In the meantime, with current (albeit constantly advancing) technology, there are few minerals that can be extracted at a profitand that's even with operating mines, that have already incurred the costs of discovery, development, permitting, and construction. It makes no sense in today's world to spend a billion dollars just to insure you'll lose even more money as the thing produces. Unless resource prices go much, much higher.

Of course, this is where the juniors come in. Because they're necessarily run by entrepreneurs, who own lots of shares themselves, their exploration costs tend to be much lower. And explore is what they mostly do, because that's the only way they can hope to get a 10-1, or 100-1, shot on their stocks. That's balanced by the fact very little "greenfield" exploration is successful and,

over time, over 95% of junior mining companies go bankrupt (or are totally reorganized and recapitalized).

Worldwide gold production is now about 80 million ounces (including 7 million from Anglogold, 6 from the augmented Barrick, 5 from Newmont, and 3 from Placer Dome). If gold continues to linger under $300, then production is going to drop gradually for a while, until the industry itself collapses. If gold goes up (I think it will skyrocket), production will still drop for the short term, if only because miners will stop high-grading and go to lower grade ore. Plus, it takes years for trends to turn in any capital and regulation-intensive industry. Entirely apart from the fact that finding any economic gold mineralization is a rare event, and finding deposits large and rich enough to satisfy the needs of the majors is an extraordinary event. The time line from discovery to production can take several years to decades, exploration is requiring more and more esoteric techniques, and the known prospects have generally been beaten to death, several times over.

In real businesses, it's something of a rule of thumb that you have to sell your product for at least twice, better three times, its hard costs in order to make money. In the gold business, at anywhere near today's prices, that means you need operating costs of less than $135/oz to even hope to be economic. Only two of Homestake's mines (Hemlo and Eskay Creek) were able to do that in 2000. The fact is, however, that nearly every major producer owes its existence to just one or two such deposits; the rest are just window dressing. Worse, these core deposits are basically being high-graded, which means production costs are being held artificially low industry-wide at the expense of both future grade and reserves.

One estimate I've seen is that 176 gold mines have been shut down since 1997, representing approximately 15 mil oz. of annual production and over 260 mil oz. of reserves and resources. And that trend is going to accelerate because of the industry's financial weakness, and current high-grading. The question becomes, therefore, how will companies replace the core deposits which allow them to survive?

Of course, since the majority of all the gold that's ever been mined is held in vaults, the price of the metal (totally unlike, say, copper or nickel) is controlled by factors other than new production and industrial demand. But the huge annual estimated shortfall of production relative to consumption (an estimated 1,500 tonnes), combined with the gigantic short position against gold, combined with a brewing economic/financial/monetary crisis of historic proportions makes me friendly towards it.

The problem and solution are probably obvious to you all by now (admittedly, there may be some bias in this audience). Considering the continual severe exploration cuts, the majors are increasingly unlikely to make the highly prized discovery. They will rely ever more on junior exploration companies to come up with the depos

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its. All of these factors mean the price tag for a major discovery will be high and the competition intense. For the junior exploration stock speculator, the resultant rewards could be spectacular.

Wake up! This is the part where you make money.

Keep two things in mind:

1. The exploration sector has been deservedly decimated over the past five years. The excesses, incompetence, waste and hype are gone, and we've seen the market bottom (a few times now, actually, as I read over some past letters). Competent junior exploration companies exploring for world-class gold deposits sport nano-sized market caps, often of less than C$10 mil.

2. The underlying fundamentals to the gold market have changed. With gold lease rates in the 1.5-2% range, interest and LIBOR rates in the 3.75% range and the CPI near 3%, the incentive to lease, hedge or short gold is gone and the gold contango, or carry trade, has effectively been shut down. The M-3 money supply is increasing at an annual rate of 10.3%. The US dollar is in big trouble (see IS XXI/11). The risk to reward ratio is as good as it gets.

I'm adding a few stocks to the list. I'll have articles on most in the months to come. In the meantime

Rimfire Minerals (RFM.CV, C$0.35) With a market cap of C$5 mil has Newmont earning in on an Eskay Creek type target (7 mil Au equivalent @ 51g/t Au, 2,200g/t Ag), and Barrick earning in on a Pogo style target (5.5 mil oz @ 19g/t) in Alaska.

Nevada Pacific (NPG.CV, C$0.24) With a market cap of C$4.5mil, Newmont is exploring its Limousine Butte, Nevada property.

Altius Minerals (ALS.CV, C$0.51) With a market cap of C$6.5 mil and 12 prospects under joint venture.

Anatolia Minerals (YMCU.CV, C$0.48) Four active joint ventures with Rio Tinto in Turkey (which grant Rio the right to 70%) and turning out some very positive drill results at Cukurdere. You can bet that 30% of the copper-gold targets Rio Tinto is drilling represent considerably more than Anatolia's US$9 mil market capitalization.

All these companies have ventured out their properties to a major in return for expenditure commitments. This is definitely the preferred methodology; it's better to keep 50% of a property for 5% of the money, than 100% for 100% of the money.

Given the trivial market caps of these companies (like those of all the others on the list), 40%, 30% or even 20% of a discovery that appeals to a major means a long ball homerun.

Notes

A few more parenthetical thoughts about the liquidation of the mining business. The director of marketing at Harmony Gold (the world's sixth largest producer and, after Franco Nevada, my choice among producers)

was quoted as saying: "We are an industry incapable of realizing good returns for our shareholders." Statements like that are the mirror image of what you heard until ever-so-recently from executives of high-tech companies during the mania. Also, during February, the gold analyst at ABN Amro, Todd Hinrichs, explained why he was going to switch his coverage to stocks in the manufacturing sector: "I've capitulated and moved on. The gold industry is a very difficult place to make a dollar. There's nothing positive. It's as bad as it gets." I don't know Hinrichs. He's quite correct in his assessment. But he's clearly no contrarian.

Another analyst, whose name slips my mind, made what I thought was an excellent comment, to the effect that the mining industry resembles nothing so much as a bunch of kids playing in the dirt, not because it's profitable, but because it's all they know how to do. Like kids, they have no concept of things like return on capital, or profitability.

Add it all up and, at least to me, it's the sound of a bell ringing at the bottom of the market. Of course we've been listening to that bell toll for many months now. And, just because the bear market has bottomed doesn't mean the next bull market is underway. Certainly I'm as surprised as anyone that the bottom has dragged out as long as it has.

But, you'll note, that while all gold shares are still very depressed, very few are any longer on the bottom. And there tend to be substantial bids underlying most of them.

I'm not sure if I've ever mentioned the existence of my Special Alert service here, in the body of IS. But, if you don't mind a brief commercial, this might be a good time to consider subscribing. It's available for US$1,500 for 12 alerts, or one year, whichever is greater; Plus, now I send out regular updates, aside from the 12 alerts. In the near future I expect there will be several stocks coming up with short time fuses and/or tiny market caps, making them unsuitable for IS itself, but which will be in the Special Alert. Think it over, and if you're interested, call Bill Lowe at 406-443-0565.

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. ©2001 by Douglas Casey.

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