Gold: Lies, Lies And More Lies

By: John Ing | Thu, Jan 31, 2008
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Weary of lies, Americans may now prefer to choose a politician or group that can offer the truth. And we're not just talking about the truth as represented in George Orwell's "Ministry of Truth" in his novel "1984". Americans certainly need more candor from their politicians, business leaders and government mandarins.

It's yet another new year and there is yet another bankruptcy, another bank in trouble and another bailout. Last summer, Ben Bernanke, the Federal Reserve chairman, warned us "not to expect significant spillover from the subprime to the rest of the economy or to the financial system." Of course, the global credit crunch began soon after. His predecessor, Alan Greenspan, once said: "I believe then as now that the benefits from broadened home ownership are worth the risk." But the Great Greenspan later recanted by saying: "I get the impression that there were a lot of very questionable practices going on."

Not only have our mandarins lied or twisted the truth, others are guilty as well. In the U.S. political primaries, Rudy Giuliani has claimed he added 12,000 police officers when he took office in New York in 2000. But he actually added 3,600 new officers because 7,100 of his "new" officers were existing housing or transit police who were merged into his police department after 9/11. Barack Obama said of politicians: They "don't always say what they mean, or mean what they say." Then there was Jimmy Cayne of Bear Stearns, who said in August that all was right and that the investment bank was solidly profitable. Soon after, two of Bear Stearns' subprime hedge funds closed, triggering the mortgage crisis of today. In Canada, the CIBC once said its subprime problem involved no more than $330 million. Wrong. And there were President George W. Bush's claims of Iraq's "weapons of mass destruction," which were, of course, a lie. Bush had it wrong. The "weapons of mass destruction" were lurking in Wall Street, not Baghdad.

True, the financial markets are always steeped in cynicism. But today there is a special, urgent need for candor and truth. There are similarities between now and other periods, particularly the Great Depression, as bubbles burst following years of easy credit. Only now, the sums are bigger. In the '30s, amid the loss of peoples' savings, homes and jobs, the banks were seen as villains and the Glass Steagall Act separated the investment and commercial banks.

Today, the big banks are more or less operating as one, freed by the repeal of the act during the Clinton presidency. In the ensuing years, the creation of derivatives and deregulation caused the blurring of roles between the investment banks and commercial banks. For a long golden period, the banks prospered, leveraging their own financial products in an era of financial engineering. Junk bonds, derivatives, off-balance sheet lending and new accounting were all part of this financial liberalization.

Then the bubble burst. The tangled web of products almost appears to be too big to unravel. But unraveling it surely is and every day there seem to be more problems in this largely unregulated secondary market. The bottom line is that while Wall Street faces billions in losses, up to two million families could lose their homes and the politicians will tell us that everything is all right. Where is a real Ministry of Truth when we need one?

The Contagion Spreads

Our view is that last summer's credit crunch was the inevitable result of the collapse of the modern-day financial system. Low interest rates, cheap money and the desire of Americans to make home ownership universal led to the creation of a largely unregulated financial system that was leveraged to the hilt. The tools at hand - structured derivatives - allowed Wall Street to build securities out of any asset, replacing traditional or conventional bank loans. Meantime, securitization gave credit to just about one and all, which democratized lending. But there was a big hidden price. The collapse of the modern-day banking system stems from the implosion of these exotic financial instruments, triggering a reversal of the liquidity tide that once sustained the financial bubble.

In early 2007 it became clear that these securities were nothing but a house of cards. Now the banking system is frozen. Wall Street has so far has taken $100 billion of losses and the subsequent infusion of cash from the central banks has failed to reverse the credit cycle or the bursting of the financial bubble. Today, we have a full-fledged insolvency crisis following the bursting of two bubbles: property and credit. Unfortunately, the debt remains and without savings, the United States' huge trade imbalance, massive budgetary deficit and $9 trillion national debt stretches an already thin capital base. The weakened economy has raised concerns well beyond residential mortgages.

The unwinding of this modern-day credit system is going to take years rather than months, which will monopolize the time and priorities of policy advisors, central bankers and Wall Street. To be sure there will be a bull market in litigators. Even so, the massive injection of liquidity and the back to back rate cuts by the Fed will neither allow it to be business as usual nor help the bankers' capital position. In the past, following the bursting of the S&L bubble, the LTCM debacle or the tech wreck, central banks would only have to lower interest rates and inject more money into the system. This time, though, it is not liquidity that is in question. It is the huge leftover toxic debt load. Debt must either be repaid or restructured. The markets will wait and see the size and shape of the final reckoning, but gold will be a good thing to have while the markets sort this out.

Wall Street's Margin Call

The credit markets are in a freefall, the result of the subprime meltdown. And the contagion has spread to the much wider structured-debt market. In the past decade, Wall Street extracted huge fees by creating structured products that enabled it to spread credit risk, thereby altering the global financial landscape. The sums were huge. The mortgage market alone is $11.3 trillion, of which defaults may represent five percent or about $500 billion of loans. And then, according to JP Morgan, there are more than $1.5 trillion of global collateralized debt obligations (cdo), almost equal to the $2.2 trillion daily money-market trade. According to the Bank for International Settlements (BIS), the total outstanding derivatives could amount to more than $500-trillion. What we have is a growth pattern of derivatives and defaults - a toxic mixture.

The troubles at Bear Stearns' hedge funds stemmed from borrowing $10 of investment for every $1 of equity. The managers could not sell in time and the effect of this imbedded leverage triggered a domino-like implosion in a thin market - a margin call for Wall Street. Leverage works both ways. Today, Wall Street's biggest firms are holding all sorts of credit instruments that are either impaired, difficult to value or worth a fraction of what they are on the books. Despite a cash infusion by Bear Stearns, the fifth largest player on Wall Street, unwinding the hedge funds wiped out the available capital and the funds were forced to close, triggering today's collapse.

The mortgage meltdown has so far resulted in $100 billion of losses. Meantime, an injection of more than $60 billion of capital has been needed to shore up the investment banks' balance sheets. Citicorp has so far received two equity injections after recording the worst loss in its 196 year history, one that surpassed that of the Great Depression. Although the fourth quarter was one of record losses for many firms, those numbers are suspect, given doubts about the value of their Level 3 assets (assets for which there is no market) and the growing uncertainty of derivative-based products. And rather than offer them into a "no bid" market, the banks instead have brought these off-balance assets on to their balance sheets. The toxic bet gets worse. Earlier, the banks had "insured" their investments by hedging and/or swapping them with other institutions. However, these insurance entities neither had sufficient capital nor the wherewithal to fulfill their obligations.

Potential losses from subprime mortgages alone are put at $500 billion, falling on investors, foreigners and the already weakened Fannie Mae and Freddie Mac. Bankers' and debtors' responsibilities have become one. Regardless of the actual losses, investors should focus on the risk capital of the big investment banks. Which is why the bank are scrambling for fresh money, and not for yesterday's losses, but for tomorrow's. America's banks and the odd French bank are in peril. Unfortunately, a quick back-of-the- envelope calculation easily wipes out Wall Street's capital. And that is impossible since the losses to the financial system cannot exceed the underlying defaults. Oh yes. Morgan Stanley has only $35 billion of capital, Goldman Sachs has but $39-billion and Citigroup, after the capital injection, has $128 billion. Like Bear Stearns' fund managers, all these big banks leveraged their capital bases in the good times. Now the bad bets are coming home to roost.

Tellingly, the Achilles heel of this modern-day financial system is counter-party risk. That is the weak link in the chain as each party tries to push the prospective risk on to others in a game of financial musical chairs. Even with stricter Basel II international banking rules, it took the world's leading derivatives player, SocGen, six days to go public with the news of its rogue trader.

Yet Another Bubble Burst

The Americans have gone from being the world's biggest creditors to being the biggest debtors and, since their savings are depleted, they must face the prospect of depending upon others. To finance its deficits, the United States was hungry for money from anywhere it could find it. Now America's banks are following suit, turning to foreign entities for financial lifelines. Americans are also selling off assets to satisfy their debts which is akin to selling the family silverware.

In the last decade, central banks flooded the market with paper, creating a series of bubbles with too much cheap money chasing too few quality opportunities. First came the tech bubble, then the property bubble and now the financial bubble. Indeed, the latest bailout is just part of a seeming never-ending series of bubbles. The United States has been living beyond its means for more than half a century, with excessive money creation creating those bubbles.

America's indebtedness forced the Fed to print excess dollars, which piled up in China, the Middle East and Japan. Foreigners hold 44 percent of U.S. debt, up from 30 percent in 2001. Total federal debt stands at $9 trillion. However, including direct and indirect debt obligations as well as off-balance sheet liabilities, David Walker, the U.S. Comptroller General calculates America's debt load at a whopping $53 trillion. Recently Mr. Walker warned about his country's "addiction to debt" and the U.S. won't be able to grow its way out of a long term credit crunch. "We've never seen anything like what we are headed into," he warned.

U.S. Dollar: The Next Big Lie

For the past five years, a "strong dollar" policy was a big lie. Against the euro, the greenback has fallen 40 percent to a record low. By the end of last year, the International Monetary Fund (IMF) reported that 26 percent of the world's foreign currency reserves are now held in euros, up from 18 percent. In the third quarter, the US dollar's share had fallen to 63.8 percent, in part due to doubts about the Federal Reserve's determination to maintain the dollar's purchasing power.

The central banks' helicopters have already started dropping bundles of cash on a global basis. The stock markets' reaction to the central banks' bailout has so far been negative. It appears that the banks are simply pushing on a string. To date, the bailouts have surpassed those of the S&L crisis, the Russian default in 1998 and the collapse of giant hedge fund Long Term Capital Management.

America once exported capital to Europe and Latin America, exercising its power by financial means with "dollar" diplomacy. The most famous example was the Marshall Plan, which rebuilt a war-devastated Europe. Under George W. Bush, things changed. The surpluses have become deficits. America has come to depend upon foreign investors and now needs a Marshall Plan for itself. What happens when all those dollar holders want to trade them for euros or gold?

Too Much Red Ink

Financial markets and policymakers are in a state of denial. Sadly for Americans, their assets and currency are being devalued every day. And for the two million homeowners who might lose their homes this year, the Great Depression has already arrived. This time, monetary policy has failed to work and Bush's $150 billion federal government stimulus plan will not fare any better.

Americans simply spend too much and save too little. They have accumulated too much debt to sustain their lavish spending styles. More spending by lowering rates and borrowing more are a prescription for bankruptcy. The world's central banks put almost a trillion dollars into the system at yearend and politicians are scrambling to come up with new and improved schemes to reliquefy the system in the form of more government spending. Policymakers are also looking to overhaul the financial system and ironically there is talk of separating the investment banks and the commercial banks again. In Britain, they too are talking of a radical revamp of their banking system to avoid a repeat of a Northern Rock-type collapse.

America today absorbs about 75 percent of the world's surplus savings. However, a weakened Wall Street can no longer fix America's debt problem. America's trade deficit grew because its savings are less than investment. Between 1997 and 2007, the current deficit increased almost six times from an annual rate of 1.25 percent of GDP to 7 percent. The US needs over $2.5 billion a day of foreign capital to finance its growing deficits. Its consumers for example saw a dramatic jump in household debt to a record $2.5 trillion, which rises to $13.6 trillion if mortgages are added. And since 1995, mortgage debt as a percentage of disposable income increased from 56 percent in ten years to almost 100 percent. Credit card debt alone is almost $1 trillion. In November, consumer debt rose 7.5 percent led by credit card debt which rose 11.3 percent.

Reflecting growing concerns over the United States' ability to maintain its financial health in light of its huge debt load and the need to finance its mammoth health care and Social Security costs, Moody's projects that increases in spending would "cause major fiscal pressure" in years to come, jeopardizing America's stellar triple-A credit rating. That is not a big lie. In December, the Director of the Congressional Budget Office (CBO), which advises Congress on the federal budget, said that the central issue would be the "fiscal challenge" Americans must face. However, a rating change by its own agencies would confirm that the world's largest creditor might not be able to handle its repayment responsibilities and instead monetize its debts.

What Happens If They Trade Dollars?

George W. Bush inherited a surplus and leaves with the largest debt in America's history. Bush was the biggest spender since LBJ who also had a war to fund. If one includes the cost of fighting in Iraq and Afghanistan, defence spending has gone up almost 90 percent since 2001.Spending has increased 42 percent during his presidency, and he has yet to veto a single spending bill. In 2001, the Fed cut interest rates by over 550 basis points, ultimately creating more bubbles. Faced with the worst housing crisis since the Great Depression and the most severe credit crunch in the past two decades, the Fed so far has lowered interest rates by 225 basis points. And yet, even with a pickup in inflation and widening interest rate spreads as a result of the credit crunch, the Fed says it is still ready to lower interest rates yet again. The markets are hoping another round of fresh debt will bail everybody out. Another big lie.

Asia, The World's Banker

Asia and the Middle East have accumulated huge surpluses and watched the Americans absorb the growing savings surpluses. We believe Asia is the trigger for global adjustment and has become the world's banker. Economic power and wealth has shifted from the West to the East, from its oil companies to mining companies to auto companies and now Wall Street's biggest banks. The sovereign-controlled wealth funds of the Middle East and Asia are the big new Wall Street players.

The foreign bailouts are a de facto foreign nationalization of America's financial system. Already, Singapore's big fund has bailed out UBS and Merrill Lynch. Yet the injection of cash has done little to solve the long-term problems or indebtedness.

The shift in capital flows comes as China's foreign exchange reserves stand at $1.5 trillion and which are still piling up at a relentless pace. Instead of buying Japanese golf courses, the Chinese are buying into the capital markets and taking advantage of Wall Street's meltdown. They are not alone. Russia has almost $500 billion and the Middle East kingdoms, flush with petrodollars, are plowing money into Wall Street's biggest, the bedrock of the U.S. financial system. While much is made of China's resource-hungry appetite, China has gone on a buying spree of financial institutions, not for bricks and mortar, but for capital market expertise to assist its nascent capital market and give China access to the global financial markets. Today, four of the world's top 10 stocks are Chinese, with PetroChina becoming the world's first trillion-dollar company by market capitalization.

Inflation Is Back

Our politicians have told us there is no inflation today. And that is yet another big lie. The U.S. inflation rate jumped four percent last year, the highest in 17 years and that is without food and energy. Wholesale inflation jumped 63 percent in 2007, the most in 26 years. And bloated with dollars, inflation has picked up in China, the Middle East and Russia. The inflation jump limits the Fed's option on rates. The pickup in inflation also comes at a time when food prices, particularly agri prices, are at record highs. Soybean prices are at a 34-year high, corn at an 11- year peak. Wheat is close to $13 a bushel for the first time. The jump in food prices also comes when much of America's grain is used for ethanol, which is subsidized by the U.S government, suggesting it is more important to drive an SUV than to feed people.

While there is a pickup in commodity inflation, energy costs rose 17 percent while gasoline has jumped 29 percent. Inflation is back at the very time when the economy is slowing down. We believe cost-push inflation will cause stagflation, a potentially devastating cocktail for heavily indebted Americans.

Gold Is The Currency Of The Realm

Under the Bretton Woods monetary system, which lasted from 1944 to 1971, currencies were exchangeable into dollars at fixed rates and the dollar was exchangeable into gold. Central banks could not simply print money without an eye on their reserves of gold. But following two oil shocks and bloated spending to finance the Vietnam War, President Nixon closed the gold window when foreigners demanded gold in lieu of dollars. Then, as now, a savings-challenged America printed dollars via its banking system, pumping out trillions of fiat obligations.

Thus the modern day financial system was born amid the collapse of Bretton Woods. For a time, the dollar became the world's currency, allowing the United States to consume more than it produced and to finance its debts with dollars. Financial liberalization spread and for a time the dollar did not need the backing of gold or, in fact, a policeman to supervise the new system. After all, the dollar was backed by the strength of America's reputation. Until now.

Today, a massive injection of liquidity by the world's central banks has not helped a collapsing dollar. Last summer's convulsions in the financial markets will not be cured by more money, but the need for a recapitalization of debt or a new Bretton Woods. The age-old recipe of more spending is doomed to fail. The problems are far deeper. It is not about liquidity but solvency. Much of the leverage has fallen on a banking system that does not have enough capital to back the huge derivatives whose underlying assets have soured. As in the '30s, the deleveraging process will not be helped by more dollars, but by the recapitalization of Wall Street's flimsy capital base.

America faces a long tough road to solvency.

Gold has surged more than 40 percent since the credit collapse in August, hitting $930 an ounce. We believe that gold is an alternative investment to the dollar for central banks and investors. Gold's supply is finite. Dollars are not. It cannot be printed or reflated like fiat currencies. The gold price is an index of investor anxiety, of which there is great deal. Gold's recent rise is due to nervousness about the U.S. dollar, the credit woes and supply worries over South African production. Gold is the ultimate safe haven and the new, old currency.

Bankers lie. Politicians lie. And now even central bankers sometimes lie. Gold tells the truth. It is the benchmark. Wall Street is in trouble. Gold is an alternative asset to stocks, dollars and, in a time of uncertainty, a safe harbour. Gold at $900 an ounce is telling us the truth, that the financial bubble has burst and a major adjustment lies ahead. Gold will be this cycle's currency of the realm.

How High?

Gold spent 27 years building a base, in the meantime bottoming at $250 an ounce. After it broke out from the previous record $850 high, most pundits are bravely forecasting $1,000 an ounce. It is our view that $1,000 is simply an intermediate target and that with a 27-year base, a "perfect storm" of drivers will push gold to be the ultimate 10 bagger investment, outperforming currencies, commodities and the stock market. Those drivers include a collapsing U.S. dollar, Wall Street's financial woes, inflation concerns, soaring demand from China and India, record investment demand and chronic geopolitical tensions. On the supply side, fewer gold supplies are expected due to the South African power outages. China has displaced South Africa as the world largest producer, but China's mines are limited in reserves. The lack of significant gold discoveries (Southwestern was yet another fraud), a "NIMBY" approach by North American regulators, higher taxes and escalating costs will also limit new production. The bottom-line? Gold will peak at $2,500 an ounce.

Amazingly, Canadian gold stocks have lagged bullion by a huge margin. While gold rose more than 31 percent last year, the TSX gold index actually fell five percent. The underperformance was due to a stronger Canadian dollar, poor quarterly earnings, rising industry costs, competition from ETFs and, most important, the lack of industry growth in production and reserves. For some time, we noted that gold stocks would underperform until gold recorded a new high, which we recall also happened with oil stocks when the price of oil broke a new high at $40 a barrel. It is our belief that investors are particularly complacent nonbelievers. But this has changed with gold above $920 and, at long last, gold stocks are expected to outperform bullion by a 2:1 margin. Indeed, there will be a degree of catching up and, with fewer players following the orgy of mergers and acquisitions, in a classic case of too much money chasing too few stocks.

The senior producers continue to attract institutional money more because of their liquidity than their growth prospects. We expect the big-cap stocks to attract money and lead the way. Newmont has been a laggard and is due for a catch-up run now that it is concentrating on its core businesses. Barrick has done well, but will falter in the long run unless it reverses or offsets the very expensive Pascua-Lama 9.5 million-ounce hedge position. Indeed, with a mark-tomarket deficit of $4 billion, the higher the price of gold, the more expensive and less likely Pascau-Lama becomes. Goldcorp and Agnico-Eagle have performed well. Agnico-Eagle has one of the best growth prospects, growing from 360,000 ounces of annual production to over 1.5 million ounces by 2010. Kinross has bumped up its annual production estimate and is benefitting from an upgrade of reserves since the bulk of its mines are open-pit. Kinross is also an ideal takeover target, particularly as an antidote against the heavily hedged senior producers such as Barrick or Anglo. In the intermediate category, Goldcorp, IAMGold and Yamana will do as well as the gold index, but the dilution of last year's deals must be absorbed by the market.

Kinross shares were among the best performers, due in part to the granting of the lease for the big Kupol mining project in northern Russia. Kupol is largely built and the company has about $170 million left to spend at this cash-cow project. At Paracutu in Brazil, the expansion will boost production by the end of the 2008 first half. In addition, Buckhorn is almost complete, so Kinross is on track to produce two million ounces this year and 2.6 million ounces by 2009. However, the company floated a $400 million convertible debenture at a time when it has almost $300 million in cash. In addition, with cash flow in excess of $750 million, this is more than enough to take care of its capex plans. So the temptation to fill its coffers is poor advice because it will put a cap on the stock in the near term. Nonetheless, Kinross has an excellent pipeline of projects plus its important two million unhedged ounces, which makes it an ideal takeover candidate. We thus recommend the shares, particularly on the weakness following the issuance of the convertible debenture.

We believe that the best opportunity is in the third tier of stocks, particularly from a risk/reward point of view. The waterfall effect will eventually trickle downward as the big caps and intermediate caps become expensive. And despite obvious frauds such Southwestern Gold, the smaller developers and producers will do particularly well and are attractively positioned. For example, we like High River Gold, which is poised to put the huge world-class Prognoz silver project into production in northern Russia. We also like Eldorado and expect the coming court decision to uphold the lower court decision, which will be favourable for the Kisladag operation. We also like Etruscan, which has two mines in production but, more important, also has a massive land spread in West Africa. Aurizon is also favoured for newly opened Casa Berardi and its large exploration package. Among the junior explorers, our list includes: Philex, USGold, St. Andrew Goldfields, Continental Minerals, Detour Gold, Unigold, and Crystallex in Venezuela. Detour Gold recently began another drilling campaign to upgrade its growing openpit resource of almost five million ounces and is an ideal takeover candidate. Indeed, we advocate a package approach for the following junior explorers because all are takeover candidates.


Aurizon Mines ltd.
Aurizon is expected to produce 170,000 ounces at its 100-percent-owned Casa Barardi mine. Mill recoveries at the mine were 91.8 percent in the quarter and total cash costs are anticipated at just under $400 an ounce. Aurizon plans to spend about $15.4 million on development and should be applauded for bringing this mine into production. Casa Baradi remains open at depth and the area continues to hold strong exploration potential. Aurizon plans to spend $10-million in the area. It is also the largest land owner in Kipawa and the rumours are that there are gold and/or uranium discoveries. Aurizon flew an airborne survey and there are many targets. We continue to recommend this junior.

Continental Minerals Corp.
We visited Continental's Xietongmen project in Tibet last November. Since then, the company has received another two permits and is left with one more remaining, which is expected to be contracted shortly. We believe the permit will allow the company to build Xietongmen, which will be the second largest copper mine in China. Jinchuan, the largest nickel producer in China, has increased its stake in Continental to 14 percent through the exercise of warrants. We believe that the acquisition by this strategic player is positive. Sometime this year, we also expect more information on the newly discovered Newtongmen deposit, which could double the life of the project. We continue to favour Continental for its prospects and important near-term developments.

Estruscan Resources Inc.
Estruscan is a Canadian-based gold producer with two mines and a huge 10,000 km2 land spread in West Africa. The Samira and Youga mines produce about 60,000 ounces a year in total and the company has an advanced exploration program at Agbaou in the Ivory Coast, where feasibility drilling was completed last year. Agbaou is 85 percent owned and so far there are three satellite deposits. A resource calculation is expected soon. Etruscan has a steady development pipeline from Agbaou, Finkolo (Mali South) and Banfora in Burkina Faso. Etruscan should spend $15 million on exploration, so news should be forthcoming. Purchase is recommend here.

Excellon Resources Inc.
Excellon shares pulled back because of a wildcat strike at its Platosa silver mine in Durango, Mexico. The company will produce 2.5 million ounces and is now debt-free. In this quarter, the company will be hurt by a strike at Penoles Naica mill, but the strike is now over. The Naica mill limits Excellon's production, so the company has been fast-tracking a mill that will allow it to increase production. Current plans call for a flotation plant onsite to make lead and zinc concentrates. The mill will be able to handle 350 tonnes of ore a day and is slated to start up by the end of 2008. Meantime, the company continues to prove up sufficient resources and has an ambitious $11 million exploration program. We continue to believe that Excellon is one of the most attractive silver producers. It has a 10-bagger potential and its exploration footprint is one of the more promising areas of Mexico.

Detour Gold Corporation
Detour Gold produced an updated resource estimate that shows an open-pit resource of almost 4.8 million ounces. The company has found higher-grade initial mineralized zones in the hanging wall and drilling to date has expanded the model pit shell. Detour Lake is in the backyard of the majors and we expect this company to be acquired. With less then 43 million shares outstanding and production capability nearing, Detour is an ideal takeover candidate. Buy.

High River Gold Mines
High River is expected to produce 300,000 ounces this year from production at Taparko and Berezitovy. The company has been expanding Prognoz, the highest-grade silver deposit in Russia with multiple veins. NI43-101 compliant resources will give news and the company has taken a 17-tonne bulk sample. Moreover, High River has an active exploration program in Bissa in West Africa, so there is a steady diet of news. Now that High River has a solid production base, Prognoz and the exploration program give this company blue-sky potential. In addition, there are ongoing discussions of dividending the stock so that a pure Russian entity could be created. We recommend the shares here.

Philex Gold Inc.
We expect a feasibility study from Anglo to be filed shortly at Philex Gold's Boyongon property in the Philippines. Anglo has had more than five drills turning and the company has so far grown the resource steadily. We believe there is more than five million ounces of gold in the envelope and Philex, the parent, will likely take in the minority to put this property into production. Buy.

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Analyst Disclosure
Company Name Trading Symbol *Exchange Disclosure code
Barrick Gold ABX T 1
Kinross K T 1
Continental Minerals KMK V 1,5
Crystallex KRY T 1
Excellon EXN V 1
High River Gold HRG T 1,5
Philex PGI V 1
St. Andrew Goldfields SAS T 1,5
Unigold UGD V 1
Disclosure Key: 1=The Analyst, Associate or member of their household owns the securities of the subject issuer. 2=Maison Placements Canada Inc. and/or affiliated companies beneficially own more than 1% of any class of common equity of the issuers. 3=<Employee name> who is an officer or director of Maison Placements Canada Inc. or it's affiliated companies serves as a director or advisory Board Member of the issuer. 4=In the previous 12 months a Maison Analyst received compensation from the subject company. 5=Maison Placements Canada Inc. has managed co-managed or participated in an offering of securities by the issuer in the past 12 months. 6=Maison Placements Canada Inc. has received compensation for investment banking and related services from the issuer in the past 12 months. 7=Maison is making a market in an equity or equity related security of the subject issuer. 8=The analyst has recently paid a visit to review the material operations of the issuer. 9=The analyst has received payment or reimbursement from the issuer regarding a recent visit. T-Toronto; V-TSX Venture; NQ-NASDAQ; NY-New York Stock Exchange



John Ing

Author: John Ing

John R. Ing
Maison Placements Canada
130 Adelaide St. West - Suite 906
Toronto, Ont. M5H 3P5
(416) 947-6040

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