When I wrote about Dorato Resources I noticed that FNV had a royalty deal with them over a part of their claims; the deal is worth 1-2% of net smelter profit (depending on gold price) and basically for getting this deal FNV has to partake in a lot of equity financings.

The main reason that I choose to write about FNV here is because the company simply represents a great investment if you want to safely invest in gold, PGM's, gas and oil. FNV's whole business-strategy is to acquire royalties on (mainly) gold and PGM-mines (also base-metals to a small degree), as well as gas and oil-wells. Today they have a huge collection of operations and they are constantly picking up royalty money and using a lot of that money to invest in great prospectors like Dorato.

If you are afraid of investing in gold-funds, individual gold-miners and you don't particularly like the idea of having to buy physical gold, then I beleive a company like FNV would be the best choice. Their 2008 results are coming out on March 26 and I think they'll see a ~$40-45M net profit. Their total net assets were valued at $1.57bn in the third quarter (I assume it's gone down a bit by now). The mcap is about $2.5bn today.

On a profit/mcap ratio it's not looking too cheap and the shares have gone up by ~100% since november. The high price may well be related to the large holdings they do have, and the great decisions that management has made in the past when picking out projects to support. As time goes by they'll inevitably see higher and higher amounts of royalty-money coming in and I guess they'll keep investing in great looking companies like Dorato.

I wouldn't personally buy into this company today, but if the SP comes down from 30 today to perhaps 20 then I'd be willing to buy, as this represents a great opportunity to safely collect income from a large number of miners and energy-companies and at the same time get a holding in a lot of very promising projects. If you want to see a list of all their investments they have a very easy-to-use website.

I include this map from Dorato to further show you in just what a great location their concessions are:

Among the junior exploration companies out there, it's hard to find one that looks like it's going to make it through the credit crisis winter alive. Dorato is however one of those few that looks very likely to pull through.

They're part of the Cardero Group which has a great track-record and so far they don't seem to have had a lot of trouble raising money. The company is focused on the highly prospective Cordillera del Condor gold district (located between Ecuador and Peru) on the Peruvian side, and as some may remember, this is the same district where Aurelian Resources made their huge discovery on the Ecuadorian side. Dorato has claims of about 800 square kilometers and has so far made a bunch of very early-stage discoveries. The district has a lot of placer mining, as well.

The concessions of Dorato have seen very little exploration because of previous political problems in the region as well as a now partly removed natural reserve status. The purchases of the concessions require about $9.2M in payments and an issuance of 10.15M shares, which would give Dorato a 100% interest.

Dorato today has an mcap of ~CDN$17M (0.50/share). And by judging from the last financial statement they have perhaps $1-3M cash and basically no debt. There is an ongoing private placement of $5M, which I judge very likely to succeed based on the great prospects of the company.

If one is well acquainted with the work of Aurelian Resources then you already know just how interesting the Cordillera del Condor district really is. The Aurelian discovery was about +15M Oz of an average ~7g/t gold. There are a number of other very good (mostly recent) discoveries on the Ecuadorian side, and as I already mentioned, the Peruvian side has seen very little exploration.

The results that Dorato has produced so far are indeed impressive; if you want the whole story of the geological settings, I suggest you go to their website and read it; I will only present the just recently released (and most interesting) sampling results from the Taricori zone. This zone has shown average grades of 11g/t gold and 131g/t silver (from 168 samples) in vein material. Further results from sampling in the area is incoming. The Taricori zone is located just 1km from the Jerusalem deposit in Ecuador (probably containing over 1.3M Oz gold) which is considered to be just a continuation of the Taricori discoveries - which is based partly on the old small-scale mining but mostly on the magnetic mapping of the area which shows some large anomalies - these anomalies will hopefully be strengthened by the coming sample-results.

Dorato has some extremely promising projects and I would be very suprised if they don't end up finding at least one world class deposit like the one Aurelian Resources found. In comparison with other junior exploration companies, Dorato's CDN$17M mcap does not look too pricey considering the remarkable concessions they've been able to acquire. Although things are looking extremely good, there have been many cases in the past where a junior explorer has had great prospects and failed miserably ... but I would still maintain that this is an extraordinary situation and I think it's reflected in the share-price; no other juniors that I know of come even close to a similar valutation. Investing in junior explorers is the riskiest of risky businesses - but the most rewarding if you nail it.

This press-release covers a lot of exploration results that I haven't.

When comparing gold to other metals that are considered precious, there does seem to be a pretty large discrepancy. Silver would be in a pretty fair relation to gold in terms of its price-'preciousness' ratio (somewhat undervalued), but when you look at the PGMs (platinum group metals) the picture is different.

In 2007 the world produced 78.7M Oz gold compared to only 7.1M Oz palladium, 6.6M Oz platinum and 824,000 Oz rhodium. Price per Oz in same order (approx.): 930 - 200 - 1000 - 1000. Obviously there is a huge price difference here in relation to production, and these are all considered precious metals, which means that they all are very similar - for example they don't oxidize particularly easily.

So why the big differences? All of the PGM's had about 50% of their demand coming from the auto-industry for catalysts (in 2007), and we all know what's been happening there lately. In the summer of 2008, rhodium was priced at ~$10,000, while the price-changes for palladium and platinum were not as dramatic, but still a lot larger than for gold or silver.

It's generally considered to be because of the (previously) growing auto-industry that the prices of PGM's went up so much, for example rhodium was at only $200 in 2001. It wasn't the only reason however, the other thing that made prices rise was the trouble of power-generation in South Africa. Today South Africa has ~70% of world production of PGM's. The electrical power shortage in the country is a long term problem, because the country has a monopoly that opposes private initiatives and then there's also the black empowerment laws that sometimes puts poorly qualified people in charge (which is clearly related to an otherwise large shortage of skilled labor in the country).

Apart from the auto-industry there is a pretty large portion of demand coming from other industrial demand, as well as jewellery (less than 20% on average); the demand for PGM's as investments are, although clearly existing, very small.
If the PGM's really are precious, shouldn't they be just as interesting for crisis-investment as gold or silver? I think that the main reason for the firmer position of gold and silver would be the fact that they've been used as money in the past, and might be so again, and also the much more easy accessibility of gold and silver. And by the looks of it today, much of the PGM-prices are ruled by the assumption that there will be a large shift toward electric cars in the coming years and that the problems in South Africa will not be large enough to work against the fall in demand.

I suppose in the end, if you want to somehow invest in PGM's, it would be on a more ideologically motivated basis - because they are more precious than gold or silver, no doubt about it - but if only a very small portion of humanity actually sees them as truly precious, then they will be ruled by industrial demand. I guess the most important lesson to take home from this comparison of gold-silver/PGM's is that gold could be considered high priced on a preciousness/price ratio, but considered as a potential future currency it would have to be compared to the preciousness of pieces of paper, which would be about infinite to zero. If gold will be used as a currency, then there could be a slight chance that someone would want to use the PGM's as well... which would mean humongous price-appreciation - I wouldn't bet on it, but the prospect would definitely represent one of the largest gains ever - if it were realized.

Very often when I read about the prospects of the US economy, it seems to be from the perspective of a debtor that can't repay his debts, and therefore must fail. Otherwise the perspective is one where the analyst pretends that the debt-situation is not that bad. Well, the debt-levels are bad (just look at these graphs!) and the derivatives market with its huge uncertainties along with constant government bailouts is not exactly making things better. I've heard estimates for total derivatives losses from only a few billion (in the very beginning) up to over hundreds of trillions of dollars. Whatever the total losses will be, we basically have two scenarios of how it will end; either the losses stop coming fairly soon or the government is going to keep bailing out the banks and eventually the bailouts will have become so many that everyone is going to start asking questions and then we'll have a great public indignation which would force the government to declare an end to bailouts and let the banks and the financial system finally crash, or the government will have to somehow quench the uproar. The bailout and stimulus-packages already in place and the potential coming ones are going to be funded by monetization, cause there's no way that the rest of the world will lend those kind of sums of money; this will inevitably devalue the dollar, which brings us to the lenders...
For the last couple of years (decades really) all they've done is to accumulate IOU's like crazy, when the reasonable thing would have been to spend those IOU's in exchange for things from the US. Now they're sitting on these huge mountains of IOU's and they're getting worried because of the bail-outs and the possible devaluation of the IOU's (or: the dollar). What would be the reasonable thing to do here? Would you throw the dollars away, keep sitting on them or would you start giving them back to the debtor in exchange for something useful?
I think the answer is pretty obvious. The countries that have huge holdings of dollars will have to start spending them, and this can only mean that a lot of business is coming to American companies. If you look at the trend, it tells you that more and more dollars are pouring back into American companies. Take GE for example, they're sucking up five billion dollars a year from China today and that number is growing. It's all very simple: If the foreigners don't spend these dollars, they're just getting into more trouble - as will the American people because they will have to default, and/or inflate away parts of the debt.

So, does this all mean that things will be honky dory? Well, one should definitely not disregard the huge importance that the US consumers have for American companies, and to rebuild wealth will take some time. It really depends on how stupid the lenders and the US government are, if the lenders start spending dollars then the rebuilding of wealth (or destruction of debt) will go a lot faster and things may well stabilize (stop going down) within two years - this assuming that the derivatives market will have stopped imploding (!) - and that really is the huge wild card here, in fact the very thing that will determine the future of the global economy. Again, if you look at the trend, the derivatives losses are not slowing down and nobody knows where it will end. But when these losses stop coming or when the government stops paying for this garbage, then I beleive it will be a good time to invest in America. But beware, not until the black hole of derivatives has gone away completely is it safe to really invest in anything related - and by related I mean economies with financial sectors exposed to these instruments. Even a company like GE, mentioned just above, has taken credit losses although they may see great growth in places like China. So, until the green light comes up... let's focus on precious metals, perhaps energy and perhaps some more independent economies.

From the viewpoint just expressed I think it looks reasonable that things may well not go so bad as some have predicted; government can really only put the people in so much debt. I doubt that we really will see more than, at the most, another five trillion of bailout or stimulus money (which in itself is obviously a humongous lot of money). But then the US government has to cut down on a lot of other spending as well, which may prove difficult - but they would not be the first country in history to have run up a huge public debt, and others in that position have prevailed. Big problems are on the horizon and the government of the US really has to do things right in order for this crisis to be resolved (globally, as well) - so far they haven't. Hopefully even they may start to see that the bailouts are not sustainable and that the spending has got to be cut. I may seem naive to say that politicians like the Obama-gang might actually learn something, but stranger things have happened, and we should all hope that they do learn... unless you happen to really like things post-apocalyptic?

China's worried...

In the years before the financial crisis gold and silver were following each-other in every up and down-turn, and silver would usually do everything in overdrive. With the big drop of gold this fall, silver naturally fell as well, but much harder. And since, silver has not been able to gain a standing in relation to gold that it had earlier. Through the bull-market in precious metals, silver has from time to time been lagging and there seems to have been doubts about its 'precious' status, but then when gold started going up substantially, silver would quickly follow. Silver has (just like gold) been used as money in the past and although its uses today are largely industrial I doubt that it wouldn't hold somewhat steady with gold even if industrial demand fell, just based on its historic relation to gold. The supply and demand picture for silver and gold is very different, where silver has a very small investment demand (regarded in % of demand), but about 25% of demand from jewellery. Gold on the other hand has demand of ~68% jewellery and investment demand ~19% and the rest for industrial. One could regard jewellery as investments, but that isn't entirely the truth, and in this comparison it almost looks like silver comes out as a gold-equal, because if financial chaos drives people to precious metal investments you might see a somewhat equal increase in both silver and gold, but then as people get poorer all over the world jewellery demand could go down (hurting gold more) and at the same time you might loose industrial demand for both gold and silver (hurting silver more) - this would leave both metals in a fairly equal position for investment-driven appreciation. It is a fact that investment demand for both silver and gold has been growing strongly, and perhaps somewhat stronger for gold - since it is the best exposed of the two. But I beleive we will see a return of the same scenario we've had many times over in the past couple of years - gold takes a dive and silver takes a much stronger dive (which happened this fall) - people are scared and more so by silver than gold, so gold appreciates faster than silver after the crash, but as people feel more safe they start pouring into silver again into the next crazy rally in which silver is able to appreciate more than gold. So basically we end up with the same driving factors for silver and gold, but because silver is historically undervalued (and recently crash-relatedly undervalued) in comparison to gold I think it deserves some extra attention.

A few posts back I presented Arian Silver which is just getting ready to start up operations, and of course there are always problems with the start-up of a mine, so I figured it would be good to take a quick look at a silver-miner that already has some good production and is growing strongly.

Endeavour Silver is just like Arian located in Mexico, and while there is a lot of violence in the country now, I don't think it will hurt the mining industry too much since this is a war between criminals and the government and not between the people and the government.
Quick numbers: Working capital ~$15M, Debt ~$11M, mcap ~$60M. Reserves/resources 42M Oz silver and some gold.
Endeavour has two producing mines which are both high grade silver with gold. The expansion potential would best be described as huge for both. Production in 2008 was 2.3M Oz silver (up 9%) and the company is aiming at an increase to 5-10M Oz per year in only 2 years time; for 2009 they expect production to increase 20% because of recent investments in the mines. Also, for 2009 there is expected a 10.000 Oz gold by-product. Production cost for the last quarter was down to ~$7.50 per Oz, mostly because of the weak peso.
The company has two really good looking exploration-projects and they are currently looking to make more acquistions of producing mines. Because of large investments in the mines and in exploration Endeavour has not seen a positive net profit yet, but considering the low cash-cost the net profit should be good as production ramps up and investment needs for the mines decreases.

I know this review of Endeavour Silver was really short, but I think the picture is pretty clear. If you look at the revenue of production in 2009 (almost 3M Oz + gold) and discount the expenditure of exploration and other investments, there would be a profit of ~$28M based on the latest cash-cost and the current silver/gold price. The mines look like they're going to be in production for a long time and with all the expansion plans, an mcap of $60M is not looking too expensive, especially if silver starts catching up to gold.