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Analysis of Junior Mining and Exploration Stocks

Commodities / Gold & Silver Stocks Oct 11, 2010 - 03:12 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleRenowned Exploration Analyst and Geologist Brent Cook produces the weekly Exploration Insights newsletter, covering geology and discoveries worldwide. In this interview, Brent catches up with former EI Writer Paul van Eeden. A fresh addition to Miranda Gold Corp.'s board of directors, Paul offers characteristically frank insights into gold and precious metals and shares several choice companies with The Gold Report.

In January of 2008 Paul van Eeden stood on the stage as the headline speaker at the Cambridge House Investment Conference and said "sell everything." He didn't say it just once but several times during his 25-minute standing room only speech. It was a very sobering and prescient talk that earned him no new fans at the time.

Up until that speech, Paul had been writing a weekly investment newsletter in which he discussed macro-economic issues, money supply, and the gold price. I worked with Paul on that letter, supplying much of the background technical and geological analysis for junior mining and exploration stock picks. In February of 2008 I bought the letter from Paul and re-branded it as Exploration Insights. For long-term subscribers that know Paul from those days and have continued as EI subscribers, this is an opportunity to update you on Paul's endeavors and thank you for sticking with us, something I very much appreciate given how quickly things got bad in the financial world in 2008.

I first met Paul in 1997 when I came on board as a mining analyst to Rick Rule and Global Resource Investments—just after the Bre-X scandal blew up the mining sector. Paul and I have worked together since on a number of projects; his business sense and integrity are irreproachable.

Last week Paul joined the board of Miranda Gold Corp. (TSX.V:MAD) and it seems like a good time to catch up with him by way of the following interview.

Brent Cook: Paul, you have effectively been out of the public markets since early 2008; what have you spent your time doing?

Paul van Eden: Well, it's true that I have not been very active since 2008, but I have not been completely out of the market either. I have kept an eye on developments and stayed in contact with several companies of which I am still a shareholder. I am particularly impressed with the creation of shareholder value at Altius Minerals Corporation (TSX.V:ALS) over the past 18 months.

In February of this year Altius made a CAD$27 million gain on its investment in IRC. The long and short of it is that Altius made a 78% gain on its investment in less than eight months, and to make that kind of gain in such a short period of time, and on a sizeable investment, is truly outstanding. Had this not been the third time Altius made a spectacular return on its capital for investors, one could understandably think it was luck.

The fourth such potential gain is already in the works.

Earlier this year Altius sold its Kami iron ore property in Labrador to Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF) in exchange for approximately 32 million shares of Alderon. Alderon is currently trading for around CAD$1.65 a share, which means Altius' Alderon shares are worth approximately CAD$53 million. The cost to Altius: under CAD$2 million.

Add to this the CAD$208 million they made on a CAD$660,000 investment in Aurora Energy, and the 12 million shares of Rambler Metals they own, that are valued at approximately CAD$5.4 million, and that cost them only CAD$580,000. That is why Altius is still the single largest position in my portfolio. . .by a wide margin.

BC: That is also why Altius has been a long-term member of our EI portfolio. What prompted your decision to join the Board of Directors of Miranda Gold?

PE: I was a shareholder of Miranda even before Ken Cunningham, the current president and CEO, became the president and CEO. As I recall, you had introduced me to Ken and I suggested to Miranda that they appoint him as president and CEO. That was back in November 2003, which means we both have quite a history with the company. I have come to know Ken quite well since then and I can tell you that I am grateful for the introduction. Ken is an outstanding human being and I have the utmost respect for his professionalism and skill. Under Ken's stewardship Miranda Gold has become a highly regarded grassroots exploration company.

Over the years Ken and I talked about me joining Miranda's board a few times, but I was not ready to take the step. While I was writing a newsletter I did not want to muddy the waters. My newsletter, like yours, was a running commentary on what I was doing with my own money. It was very simple, and I wanted to keep things that way, without any conflicts of interest such as directorships or consulting agreements.

During my investment career I have been a stockbroker, analyst, newsletter writer, consultant and, throughout it all, an investor. Looking forward I intend to focus more on investments and that has opened up the possibility of accepting a limited number of board positions. But I would only be interested in joining the board of a company in which I had a significant share position.

As you know, I sold almost all my investments in early 2008. I have added a few back, but I have been very selective. There are, however, several opportunities in the market where company valuations appear completely out of whack with prevailing metal prices or their peers. I have recently made a few sizeable investments in companies that I believed to be undervalued, not just on a relative basis, but on an absolute basis. However, I am digressing.

With hindsight it's easy to see that I should have joined Miranda's board in November 2008, when the stock was at its lowest. Had I made the investment then, instead of now, I would already have doubled my money. But if we had hindsight, investing just wouldn't be as much fun.

Miranda has an exploration team second to none, and an outstanding CEO. Throughout my career I have always worked on the principle that if you surround yourself with good people then good things will happen to you. My investment philosophy is still the same and the reason I agreed to buy shares of Miranda, and join the company's board of directors, is because these are genuinely good people and I am pleased to be associated with them.

The size and quality of Miranda's inventory and the ability of its mineral exploration team to generate more projects make this a compelling investment. The way I see it, if the stock price goes down, I will be able to average down my cost basis and if the stock price goes up, I will be making a profit on the shares I own. Either way is okay with me. Mineral exploration is an uncertain and risky business, but if you don't own the companies that generate ideas and explore for minerals you cannot benefit from the stupendous creation of value when an economic discovery is made.

BC: Does this mean you are bullish on gold and other metals?

PE: No. On the contrary, I am actually very bearish. But I will have to explain: At heart I am a value investor, despite the fact that in practice I am a speculator. Actually, I became a speculator because for most of my career there have only been very brief periods during which the market offered true value. I started investing in the mid-1990s and was immediately confronted by the Internet boom and tech bubble. When that crashed I had hoped for a period of sanity during which value investors could accumulate assets, but Greenspan had other ideas and promptly inflated a debt bubble that spilled over into real estate, stocks and just about everything else. When that crumbled in 2008, I was again hoping for sanity to prevail but, alas, no. Quantitative easing and almost zero percent interest rates are keeping the party going. Everyone at this party is now so drunk that they have to lie down to stagger.

From a fundamental perspective I think that metal prices, the S&P500, the Dow Jones Industrials, bonds and yes, even gold, are all grossly overpriced. But that doesn't mean their prices will imminently decline. As my good friend and mentor, Rick Rule, has often told me: "That which is inevitable is not necessarily imminent."

The reason the market is so ridiculously overpriced (IMHO) is that people don't know how to quantify the money supply and inflation, and they are concerned about the talk of quantitative easing, which is equally unquantifiable by most. This environment of uncertainty leads to speculation, and in most cases the object of such speculation is gold and other "hard assets."

On the other side of the spectrum are those who believe the Brazil, Russia, India And China (BRIC) economies are going to create such enormous demand for raw materials and finished goods that they bid the prices of commodities sky high. Most of these commodities are also part of the "hard assets" that the fearful group is buying. Mix the two together and you get a recipe for outrageous prices.

Again, as I said, just because I think metals and other commodities are overpriced does not mean their prices are going to fall anytime soon. The current environment, which is conducive to higher prices, may last quite a while and metal prices could increase substantially before they return to something even remotely resembling sanity.

That's not the same as being bullish; it's merely recognizing that prices can go higher. I would not in the least be surprised to see metal prices (including gold) fall by 50%. Nor would I be surprised if they increased by 50%. Instead of worrying about what prices are going to do I focus on what I am going to do in response to prices. If prices fall—I buy. If prices rise—I sell.

Another way I insulate myself from the gyrations of the market is by owning businesses and not trading stocks. I view my portfolio as a series of fractional ownerships in a selection of businesses. If my fractional ownership warrants it, and I get along with the people, I may consider a directorship. This is what happened with Miranda.

I have been involved in mineral exploration in one way or another for the past 15 years. I thoroughly enjoyed it, and I will hopefully be able to remain involved with mineral exploration for many years to come. I have, however, finally reached the stage where I believe that my involvement can span both that of an investor and as a director. Although primarily I will always be an investor.

BC: Yes, a very thorough investor as I once again experienced on our trip through the Yukon a few weeks back.

PE: As you know, I do a lot of boots-on-the-ground due diligence—you and I have visited many countries and countless projects together. But I am not a geologist and I don't pretend to be one either; I am acutely aware of my limitations. While I find that my own hands-on due diligence is invaluable, I have also come to rely heavily on your expertise and due diligence. I owe much of my success in the exploration sector to your insights: you have both made, and saved, me a lot of money. I honestly don't understand how anyone can hope to succeed in the junior mining sector without the advice of someone like you who has decades of real experience in the field. And by "real" experience I mean "real mineral exploration" experience. I had the opportunity to watch the video you made during our trip and suggest that anyone reading this interview also take the time to see how you evaluate exploration properties.

BC: Thanks for the plug, the three-part video (each one better than the previous) is linked here for anyone who is interested. I look forward to catching up with you in the future and know subscribers to Exploration Insights appreciate the time you took to talk to us.

Paul van Eeden is President of Cranberry Capital Inc., a private Canadian holding company. He began his career in the financial and resource sectors as a stockbroker with Rick Rule's Global Resource Investments Ltd. in 1996. He has been active in financing mineral exploration companies and analyzing markets ever since. Paul is well known for his work on the relationship between the gold price, inflation and currency markets. His model for determining the fair value for gold was able to predict both the run up in the gold price to over $1,000 an ounce between 2001 to 2008, and its subsequent decline to around $750. He also created a measure called the Actual Money Supply (AMS) to monitor the real rate of inflation. AMS is crucial to analyzing real (inflation adjusted) changes in prices and to calculating the real return on investments.

Brent Cook brings more than 25 years of experience to his role as a geologist, consultant and investment adviser. His knowledge spans all areas of the mining business from the conceptual stage through to detailed technical and financial modeling related to mine development and production. His hallmarks include applying rigorous factual analysis to the projects and companies he examines, and augmenting his analysis with on-site field evaluations. He has worked in more than 60 countries on virtually every mineral deposit type. Brent's weekly
Exploration Insights newsletter focuses on early-discovery, high-reward opportunities primarily among junior mining and exploration companies. Paul van Eeden, who produced Exploration Insights' predecessor publication, claims Brent "has always been my primary source of information and intelligence with respect to mineral exploration investments."

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

The GOLD Report is Copyright © 2010 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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