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Gold: The Audacity of Hyperinflation

Like a butterfly landing on flowers, President Obama has fluttered to yet another crisis to fix. Obama has gone from saving Wall Street, to Main Street and back to Wall Street, fixing a host of issues from cap and trade to healthcare to reforming the financial system. The banks were bailed out last fall, the automobile companies this spring and now credit card companies - will it ever end? In creating Government Motors, he has thrown billions into a black hole without fixing GM's core problems of a broken business model. Meanwhile $75 billion of incentives to housing lenders to reduce loan payments has not helped troubled borrowers or the foreclosure rate and there appears no end in sight. Yet Mr. Obama has fluttered to another flower.

To support his rhetoric and good intentions, President Obama needs to put more effort and political weight on putting America's fiscal house in order brought on by too much leverage. Unfortunately Obama's plans have done little to reverse the deteriorating health of the US consumer or even the banking system. Lately his moves are making things worse. Familiar problem are coming back into view.

First among these is the dollar's fall under the weight of an increasing debt load. President Obama's budgetary projections show a debt load that is the biggest since the Second World War and expenditures will soon account for almost half of the United States economy, a level last seen since that war. The non-partisan watchdog Congressional Budget Office (CBO) calculates that President Obama's

deficit spending will double the nation's debt within five years and take America's debt to 108 percent of GDP by yearend and that excludes the debt of the states and municipal governments or unfunded social security and medicare obligations. American household debt at $13.8 trillion is more than 130 percent of disposable income.

Rhetoric Over Substance

What happens to a country that has not only spent freely but now finds itself far poorer and close to insolvency as its corporations. Public spending as a share of GDP in the United States has topped 45 percent. The size of government in 1933 was just 10 percent. It is clear that a reduced standard of living for both governments and public workers are in the offing. Obama's increase in government borrowing and bigger government role from automobiles to banking masks the true extent of the crisis. We believe his push to expand social programmes as a cure to stabilize the financial system will jeopardise the very system he is trying to save.

While the massive injection of taxpayer funds saved Wall Street from immediate collapse, long standing structural problems remain and ironically the system is more vulnerable and more dangerous than ever before. The growing US deficit exceeds domestic savings and is larger than the combined surplus savings of the rest of the world. Perversely, Obama's regulatory reforms add yet another layer of regulation and enhances the powers of an omnipotent Fed, but does little to alleviate America's debt problems or the overleveraged shadow banking system. Whatever happened to the single regulatory oversight of the tangle of hedge and insurance groups, or the promised fix for the systems' indebted capital structure? Whatever happened to a tougher SEC or reigning in Wall Street's buccaneers? Rhetoric over substance? Even if the so-called reforms were in place four years ago, there still would have been a financial meltdown.

Rather than spend money on wars like his predecessor, Obama instead redistributed revenues to rescue the financial system but at the same time enlarged social programs, introduced universal healthcare and a makeover of the economy (not wanting to waste a crisis). Unfortunately, Obama is still using the same spending and borrowing policies of his predecessors of too much credit and easy money that fostered the biggest bubble in history. His fiscal policies are unsustainable. America has got even deeper into debt just after racking up record amounts of debt to maintain their lifestyle. In rescuing the banking system with more credit and easy money, Mr. Obama ignores the history of Argentina, Germany and recently Zimbabwe which lived beyond their means and inflated their way to pay for huge debts, ultimately leading to hyperinflation and defaults. Mr. Obama has simply mortgaged his country's future.

Deeper in Debt

To fight the recession, the White House has gone on a borrowing spree of its own, running up an almost $2 trillion budget deficit equivalent to 13 percent of gross domestic product which is more than four times larger than last year's all time high and twice the next largest deficit since World War II. Mr. Obama unveiled a budget for 2010 with a $3.5 trillion price tag to be financed by over $1.3 trillion of new debt. The Congressional Budget Office projects that Mr. Obama's deficit spending will increase the ratio to gross domestic product of federal debt from 41 percent at the end of 2008 to over 100 percent by the end of 2009 and over 120 percent by the end of his first term, a level not seen since the end of World War II. Something will have to give. The Fed's balance sheet has exploded to over $2 trillion swollen by the purchases of toxic paper (sub-prime mortgages, credit, loans etc.) and the need to finance 40 cents of every dollar spent. Treasury debt alone rose $466 billion to $6.8 trillion in the last quarter, increasing $1.5 trillion or 28 percent in the last year. The Americans still have too much debt.

Mr. Obama has done more to revive the financial markets than to shore up the economy. Ironically, using taxpayer money to replenish Wall Street's capital isn't a panacea for the kind of problems that caused the current crisis such as leveraged debt. Much of the spending went to reliquefy the banking sector and while the banks are flush with cash, their balance sheets are still stuck with worthless toxic assets. Excess bank reserves have increased tenfold to a trillion in less than a year from August 2008, yet billions of surplus reserves have piled up instead of being distributed through loans or investments into the economy. Somebody somewhere has to hold those toxic assets until they're resolved, either paid off or liquidated. Neither is happening.

Risk Has Been Socialized

President Obama misses an essential point. Less than a year ago, Treasury Secretary Henry Paulson, jammed through Congress a $700 billion "TARP" bailout to buy the toxic assets from the nation's banks. Then the new Secretary Tim Geithner proposed to set up a partnership (PPIP) with the private sector in order to repurchase those bogus assets. Instead the government spent most of the $700 billion buying equity stakes in the banking industry, proclaiming success when today less than ten percent had been repaid by some 10 of the 19 banks. And whatever happened to those toxic assets? Like a cancer, they are still on the banks' books. The Federal Reserve which had also taken on some of those obligations as collateral has seen its balance sheet double with questionable assets to $2 trillion. Yet, today the government still guarantees huge parts of the financial system, collateral rules are still relaxed and the liquidity facilities are still in place. In shuffling the paper around and $700 billion later, nothing was accomplished except to make America's debt load even larger putting the taxpayer at risk. And the median leverage of the commercial banks? It is still more than 20 to 1, albeit down from a lofty 35 to 1.

At the heart of the shadow banking system is that risk had become a quantifiable derivative created by Wall Street. Financial alchemy aided and abetted this process, as did government sponsored Freddie and Fannie Mac which used ever increasing leverage to create more cheap loans, and earn more fees. Derivatives contributed to almost $1.5 trillion of the financial system's losses and writedowns. The lifeblood of the $592 trillon over-the-counter derivative market was the structured products like collaterised loan obligations (CDOs) which made up more than 70 percent of leveraged loans during the boom years. But risk was found not to be singular; there were market risks, credit default, and liquidity risks. Wall Street's derivatives were supposed to limit these risks. Wrong. Huge losses were suffered. Credit default swaps (CDOs) which are used to protect investors from default even sank one of Wall Street's biggest investment bankers and caused the nationalization of AIG. Today a bailout of CIT, the largest mid market lender, is being considered.

To make matters worse, the derivatives not only did little to limit risk, they actually magnified risk since Wall Street's over-dependence on leverage and the piling on of debt undermined their effectiveness. Then, those credit swaps were to be insurance against defaults but actually enabled holders to benefit from bankruptcies rather than give them protection. These so-called investments pushed previously solvent firms like GM or Abitibi Bowater into bankruptcy so the CDS holders could collect. According, to the Bank for International Settlements(BIS) there are some $42 trillion of swaps still in circulation. Needed then is for these toxic derivatives to expire to even the playing field. Needed also is to lessen our dependence on those structured products that appear less risky in a boom but in a bust, magnifies risk which exposed a leveraged system of a deck of cards. Unfortunatley credit risk has been socialized by the state.

Are Central Banks Part of the Problem?

Central banks are supposed to be stewards of money but are now manipulating their currencies in a round of competitive devaluations. Even Switzerland has intervened twice and its central bank has tripled the monetary base in the last year. Central banks around the world have gone from being lenders of last resort to buyers of first resort. Once independent from their government masters, central banks have become intricately intertwined with the government bailouts. With interest rates at near zero and more debt than buyers, central banks are selling billions of government debt with one hand and with the other, they are "quantitative easing" by purchasing those same securities in a blatant money printing exercise. A new bubble is in the making.

Even fewer are considering the inflationary consequences of monetizing the trillions of debt or talking about an exit strategy and the need to drain reserves, the feedstock of inflation. Either way, central banks have a much bigger role in markets today. But, could they be part of the solution or are they part of the problem? Debt got us into this problem , more debt would appear to get us out. Wrong.

Governments need to get their fiscal house in order and increase new sources of revenue to plug a deepening fiscal hole brought by increased spending and plunging revenues. While raising taxes to pay for the spending is a realistic option, California voters showed, this too has limitations since taxpayers are not going to accept an increase of their tax burden. Another alternative is for a big jump in interest rates but that too has limitations. Retroactive taxes, a consumption tax (GST?) and more bullying are to come. The massive bailouts may have prevented a collapse but who will bailout the government?

Chinese Checkmate

Since 1917, the Americans enjoyed a Triple A credit rating, but the effects of the recession, bailouts, Obama's new spending and the Bush legacy of two wars, jeopardizes this rating. A downgrade is inevitable. After all Standard and Poors recently warned that Britain's sovereign Triple A rating is in danger of a downgrade because government debt equals 55 percent of GDP. America's government debt today is about 50 percent, not far from Britain's.

Today, China is sitting on a huge stockpile of US dollar denominated debt, and are worried. There is growing concern that America will monetize their debt. China is openly warning about the risks of inflation and depreciation which poses a threat to their massive portfolio of US dollars. China's mandarins are rightly searching for alternatives to the greenback by upping purchases of commodities as a hedge against the dollar and set up strategic stockpiles. Already, the Chinese and the Russians are today settling trades in their currencies and are also bulking up their gold reserves. And China's banking system has issued the yuan-based bond offerings. China has also concluded swap agreements with a dozen countries like Russia and Brazil.

China can hold down the yuan's exchange rate by buying dollars, converting those dollars by stockpiling dollar-denominated commodities like iron ore, coal and gold. Buying gold, effectively eliminates the risk of Chinese dollar conversions that would otherwise cause the financial markets and world economy to collapse on such a conversion. America should be happy with China's purchases, instead of running to the World Trade Organization (WTO). China has increased its official gold holdings by 75 percent but still holds less than 2 percent in gold which is a fraction held by the European Community or the United States. Be prepared for more gold purchases.

Hyperinflation Redux

Today, pundits defend Obamanomics by noting the lack of inflation. Wrong. Along the way, inflation is soon to return. We do not have price inflation, we have monetary inflation. Inflation in goods and services will come later. We believe inflation is now inevitable, stoked by the Fed-led expansion of the money supply. Eventually this inflation will spiral to hyperinflation. Obama's profligate monetary and fiscal policies threatens America's financial stability, sowing the seeds for the next crisis. Government borrowings are at a record pace and it is unlikely to be met by demand. Either the Treasury will have to raise rates to attract funding or the Fed will have to expand their purchases. Eventually sooner rather than later, a Fed auction will fail and then the illusive inflation cycle will begin.

The rescue of the financial system and deleveraging exercise has been accomplished by the printing of money. US monetary base, consisting of bills and coins in circulation plus bank deposits grew at a whopping 114 percent over the past year. In the past 48 years, money supply growth averaged 6 percent.

Nowhere in history has there been an orderly or even an exit without some dislocation. To date, foreign central banks have claims of nearly $10 trillion foreign exchange reserves of which most are in US dollar assets. Most investors today are now familiar about the lessons of the Great Depression, but few are so sanguine about the lessons of the Twenties and Weimar Republic's hyperinflation.

We believe this excess liquidity will eventually swamp the economy with an inflationary surge. Furthermore the US government's torrent of borrowings has crowded out private investment borrowings on a never seen scale. Massive government borrowings and state guarantees have dominated the capital markets, ironically creating another re-financing problem since a scarcity of capital has increased the cost of borrowings. US Treasuries reached four percent in June doubling in less than six months. We believe the uptick in rates reflect concern about the future of inflation, future fiscal deficits and the future risk appetite of foreign investors.

Hyperinflation, A Consequence of Government's Recklessness

History is full of examples of countries that have failed to pay their debts opting for hyperinflation to pay down debt. Inflation reduces the value of debt and makes the inevitable adjustment easier. Recent defaults include Iceland and Zimbabwe and in the Thirties, the United Kingdom and America too defaulted. Rather than focus on the Thirties, investors would be wise to study the Weimar hyperinflation in the Twenties or France's fiat money inflation in the 18th Century.

The main cause of hyperinflation is a massive growth in the amount of money without an attendant increase in goods and services. An economic business expansion is not even needed. Hyperinflation is rooted in the imbalance of too much money chasing too few goods, causing a loss of confidence in money itself. And with hyperinflation comes not only hourly price likes but hoarding, tax evasion, speculation, illegal transactions and corruption. Old virtues such as thrift, hard work, trust and honesty are lost in the quest for survival. When governments balk at paying their bills and are reluctant to tax their people, they print money. History show that prices inevitably rise in response to the increased supply of money. Andrew White's book, "Fiat Money Inflation" tells us that in 1890 fiat money plunged France into a decade long hyperinflation. After going off the gold standard, the French government issued paper "livres" and in less than six years, there was over $45 billion of notes. Money had become worthless and prices skyrocketed when the value of the assignat collapsed.

Today, the German government is ringing the bell about the rampant printing of money and the need to look at its consequence. Germany remembers too well the Weimar Republic hyperinflation which was caused by the printing of too much money to pay for reparations after the First World War.

After the war, the US became the world's largest creditor. The US had claims on their allies Britain and France with Germany owing over 100 percent of its gross domestic product. To pay their bills, they shipped gold to the United States but it was not enough. The collapse of revenues also forced the government to increase taxes on everything including beer but it was not enough, so Weimar Germany relied on foreign creditors to finance its budget. Weimar Germany had to print money and experienced the greatest inflation in modern history eventually wiping out the savings of Germany's domestic creditors. In "The Economics of Inflation", Bresciani-Turroni described Germany's hyperinflation. He wrote, "It is easy to understand why the record of the sad years 1919-1923 always weighs like a nightmare on the German people". Weimar Germany's highest value banknote then had a face value of 100 trillion marks. Of course, the German government had to default. Today Germany has restrictions on the ability of the government to run deficits or a debt brake at 0.35 percent of GDP in 2016. Never again?

And of course, the downfall of Russian Communism was due to a modern day hyperinflation caused by deficit spending and the printing of money. The ruble was devalued from about 40 rubles to the dollar in 1991 to over 30,000 rubles in 1999. Communism simply ran out of money as they spent money that they did not have. And today, just look at California, which represents some 15 percent of the American economy, are printing IOU's or warrants in lieu of cash to pay taxpayers, local governments and business because of an ever-widening budgetary deficit.

An eerie parallel seems to be at work. This time the US position is worse because like Weimar Germany it has a higher dependence on foreign capital to finance its deficits. The cost of this indebtedness is huge and increases the probability of a debt trap and a hyperinflation, US-style. Oh yes, in hyperinflation, debtors become winners, since their debts become worthless - maybe Washington is on to something after all.

Gold Is The Antidote to Our Problems

Today, there is no longer a monetary anchor. Floating exchange rates, deficit financing, bailouts, near zero rates have replaced fiscal prudence. Today's dollar-based monetary system is a remnant of the Bretton Woods' system set up after the Second World War when currencies were pegged to the dollar and the dollar to gold at $35 an ounce. Then the US was the largest creditor in the world which gave the dollar its preeminent status. In 1971, President Nixon severed the backing of the US dollar with gold. Since then dollars have been printed without the need of a gold backing, convertibility or collateral and little wonder there's a surplus of dollars today. The United States has become the biggest debtor in the world. The idea that the dollar would be backed by the good faith of the US economy, is now undermined by the accumulation of debt on a horrific scale. What happens when faith leaves a faith-based currency?

Gold is a barometer of investor anxiety and today people believe the US dollar is an overvalued currency. Today, China is the creditor to the world in a world awash in dollars. It appears that the Far East will continue to grow while America's recovery remains protracted. As such there will be increasing demand for Asia's currencies which will mean that the dollar will decline in relative importance for international investors, prompting calls for an alternative to the US dollar as a reserve currency. Recent events have caused a loss of Chinese confidence that the US will never get its fiscal house in order. So far the US has been reluctant to defend the dollar, reduce spending, raise interest rates or taxes to reduce the deficit and the mountain of debt. Money has to come from somewhere, if not in higher taxes then borrowed and inflated away or sovereign deficit. Be prepared. Gold is a classic hedge against inflation.

Gold is thus a natural insurance policy without the counterparty risk. Gold has become the new old global currency. Gold has benefited from the weakness in the dollar and today gold remains the world's primary financial asset. Gold's flirtation with $1,000 an ounce shows that investors are concerned about the greenback. This is an important message for the central banks. What damages the dollar, damages other currencies, and historically gold has served as an alternative investment.

Because the United States consumes much more than it produces and owes much more to so many, an avalanche of dollars pours into the world every day. The paper dollar era is over. That will be good for gold but bad for the dollar. A gold standard once offered the kind of discipline that's missing. And its return is logical. A return again as a monetary asset would be bullish for gold as would central bank purchases such as China. Gold is the antidote to Obama's problems. We continue to believe that gold will hit $2,000 an ounce this year.


Producers are faced with increased risks from political and regulatory influences in many developing nations. Indeed, the threat of increased taxes or royalties have stopped many projects. Unfortunately these problems include permitting, causing lengthy delays resulting in fewer discoveries. In fact the dearth of 5 million ounce plus projects raises the prospects of "peak gold", which would be bullish for existing producers. We have said many times, there is more leverage to buy a gold producer with the ounces in the ground than buying ETFs.

The mining industry continues to face the challenges of cost pressures, low commodity prices, and low growth. Nonetheless the financing picture has picked up and the majors have been able to replenish their treasuries. For the producers this was the time to strengthen balance sheets, however, for the junior explorers, survival was the key and thus there has been a slowdown in exploration. Growth stocks continue to display better performance than the seniors who are faced with the ongoing difficulty of replacing reserves. Investors at long last seem to favour organic growth versus the acquisitors who have grown in ounces but also in share issuances. The gold mining industry continues to prove itself more adept at mining gold on Bay Street rather than the drill bit.

There have been some exploration news such as Ventana Gold's La Bodega discovery, along strike to Greystar Resources' huge Angostura deposit in northeast Columbia which hosts almost 12 million ounces of gold. The capital costs are huge partly because the better grade is deeper and in the sulphides. Ventana's results sparked activity but a cautious note is that the intercepts are like Greystar, largely sulphide and deeper. And in the backyard of Canada's mining industry, Lake Shore Gold Corp and West Timmins Mining. reported a bonanza intercept of 12.7 g/t of gold over 83 meters at their Thunder Creek joint venture property in Timmins, Ontario. So far the companies have completed about 15,000 metres of drilling of a 22,000 meter program. Four drills are turning and we believe that this discovery will revitalize the mining district. Thunder Creek is adjacent to Lake Shore's Timmins mine which will be in production this year. Both companies are takeover candidates.

Among the senior gold producers, we like Barrick and Newmont, for their balance sheets and portfolio of mines, however both companies face near term growth problems. More aggressive investors should instead look at the mid-tier miners such as Agnico-Eagle, Centerra and Eldorado which enjoy superior growth profiles in terms of per share production and reserves. On the other hand both Goldcorp and Yamana are suffering indigestion problems from their acquisitions and Goldcorp's Penasquito project in Zacatecas has yet to justify its hefty price tag. Among the junior mines, we like Aurizon and have added Allied Nevada a new/old producer in Nevada to our coverage list. We have also have added Centamin, a budding Egyptian producer with over 10 million ounces of resources. Among the silver producers we continue to recommend MAG Silver now that the company is free from the "take under" obstacle as well as Mexican based silver producer Excellon Resources which has new management, a new mill, new concentrate agreement and a strong balance sheet. Excellon recently acquired Silver Eagle which brings a mill, tax efficiencies and a huge land position. Excellon plans an ambitious drill program this summer in its quest to expand the carbonate replacement deposit discovery. Maison has raised money for Excellon this year through a private placement and managing a rights issue.


Agnico Eagle Mines Limited

Agnico Eagle continues to position itself as the fastest growing senior producer with production doubling this year and next. Importantly, Agnico continues to maintain its low cost profile, conservative balance sheet and its array of mines possesses low geopolitical risk. Agnico has brought on Goldex and the Finnish Kittila mine with Pinos Altos in Mexico starting up later this year. Production delays at Kittila is normal and the company expects a full year contribution next year. Looking ahead, Meadowbank should add another 400,000 ounces and the company's recent tripling of its credit lines ensures the financing of that project. Indeed, with a flush balance sheet, Agnico Eagle is considered an acquisitor. Buy at current levels

Allied Nevada Gold Inc.

We have initiated coverage of Allied Nevada. Management was formerly from Kinross and have restarted the Hycroft Mine in Nevada. Allied Nevada will initially mine the oxide and plans to mine the deeper sulphides which contains more than 4 million ounces and 64 million ounces of silver. A reserve update recently increased resources to 5.9 million ounces of gold and 17.5 million ounces of silver following the company's drill program. Allied Nevada has cash, no debt and sufficient funds on hand to become Nevada's newest producer. The heap leach mine will be in production by the third quarter and produce 90,000 ounces at a cash cost of $450 an ounce. Allied Nevada owns 100 percent of Hycroft and we expect once in production will generate free cash flow in order to convert its large resource base into the proven and probably category. We like Allied Nevada here.

Aurizon Mines

Aurizon owns 100 percent of the Casa Baradi mine in Quebec which will produce 154,000 ounces of gold at a cash cost under $400 an ounce. Aurizon will spend $15 million on exploration at Casa Berardi. Next year the company expects to expand output and Aurizon recently reported expansion plans at the Joanna development which is likely to be the next gold mine. The company has identified significant development potential on its large land package and a prefeasibility study will be completed in the next quarter. With over $100 million of cash, free cash flow from Casa Berardi, Aurizon is well placed to bring on a second mine. Buy.

Barrick Gold Corporation

The world's largest gold miner, finally gave the go-ahead to build the huge Pascua Lama gold/silver project straddling the Chile-Argentina border. After reaching a tax agreement with both countries, the project's price tag has increased to $3 billion. Barrick projects annual production of 750,000 ounces of gold and 35 million ounces of silver, which would make Barrick one of the largest silver producers in the world. The price tag should firm up later this year, but this project is still too far off in the future. In addition, Barrick is handicapped by over 9 million ounces of gold hedged against this project and the mark to market loss is in excess of $5 billion. We believe the that the capital costs, formidable infrastructure issues and negative mark to market loss significantly reduces Pascua Lama's IRR attractiveness. More prospective is the expected 2 million ounce production from the recently consolidated Cortez Hills project in Nevada which should come on-stream in the first part of next year at a capital cost of $500 million. The Buzwagi project in Tanzania came on-stream and should be a steady contributor. At Pueblo Viejo in the Dominion Republic, the price tag has increased to a lofty $2.7 billion and that project will not be in production until the end of 2011. Thus, Barrick's problem is of a near term nature and in order to maintain its growth, Barrick must grow through acquisitions so a fill-in acquisition is likely. Longer term, Barrick has a solid balance sheet, full project pipeline and stellar management group. Buy.

Centamin Egypt Ltd.

Centamin is a sleeper company which will pop up on everybody's radar screen now that it is in production. Centamin's main asset is the Sukari Gold mine in Egypt's eastern desert and is one of the largest gold projects to come on stream this year. Sukari has nearly 10 million ounces of resources and will produce 200,000 ounces this year ramping up to 500,000 ounces from an open pit. The project cost of $260 million is largely spent and Centamin was able to bring this project on stream by refurbishing the former Kori Kolla processing facility. Centamin also installed a 25 kilometre seawater pipeline. Centamin is spending about $10 million a year on exploration and has eight rigs turning with recent results resulting in an update grade of its resource. Centamin plans an underground development to begin sometime this year. Centamin is debt free, unhedged and has about $110 million of cash. We like overlooked Centamin here.

Centerra Gold Corp.

Centerra has finalized its long awaited agreement with the Kyrgyz Republic and with the ratification in June, gave a bigger ownership stake to the government. At the same time, however the Mongolian government suspended Centerra's Boroo permit for three months. The suspension was a surprise and coincided with a brief labour strike. However, we expect this Boroo permitting issue to be resolved. Meantime, Kumtor will produce more than half a million ounces this year which would generate free cash sufficient to kickstart a major exploration program on Centerra's 26,300 hectares. Exploration had been suspended while the company was in negotiations with the Kyrgyz Republic, so we expect Centerra to come out some good news at long last. We to recommend Centerra as one of the cheapest intermediate sized producers because of the company's potential to grow ounces quickly.

Eldorado Gold Corporation

Eldorado has acquired the 19.9 percent interest in Sino Gold Mining from Gold Fields of South Africa. Sino Gold based in China is producing about 170,000 ounces and production is planned to increase Jinfeng to 220,000 ounces per year when the underground operation is commissioned. The Jinfeng mine is the second largest gold mine in the country and Sino's second, the White Mountain mine should produce about 65,000 ounces. Eldorado's stake in Sino Gold gives it an important stake in China and with Eldorado's Tanjianshan mine, Eldorado will become the largest foreign gold producer in China. The Tanjianshan mine produced 118,000 ounces of gold last year and will produce about 100,000 ounces this year with the new roaster facilities in place. Eldorado's China venture complements its flagship Kisladag mine in Turkey which is its "bread and butter" mine producing about 240,000 ounces this year. Eldorado plans to expand Kisladag and bring on Efemcukuru gold mine which will be its second mine in Turkey. Eldorado should produce 340,000 ounces this year at a total cash cost of less then $300 an ounce. We continue to recommend Eldorado for its growing production profile, strong management and balance sheet.

MAG Silver Corp

MAG successfully fended off its Mexican partner, Fresnillo which had unveiled a "take under" proposal last December. We think that Fresnillo got frustrated with the process but will be back again with a higher price and perhaps a better legal strategy since the bulk of the needed reserves for Fresnillo's Juanicipo project lies on joint venture ground. MAG management is now free to continue to grow ounces and with a strong balance sheet of more than $50 million in cash, the company is well prepared to expand the Juanicipio joint venture. MAG is also receiving excellent results at the potential carbon replacement deposit (crd) discovery at Cinco de Mayo. MAG Silver wholly owns the 15,000 hectare Cinco de Mayo in north Chihuahua state and is searching for a (crd) style deposit whose system is responsible for over 40 percent of Mexico's silver production. The search for the mantos and chimney type formation has been confirmed with recent drill results. MAG silver has over 11 projects but the crown jewel, 44 percent owned Juancipio is still to be exploited particularly with the recent results from the Valdecanas vein. We recommend the shares here.

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Analyst Disclosure
Company Name Trading Symbol *Exchange Disclosure code
Excellon EXN T 1,4,5,6
Mag Silver MAG T 1
Barrick Gold ABX T 1
Eldorado ELD T 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


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