June 21, 2010

This report was originally prepared for Strategic Energy Research and Capital, LLC.

The precious metals shares are poised to outperform the metal in the second half on strengthening margins and cash flows, having lagged precious metals prices for most of the past four years - except for 2009. Depending on the index used in the calculation, the average gold stock is still down anywhere from 35 to 48 percent on the gold price compared to where this ratio was in 2006. Take the GDX/GLD ratio below. It looks similar to all the others. Note that relative to gold prices the gold shares are currently about in the middle of a range of values stretching back to 1994. We like it as a measure of sentiment though not necessarily a contrarian indicator.

It tells us gold share investors are neither as optimistic as they were before the 2008 crash nor quite as pessimistic as they were in the immediate aftermath. We believe, if our $1400 gold price target is achieved, investors will become at least as optimistic about the gold price outlook as they were in the pre-crash years (2003-2007).

And why shouldn't this be true given the state of the economy. Gold miners today can more easily bid the factors of production away from resource companies in segments where the commodity price is still relatively depressed.

This phenomenon is implicit in the graph of the Gold/CRB ratio on the right (above). It is explicit in the calculation of average margins (realized gold price minus total cash costs per oz) for ten major gold producers - which shows that gold miner margins have generally been expanding in line with the Gold/CRB ratio... put another way, the gold price has been rising faster than production costs. Expanding margins should boost cash flow multiples, but those multiples have not been expanding. Rather, they've been contracting along with the equity market overall. This is something that we may expect to generally continue through the bull market, especially as interest rates ratchet up.

Rising cashflows should sustain an advance in the shares nonetheless, and returning investor optimism is likely to drive the ratio between the gold share averages and gold prices (GDX/GLD above) closer to the 2003-2007 range.

Based on our target high for gold prices in 2010, this translates into a rally approximating 55% in the HUI (AMEX Gold Bugs Index). Unlike gold, most of the gold share averages have not broken past their 2008 highs, though some would argue that the CBOE index (GOX) broke out last year, and that technically they all look poised. Still, others say, the non-confirmation (of the new highs in gold prices) by gold stocks is typically a bearish divergence -portending bad news for the bull market in gold. This divergence has occurred in the past. Turns out, gold share investors are not always better forecasters of gold prices than gold traders (though they are usually pretty good).

For example, they ignored the break out in gold prices in 2005, but eventually confirmed on the 2006 new high; they also lagged the break out in gold prices late in 2007 and early 2008. In our view this was because they were consolidating relatively frothy valuations that occurred early in the cycle -as early as 2003. However, where they were quick to discount higher gold prices then, today they hesitate, in our view because of the equity backdrop.

Since we remain steadfastly bullish on gold we feel that this divergence has created a valuation opportunity, particularly in light of the fact that the pressure on other commodities has checked some of the cost inflation.

We also expect that as gold prices continue higher the pressure on this divergence will intensify, leading to a break out in the gold share averages sometime between now and September resembling a sling shot as they catch up.

Despite the bullish activity on the tape, we should remain vigilant about the summer for the following reasons,

• Euro bounce and/or summer rally in the Dow would be unexpected, and could unwind the risk trade
• Uncertainty with respect to the Fed's next move
• Seasonal patterns still lean towards weakness in June or July

On the other hand, the geopolitical situation scares us, and the summer rally in stocks is still missing something, we think, perhaps merely the additional impetus from lower lows in the Dow prompting the Fed into expanding again.

These could be sources of additional catalysts for the potential advance in gold shares.

A copy of our report on the 13 gold stocks to own today is available on request: gold@goldenbar.com The report recommends the following companies (with a sample on two exploration companies below),

AGNICO EAGLE MINES LTD (AEM)
NEWMONT MINING CORP (NEM)
JAGUAR MINING INC (JAG)
GOLDEN STAR RESOURCES LTD (GSS)
GOLD ONE INTERNATIONAL (GLDZY:USBB, GDO:ASX)
GUYANA GOLDFIELDS INC (GUY:TSX)
NEVSUN RESOURCES (NSU)
B2GOLD CORP (BTO:TSX)
NAUTILUS MINERALS (NUS:TSX)
SABINA GOLD & SILVER CORP (SBB:TSX)
GOLDEN PREDATOR CORP (GPD:TSX)
EURASIAN MINERALS INC (EMX:TSXV)
EVOLVING GOLD CORP (EVG:TSXV)

GOLDEN PREDATOR CORP (GPD:TSX)

Description: Golden Predator is a TSX listed exploration and development company with a large portfolio of assets located on established gold trends in prospective geology in the Yukon and Nevada. The company is headed by its founder, Mr. William Sheriff, a prospect generator turned company builder after assembling a package of Uranium assets for Energy Metals Corp, then selling it to Uranium One for $1.75 billion in 2006. Golden Predator was listed in 2009. Its immediate focus is to develop its assets on the Tombstone Gold Belt, in the Tintina Gold Province, a 600-800 kilometer long belt of gold deposits trending NW-SE through the Yukon into Alaska. The company plans to fund its exploration program through a royalty scheme and cash flows generated by its emerging operations in Nevada - where it will utilize its mill sites to process ore from its nearby satellite deposits; it also has a significant portfolio of exploration assets that can be farmed out.

Comment: Believe it or not, the Yukon's Tintina Gold Province is still a frontier exploration story. It is known for its rich placer deposits but the region has not been systematically explored for their sources up until recently. Over the last few years new hard rock discoveries have been made in the Yukon by Underworld, ATAC, Freegold and now Kaminak, which reported a drill hole last month that intercepted more than half an ounce of gold over 15.5 meters, just 30 kilometers south of Underworld's discovery (acquired by Kinross). We believe the Yukon is among the last exploration frontiers within NAFTA -where previous exploration has not been exhaustive. What we like about Golden Predator is that its Yukon exploration portfolio is extensive, and the company already made a few preliminary discoveries at its Gold Dome property, Antimony and Brewery Creek (a former operating mine). The company recently acquired properties 50km north of Kinross's White Gold property (discovered by Underworld) that also look prospective. Fund managers Sprott and US Global continued to top up their positions in recent months - they currently own over 10 million shares between them. And why not. The company plans to drill a staggering 350 RC holes at its five properties over the next several months. Chances are good that this exploration program will dominate the headlines, and if there is anything of value around their best targets, within 200m of surface, we would be surprised if such an extensive drill program didn't uncover it. We continue to like Golden Predator Corp.

EURASIAN MINERALS INC (EMX:TSXV)

Description: Eurasian Minerals is a global precious and base metals exploration company headed up by David Cole, a former Newmont executive (geologist) in Turkey and Eastern Europe. Eurasian Minerals has been built on a strategy of acquiring promising exploration assets in the under-explored frontier regions of the world, and funding their development through joint ventures. It currently is in JV's with Newmont, Freeport, Eldorado, Centerra. It has backing from the IFC (world bank). Eurasian continues to add to its property portfolio, currently spanning Turkey, Europe, Kyrgyzstan, Asia, Haiti, and the US. Its most recent acquisition, Bronco Creek Exploration inc. (BCE), a privately owned exploration company based in Tucson, Arizona, resulted in the acquisition of several promising copper-gold porphyry targets in Arizona owned 100%.

Comment: While the bleeding hearts are sending money to Haiti, by the plane, Eurasian is busy trying to create jobs for Haitians the old fashioned way. It is looking for rich deposits to extract valuable metals for export, and for building stuff that makes life more bearable for homo sapiens sapiens in this world of want and scarcity. Moreover, Eurasian doesn't need charity. It has a fat treasury, and has been turning away offers to fatten it further. It has closed on $5 million worth of financings from Newmont and the IFC in recent months, which we suspect is telling. Most of the company's projects are funded out of its joint venture arrangements, and it has no debt on its balance sheet. It will invest the surplus proceeds of recent financings in royalties to fund future exploration. CEO David Cole and his partner Scott Close have assembled a team of first rate exploration talent, each with a specific niche, or special knowledge about a given prospect or region. Many of its projects are being actively drilled and developed, but the market has honed in on Haiti and Arizona. Eurasian acquired its Arizona properties in 2010. They represent a portfolio of copper-gold porphyry targets -one which is the setting of the old Magma Vein (a copper-silver-gold vein that produced 25 million tons of ore with >4% Cu) and Resolution Copper's former deposit (~1.3 billion tones containing 1.5% copper) in the Pioneer Mining District, Pinal County, where the company is following up on sniffs produced at the time of the Resolution discovery that were never explored to the west. Eurasian is targeting the western extension of the Magma Vein, and the porphyry system that Bronco Creek management believes is the source. We also like Eurasian's Haitian portfolio, and believe that it has already made substantial discoveries there, which the market hasn't fully come to terms with yet. The region is highly prospective and under-explored. Their most advanced project in Haiti is the Grand Bois (joint ventured with Newmont) project, a near surface gold/silver deposit, which was discovered by Kennecott back in 1975. Based on 72 diamond drill holes, a UN team estimated a non-NI43101 compliant (historical) resource of 4.3 million tonnes averaging 2.24 g/t gold and 14.92 g/t silver in 1983. Eurasian management is confirming the resource, extending it, and believes that there is a porphyry source (recent drill intercepts of 10-20 gpt gold over more than 20m thickness in oxides, and up to a 100 meter thick intercept of copper mineralization underneath the oxides grading 0.56%). Eurasian Minerals has been putting out a stream of positive exploration results that we expect to continue and turn heads this year.

DEFINITIONS AND TERMS
EV/oz (global) - enterprise value per ounce (P&P + M&I + inferred)
P/CFPS - stock price to forward cash flow per share ratio
EV/EBITDA - enterprise value to trailing EBITDA ratio
EV/NAV - enterprise value to net present value ratio
Total cash cost per oz - non gaap measure of cash operating expenses per ounce of gold sold