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Gold: Debt, Deficits, Doom, and Gloom

Debt vs Global Recession Cartoon - Which came first?

Last month gold plunged more than $200 in less than a week and the dollar soared, trumping even gold. The move caused a catfight among letter writers with investors and central bankers questioning gold's safe haven status. By contrast, the US Treasury sold more debt despite growing concern about the US economy and politically dysfunctional Washington. In the seventies, gold corrected more than 50 percent, dropping $100 before heading higher. In the eighties, gold pulled back $100 after reaching $510 per ounce before reaching new highs. So, why the disconnect?

Start with cash strapped Europe where concerns about the euro crisis have sent investors into dollars instead of gold in a "dash for cash" because dollars provide liquidity at a time when liquidity is at a premium. Although the one month gold lease rate hit 0.2703 percent, European banks were "swapping" their gold in order to raise cash amidst a shortage of dollars, depressing gold prices. Investors seem to have confidence to hold dollar assets for maybe 30 seconds, 30 days but not 30 weeks.

Gold's Next Stop

However, gold has reversed course, resuming its uptrend on growing concerns over the lack of confidence in paper assets and the prospect of another round of quantitative easing. Central banks remain firmly on the path of printing money to pay off public debts and to keep their banking systems solvent. As bankers print ever more currency, they reduce the buying power of money in circulation. It is this dependency on the printing presses to liquefy the entire western banking system that has caused the central banks' balance sheets to be bloated with sovereign debts and the toxic paper of yesteryear. History shows that inflation always follows monetary expansion. Even with the correction, gold has done better than every other asset, including the dollar, up more than 10 percent last year making its eleventh consecutive annual gain. Having achieved ninety percent of our forecast of $2011 in 2011, we expect gold to reach $3,000 an ounce and end up for an even dozen years in 2012. There's just a lack of compelling investment alternatives.

Never-ending European Collapse

Markets are hoping for yet another quick fix so the Euro leaders could just kick the can down the road, one more time. Europe's underlying problem and left unsaid is just who is to buy the billions of debt needed to rescue its weakest Eurozone members. The solution du jour is to have the European Central Bank (ECB) disgorge a fresh €2 trillion to purchase the weak sovereign debt similar to the Federal Reserve's $4 trillion money printing exercise that bailed out Wall Street only two years ago. To date the ECB has recycled $600 billion in cheap funding to the overleveraged banks. Standard & Poors has already opined, downgrading the credit ratings of nine European countries, including France and Italy leading to sell offs in their sovereign bonds. Portugal was slashed to "junk" status. Money is still cheap, governments overprint and two months after the October debt and loan accord, Greece is found waiting, again. A Greek default still looms. The IMF's new Managing Director, Christine Lagarde warns of the risk of "economic contraction, rising protectionism, isolation similar to what happened in the 30s". The IMF itself only has $400 billion left to save the world, raising the inevitable question - who backstops the backstop?

The breakup of Europe would no doubt cause a global recession, worse than the 2008-2009 period and precipitate a combination of messy sovereign defaults, currency barriers and massive unemployment. This very possibility prompted the European leaders to do whatever it takes to avoid catastrophe, yet to date they failed to control the spreading debt crisis. To be sure, past financial crises have shown that bold leadership and a dramatic reduction in debt are needed. Still despite an EU summit a month, Europe's policymakers appear unable to ring-fence their problems. Instead their dithering and politicking is all too reminiscent of the policy parallels in 2008 when the bankruptcy of Lehman spread through markets, triggering the worst downturn since the Great Depression. Even worse, European leaders have not prepared their own people for the harsh medicine to come. The markets are not as patient and the rash of downgrades with negative interest rates does not bode well for Italy and Spain who must rollover some $200 billion of bonds. That two or three leaders have been replaced so far appears to be only the beginning, but replacing them with unelected refugees from Goldman Sachs is not the answer.

Of course, the inability of European leaders to kick the can down the road has prompted the obvious solution. Force the so-called independent European Central Bank (ECB) to loosen by printing buckets of money in a Euro-style quantitative easing program. The ECB itself owns about 18 percent of Greek debt. The ECB so far has temporarily boosted liquidity through a swap program designed more to shore up their broken banks than the sovereign states of southern Europe. The much ballyhooed European rescue facility (EFSF) triple A rating was downgraded, after only one payment. However the monetization of debt is exactly what caused Germany to slide into hyperinflation. This is not the panacea. Is forcing the ECB to print money part of the solution or another problem?

Stop Wall Street From Occupying Washington

Everywhere from the Occupy Wall Street movements to Washington to Omaha, the top one percent has been vilified and there is a sense that capitalism and even democracy has fallen short. Part of the reason is that taxpayers were on the hook for the billions of bailouts for the supposed "too big to fail" institutions losing confidence in the free market system. Fiscal gridlock has frustrated everybody. There was even an insider trading scandal at the Swiss National Bank. The anger is understandable. Part of the blame is the financialization of the global economy where Wall Street today represents almost a third of America's corporate profits. The other is that the world's largest economy's finances are caught in gridlock and the promise of pensions and ruinously expensive medical care to America's retiring generation are not even talked about because those obligations dwarf the country's debt obligations. Taxpayers are rightly frustrated, losing trust in the system.

The Financialization of The Global Economy

The financialization of the global economy once a blessing is the darkest shadow due to derivatives. Debt has become synonymous with money. Debt is no longer amoral. Debt on debt has become the solution du jour and derivatives the enabler. Too much debt caused the 2008-2009 financial crisis. Too much debt caused Europe's problems and too much debt will sink the US economy. Countries around the world are hopelessly in the red with debt rising every day. Derivatives a product of Wall Street's financial engineering or alchemy has been the enabler that allowed the big investment banks to make big money at the expense of the system, escaping the bounds of physical assets, the real economy, debt and regulatory purview. The size of the derivative market has been allowed to grow and prosper to over $600 trillion and is largely run by the world's banking giants. Indeed, it is the failure of some of those derivatives like credit default swaps (CDSs) that is at the heart of Europe's problems, a replay behind the failure of Lehman and "too big to fail" AIG.

The proposed 50 percent Greek haircut looks like a default, is structured like a default and is a default. The problem is that no one wants to pay out the CDS bets. The Bank for International Settlements (BIS) reported that hedge funds sold three times or $111 billion of protection on sovereign risk. And America's big banks in aggregate have "guaranteed" more than $500 billion of debts to Greece, Italy, Portugal and Ireland or three time their exposure. Déjà vu - again it is the banking system that is overexposed which will lead to insolvencies in the event of a default.

Exchanges and brokers too jumped on the bandwagon, changing the rules to attract trading in more derivatives. And existing rules have been relaxed further to enable trading in dark pools, automated trading with computer algorithms and high frequency trading. The biggest concern, however, remains the counterparty risk credit leverage and cross border risks. The strength and credibility of all contracts is the "weakest" counterparty, not so insignificant given the demise of MF Global and AIG. Drachmas anyone?

And then there is America, the world's largest derivative player and biggest debtor. The poor performance of the world's largest economy in the wake of the collapse of the sub-prime mortgages and credit bubble burst together with Washington's debt growth, raises disturbing parallels with Japan's lost decade. America still has a mortgage problem despite two doses of quantitative easing, closing the year with $15.2 trillion of debt and needing almost $3 trillion of the $7.6 trillion dollars of debt that must be rolled over by the G-7 countries this year. That is a lot of Treasury bills to sell. Spending reached a post war high at 25 percent of GDP, while taxes has fallen to 14.5% of GDP. Like Mr. Ponzi, America has been adept at issuing new debt to pay for old debt.

ObamaDebt vs All Previous Presidents Combined

America is in the midst of a balance sheet recession relying on debt to pay its bills. And as the supply of debt increases, investors will demand a higher yield pushing interest rates up leading to higher inflation in the future. Foreigners already own 50 percent of US debt following a 100 percent increase during Mr. Obama's term. Indeed in only one term Mr. Obama has piled up more debt than all 43 Presidents combined. The worst is yet to come. The average yield on US debt is a contrived 1 percent. Today, the weaker European players are paying 6 percent plus. America's debt to GDP surpasses some of Europe's weaker members. America then must eventually pay the piper and if they have to pay 6 percent on the $3 trillion plus of debt that must be rolled over, someone will have to write a big check. And with the US entering a period of protracted gridlock to be solved hopefully by the election this November, nothing has been done to address America's problems.

So far America has been successful in inflating their debt away, debasing the dollar through artificially low interest rates, quantitative easing and bailouts. The cost is normally a weaker currency as the Fed's balance sheet expands. Recently the dollar has rallied, primarily because other currencies are in worse shape. Until now. Any refinancing is dependent upon the Chinese who ironically are being asked to financially support the very economy that is expanding its military in Asia to counter China's so-called rise to power. Chinese holdings of US debt has fallen 2.4 percent to $1.13 trillion, down from $1.5 trillion in October. Is America's debt worth this risk? Dollars anyone?

Internationalization of the Reminibi

Since 2005, the reminibi has gained 30 percent against the dollar and still the reminibi is a source of complaint to the United States. Though shrill, the China bashing has declined as the US slides from global leadership. China has created another $300 billion sovereign wealth fund to be funded from the $3.12 trillion of foreign currency reserves. The internationalization of the reminibi is the best argument against a revaluation of the reminibi. To be sure, Beijing has taken additional steps to liberalize the reminibi in a move to convertibility setting up currency swap agreements with more than 10 countries. The key is the settlement of China's trade with others and resultant liquidity. Already there is more trade using the reminibi as a medium of exchange between China's major cities in the immediate area of Hong Kong like Shanghai, Dongguan, Shenzen and Macau. More and more, neighbours like Singapore and Korea are using the reminibi. It won't happen overnight but the dollar days are ending. History shows that great power shifts are accompanied by changes in the world's reserve currency - the last time was the demise of sterling replaced of course by the dollar. Reminibi anyone?

With record amounts of liquidity sloshing around from taxpayer financed bailouts, quantitative easing programs and deficit spending, investors are nervous about holding fiat currencies. Needed is a new Bretton Woods with a currency based on gold, instead of the so called faith-based currencies of countries that cannot live within their means or honour their debts. China and other creditors have rightly diversified away from the dollar and euro, searching for other options because of diminished confidence in the western financial system. China is in an excellent position and lately encouraged other countries to use its currency as a medium for trading and importantly investments. China has become the first port of call as countries seek funding in a capital short economy, promoting direct trade of the yen and reminibi without the usage of dollars with its biggest trading partner Japan. By its very size, China's reminibi is destined to become a reserve currency like the euro and the dollar.

The Rise of China

Sinophiles are difficult to read. Everybody it seems is an expert, and many believe China is to be blamed for America's problems. Yet few have travelled to China and many are prescribing what China needs is a US-type solution of revaluation and consumerism. While consumer spending is only half that of the United States, the Chinese are buying their first car, not their second SUV. China's government too has been in a catch-up phase, spending on infrastructure like airports, roads, trains and yes housing. While the so-called real estate bubble has burst, no Chinese banks have been brought down. Chinese banks are backed by the state, America's banks had to be backed by the state when Fannie Mae and Freddie Mac become wards of the state. However, unlike the demise of MF Global, a card carrying member of America's shadow banking system, China has not had similar failures. No depositor can claim a loss of savings, something MF Global shareholders cannot claim.

Despite the turbulence overseas, there is tremendous confidence led by China in the huge consumer spending power in Asia. Although, consumer spending is half of the United States, the world's second largest economy's per capital output is only one fifth of most developed countries. After three decades of robust growth due to ever-increasing exports, China is the world's most prolific exporter and has significantly raised the living standards for its billion plus population. Domestic pressures remain. The need to maintain growth and peace within its borders is a dominant issue for China's new generation of leaders to be selected this year. While infrastructure spending has slowed down, there are signs that the young population is just discovering fashion, the internet and spending as a past time. However, unlike the west, China's savings rate is quite high. Its hotel market is also booming and expected to overtake the US in the next decade. Tourism is considered a major part of the current five year plan, and thus there has been a big increase in hotels to accommodate the increase in tourism. Hilton for example plans 100 hotels by 2014 or four times the number of properties it currently manages. And, gambling revenues in Macau were up 26 percent in December or five times that of Las Vegas.

And Enter The Dragon

And in a sign that the consumer is following a western style consumption, it was noteworthy that red wine has grown at a compound annual growth rate of 12 percent with wine being bought not only for consumption but for investment. In fact the Shanghai Wine Exchange Center was established only in September has 2,000 investors already. Although possessing a largely unsophisticated palate, Chinese investors and consumers are collecting the big brands, big years and big wines such as a Chateau Lafite which sold for 2,550 yuan in 2008, now sells at 12,620 yuan or an increase of 500 percent in only three years. A case of 1985 DRC Romanee Conti recently sold for $1.46 million HK or $230,000.

The government has tightened monetary policy for about a year now. The planned slowdown in the real estate sector was the major casualty. Average new home prices in 52 of 70 major cities fell in December, but the decline was due more to the government's dictate that curbed loans to the real estate market. Also in evidence, in a conversation with the Shanghai International Mining Commodity Exchange some of its newest members have switched from real estate into mining in search of the next big profit opportunity. Inflation is a major government concern. Since 2007 housing prices were up 140 percent nationwide, and Beijing alone had an eight fold increase in the past eight years. But the bigger story than the housing slowdown is that inflation has fallen for the fifth month in a row to a 15 month low.

We believe, China's economy will grow at 9 percent in this year of the Dragon and next. Dragon years are often periods of prosperity but also brings periods of unpredictability and turning points (eg: Dragon year 1928). Although, the government reduced subsidies for fuel efficient models which caused a 4.2 percent decline in vehicle sales in October, 1.1 million units were sold. Hyundai reported a 13 percent increase, selling 100,000 units in the month. Since its entry into the WTO in 2001, annual automotive sales grew from 2 million units a year to over 18 million units. In another move to consumerism, the Chinese only worked 17 days in January thanks to the New Year three day holiday and the seven day Spring Festival or Chinese New Year holiday. The holidays caused the world's largest seasonal migration of free spending people that China's three biggest airlines even increased the baggage allowance over the festive season. China is still in the early stages of urbanisation. Rather than a migration from farms to choke the big cities, China's policy is to build up the second or third tier cities. Each year, 17 million people move from rural to urban areas, equivalent to half the population of Canada. As a result China plans to build 97 airports, linking these urban centres.

Later this year, China will introduce a new set of leaders with a new President and Premier and seven of nine Politburo Standing Committee members to be replaced. The new generation of leaders have a vested interest in ensuring the next five years of growth continues at the same pace of the previous 38 years. While the world is obsessed with real estate, China is expected to encourage investment in energy, environmental, agriculture as well as infrastructure investment. In December, the writer took a high speed train from Beijing to Tianjian which is a normal 3 ½ hour car ride. The trip was completed in 30 minutes with speeds of up to 300 km/hr. Yet like all things in China, there are contradictions because when I arrived at the Beijing station, the queue for a taxi was at least the distance of a football field and it took another 30 minutes to get a taxi. Traffic remains horrendous in Beijing and while there were fewer cranes, signs of a slowdown were not evident. Chinese hard landing forecasts appear to be a western obsession and ill-founded.

China is the largest gold producer in the world and soon, the largest consumer of gold. Although China holds the fifth largest gold reserve, China has less than 2 percent of its reserves or 1,054 tonnes in gold. We expect China to boost its gold reserves in line with other industrialised countries' average at 10 percent. Such purchases would take up to two years' of world output. In November gold imports in Hong Kong grew 20 percent and almost 500 percent year over year reflecting retail demand for mainland purchases and Hong Kong's lower tax rate on gold purchases. China's appetite is expected to grow.

Are Regulators, Politicians too?

Much is made of the string of scandals caused by Chinese companies listed on the North American markets. The value of Chinese delistings on US exchanges exceeded the value for China IPOs. That firms such as Muddy Waters could publish unsubstantiated accusations without the regulatory oversight of the Street is just another regulatory loophole. The irony is that companies are considered guilty until proven innocent, and like many victims of violent crimes today must resort to the courts for the arduous process of seeking remedy. Rui Feng's Silvercorp Metals is accomplishing more than the regulators.

Blaming China and its regulatory framework for loose standards is equally unrealistic as many of those Chinese companies retained America's top rated accounting firms such as KPMG and Ernst & Young for their audits. Similarly it was a rash of American dealers who specialized in reverse takeovers (RTOs) that not only made the rounds in China but used a network of hedge funds to finance the plethora of reverse mergers. Of course, many RTOs should not have been allowed, but then the cheque writers were equally guilty in the pursuit of quick profits among these thinly traded RTO. But should listing standards be tightened? The reverse takeovers have been part of listing standards since day one. The standards are high in every regulatory environment from London to Toronto and to the United States and are even higher in Hong Kong and Shanghai whose market caps surpass that of North America. The failure then is not standards, but in the due diligence by investors and the so-called dealing community whose quest for quick profits created the very loopholes that caused the rash of listings and governance problems.

Capital markets are like highways, creating barriers might keep some bad drivers away, but it is a two way street. There are an equally large number of American companies seeking listings and funding from the important capital pools in Asia. Putting up false barriers could boomerang on those who need capital most in a capital-short environment.


Valued in terms of market cap per ounce per ounces of reserves, we have calculated that the world's top twelve gold companies in situ reserves are trading at an 80 percent discount to the bullion price or under $400 per ounce. Indeed, other than central bank stocks, the in-situ reserves of the gold producers are the sole source of future gold. The gold shares' disconnect then is not sustainable.

World's Top Dozen Gold Producers

Gold is the only real money. Central banks can always print money, but they can't print gold. Unlike currency, gold is finite. Global annual production is estimated at 2,500 tonnes. Central banks' reserves hold roughly one third of above ground gold or about 30,000 tonnes. And they have been consistent buyers, after selling for 20 years and thus, there are no big suppliers of gold anymore except for the in situ reserves of the gold producers. We estimate that the top dozen gold producers hold about 23,000 tonnes of reserves of proven and probable gold in the ground. Of note is that the market is valuing this gold at lows since the market cap per ounce of gold in the ground is valued at only $342 an ounce. If the central banks including China keep buying gold to diversify from fiat currencies, where is the gold to fulfil this demand. We believe gold producers are cheap. Gold anyone?

Despite bullion averaging $1700 in the third quarter, gold stocks remain in a funk, underperforming bullion for another year. Investors appear to be losing faith in stocks. We believe the disconnect between bullion prices and shares is attributable to a combination of competition from gold ETFs, dilution from takeovers and the inclusion of shares in baskets by hedge players. Ironically gold miners' earnings per share and cash flow are at record levels. A $100 move in bullion for example translates into $500 million cash flow for Barrick Gold, the world's largest gold producer.

Gold's underlying fundamentals remain in place. Nineteen central banks including Russia are buying gold. China too is buying. China will soon eclipse India as the largest user of gold. And of course as long as Americans demand more than they can afford or borrow so much in a "free lunch" mentality that they continue to resist both higher taxes and lower spending, gold prices must head higher. And then there are those free spending politicians on both sides of the pond who are adept at giving voters what they want, not what they need. We believe that the amount of global stimulus and consequent inflation will support ever higher prices in gold and gold will reach $3,000 per ounce this year.

The inclusion of gold stocks in the market timers' hedging baskets also put downward pressure on the shares. The declaration of dividends tied to gold has resulted in a closure of the gap between stocks and gold. Gold stocks are often included in baskets by hedgers and the imposition of dividends makes it difficult for these stock to be included in the baskets. Indeed, gold producers like Newmont and Eldorado have tied their dividends to gold which have attracted value investors. Why not, take it one step further and declare dividends in physical gold giving the industry another reason to differentiate themselves from paper gold and ETFs. The shortage of major discoveries has resulted in a significant increase in exploration budgets. While, there have been few new discoveries to date, exploration dollars spent in Timmins, Alaska, Columbia and Santa Cruz, Argentina have opened up those areas and odds of success increases.

Gold stocks are thus cheap and undervalued, particularly since they are trading at a discount to the TSX averages. Barrick for example is trading at less than 10 times this year's earnings. In the fourth quarter despite a lower gold price, gold miners' earnings for the year reached the highest levels and their balance sheets are growing with cash. Gold companies today are undervalued with low price to earnings ratio and healthy cash balances which are the ingredients for value players. With cash costs around $400 an ounce and selling at $1600 an ounce, gold miners' profit margins are among the highest margins in the business, any business. Therefore, we believe that the underperformance will end this year. The cheap valuation will also spur the continuation of M&A activity and believe that the deal making will involve not only the majors but the intermediates like Eldorado's acquisition of European Gold, where they bought reserves for under $200 an ounce. Consequently we prefer the producers with an emphasis on the intermediate players such as Eldorado, Centerra and fallen angel, Agnico-Eagle. With few discoveries, investors should also look at developers like Detour Gold, McEwan Mining, St. Andrews Goldfields, and Continental Gold to name a few.


Agnico-Eagle Mines Ltd.

Agnico-Eagle is a Canadian based producer with assets in geographically secure Canada, Mexico, the US and Finland. Agnico-Eagle shares were punished in the third quarter following the writedown of Goldex which was suspended indefinitely due to unsettled ground conditions. While Goldex represented only 250,000 ounces per year, Agnico lost $1.5 billion in market cap. Growth portfolios quickly turfed Agnico-Eagle shares causing the stock to underperform its peers for the first time in many years. We believe that the correction is overdone, particularly since there is the possibility that Goldex is not yet a lost cause. La Ronde continues to be its flagship providing 300,000 plus ounces with potential at depth, to the east and west. Both the Kittila mine and Pinos Altos mine in Mexico are operating well. Meadowbank's teething problems appear to be resolved and should contribute almost 400,000 ounces per year. We believe that Agnico-Eagle shares are particularly attractive at these levels and recommend the shares here.

Aurizon Mines ltd.

Aurizon announced record production of 163,845 ounces from 100 percent owned Casa Berardi last year and forecasts about the same this year. Aurizon will spend about $80 million at Casa Berardi as it deepens the shaft, build a paste backfill plan, equipment purchases and additional drilling. With over $200 million in cash and costs of $535 an ounce, Aurizon's Casa Berardi is a cash machine. Aurizon is spending $23 million for feasibility work on the Cadillac Fault west of the Hosco deposit that will see 3 or 4 drill rigs turning. Aurizon has eleven properties with two or three properties of note which are targeted for development. We continue to recommend the shares here.

Detour Gold Corp.

Detour is based near Cochrane northeast Ontario and continues to expand its p+p reserves at more than 15.6 million ounces of reserve and 25 million ounce resource with a lifespan of over 20 years. Detour plans an expansion of daily throughput to 75,000 tonnes per day with initial production at more than 650,000 ounces making it Canada's largest gold mine. Detour is partially funded with over $800 million cash. Cash costs should approach $543 an ounce. Construction is scheduled to begin next year and cost about $1.4 billion. Detour remains a potential takeout since deposits of this size are scarce and the mine is located in the backyard of the majors. We like the shares here.

Eldorado Gold Corp.

Eldorado has six operating mines, one under construction, two under development and launched a $2.4 billion bid for European Goldfields which will give it operating mines in Greece and development projects in both Greece and Romania. European Goldfields has gold reserves of 10 million ounces and thus Eldorado is paying about $100 or so per ounce. Eldorado has grown both organically and through acquisitions. Eldorado pays a semi-annual dividend tied to the gold price. Eldorado produced 659,000 ounces last year at a cash cost of $405 per ounce and should produce 750,000 ounces with output from Efemcukuru in Turkey and planned start-up of Eastern Dragon in China. We like the shares here.

Goldcorp Inc.

Goldcorp announced a flat production profile of 2.6 million ounces this year. Contributions from slow starting Penasquito in Mexico and first production (85,000 ounces ) from 40 percent owned Pueblo Viejo joint venture in the Dominican Republic will offset the decline in almost half of Goldcorp mines. The Company disclosed it had given the go-ahead for the $3.9 billion El Morro project copper/gold in Chile but production is not expected until 2017. Start-up problems at Penasquito remains a problem with lower processing rates and Goldcorp has yet to show that mine at planned output. December throughput reached an average of 107,000 tonnes per day and ramp up at design capacity is not expected will end of the first quarter. Goldcorp hopes that Penasquito will produce 425,000 ounces of gold this year and 26 million ounces of silver, but to date the Penasquito has been disappointing. Projects such as the Eleanore property in northwestern Quebec is slated for 2014 and Goldcorp plans to spend $400 million towards drilling and working on a feasibility study. We believe that Goldcorp's flat production profile, healthy price/earnings multiple in comparison to its peers, execution risk and $2 billion in capex this year will cause Goldcorp shares to underperform its peers. We prefer Barrick at this time.

Kinross Gold Corp

It didn't take too long but Kinross' big bet to spend $7.1 billion to purchase Red Back Mining in 2010 is turning out to be the company breaker and not the company maker that was widely advertised by Tye Burt. Kinross will have to write down over 60 percent of the Tasiast mine in Mauritania purchase in good will. The $4 billion plus writedown of good will excludes the $1.3 billion that Kinross plans to spend for a project which is delayed, over budget and the 1 million ounce plus prediction is still not in sight.

Although the shares are off 42 percent, Kinross needs another 6 to 9 months before it will have some of the answers, so the best case is a 2016 start-up at a capital cost of almost $4 billion. The market has already delivered its verdict. Meanwhile, Kinross has increased its ownership from 75 percent to 100 percent in Chukotka Mining in Russia which holds the Kupol mine to be financed by a $200 million loan but the purchase is ill-timed particularly since gold output fell 20 percent last year due to the depletion of higher grade ore, continuing a 20 percent decline from a year earlier. We understand why there was a seller, we just cannot understand why Kinross had to be a buyer. The bottom line is that Kinross has bet the farm too many times, and overly diluted its shareholders. Ironically, Kinross shares are lower today than when they bought Red Back which caused a 40 percent dilution. With its three big development projects, Tasiast, Fruta del Norte and Lobo-Marte facing delays, we continue to believe that the stock still has more downside risk than upside. Sell.

McEwen Mining (formerly US Gold)

At long last US Gold and Minera Andes will amalgamate with cash flow from Minera Andes to be used to finance the El Gallo Phase I development in Sinaloa, Mexico and begin the Gold Bar project in Nevada. Phase 1 should be completed by midyear and US Gold should be producing 30,000 ounces or so. Prestripping has already begun. Exploration drilling has focused on two new areas. We like the combination and note that the combined company will be called McEwen Mining which will have a broad US following. The 49 percent owned San Jose will produce 2.6 million ounces of silver this year and drills will be turning to expand reserves on 100 percent owned lands in the area. McEwen Mining will have $85 million in cash, no debt and assets in Argentina, Mexico and Nevada. We rate the shares as a buy providing exposure to both a high growth gold and silver story together with smart management.

Yamana Gold

Yamana is a Canadian based producer with assets in Brazil, Argentine, Chile, Mexico and Columbia. Yamana will produce 1.2 million ounces this year, up 13 percent due to major production from the Mercedes mine in Mexico and expansion from Minera Florida in Chile. Yamana's flagship El Penon in Chile was a major contributor producing 115,000 ounces of gold equivalent ounces in the last quarter for 475,000 ounces in 2011. This year El Penon should produce 440,000 ounces. Yamana is expected to spend $665 million this year in development dollars and $125 million on exploration but so far there is little to get excited about. We prefer Eldorado here.

Maison Placements Canada Inc.
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Analyst Disclosure
Company Name Trading Symbol *Exchange Disclosure code
Aurizon Mines ARZ T 1
Barrick Gold Corp ABX T 1
Centerra Gold CG T 1
Cetamin PLC CEE T 1
Continental Gold KMK V 1
Detour Gold DGC T 1
Eldorado Gold Corp 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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