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Gold: Rich Country, Poor Country

Obituary writers are already preparing the death notices for commodities. Once a beneficiary of hot money, commodities began the New Year by crashing. Oil dropped more than 11 percent. Base metals also collapsed, with copper breaking $3 a pound on the doubling of LME inventories. Like Nelson Bunker Hunt more than a quarter of a century ago, hedge and commodity players attempted to corner the physical markets. Linked by computer screens, traders bought up supplies using complex derivatives to drive up prices. Non-industry players controlled large supplies, from natural gas to uranium to nickel. The spectacular failures of hedge funds Amaranth and Red Kite may be only the tip of the iceberg. Then, trigger-happy hedge funds headed for the exits en masse on fears of an economic slowdown. But we believe that fears of a slowdown are overblown. Asia, the new paradigm, remains strong and, with a large part of the world's $4.5-trillion of savings, is well financed for the largest infrastructure spending spree in the world. The commodity super cycle not only is intact but will last for several years. And no one yet has written an obituary for liquidity.

The US dollar plunged sharply in the fourth quarter but has since rebounded in a bear market rally. We believe that bounce is temporary and the greenback will soon take out the previous record low. The trouble is that such a drop will disrupt capital flows, push up US inflation and take out the underpinnings of the stock market boom. Last year, gold gained 23 percent while the dollar fell 10 percent against the euro. America's huge $1-trillion current account deficit continues to grow at seven percent of GDP. At that level, the US requires $2.5 billion a day in foreign borrowings to finance its indebtedness and thus has pursued a policy of currency debasement. However, those borrowings have caused a huge glut of liquidity in the global markets.

Printing Presses Are Working Overtime

Central banks have played a major part in flooding the system with money. Because the US consumes more than it produces and owes more than it owns, the Federal Reserve has flooded the world with dollars. President Bush proposes spending a whopping three quarter of a trillion dollars this year in his $2.9-trillion budget. The world's biggest debtor created greater quantities of dollars to finance its massive savings shortfall. As a result, the more thrifty Asians have dollars piled sky-high and the oil producers in the Middle East have even greater piles of petrodollars. The world's insatiable demand for energy has given the Middle East, Turkmenistan and Russia a new strategic importance and a new route for global influence. Asia, OPEC and Russia have in essence provided the United States with an annual multibillion-dollar subsidy to finance America's living standards. Despite its riches, America's personal savings rate is now a negative one percent, the lowest since the Great Depression.

America's indebtedness is due to its addiction to cheap money and cheap oil and the desire to subsidize its consumption with offshore debt. That is ending. According to Treasury Department data, OPEC nations in the latest quarter dumped $10.1 billion of treasuries or 9.4 percent of what they held. Only Japan, China and the United Kingdom own more treasuries than OPEC but China, too, pared its purchases by 1.7 percent in the same quarter. Thus, the huge dollar overhang is ripe for a correction.

According to the Bank of International Settlements (BIS), central bank holdings of US dollars have fallen almost 16 percent of 59 percent of the deposits held as of the first quarter of 2006. Since then, the US dollar has fallen further, suggesting that central bankers have had enough dollars. Oil-producing nations, such as Russia and the OPEC countries, have diversified their revenues into euros, yen and sterling, according to data from BIS. The latest BIS review shows that the oil producers unloaded $10.4 billion of US treasuries at the fastest pace in more than three years, while at the same time boosting their holdings of euros to 22 percent from 20 percent. The last time oil-exporting countries reduced their exposure to the dollar - in 2003 - it pushed the euro to a record. And for the second year in a row, the euro has displaced the greenback as the world's top currency in international bond markets. According to the International Bond Association, outstanding euro-debt was $4.836 billion, compared with $3.892 billion for the greenback. Today, the value of euro-notes, at $828 billion, exceeds the almighty dollar value at $753 billion. After the displacement of the greenback in the bond market, are the currency markets next?

The US twin deficits - federal budget and trade - keep rising, with gross government liabilities as a share of GDP at 65 percent. The UK has just repaid the United States and Canada for its last installment for the Second World War, which cost $600 billion. The Vietnam War, which ended in 1975, was America's longest, killing 58,000 Americans and costing more than $660 billion in today's dollars. The Iraq war, while shorter, is already in the midst of a third request by the Bush administration for another $100 billion. Since 2001, Congress has spent more than $500 billion on appropriations for Iraq and Afghanistan. The price-tag of the Iraq and Afghanistan conflict is not even included in the budget presented by Mr. Bush, who has been caught in a sectarian vise. That price-tag is also rising. Unfortunately, with the increased escalation of violence, there is no end in sight. Combined with the conflict in Afghanistan, America's involvement is growing at $10 billion a month.

In the 1960s, President Lyndon Johnson was blamed for triggering inflation by spending on both "guns and butter" to pay for his "Great Society" initatives while at the same time fighting the war in Vietnam. He failed. Rampant inflation ensued and gold subsequently hit $850 an ounce amid the legacy of red ink from the war. History is repeating itself. The parallel with the '60s is that Mr. Bush is pursuing the same "guns and butter" policy, refusing to raise taxes and borrowing more. America is living on borrowed money, energy and time.

Savings-short Americans have absorbed about 75 percent of the excess savings of the rest of the world. The United States appears to be dropping money from helicopters, as once suggested not entirely tongue-in-cheek by Federal Reserve chairman Ben Bernanke. Money supply is an indicator of future inflation. The Godfather of Money, Milton Friedman, died last Thanksgiving. However, his market legacy continues as the inevitable result of central bank profligacy is borne out in higher rates of inflation. For those who think differently, they only need look at Zimbabwe, where the current inflation rate is 1,500 percent, in line with a similar growth in money supply.

And central banks today continue to expand the supply of money. Consider the growth in money supply elsewhere. For example, broadly based money supply stands at 9.7 percent in Europe, 13 percent in the UK, 17 percent in China, 19.5 percent in India, 13 percent in Mexico, 10 percent in the United States, 8.4 percent in Canada and 9.5 percent in - a three-year high. Although the world's central banks' rhetoric had been about tightening, the proof in the pudding is that global liquidity remains overly expansive. Unfortunately, a large part of the money flow is ending up in the wrong places.

Liquidity Flood

The spike in energy prices resulted in Middle East current account surpluses twice as big as the peak of the '70s. The cumulative surpluses of oil exporters could amount to $1.7-trillion in 2007, eclipsing China's surplus of some $700 billion, according to the IMF. The economic boom in the Gulf has also caused a surge in financial liquidity greater than the oil bonanzas of the '70s and '80s. Unlike the Chinese, who now hold about two-thirds of their surplus in US treasuries, the Gulf oil producers have shifted funds from dollars to euros, gold and yen. The surpluses have been recycled internally and undoubtedly have sloshed over into their capital markets. Having been burnt in the '70s, Middle East players have not acquired American trophy real estate or paintings, but instead have been big backers of European capital markets, financing the huge increase in hedge funds, private equity and stock markets.

Not only has the spike in oil prices helped the oil-rich Middle East, it has created a new axis of wannabe superpowers such as Russia, Iran and Venezuela that can thumb their noses at the West without financial retribution. Newly assertive Russia has hinted at a natural gas OPEC, wielding its petropower in order to consolidate its energy interests. Venezuela has used its petropower to consolidate its influence in Latin America. The oil producers are also reviewing whether to leave the dollar peg in place in light of the falling US dollar, which increases the cost of their imports. In true globalization fashion, America's addiction to cheap oil is actually transferring wealth from the richest nations to the poor. The question to ponder now is whether the United States is a rich country or a poor one?

And What About Asia?

Asia now contributes about 35-40 percent of the world's GDP, America's profligate spending contributing to a swing in wealth from the West to the East. Indeed, the combined financial reserves of China and Japan now underpin the deficits of the West. China's imports exceed that of the US, so America's huffing and puffing about revaluing the renminbi has little impact. China's GDP has grown at 10 percent plus annually for the past 20 years, with industrial production growing at 10 percent and foreign reserves reaching $1-trillion. More amazing, China's savings rate exceeds that of its huge investment hoard. This surplus is a big headache, exposing the central bank to big losses if the dollar collapses. As such, newly rich China has shifted some of its cash hoard, trimming purchases of US government debt by 1.7 percent in the first 10 months of 2006 to $346.5 billion. While Beijing and Washington appear set on a collision course over the renminbi, China has even fewer reasons to bankroll the world's richest economy.

America's xenophobic fear of a rising China threatens America's future as the sole superpower. But whether Americans like it or not, their countries' economies have become interdependent and their politics are oriented around the goal of energy security. Treasury Secretary Paulson led the largest ever US government delegation to China, awakening new xenophobic concerns in Congress. Chinese Vice-Premier Wu Yi admonished the Americans for "misunderstanding" China and reminded Fed chairman Bernanke of 5,000 years of Chinese history. China requires an economy strong enough to create 300 million new jobs, equal to the population of the United States. The history lesson was lost on Mr. Bernanke, who adopted the hard-line position echoed by a protectionist Congress. Of course, Mr. Bernanke overlooked the important fact that China's recycling of its surplus keeps US interest rates low, as well as providing the necessary liquidity to keep the American financial system afloat.

The prospect of a collision with Washington makes Beijing unlikely to keep all its eggs in the dollar basket. In a speech that rocked the foreign exchange markets, Prime Minister Wen Jiaboa stated that China's policy is changing, with the country actively exploring new ways to open and expand the channels and methods for using its foreign exchange reserves, which are held mainly in American debt. First, China is to establish the State Foreign Exchange Investment Company - similar to Singapore's huge Government Investment Corporation, which has made investments in equities, fixed income, real estate, etc. The Ministry of Finance then hinted about a policy switch on foreign exchange to diversify its holdings. Such a move to diversify its stash of dollars would send the dollar sharply lower and the gold price significantly higher. The last currency crisis was in the fall of 1987, when the October stock market crash began with the collapse of the US dollar - déjà vu?

A Golden Renminbi

China has already diversified its holdings by buying euros, oil, and yen. Chinese gold consumption is expected to reach 350 tonnes this year - up from 300 tonnes last year - due to strong jewelry demand. India remains the largest consumer of gold followed by China, which is the world's fourth largest gold producer. Chinese production is not keeping pace even though it could reach 240 tonnes this year, up from 224 tonnes in 2006. The supply comes from more than 1,200 mines, but about 60 percent are "mom and pop" operations with daily ore capacity of only 50 tonnes. China is believed to have put in legislation to streamline the permitting of mines and pave the way for more consolidations.

We expect China to eventually build its gold holdings to about five percent, buying domestic gold as well as gold on the open market. China now has less than two percent of their foreign exchange reserves in gold - or 600 tonnes. A five percent holding would require China to purchase 1,857 tonnes, or almost all their production for the next seven years. The State Information Centre, a think- tank of China's central planner, the National Development and Reform Commission, proposed the accumulation of reserves by giving its people further access to foreign exchange as well as the building up strategic reserves of crude oil, metals and other strategic commodities. Vice-Premier Zeng Peiyan also said that China will use its massive foreign exchange reserves to purchase "strategic resources". And as if on cue, Larry Yung, head of China's biggest investment company, has acquired a two-percent stake in Anglo-American from the Oppenheimer dynasty for $800-million. Larry Yung apparently made a personal investment and is likely the second-biggest single non-institutional holder after the Oppenheimers. So the question is whether China is a rich country or a poor one?

So Much Money, Too Few Stocks

The glut in global liquidity has been further boosted by the explosion in mergers and acquisitions. Deals are growing bigger, more expensive and riskier. And they are in danger of suffering from the curse of overvaluations and excessive leverage, two classic symptoms of another bubble. Fewer company defaults, frenzied "club deals" and a stock market bubble have played a major role in pumping up equity prices, with record amounts pouring into the private-equity asset class.

Private-equity investors typically make money by buying control of companies in the hopes of quickly cashing out through a stock offering or outright sale. Private-equity funds were able to emulate Canada's income trusts by loading up their targets with debt and stripping the cash to pay investors and debt holders, which are often the same-private equity players. In many cases, companies devote more than half their yearly cash flow just to meet the interest payments on the new debt. To the private equity world, debt-to-cash flow ratios are often ignored. However, as more and more companies are being pushed to pile on increasingly heavier loads of debt, the risk of default increases. For example, HCA, the hospital operator, was recently taken private and now has debt of $28 billion or 6.5 times current cash flow. In one 24-hour period, there were more than $75 billion of deals, ranging from mining to commercial property to stock exchanges. Freeport McMoRan's mammoth $26 billion takeover deal for Phelps Dodge will create the world's largest publicly traded copper company, but with more than $15 billion of debt.

The Next Bubble to Burst

In our view, credit is too easily available and another bubble is in the making. According to DealLogic, the value of M&A deals was 16 percent higher last year than at the height of the dot-com boom in 2000. In the United States, the debt-fuelled M&A boom has been supported by the creation of derivatives that has replaced simple bank financing. In a sign of how important derivatives have become, Wall Street's biggest securities firms are playing a lead role, which is the main reason for their record profits and the multi-million-dollar bonuses paid out. Once exotic instruments, derivatives are today very much mainstream and the "enabling" tool for hedge funds and private equity. Those exotic derivative instruments transfer risk to somebody else. The risk hasn't disappeared but, as in the shuffling of a deck of cards, just distributed to someone else. The origins began with the classic mortgage business whereby local banks transferred that risk to Wall Street, which in turn passed it on to its clients. Has anyone noticed that America's mortgage behemoths, Fannie Mae and Freddie Mac, haven't yet released their financials and the last restatement was in the face of billions in losses? While there are always two sides to a transaction, derivatives inevitably face a future of failure or big default due to someone mispricing risk. HSBC, the world's third-largest bank, just took a big hit due to its exposure to mortgages. Prices are going up but future returns are going down.

Furthermore, in the United States, almost 16 percent of all bonds are rated triple C or below, which is reserved for junk status. While the amount of junk bonds issued has increased, derivative financial instruments have mushroomed at a faster pace and become a key part of the changing structure of the debt market. Indeed, mortgages packaged in bonds or collateralized debt obligations have joined the growing list of derivative products. I-bankers would have you believe this explosion is attributable to the sophistication of the financial world. However, low interest rates and investors' insatiable appetite for alpha returns are behind this orgy of lending. Of concern is that despite the ratcheting of interest rates, more and more of the derivative products are created with more and more leverage. But investors appear to have overlooked the fact that rising leverage levels and shrinking risk premiums stretch the financial system. These instruments have yet to be stress-tested by an uptick in interest rates, a geopolitical event or a sharp US economic slowdown. Despite the obvious risk of default, the underlying message is that hard assets are more valuable than financial assets.

At the recent forum in Davos, Switzerland, Zhu Min, a Bank of China executive, warned that the explosive growth in derivatives to $370-trillion has flooded the global system, making it too easy to acquire credit. "There is money everywhere," he warned. "You can get liquidity from the market every second for anything. Derivatives are eight times world GDP and much of the money is flowing to Asia, where people have no idea what risks they are taking." Plain English, but is anybody listening? Gold is a good thing to have.

Gold at $1,000 an Ounce

We expect gold to surpass its May peak at $731, when hedge funds and commodities funds steam-rolled into commodities. In our view, gold has broken out from the $645 level and appears poised to retest the May high on its way to $1,000 an ounce this year. Gold is an asset class whose performance has lagged other commodities, including nickel and oil. However, the socking away of almost $11.8 billion of gold into the seven ETFs has tightened the physical market, causing gold producers to reverse their gold hedges, adding further to the price rise. In terms of tonnage, ETFs now hold 567 tonnes of gold, which ranks them among the top 10 holders in the world. While central banks have been reducing their gold holdings, private investors have been taking up all the gold that is offered.

The expansion of the middle class in the developing world and the influx of petrodollars into the Middle East are having a positive impact on demand. Indeed, jewelry demand - particularly from India - is expected to take up all of the 2,700 tonnes of production in the West. Total demand for gold is almost 4,000 tonnes annually while mine output is expected to decline over the next couple years as ore bodies get deeper. The election of the Democrats and prospects of gridlock in Washington will further fuel spending. In addition, bullion has become an asset class of growing importance as an alternative investment.

Gold is simply a barometer of investor anxiety and there is much to be anxious about. The liquidity bubble is still growing and with the fiat dollars overvalued from endless printing, gold, which is limited in supply, is a natural hedge and store of value. Gold is an alternative investment to the dollar for many central banks and a superior form of wealth protection. The gold price has risen in the past three years by almost two-thirds, and as with the canary in the mine, the warning signal is clear. The need to fund America's deficit is dogging the dollar. We expect the dollar to sink further, with inflationary consequence this time. Debt on debt is not good.

The Bottom Line

Gold will continue to rise as long as the United States continues to debase its currency. When George W. Bush was inaugurated as president in 2001, the price of gold was $265. Six years later, the price broke through $650. That means the dollar has been devalued in terms of gold by almost 60 percent in almost six years. America's failure to address its growing reliance on cheap money and cheap oil has created systemic risks and economic dependence inconsistent with its super-power status. A dollar collapse is inevitable. Gold's bull market has only just begun.

Gold Stocks Have Become Endangered Species

A panel, which included Alan Greenspan, recommended that the International Monetary Fund sell 400 tonnes of gold worth $7.2 billion as part of the refinancing of the IMF, which holds 3,217 tonnes in total. The extra money would be used to finance the agency's deficit. However, any agreement on IMF gold sales will need to be approved by 85 percent of the member shareholders as well as the US Congress. Neither approval from the majority of IMF states nor the US Congress is in the offing and the trial balloon was ignored. The price of gold rose $10 that day.

The shortage of world-class deposits is the reason for the $20 billion-plus manic takeovers of Inco, Goldcorp and Placer Dome. Today, 10 producers control 40 percent of the world's production. The lack of exploration and the shortage of world-class deposits dictate another few years of high commodity prices. The drop in stock prices and rising cash flows resulted in a shortage of gold companies. Gold stocks have become endangered species. The next big move in gold stocks will come when our Canadian institutions finally realize that we are in the midst of a secular bull market for commodity stocks. We believe that a multiple expansion is in the offing, contributing to the second leg of the bull market. We continue to believe that investors should be overweight commodity stocks because many trade at less than 10 times earnings. Only when the institutions wake up will they realize that instead of paying 40 times earnings for RIM, they are not imprudent buying commodity stocks trading at less than 15 times earnings. The mining industry has traditionally been susceptible to boom-and-bust cycles, and investors have already discounted the bust. They are wrong.

With depleted reserve bases, gold companies need to grow their reserves to remain competitive. Hence, further consolidations are expected. The industry is still not spending enough on exploration and it is still cheaper to buy ounces on Bay Street with ready-made deposits than explore in the ground. The senior gold mines appear to have lost their appetite for exploration due to the harsh reality that many of the most prospective regions such as China are closed and success to date has been modest. Barrick, the world's biggest gold producer, will spend a paltry $175-million on exploration this year for the second year in a row despite making a couple of billion-dollar takeovers.

Rather than buy the so-called "growth" big caps, which have grown through the issuance of more paper, we prefer the mid-cap players such as Eldorado, Meridian and Agnico-Eagle. We also like a "package" of development players such as Crystallex, High River Gold, Etruscan, Aurizon and Golden Star. We like Crystallex because of the prospect of receiving the long overdue Exploration Permit in Venezuela is near. And we also like Aurizon for the Casa Berardi production and its exploration lands. Among the lowly juniors, Estrucan has recently released some excellent results from its Mali play and, with one of the largest land positions in West Africa, the company has an attractive exploration profile.

Juniors - The Next 10-Baggers

At long last, new money is financing exploration plays. In our last report, we highlighted seven 10-baggers. St. Andrews Goldfields is undergoing a whopping $110-million rights issue that will finance the excellent Holloway acquisition, allowing for the development of the one-million-ounce Aquarius property and financing the expansion of newly opened Nixon Fork in Alaska. St. Andrews will have major land positions in Timmins, Eskay Creek, Alaska and New Zealand. With production from Stock and Nixon Fork, the company is in a position to expand its production significantly over the next few years.

Philex picked up on news that Anglo-American will sign a venture agreement with a landholder to the north of the huge Boyongan property in the Phillipines. Anglo-American will complete a pre-feasibility study this year on Boyongan and we believe that Philex's parent will make a premium bid for the outstanding Philex shares currently held in Canada in order to consolidate the play. Philex shares continue to be attractive at these levels. Unigold is currently drilling in the Dominican Republic and a second machine was added to the Candelones property. We believe that the geology is interesting and the company - in its third year of exploration - is poised to expand the ounces at Candelones. Unigold has the largest land package in the Dominican Republic and is looking for another Pueblo Viejo, formerly one of the Western world's major producers.

Excellon Resources released drill results of 13 drill holes confirming visuals at the Platosa mine in Mexico. The high-grade results extended the Quadalupe mantos and we believe that Excellon now has a 4 ½ year mine life. The company is currently mining and crushing and sending the ore to the nearby Penoles mill, which has limited capacity. As a result, Excellon has begun the permitting process to build a mill that would allow the company to expand its production. Meanwhile, Excellon has an aggressive exploration program and has participated in an airborne survey. Excellon is well situated in a belt of carbonate replacement deposits. USGold remains a buy and the company at long last is able to take in previously mentioned White Knight, Tone and Nevada Pacific. Coral Gold was excluded but the takeover will allow US Gold to hold one of the larger land positions of a junior in the Cortez area. We continue to recommend the shares.

The mining industry is in need of exploration and these junior companies have the land packages, needing only funding. The market is more receptive to finance exploration and we believe these companies are well positioned since they are well financed. We have reviewed all the geological programs and believe they possess attractive geological potential. Most important is their "blue sky" potential and all have large enough land packages. From a risk-reward standpoint, they are potential 10-baggers and should be bought as a package.


Selected Junior 10 Baggers
Company Symbol Price Area of
52 Week Shares o/s
Market Cap
High Low
Continental KMK $1.57 China 2.96 1.31 53,110 $83,384
Etruscan Reserves EET $3.9 Mali 4.48 1.5 99,868 $389,487
Excellon EXN $1.64 Mexico 1.55 0.42 158,188 $259,429
St. Andrew Goldfields SAS $1.23 Timmins 3.2 1 41,872 $51,502
Philex PGI $0.75 Philippines 0.9 0.3 40,594 $30,445
Unigold UGD $0.57 Dominican Republic 0.84 0.34 60,449 $34,456
US Gold UXG $5.8 Nevada 7.5 4.48 61,662 $357,642


Agnico-Eagle Mine Ltd.

Agnico-Eagle released an update of its operations that reiterated the attraction of Agnico's byproduct credits (zinc, copper and silver). Agnico produces gold at a negative $837 cost expected this year and it is rolling in cash. Agnico is expected to quadruple mine output from the current 350,000 ounces to 900,000 ounces in 2009, with production coming from LaRonde, LaRonde Deep, Lapa, Goldex, Kittila in Finland and Pinos Altos in Mexico. Agnico is a well established second-tier producer and is well placed to grow resources and production. Agnico is debt-free and, with four mines under construction, has one of the best growth profiles. Buy.

Crystallex International Corp.

Crystallex remains stuck in the mud as it waits for the long-awaited and overdue environmental permit. However, a change of Venezuela's environmental minister by President Hugo Chavez gave hope to Crystallex shareholders that the company will finally receive its permit to exploit the 100- percent-owned 14-million-ounce Los (LAS?)Cristinas deposit. But Chavez, flush with yet another election victory, stirred up the market with nationalistic rhetoric, triggering a collapse in Crystallex shares yet again. Investors should be used to these histrionics and should focus instead on the fundamentals. First, Chavez cannot nationalize what the country already owns. Under state law, Las Cristinas is already owned by the state and has contracted Crystallex to exploit one of the world's largest undeveloped gold projects. Second, Crystallex is cashed up and ready to begin construction once the permit is granted. Many feasibility studies have been done and production will begin 18 months from when the environmental permit is granted. Third, the company has received all permits, financings and there are no outstanding technical questions. Thus, while it is very much overdue, we expect the permit to be granted. And once granted, we expect Crystallex to be auctioned off to the highest bidder. Newly appointed President Gordon Thompson is well qualified to head this process. Buy for the takeout.

Eldorado Gold Corporation

Eldorado successfully brought on-stream Turkey's Kisladag open-pit mine, which is expected to produce almost 200,000 ounces this year. Moreover, Eldorado will bring the Tanjinshian gold mine in China into production at 120,000 ounces at a cash cost of $245 an ounce. Eldorado will thus produce 325,000 low-cost ounces this year, coinciding with the closing down of the Sao Bento mine in Brazil. Significantly, drilling at Efemcukuru in Turkey is continuing and, with four drill rigs at work, the company could be looking at a third mine in 2009. With Eldorado's successful startups and elevation to mid-tier status, we believe it will begin to outperform its peer group. We recommend the shares for the company's rising production profile and excellent potential to increase that production further. Buy aggressively.

Gabriel Resources Ltd.

Gabriel Resources shares have done well in line with the market, despite a delay in permitting from the Romanian government. Gabriel has completed the acquisitions of additional homes but that, too, remains a problem. Consequently, the project is delayed again, thereby testing the company's relationship with Romanian stakeholders. With Newmont's assistance, Gabriel continues to negotiate with various levels of government. Rosia Montana would be an excellent project were it located in a different part of the world. However, the project is iffy due to politics and we prefer other situations.

High River Gold Mines Ltd.

High River is an undervalued gold producer poised for elevation to the mid-tier status. High River produces 135,000 ounces from two producing underground mines in Russia, Zun-Holba and Irokinda, operated by its Russian subsidiary, Buryatzoloto. This year, the Taparko mine in Burkina Faso, West Africa, will come on-stream in May at an initial production rate of 100,000 ounces, ramping up to 140,000 ounces in three years, after $100-million was spent.

In addition to these two mines, High River Gold has secured Prognoz, which is a high grade 200-million-ounce silver deposit found by the Russians. High River expects to spend $13-million on exploration work and this could be the richest silver deposit in Russia. High River also has the highly promising 100-percent-owned Bissa project in Burkina Faso (one-million-ounce potential), which complements its Taparko operation. With more than 280 million shares outstanding, High River stock underperformed because of financing delays. High River is now cash-rich. And we believe it will spin off its Russia assets, which would better differentiate the company. We also believe buyers would be interested in a Russian precious metal producer and other investors would be interested in the West African mines. Buy.

Kinross Gold Corporation

Kinross was successful in acquiring Bema, notwithstanding the threats of last minute dissent. With a reserve and resource base of more than 50 million ounces, nine mines located in five countries and a production forecast of 2.8 million ounces in 2009, Kinross is an excellent value and growth story. The 100 percent owned Refugio mine in Chile and Paracutu mine in Brazil will be major contributors offsetting declining La Coipa and Fort Knox. The only fly in the ointment remains the huge Cerro Casales copper/gold mine in Chile, where Bema's partner, Arizona Star is a holdout. Cerro Casales however is such a big ticket project, we think it should be inventoried and Kinross should instead focus on high gold/silver Kupol project in Far Eastern Russia which could produce almost a half a million ounces of gold in 2008. Kupol is an excellent high grade deposit with 3.3 million ounces of gold and 40 million ounces of silver. Buy.

Meridian Gold Corporation

We continue to recommend Meridian Gold for its low cost gold/silver El Penon Mine in Chile. Notwithstanding the perception that Meridian is a single mine company, El Penon remains attractive and the Company continues to add to reserves. Meridian's Alhue mine (Minera Florida) should produce 65,000 ounces this year, up from 35,000. Meridian should be able make some changes to this acquisition. Meridian has a flat production profile and its reliance on a single operating asset like El Penon has given the Company an "o-hum flavour". However, we believe that Meridian is a cash cow and any news from the advanced stage development and largely written off project at Esquel in Argentina could cause some excitement. We expect some movement to develop this 2.3 million ounce deposit this year and thus believe Meridian is a low-risk buy.

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Analyst Disclosure
Company Name Trading Symbol *Exchange Disclosure code
Barrick Gold ABX T 1
Bema Gold BGO T 1
Continental Minerals KMK V 1,5
Crystallex KRY T 1
Excellon EXN V 1
High River Gold HRG T 1,5
St. Andrew Goldfields SAS T 1,5
Unigold UGD V 1
Philex PGI V 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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