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PDAC Convention 2005 Speech

By Lawrence Roulston
March 06, 2005

Good afternoon ladies and gentlemen

There is a very upbeat mood in the mining industry now, especially in the junior sector. You can feel it in the mood at the conference here, especially with the record number of attendees.

Remember, exactly a year ago, it felt pretty much the same… And then we had that big letdown that continued for the balance of last year.

A lot of people are wondering: Is this just another short term rally? Or, is this the beginning of a long term bull market in the mining industry?

The short answer is that things are fundamentally different now. Fundamentally stronger.

There are a lot of reasons to believe that we are in a sustainable bull market in the mining industry.

There will be volatility; the market will have ups and downs. Individual companies will certainly go through some wild swings in price.

I believe that we will see a good year overall, but the wealth will not be evenly distributed. There are many companies that will hit multiples of their current prices this year. Other companies will continue to languish, at least for now. Later in the cycle, everything will escalate.

I would like to point out some fundamental trends that suggest that this upbeat mood will be here for some time yet.

One of the big differences from last year is the gold price. Ironically, the gold price is almost exactly the same now as it was at the last PDAC.

Last year at this time, gold was on a tear - it hit a five-year high of $427 just two weeks after the PDAC - But then it quickly dropped by more than $50. It took the balance of last year for investors to regain confidence in the gold market.

This year, we have already experienced a drop in the gold price - almost as large. Gold plummeted from a 16-year high of $456 in December to a recent $411 before it turned back up. This time, the equities market pretty much shrugged off the drop in the gold price.

Investors are finally getting used to the fact that gold is continuing its 3-year pattern of notching higher, with regular pull-backs… gradually working its way upward.

A year ago, investors had a mind set that said you owned gold companies because you expected the gold price would soon be $1,000 an ounce… or higher. The merits of the companies were secondary. The focus was primarily on the commodity price.

As a result, there was a lot of nervousness every time the gold price corrected a bit. It was like investors would say to themselves: "On no! Gold may not go straight to $1,000. Quick dump the gold stocks."

Today, there is a much more sophisticated outlook - a recognition that many gold companies will deliver big returns - regardless of where the gold price goes.

Many investors are now taking an enlightened approach and taking advantage of dips in the gold price to load up on gold stocks in anticipation of the next up-leg. I have been urging my readers to do that for years.

The driving force now for many investors is a recognition that the majors need to replace reserves, and those investors recognize that the most effective explorers are the juniors.

I'm sure everybody in this audience realizes that if a junior company proves up a big gold deposit, shareholders will make a lot of money, even if the gold price doesn't move a penny from where it is today.

Having said that, I fully expect that the gold price will continue to move higher. Fundamentally, I agree with the previous speaker when he said that gold is destined to move higher - in U.S. dollar terms - as the dollar continues to sink in value. I would go further and say that I see gold increasing in fundamental value, beyond the changes implied by declining currency values.

The big unknown is the timing. I don't agree that there will be a catastrophic event. I see it more as an evolving adjustment, a continuation of what we have been seeing for the past three years.

The best outlook that I know of for gold is to take a graph of the gold price over the past 3 years and slide it to the right and up.

With a generally bullish outlook for gold - and the possibility of a 1980-style run in the gold price - it's worth owning gold stocks. Many of you have heard me speak before about the advantages of gaining leverage to the gold market by owning companies with early stage gold deposits.

Articles on the Resource Opportunities website get into detail about how an early stage deposit is valued around $10 per ounce of gold in the ground. That value gives you exposure to massive amounts of gold.

As that deposit moves toward a proven and probable reserve, its value can escalate by a factor of ten, aside from any movement in the gold price. In short, it's worth owning some gold stocks.

Many of the other metals are looking even more exciting than gold.

Nearly all of the metal prices are at multi-year highs. The mining industry simply can not deliver enough metal to meet demand.

An important driving force in the metals markets is the enormous growth in China, in India and right through Asia. The previous speaker commented that China is simply replacing production that would have occurred in other countries. This is a common miss-perception.

I have traveled extensively in China and have seen first hand the fact that a massive amount of metal is being consumed in China - both for infrastructure and for consumer goods.

The huge increase in overall demand for metals across the board is confirmation that China is a huge net consumer of metals. That situation is not going to change any time soon.

As demand for metals increased, the mining industry was simply not able to increase production enough to satisfy demand. The result is that nearly all the metals are up between two-times and ten-times from their lows.

Part of the reason that the mining industry was not able to increase production fast enough is that the industry almost completely shut down exploration for several years when the metal prices were down.

I don't expect the base metal prices to move a lot higher. But I will say with confidence that the share prices of successful exploration companies will escalate, in some cases to multiples of the current levels.

The major base metal producers simply must develop new deposits… and many of those deposits will come from the junior exploration companies.

The mining industry is well funded now - probably better than at any other time in history. The majors are racking up record profits and they have amassed a huge amount of cash.

In addition, more than $4 billion of new equity has come into the exploration companies over the past year or so in the form of private placements.

You can still see big private placements happening on a regular basis. Northern Orion recently raised $150 million for a project that doesn't even have a feasibility study yet. Any number of private placements in the $10 to $25 million level have been quickly over-subscribed.

With many of the good juniors now cashed up, they are turning down offers of further funding. As a result, investors are finally buying shares in the markets. We are now seeing big trading volumes in select companies as funds accumulate shares in the market.

There is a huge amount of money now looking for investments in the mining industry.

Some funds have realized big gains from holding the major mining companies. Also, a lot of money has been made from investing in oil companies.

And of course, with resource funds generating big returns, new money is flowing into those funds. The general investment funds are also recognizing that the resource sector is the place to be.

The junior companies are now becoming popular as the investment dollars cascade down and money managers recognize that the smaller companies offer better value.

Many fund managers have big bucks looking for resource investments and they are under pressure to put that money to work. However, they are also fully aware of the importance of having an exit strategy. When you or I put $10,000 into a junior, it's not too hard to find a buyer if we change our minds about the company. With funds investing in $1 million chunks, it's important for them to think of how they will eventually off-load those positions.

One of the best exit strategies is a major company takeover. Consequently, a lot of the money from the big funds is going into companies with projects that are large enough to potentially attract a major takeover.

I believe that the investment funds will continue to dominate the resource market for some time yet. Even as a broader retail interest develops, much of that money, at least initially, will be directed through funds.

With the market driven by investments from big funds, the smaller companies need to come together to create entities with enough size to be noticed by the fund managers. Even if a fund wanted to invest in a very small company, it's just not possible on a practical level. I believe that we will see more mergers like International Taurus and American Bonanza, and that those mergers will generate value.

Another developing trend is that money is coming into the juniors from the smelter companies and the metal trading companies. The down-stream metal companies are clamoring for new sources of supplies.

There's willingness for the big metal companies to invest in near-term production situations where they can lock up concentrate or the metal produced from a new mine.

We're going to see a number of mid-size mining projects funded to production over the coming year, situations that might not have attracted financing a year or two ago.

Right now, there is several billion dollars in the hands of junior exploration and development companies - more than at any other time. My sense is that the vast majority of that money is being directed by capable explorationists.

In fact, some of the most capable exploration talent in the mining business is now in the junior companies. It started when the majors slashed their exploration teams a few years back. Now, more and more top geologists recognize that they stand to gain far better returns from their successes as owners of junior companies than they would as employees of the majors.

There is a huge pool of money that is being directed to systematically and methodically move projects through the exploration and development process.

Exploration is going on everywhere in the world. I believe that some of the best opportunities are available right in our own back yards. Some of the old districts in northern Ontario and Quebec are being revitalized.

British Columbia has come back to life after being out of favor for 3 decades.

I don't know how many times I've heard the comment "We need a big discovery to get the industry going." Good heavens, we've had dozens of big discoveries. There have also been some huge successes from juniors taking a fresh look at projects that were previously explored by a major. NovaGold has done that twice.

Just last Friday, another junior - Northern Dynasty - announced a resource estimate that outlines one of the biggest metal deposits ever found.

Investors got the wrong idea in 1996 when Barrick bid for Arequipa after the junior had completed just 9 drill holes. As far as I can determine, there has not been another big takeover bid so early in an exploration program.

Typically, the majors need to see a feasibility study before they put big bucks at risk in a takeover bid. Those deals are worth hundreds of millions, or even billions of dollars. If a major bids too low, they will be scooped by a competitor. If they don't have their numbers right, they could pay too much.

There are tens of projects out there now that are moving toward feasibility status … drill hole by drill hole by drill hole. Before the end of this year, at least a few of those exploration projects will be at a level where the majors will begin to make bids.

The first big cash bid will blow the top off this market. That's what happened in 1996.

First, a bid from a major will validate the exploration sector and that will attract a broader level of investor interest.

Equally importantly, a few hundred million dollars of new cash coming into the hands of resource investors will quickly go looking for the next deal.

This is going to be an exciting year. And, the fun is going to go on well beyond this year. Metal prices will at least remain strong enough that the majors will continue to seek out new deposits. That will go on until at least a few new mines come into production. And that will take years.

In summary: This is an excellent time to be investing in the junior resource sector. But, be cautious. Do your due diligence. Be aware of the risks as well as the potential rewards.



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