Golden Minerals Company

Numerous times throughout this 10-year gold and silver bull market, precious metals have sold off for reasons considered counter-intuitive. One of the most memorable occurred the week of March 17, 2008 when gold/silver plunged uncharacteristically following the announced bankruptcy of Bear Stearns—the fifth largest U.S. investment bank.

The same year, a lengthier selloff occurred in the 2H ’08 when gold and silver prices were annihilated from near-record highs in the midst of the financial crisis and credit crunch—fundamentally a bullish environment for gold/silver. Undoubtedly, bullion banks (and certain western central banks) have played a significant role during these periodic metal price contractions, and currently JP Morgan is facing numerous class-action lawsuits over its role in the silver manipulation of 2008.

On Sunday May 1, 2011, as President Obama announced the death of Osama bin Laden, silver instantly began a massive descent from its near-record high $48/oz. down to $42/oz. in a matter of minutes, and subsequently declined to $34/oz. by the end of the week. Facetiously, I’m unclear what impact bin Laden’s death had on the global economies, but the whole scenario reeks of blatant price manipulation!

On September 6, 2011, as gold reached a record high of $1920/oz., the metal suddenly began a $60/oz. descent as the Swiss National Bank announced a devaluation of the Swiss Franc (SF). Since the SF is perhaps the strongest global fiat currency, this impact on gold was illogical because it lessened competition for gold. Once again, there is little doubt that the “official” sector is desperately trying to minimize gold’s ascent. After all, gold is a “political” metal and an ascending price reflects the inherent weakness of the global fiat currencies as their values are inflated away.

This past week, gold was hovering around $1810/oz. and silver at $40/oz. when the Fed issued their statement from the 2-day FOMC meeting on Wed. Sept. 21st. Although the Fed announced the implementation of Operation Twist—a tool utilized to reduce long- term rates in an effort to stimulate the economy, the announcement lacked any indication of another Quantitative Easing program (QE3—printing money). This caused a modest decline in global equity markets and an even greater collapse in precious metal prices. Following the Fed announcement, gold declined 8.5% from $1810/oz. to $1657/oz., and silver plunged an even greater 23% from $40/oz. down to $31/oz. in merely 2 days!

Although I can accept the fact that some selling will occur in all asset classes as global institutions are forced to increase liquidity and raise capital, this degree of pressure on silver and to a lesser degree gold, is absurd, and once again reeks of bullion bank/central bank intervention. If one needs more proof of “official” suppression, consider the fact that after the market closed on Friday Sept. 23rd, after gold/silver prices had been slammed, the CFTC-regulated COMEX, where the majority of “paper” gold/silver are traded, RAISED (not lowered) the margin rates for the metal!

Consider for a moment that Greece is near default and the havoc that will occur among the European currency (Euro) and the European banks when that happens. After all, wasn’t it the potential European financial crisis that drove gold $400/oz. higher over the past 4 months? This past weekend, the Greek Finance Minister claimed that a 50% default on the country’s debt is possible, and that such an outcome would be a preferred “orderly default” versus the possibility of a calamitous “disorderly default.” Also, greatly impacted by Greece’s economic status are the other vulnerable European countries of Portugal, Italy, Ireland, and Spain (PIIGS). With the European currency so vulnerable at present, it seems completely irrational that gold and silver, the safest and most sought after global currency, would sell off sharply because the Fed did not implement QE3 on Sept. 21! Rest assured though, QE3 thru 6 will be implemented before long because it is the only way the U.S. government can pay off debt.

Soon after the current metal price takedown, gold and silver are likely to resume another climb to record highs as has happened so frequently over the past 10 years. Global demand for the metals, beyond the stalwart nations like China and India, are now growing rapidly amongst the citizens and central banks of many Asian, European, Middle Eastern, and South American countries. That demand is only likely to tighten further the limited physical supply of precious metals.

The gold/silver mining stocks were beginning to gain traction a few weeks ago and narrow the massive diversion with the metal prices; however, during this recent takedown all mining stocks (major producers and junior exploration) were crushed. When gold declines 8.5% and silver 23% over a two-day period, the assessed “undervaluation” of the miners is temporarily ignored. However, as the metals stabilize and begin to recover, one should expect the miners to follow. At that point, the mining sector will resume its attempt to narrow the diversion with gold and silver prices.

GOLDEN MINERALS/ECU SILVER

Last week, I met numerous times at two separate conferences with Jeff Clevenger, CEO, and Jerry Danni, EX. VP, of Golden Minerals. They are extremely optimistic about the gold/silver/base metal resource at ECU’s Valardena mine. With a keen focus on production and growth of cash flow, their plans are to implement Golden Mineral’s strong cash position ($100 million) and immediately improve the production capability of the oxide and sulfide mills, as well as provide the necessary equipment to further develop the mine in order to reach the higher grade ore for processing.

Golden Mineral’s management appropriately believes that the best way to turn this stock around and generate sustainable appreciation is to show consistent growth in cash flow. In fact, this progress accounts for the recent success of the stocks of some of the mid-tier silver producers. Thus, after making the necessary capital improvements during the 4Q ’11 during which production will decline, cash flow should begin to improve in the 1Q ’12 and accelerate throughout the year. A key milestone will be to reach positive cash flow and the company believes it will in 3Q ’12.

Other near-term achievements that should allow the company to gain greater visibility and analytical support will be the completion of two updated 43-101 resource reports at ECU’s Valardena and Golden Mineral’s El Quevar project in Argentina; both are scheduled for completion by the 4Q ’11. In addition, a Preliminary Economic Assessment (Scoping Study) is expected to be completed on Valardena during 2Q ’12.

Ultimately, Golden Minerals wants to initiate construction on a 2000 ton per day sulfide mill at Valardena. Although this is a long term construction project (3 years from present), the initiation of the build-out should lend enormous credibility to the company from the eyes of the investment community. Conceivably, a mill of this size could generate as much as $336 million cash flow annually, an amount greater than the entire market capitalization of the company.

Investor patience remains critical, but the combined company now has the appropriate production experience, direction, and capital that it desperately needs. As the metals stabilize and rebound, and Golden Minerals achieves some near-term goals, the stock should begin a longstanding recovery from this low valuation.

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