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I know what it is !!! An eminent analyst recommended the stock yesterday !!!
I'm in !!!
From Ed Steer:
I'd forgotten that Thursday was the day for the release of the U.S. jobs report for June. If I'd know that when I wrote my commentary yesterday, I could have predicted [with 95% certainty] that gold would have been down...and it was. It happens every time that there's a crappy jobs report. It was no surprise that the Dow got creamed...but along with a rising U.S. dollar as well??? Something doesn't smell right...or is it just me?
I could also tell even without the jobs report that it wasn't looking good for gold yesterday, because at 4:00 p.m. in Hong Kong in their afternoon...3:00 a.m. in New York...the prices for both gold and silver rolled over. I don't know what it is about that [one hour and change] stretch of time between the Sydney close and the London open...but if there is going to be a down day...it starts right there a large percentage of the time. Here's the Kitco gold chart for the last three days. Note that the two down days...Tuesday and Thursday... where the top was in for both metals during that time period. This phenomenon has been going on for years.
Not much to say about yesterday's activity. As I mentioned, the top was in at 4:00 in the afternoon in Hong Kong...and most of the damage was done between the London a.m. gold fix [10:30 a.m. in London...5:30 a.m. in New York] and twenty minutes after the Comex opened...when gold and silver hit their lows of the day. I believe the low occurred the moment that the jobs report was released...and someone can correct me if I'm wrong about that. From that point on, both metals traded sideways until electronic trading was through at 5:15 p.m. Eastern Daylight Time.
Open interest changes in gold and silver for Wednesday's big up day were [once again] counterintuitive to the price action...as open interest fell as prices rose. Gold o.i. fell 840 contracts to 378,359...on pretty big volume; 104,120 lots. In silver, o.i. fell a huge 3,625 contracts to 100,969...on 24,265 contracts. It's very possible it could have been a short covering rally in both metals that drove the price higher on Wednesday...as the gold price rose at 8:00 a.m. and 12:00 p.m. in two vertical $8 price spikes. This action would not only cause the price to rise as it did...but open interest to fall as well. However, the silver price was nearly comatose...so that theory doesn't hold water for it. Part of silver's drop in o.i. had to do with deliveries, as once a contract has been delivered...the open interest drops by that amount...and there were 1,885 silver contracts delivered on Wednesday. It's also possible that 'da boyz' are not reporting the open interest numbers in a timely manner...further distorting the o.i. numbers.
The Comex Delivery Report for Thursday showed that 15 gold contracts were delivered and 474 silver contracts as well. Let me make this point about deliveries and open interest one more time...and I should have made this clear ages ago. When a delivery is made, a long and a short cancel each other out [as the long takes delivery of physical bullion from the holder of the short position], so open interest drops by the appropriate number of contracts. So, using today's Comex Delivery Report as a guide...total gold open interest dropped 15 contracts and total silver open interest dropped 474 contracts. This is a mechanical process that occurs automatically on delivery. I hope that makes things a little clearer.
In other precious metals news, I note that there were no changes to the alleged holdings of either the GLD or SLV. And there were big changes reported by the U.S. Mint eagles program as well...and if Ted [Hawkeye] Butler hadn't seen it...I would have missed it entirely. Here's what happened. When I reported the new mintings for July 1st...I failed to notice that the Mint had increased their June gold and silver eagle production at the same time! I wasn't even looking for that. Anyway...here are the increases I missed. The U.S. Mint added another 3,000 one ounce gold eagles to June production, bringing the total up to 116,000...and in one ounce silver eagles they upped the total by a whopping 300,000...bringing the grand total for the month of June to 2,245,000. There were no changes reported in silver inventories over at the Comex-approved warehouses.
In other gold news, the usual New York commentator passed along the following comments that Richard Russell made last evening..."Gold is now fluctuating just above its 10-week moving average. But what's so interesting is that the rising blue 10-week m.a. is above the rising red 40-week m.a. [That's the 50 day and 200 day moving averages - Ed], and gold is trading bullishly above both rising m.a.'s. Does gold have the strength to attack the $1,004 resistance level again? That's what we're going to find out in this fateful month of July." [Richard, I couldn't agree more - Ed]
Al Korelin of Korelin Economics was kind enough to interview me about a week ago...and, for whatever reason...I just got the link yesterday. So here it is...better late than never, I suppose. Click here.
Since it's a long weekend [for my American readers], and you probably have a little more time on your hands than normal, I'm going to run a few extra video and audio clips...and a few extra stories...plus the main feature...and it's a monster! Anyway, the first story made my jaw hit the floor. If this isn't the best reason I've heard of lately to rush out and buy all the gold and silver you can afford, I don't know what is. It's courtesy of Craig McCarty [so what else is new?] and was posted in The Guardian out of London. The headline reads "Banking system like South Sea bubble, says senior Bank of England official"..."The Bank's executive director for financial stability, Andy Haldane, compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely 'resorted to the roulette wheel' to keep up with each other." Wow! The link is here.
The next item is a really good interview with Nassim Taleb on CNBS, author of the world-famous book "The Black Swan". It lasts about nine minutes and is worth listening to. Craig McCarty slipped me this story as well. [Don't you have a job, Craig?] The link is here.
In a story out of the Financial Times in London comes this headline..."China moves to cut reliance on dollar". "China has taken another step towards internationalizing its currency and reducing reliance on the US dollar with the announcement of new rules to allow select companies to invoice and settle trade transactions in renminbi." The link is here.
And in a GATA release yesterday comes this headline "Austrian bank's gold report cites market manipulation". The entire report's comments on this subject appears to be taken directly from the years of work done by GATA ...and silver analyst Ted Butler. The most stunning comment comes from the CEO of Freeport McMoRan, James Mofett. He is quoted as saying "The central banks are the OPEC of gold. They will control the price of gold by selling until they change their minds." It nearly goes without saying that I think this is worth reading, and the link is here.
And while I still have my gold-plated tin-foil GATA hat on...here's another interview worth your time. GATA Chairman Bill Murphy, GATA secretary treasurer Chris Powell, and your humble scribe were interviewed about the gold and silver markets for a half hour yesterday by Eric King of King World News. The link is here.
And lastly, is the biggie I spoke of earlier. The quote I used yesterday came from this essay and went like this...The world's most powerful investment bank [Goldman Sachs] is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. Here's the full article by Matt Taibbi of Rolling Stone magazine. It's entitled "The Great American Bubble Machine". This particular copy of the essay [and there are lots around] is posted at correntewire.com. I thank Don Hagema for this sending me this version. Pack a lunch, blow the froth off a cool one, then click here.
Cautious, careful people, always casting about to preserve their reputation and social standing, never can bring about a reform. Those who are really in earnest must be willing to be anything or nothing in the world's estimation, and publicly and privately, in season and out, avow their sympathy with despised and persecuted ideas and their advocates...and bear the consequences. - Susan B Anthony [1820-1906]
Today's blast from the past is another well-known chestnut from the 1960s. I have a purloined DVD of their last concert appearance in Edmonton in 1992...which I was fortunate to get tickets for...and someday I'll get around to putting up some of the songs on youtube.com. Anyway, you might know most of the words to this, so feel free to sing along if you wish. Turn up your speakers and click here.
I see that the FDIC reported yesterday that it closed another seven banks...one in Texas and seven in Illinois. I keep asking myself how long can this insanity continue without the world's economic, financial and monetary systems collapsing into a smoldering ruin. If you believe some of what the above commentators are saying, it shouldn't be too long. That's why I feel you should still be buying all the physical gold and silver you can afford.
But there's nothing that can be done about it over the [long] weekend, so I suggest that you make like this squirrel below, and forget about everything until the world opens for business on Monday.
See you on Tuesday morning.
Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.
From Ed Steer:
Gold managed to add about three bucks to its price from the beginning of Wednesday morning trading in the Far East...right up until 1:00 p.m. in the London afternoon...which was 8:00 a.m. in New York. At that point, gold tacked on $8 in less than 30 minutes...sat there until lunchtime...then tacked on another $8 in less than 15 minutes. Then one of the usual not-for-profit sellers showed up and that was it for the day. Gold did manage to poke its nose above $940 again...and finally closed above the $940 mark at $940.30. Does this price have any significance? Who knows, but I can easily tell that 'da boyz' have been defending this price with great enthusiasm since June 15th...as the daily market action has been so obvious lately...confirmed by the graph below.
Silver didn't show up for this party, but still managed to add 15 cents to its price by the close of electronic trading in New York at 5:15 p.m. yesterday afternoon. The precious metals shares did surprisingly well, but did give back some of their gains as the day wore on.
Of course the dollar fell a bunch yesterday...and it was encouraging to see gold gain back everything it had lost from the prior day. But it didn't tack on those gains in lock-step with the dollar decline...but put all its gains into two big moves...one at exactly 8:00 a.m. and the other at exactly 12:00 noon Eastern time. With everything seeming to happen precisely on the hour in New York...what are the chances that these are random events? Just asking.
As I mentioned yesterday, I expected Tuesday's open interest to decline significantly after the huge declines in the gold and silver prices that we had on that day. Well, that's not what the report showed when I checked yesterday. Gold o.i. actually rose another 632 contracts while silver o.i. rose 95 contracts. Volume in gold was 109,797 contracts, while silver volume was only 27,320...the lowest it’s been in a while. Despite what the report showed, there was liquidation, as tech funds pitched longs and/or went short...while the bullion banks went almost exclusively long against them...and did not cover shorts. That's why the open interest numbers showed an increase in the face of obvious liquidation. Since this happened on Tuesday [which is the cut-off for this week's COT], this data should be in the next report...which won't be published until Monday because of the U.S. holiday tomorrow. But will it...as the bullion banks are known to hold back information until it suits them to publish it.
Ted Butler and I were both surprised how few contracts were delivered on first day notice on Tuesday. Well, they made up for it on Wednesday...especially in silver, as July is a big silver delivery month. There were 1,885 silver contracts delivered...that's a bit over half of the 3,642 silver contracts that are shown to be standing for delivery at the moment. There were 42 gold contracts delivered yesterday as well. There were no changes in either GLD or SLV. Over at the U.S. Mint...5,000 one ounce gold eagles and 50,000 silver eagles were reported produced in their July 1st update. The Comex-approved warehouses showed that their silver inventories only increased by a very small 8,829 ounces. Their total silver inventory at the end of June stood at 117,583,739 ounces.
In other gold news, I note that India was a buyer in the gold market yesterday. The usual N.Y. commentator had one other thing to mention as well..."In times gone by, the Istanbul Gold Exchange would promptly publish Turkey's gold import data on the first of the month. Now they are tardier. But a report has appeared saying the country imported at least 4.1 tonnes in June. While this is modest compared to the 15-20 tonnes/month Turkey has usually imported in recent years, it is the strongest import in 8 months and suggests this traditionally stalwart buyer is getting back into line."
I do have a couple of gold-related stories for you today. The first is a Liberty Dollar prosecution update. Bernard von NotHaus, founder of the Liberty Dollar, has provided an update on the legal situation of himself and the other Liberty Dollar people being prosecuted by the federal government on counterfeiting charges. Von NotHaus reports that a long slog through the courts is ahead and that he and his people will be grateful for any assistance. You can read the von NotHaus' update toward the bottom of the Liberty Dollar dispatch linked here.
And the second story...Mike Zielinski, proprietor of the Mint News Blog, reports that U.S. Senator Mike Crapo [R-Idaho] has introduced legislation to provide precious metal investors the same favorable capital gains tax treatment afforded to stock and mutual fund investors. The legislation is entitled "Fair Treatment for Precious Metals Investors Act" and the link is here.
Two other stories today. The first is from The Times in London. It's a story that discusses which central bank is debasing their currency the fastest...the Euro by the ECB, or the US$ by the Fed. The story is entitled "How the ECB's fig leaf has completely withered away". It's a longish piece, but definitely worth the read, and I thank Craig McCarty for sending it along. The link is here.
And, with another tip of the hat to Craig McCarty, comes this Bloomberg piece entitled "CFTC Looking at All Options for Fair Markets, Gensler Says"..."The CFTC will use all of its regulatory power to ensure fair operations of futures markets for oil, agriculture, currencies and interest rates, the agency’s chairman said." I didn't see him mention either gold or silver. Maybe they're only concerned about manipulation on the long side of the market. The bullion banks' obscene short-side corner in the silver and gold markets may be of no concern to them. The link is here.
The world's most powerful investment bank [Goldman Sachs] is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. - Matt Taibbi, Rolling Stone magazine, June 2009
We are now celebrating the first anniversary of the beginning of the big commodities crash of 2008. It came out of nowhere and crushed every commodity on the planet. Donald Coxe, global portfolio strategist at a Canadian bank, BMO Financial Group, blamed it on a secret plan cooked up by the U.S. Federal Reserve. The link to the interview on this subject is here. Listening to the first eight minutes will suffice. Will it happen again? Don't know...but nothing would surprise me...as there are no markets anymore, only interventions.
All of us at Casey's Daily Resource Plus hope that all of our American readers have a great Fourth of July holiday weekend, and we'll see you right here tomorrow morning.
Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.
From Ed Steer:
Gold gained about $8 in the first eight hour of trading in the Far East yesterday morning. The top came shortly after 3:00 p.m. in Hong Kong...and between that time, and the Comex open, gold gave half of that gain back. Then we were treated to that [by now] familiar chart pattern...with the worst damage occurring once the London p.m. gold fix was in at 10:00 a.m. New York time. Between its high in Hong Kong and its low in New York...gold got hit for around $23.
Silver's flight path was similar to gold's...with the high at the same Hong Kong time as gold. However, the real sell-off in silver didn't begin until the London p.m. gold fix at 10:00 a.m. New York time [3:00 p.m. in London]. From that point, silver 'lost' about 48 cents in an hour...to go along with the 21 cents it lost between its Hong Kong high and the London p.m. gold fix. The silver chart is typical of what a market looks like when the bullion banks pull their bids and the tech funds puke up their longs and are forced to sell into a vacuum as sell stops are hit. But I only give JPMorgan a 8.9/10...as the decline wasn't more than a dollar...and I know they can do it, as I've seen it happen before.
Both metals gained something back from their lows of the day...but not much.
Of course both gold and silver 'fell' in lock-step as the US$ 'rose'. If you check the one day US$ chart below...along with the silver chart above [gold is the same], you'll note that the dollar gained 70 basis points [well under 1%] between 8:30 a.m. and 10:45 a.m....the exact time frame that both gold and silver got hammered. Platinum, too. On Thursday and Friday of last week, the US$ fell over a cent in one 24-hour period...during which time New York gold gained a whole four dollars. I commented several times last week that gold was not being allowed to close above $940...regardless of what the dollar did. It's my opinion that what happened yesterday was a deliberate act. The bullion banks make sure that gold and silver prices fall faster than they rise...despite what the currencies are doing.
Open interest changes for Monday were disappointing. Gold o.i. rose 134 contracts to 378,567....on very small volume of 61,810 contracts. Silver o.i rose 1,711 contracts to 104,499 on volume of 30,015 contracts. I was hoping/expecting better. Tuesday's open interest numbers should show quite a drop when they become available later this morning.
Yesterday was first day notice for July delivery. Both Ted and I were amazed at how few contracts were delivered...only 169 in gold contracts and 253 in silver. There were no changes in SLV yesterday...but over at the GLD 166,914 ounces [5.19 tonnes] were taken out. As expected, the U.S. Mint did not update its eagle mintings for the end of June. However, the month-end numbers were impressive anyway...with one ounce gold eagle mintings at 113,000 and silver eagles at 1,945,000. For the first six month of 2009...totals in both are very impressive. In gold y-t-d 667,500 have been minted...and in silver eagles y-t-d it's 13,524,500. Over at the Comex-approved warehouses, another 666,523 ounces of silver were withdrawn from their inventories.
Tuesday was a slow news day for gold...but the usual New York commentator had the following..."The European Central Bank weekly statement of condition indicated a decline of €96 million [4.33 tonnes] in 'gold and gold receivables'...attributed to a sales by one captive central bank and sales of gold coin by two others. Last week saw a sale of 0.9 tonnes reported."
With the 50-day moving averages having been broken to the down side again in both precious metals, some serious consideration has to be given to the fact that the 200-day moving averages are now in the sights of the bullion banks. There has been surprisingly little long liquidation by the tech funds [and therefore short covering by the bullion banks] despite the fact that we are already down $65 from gold's high a month ago. In silver, we are down over $3 from the highs of early June. If...and it's not a very big if...the bullion banks continue to flush out the spec longs and cover as many of their own short positions as they can...I figure that we've got at least $75 left in gold and $2 to the down-side in silver. Those are minimum numbers too! In other words, we will have to give back all the gains from the April 19th bottom before we find another bottom.
But, we could also go to new record highs...starting right now. All that JPMorgan and HSBC et al have to do is stand aside with their hands in their pockets and do nothing...and we'll have $1,000 gold in a few hours...or less! Only the bullion banks are prepared to go short against all comers in this market. That's why the price does what it does...and is where it is.
I have three stories and a five-minute CNBS video clip today.
Let's start with the video clip. For five minutes Monday morning, CNBS market analysts discussed how obvious U.S. government manipulation of the financial markets has become. If manipulation is obvious to these analysts now, soon even some mainstream gold market analysts may have trouble denying it. The video is linked here.
The first story is from The Telegraph in London. This short blog by their economic editor, Edmund Conway, is entitled "Probably the worst three months for the economy since the 1920s" The link is here.
Here's another story about the dire straits that the U.K. finds itself in. This one's from Bloomberg. This year's government deficit will hit 12.4%...and reach 17% of GDP in 2010. The story is headlined "Sterling Crisis Looms as U.K. Unraveling Points to Budget Cuts". I thank Craig McCarty for the story...and the rest of the morbid details are linked here.
And lastly comes another story from The Telegraph. This one was filed by Ambrose Evans-Pritchard on Sunday, June 28th, and comes courtesy of the King Report. It's entitled "China's banks are an accident waiting to happen to every one of us"...and the link is here.
Alexis de Tocqueville...like other students of politics...was familiar with the concept of democracy, which history and reason informed him was the intermediate stage between republicanism, and either despotism...or civil war. - The Life and Times of Andrew Jackson by H.W. Brands [page 455]
With gold and silver being taken to the cleaners yesterday, it was a sure bet that when the U.S. equity market tanked, nobody would be taking their money out of them and putting it into the precious metals. I wonder if that was part of the plan as well. I'm not sure how long it will take the bullion banks to cover as many of their short positions as they can. Are they in a hurry...or are they going to take their sweet time about it? My bet is that since they're in total control of the gold and silver markets right at the moment, they will drag this process out as long as they can. But whether or not they can, or will, do it...will be something that is only known in the fullness of time. I wish I had happier news than that, but I don't...as I have past history on my side.
See you on Thursday.
Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.
A Mother Lode for Pennies on the Dollar
by Sean Brodrick
Dear Subscriber,
What if I told you that there was a producing silver miner, sitting on nearly half a billion ounces of silver equivalent, that you could buy for under a buck a share. Would you be interested?
You'd probably have more questions. I had a lot of them when I had a chance to sit down this week with Stephen Altmann, President of ECU Silver (symbol ECU on the TSX in Canada; ECUXF on the pink sheets in the United States). ECU is a Canadian miner hard at work in mineral-rich Durango State in Mexico.
Let me tell you what I like about this stock. Then I'll tell you what bothers me about it. You can draw your own conclusions.
ECU can currently mine from 5 different areas within its Velardeña District Properties. The properties contain a measured and indicated mineral resource of 40 million silver-equivalent ounces and an inferred mineral resource of 391 million silver-equivalent ounces.
"We took this resource from 25 million ounces to 431 million ounces in less than four years," Stephen told me proudly.
(Gold and Silver)(ounces)
(All Metals)(ounces)
Here's a piece of the company's technical report from January ...
The resource estimate is based on 46 veins and includes the sum of mineral resources from the main Velardeña Property, the Chicago Property and 50% of the San Diego Property, which is a joint venture with Golden Tag Resources (GOG on the TSX-V).
Stephen thinks there's a lot more silver to be found. The technical report also outlines a further mineral potential of another 570 million to 930 million silver-equivalent ounces. If it works out, this could eventually take ECU's resource to more than 1 billion ounces.
However, there is already a big difference between "inferred" and "measured and indicated" — we'd really be pushing the envelope to consider "mineral potential." So let's use the 391 million-ounce resource number, which is still very good.
And ECU is sitting on more than precious metals. About two-thirds of ECU's mineral resource is gold and silver (gold is nearly half of the precious metals resource). The rest is lead and zinc. The base metals credits should lower ECU's mining costs for gold and silver dramatically.
ECU recently celebrated its first gold/silver pour at its mill. And the pour was a success. Assays confirm that the 20 doré bars contain about 140 ounces of gold and 7,250 ounces of silver.
"The original doré bars came from low-grade material and development muck — the rock we go through to get to the mineralized zones," Stephen told me. "This is typical in any mine start-up as you don't want to find any start-up problems with your higher-grade mineralized material."
Going into production is an important milestone for ECU, and more importantly, gives it cash flow when mining companies without cash flow are being ground into dust.
The speed with which ECU brought its Velardeña oxide mill online surprised the industry because ECU had acquired the plant just six weeks earlier. Normally, it would take months to get a mill up and running.
But Stephen said that ECU had an inside edge. "We built that mill," he explained. "Then ECU sold it to Hecla Mining 10 years ago when we needed money."
When Hecla's silver in the area ran out, they put the mill on care and maintenance — lifting the big ball crusher up off its cradle and shrink-wrapping all the motors in plastic. But ECU was able to buy the mill and quickly put it back into production.
The company is operating the mill at 400 tonnes per day, and it has a capacity of 500 tonnes per day. ECU has to build a new water line for the mill, Stephen says, but the mill can operate with the old water line for now.
Let's Crunch Some Numbers
If a lot of numbers make your eyes roll back in your head, you can skip this next part. But I think this is where it gets interesting ...
The oxide grade resource that ECU is working with has 2.95 grams per tonne (g/t) of gold and 162 g/t of silver. That's about 5.25 g/t of gold equivalent or 370 g/t of silver equivalent.
If the mill can process 400 tonnes a day, with 2.95 grams per tonne of gold and 162 grams per tonne of silver, at $700 a troy ounce for gold and $10 a troy ounce for silver (I'm being very conservative here), the company should have revenue of $47,450 a day from the mill, or a little more than $1.4 million a month.
Of course, costs have to be deducted from that.
"Our mining costs will be between $45 to $50 per tonne," Stephen told me. "This translates to about $3.80 to $4.20 per silver-equivalent ounce using the resource grade."
So, that means the company should make between $5.80 and $6.20 per ounce of silver in the rock ... or cash flow of between $27,422 and $32,096 per day based on $10 silver.
Now here are a couple potential boosters ...
- The mineral grades in the area that ECU is currently mining could be higher. "The grades we expect in this certain area will be closer to 4 grams per tonne gold and 180 g/t silver," Stephen told me. "That's about 6.6 g/t gold equivalent or 460 g/t silver equivalent."
-
ECU should have that mill operating at 500 tonnes per day in six to nine months. That raises cash flow potential to a range between $34,277 and $40,120 per day at full capacity.
And the company has a second plant it is already operating — a flotation sulphide mill with a capacity of 320 tonnes per day. However, the company is concentrating its efforts on feeding the oxide mill.
Not All Mills Are Created Equal
The difference is that the oxide mill turns material from ECU's oxide resource into a gold/silver doré bar that is shipped directly to a refinery. There are no base metals produced from the oxide material.
The sulphide mill produces three concentrates — a lead/silver concentrate, a zinc concentrate and a gold/pyrite concentrate. The lead/silver and zinc concentrate must then go to a smelter for further treatment.
As you probably know, lead and zinc prices plunged last year while smelter charges have remained high, which made the sulphide operation unprofitable. And the third product — the gold/pyrite concentrate — also needs more treatment beyond the smelters.
The good news is that when base metals start to recover, that should give ECU's share price some extra oomph.
Certainly, the insiders think ECU's stock is cheap. Records show they've been buying, not selling the stock recently.
So What Don't I Like About The Stock?
The company had to file a restatement of its Dec. 31, 2007, and Sept. 30, 2008, financial statements. You never like to see that. But Stephen explained: "The reason we had to re-state our financials is because the regulators wanted us to report as an exploration and development company and not as a producer until after we completed a pre-feasibility study. So in essence we could not report revenues and instead had to report revenues as a reduction in our deferred expenses. The deferred expense being those that relate to mining activity."
A bigger problem is that ECU has 278.6 million shares outstanding, and fully diluted shares, figuring in options and warrants, rise to 339.1 million shares. That's a huge float.
"We do have a large number of shares, but about 125 million are tightly held within five groups," Stephen told me.
The company increased the number of shares recently when convertible notes (debt) converted to shares of stock. The company did a bought-deal financing to raise the U.S.$8 million it needed to buy the mill.
"We raised C$17.5 million in our last financing for the purchase of the mill and for working capital," Stephen explained. "We have U.S.$15 million of debt."
Some investors won't like that debt hanging over the company, but the money was used to get ECU to production and give it a cash cushion.
Another potential problem was raised in the Management Discussion & Analysis that Golden Tag Resources — ECU's joint venture partner on the San Diego property — released on Wednesday. In the MD&A, Golden Tag's management wrote:
"Subsequent to the year-end the company became aware that its joint venture agreement (JVA) partner on the San Diego property is in breach of several covenants and representations made by it in the JVA. The matters are not in material dispute and the other party has advised the Company (Golden Tag) that it believes it will have these breaches rectified."
I asked Stephen about this, too. He replied: "The breach in the JV agreement is that our lenders have our mineral assets as collateral. There was some confusion as to whether this claim included GOG's 50% interest. We are working with the lenders to sort it out. And they have told us that it would be no problem to sort it out."
Stephen added that the lender, IIG Capital, has worked with ECU for the past 10 years and is very accommodating.
The final thing I don't like is that even with the first mill running at 500 tonnes per day, it really needs more capacity.
And that's where ECU's 3-phase plan comes in.
The Three-Phase Plan
In Phase 1, the company will expand the operations that feed its 500-tonne-per-day mill to capacity. That should be done in 6 to 9 months, with a maximum production of more than 1 million ounces of silver equivalent per year.
In Phase 2, the company will construct a 1,500-tonne-per-day sulphide operation. This would raise the company's production to more than 3 million ounces of silver equivalent per year. This would require a big expansion of the existing sulphide plant or a new mill.
In Phase 3, ECU plans to expand the sulphide operation to 5,000 tonnes per day, raising its production to more than 10 million ounces per year.
ECU may look for a partner to complete phase 2 and phase 3. And as its production increases, especially if its existing resource expands, there is more and more potential that the company will be snapped up by a bigger player.
Is This Stock Cheap?
Recently, an analysis of junior producing silver miners showed they were valued at about U.S.$0.58 per ounce of silver resource. Using that metric, ECU should have a valuation of about U.S.$249 million. The stock recently had a market cap of around U.S.$150 million.
By this metric, ECU is very undervalued and could rise by at least 60 percent. And if a big miner starts sniffing around, its value could really go up.
- This is a high-grade producing mine with the lower grades proven at 2.8 grams per tonne of gold and more than 100 grams per tonne of silver.
- They already have a large resource. More drilling could expand that resource.
- They have leases in place on vast tracts of land, where they can do more exploration.
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ECU is already mining from 5 different areas within its properties.
Bottom line: As I said, you can draw your own conclusions. Mine is that ECU's problems are road bumps, not road blocks. This stock is undervalued, and looks to go higher. The stock is up about 43% from its closing low on March 31 — investors liked the news about the first gold pour — so you could wait for a pullback before adding it.
The question is when ECU will really start to rally. As I said, the company needs to expand its production capacity. I think even before ECU finishes phase 2, it will already be taking off.
Stephen told me that he wants the stock's value to grow prudently — he doesn't want a moon-shot stock with flipside risk of crashing and burning. So far, the company seems to be making the right moves.
Nothing is guaranteed, and small miners like this are much riskier than big, established miners. But as I think I've shown you here today, with the risk comes the potential for big reward, as long as you have some patience.
You'll have to make your own decision whether to invest in ECU. Consult your investment advisor, and never invest more than you can afford to lose.
Oh, and you also may be worried about Swine Flu, since this miner is operating in Mexico. If you've been reading my blog, you know that while I don't mean to minimize any personal tragedies, I think that, at this time, there is more hysteria than necessary to the Swine Flu scare. And ECU's operations are nowhere near Mexico City.
Yours for trading profits,
Sean
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