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Minyan Mailbag: Miners On Track for Recovery


Metallica Resources, gold stocks recouping from correction.

Dear Professor Lewis,

I want to congratulate you on being spot on about mining stocks playing "catch up" to the metal. You kept my feet to the fire and I thank you for that.

One quick question. Is this run in Metallica Resources (MRB) justified? My calculations have it merging at a lower price.

Thank you for all your insight.

Minyan Kathy


Thanks for the kind words, While the shares have indeed been recovering from the correction faster than the metal after positively diverging from gold and not making a new low below the mid-March lows when the metal did on April 1st, I'll feel a lot more comfortable about being "right" once the shares are making new highs again. But so far, the recovery from the correction in the gold complex appears to be progressing well from where I sit.

As for MRB, the recent deal gives its shareholders 0.9 shares of New Gold (NGD) for every 1 share of MRB. So, at present with NGD bidding $7.47, MRB should be trading at approximately $6.72.

However, keep in mind that Xstrata already owns over 10 percent of MRB and has the majority interest in the El Morro project, which the two companies share (MRB has the minority interest). It's still possible that Xstrata could make a competitive offer for MRB.

Either way, with MRB now trading at just over a third of the NAV of its P&P gold reserves in Mexico alone (based on $900 gold), I still consider MRB to be "dirt cheap" even after this recent move to all-time highs. I haven't sold a share of stock in either MRB or NGD (both of which I already owned before the deal) for whatever it's worth.

But then again, many juniors are cheap like this. Why is this still the case with gold comfortably over $900? Nobody knows exactly. It's a big mystery among many of us in the gold sector. "Lack of liquidity" is the best explanation I can come up with. John Hathaway of the Tocqueville Gold Fund has expressed similar thoughts as well. As the Fed continues to inflate, however, liquidity will eventually return (and then some), and I continue to watch the short end of the yield curve for hints as to when that time is. As yields in the short end rise and move back closer to the Fed funds target rate (just as we've been seeing since mid-March which is also coincidentally when most of the gold shares hit their lows for the correction), we should see liquidity conditions in the equity market continue to improve.

Increasing liquidity in order to bring in more institutional interest was also interestingly precisely why the deal between NGD, MRB, and PIK was done according to the guys that put it together. Deals like this that combine various juniors may even become a trend if the large valuation disparity between them and a handful of the seniors that people continue to pile into continues to widen even further.

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Position in MRB, NGD

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