Precious Metal Developers Provide Value, Upside in 2009

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"As exploration companies have declined more than most, we see these now as potentially having the greatest upside potential."

We are approaching an inflection point in the economy and the metals markets favorable to precious metals and mining equities. Moving beyond 2008, investors long in mining and metals equities are no longer burdened by the combination of redemptions and tax loss selling. While producers appear less risky, we see mining and metal equities with development potential as offering the greatest leverage for appreciation in the new year.

Slower levels of economic growth worldwide have led to higher than anticipated inventories, declining base metal prices, and shelving base metal projects. As we anticipated, this has produced increased availability of labor and equipment leading to moderating operating and development costs. While in many cases, base metal prices have declined to below required levels for production, precious metal prices remain above real long-term price levels.

These factors are favorable to junior precious metals equities. Gold and silver prices are correlated to inflation, suggesting stable or higher precious metal prices. Slower economic growth should increase the supply of labor and equipment for moderating operating expenses. The combination of increased prices and lower costs may expand margins, increasing the attraction of precious metal equities by investors. Though investors may recognize the importance of production and cash flow, the most attractive returns may be in development and exploration of precious metal resources. We believe that investors will look for leverage and screen precious metals companies by size (or resource) and probability of development.

As exploration companies have declined more than most, we see these now as potentially having the greatest upside potential. Moving out of a period of tax loss selling, equities in general may see a real bounce. Developers may enjoy the greatest appreciation from stable or increasing precious metal prices, moderating operating or development costs, and increasing availability of credit or profitability of major producers.

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