Special Report from the PDAC: Experts Separate Good from Bad and Worse Juniors

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Sunday is the quiet day at the PDAC, only 10,000 delegates or so. The convention doesn't officially open until Monday—but Sunday offered investors access to an impressive slate of newsletter writers and commodities pundits.

The highly quotable Ian McAvity was up first and was harshly realistic on the economy in general, perhaps even more so than usual. "I am about as bearish as one can get on the system," McAvity said. "I am very concerned about the major trend. I think we are in a very, very dangerous period." McAvity predicted that the Dow would dip to between 8,200 and 8,500 in the August–September period when another debt ceiling battle is expected to rage. He also pointed to the Israeli Central Bank's decision to buy into a U.S. equities ETF. "Central banks used to protect domestic currency," McAvity said. If there was one thing he wasn't bearish on, it was gold. He forecasted at least another five years in gold's current 11-year bull run with $2,500/ounce or higher prices before year-end. He added that the major gold producers have proven that they can't have sustained runs (see Kinross Gold and Agnico-Eagle Mines) and that the only way to play them is to trade in and out, versus a buy-and-hold strategy.

Fast-talking Mickey Fulp, editor of The Mercenary Geologist, took the stage after McAvity and resurrected a talk that he presented at the PDAC in 2009—the good, the bad and the butt ugly aspects of the junior miners. Fulp said the good companies are the ones with the ability to raise capital, with short lead times to production. He likes open-pit, heap-leach gold deposits; in-situ recovery (ISR) or open-pit copper deposits; or ISR or open-pit uranium deposits. According to Fulp, the bad juniors are those with polymetallic volcanogenic-massive-sulphide (VMS) deposits, nickel-copper-PGM-cobalt deposits, iron ore deposits or even copper-gold porphyry deposits. Fulp says all these types of deposits are best handled by big miners with deep pockets. As far as Fulp is concerned, ugly or even butt ugly juniors are ones with molybdenum deposits, volcanic-hosted uranium deposits, deposits in unconventional or unusual geological environments or gabbro-hosted copper-nickel-PGEs deposits, some of which occur in Minnesota. Fulp likes rare earth elements plays (REEs), as long as one is selecting the "cream of the crop" juniors, and he called graphite "the next big thing."

. . .Later in the day, Jay Taylor, editor of Gold, Energy and Tech Stocks, reiterated much of the economic doom and gloom presented by McAvity. Taylor predicted more global credit default problems and used a chart showing that U.S. debt is now about 360% of GDP. Another chart showed that there is US$1.6 trillion just sitting in U.S. banks because "they're having trouble finding credit-worthy borrowers." Nonetheless, Taylor remains bullish on gold with his top picks being Sandstorm Gold Ltd. (SSL:TSX.V) and Dynacor Gold Mines Inc. (DNG:TSX). . .

The affable Adrian Day, principal of Adrian Day Asset Management, said that we are witnessing the decline of the U.S. dollar. He illustrated his point by looking at emerging markets and how they continue to limit their exposure to the greenback. Day said that in 1999 the foreign exchange reserves of emerging markets countries were 75% U.S. funds, but by the second quarter of 2011 that percentage had slipped to 56%. He said that was due in part to Asian markets becoming increasingly independent from the influences of Europe and North America, and producing more and more goods for their domestic markets. "The largest destination for Asian exports is Asia itself," Day said. Ultimately, Day notes, this is good for commodities, especially gold. "Commodities and resources move in very long cycles. The shortest ever cycle for copper is 16 years. . .we are a long, long, way from the end of the (commodities) cycle. . .you ain't seen nothing yet."

Day said China's industrialization, urbanization and emerging middle class are changing the patterns of consumption in that country. He noted that about half of all the cars on the road in China were purchased in the last 3.5 years. According to Day, global car ownership is somewhere between 550 and 600 vehicles per 1,000 people. Although Chinese car ownership has risen dramatically in recent years, it's still well below 50 cars per 1,000 people—certainly room for growth there. Finally, Day offered this bit of wisdom: "The biggest mistake people make is getting freaked out by the volatility."

. . .PDAC convention organizers probably saved the best for last with Global Resources Investments' Rick Rule—always a treat. Rule also called his talk the good, the bad and the ugly. The good: Rule said there is $8 trillion sitting on the sidelines "losing 300 basis points a year," a shortage of good deposits and an environment where gold producers are in "perpetual liquidation" and must constantly replace the ounces they produce. The bad: The U.S. Federal Reserve is "counterfeiting" by printing money and has shown Europe how it's done. The ugly: Junior resource companies are the worst counterfeiters. Rule said juniors can "print phony share certificates faster than central banks can print phony currencies." He that said one company in his portfolio (a position that he is in the process of exiting) spent 2.5 times more on general expenses and administration than it did on exploration. "I started looking at other companies, too, and it ain't pretty. . .when you walk around out there (in the Investors Exchange), don't look for companies to buy, look for companies to sell." He added that the top 5% of juniors "generate 100% of the profits." Rule advised buying the 5% on "psychotic breaks" in the market, adding that some companies are "stupidly underpriced." In particular, he said, gold stocks are inexpensive relative to gold. Rule predicted that we would soon see the best private placement market since 2008, with cash-starved juniors seeking financing on very good terms—yours. His picks included Perseus Mining Ltd. (PRU:TSX; PRU:ASX) and Esperanza Silver Corp. (EPZ:TSX.V).

See and heard. . .a quick poll of exhibitors in the Investors Exchange—consisting almost exclusively of company booths—said traffic was busier than usual while those in the Trade Show were quietly wondering why there wasn't more traffic. . . The world's biggest mining convention is now in its 80th year and shows few signs of slowing down. The show attracted more than 27,000 visitors in 2011 and PDAC President Scott Jobin-Bevans expects the number to reach above 30,000 this year, which would be a new record.

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