It looks like my Christmas present to some was ringing the warning bell on cryptocurrencies. On Dec. 8, I was thinking they were going higher but by the 19th the mania looked like a climax and I posted a couple of charts at 'Chart of the day' and called them mania charts. A couple of days later I commented: "I am still nervous on the price of these cryptocurrency and block chain deals."
My alert on Dec. 20 was to sell Blockchain: "BLOC is breaking down on the chart and is currently $2.20 and I was concerned about a close below $2.23. It might bounce back but I am getting nervous on this whole sector because it is so frothy. I would rather take the profits and visit again in January "
It is now Jan. 23 and I am revisiting the sector, and what I see is a train wreck and bear market. The two mania stocks, RIOT and LFIN, have dropped between 50% and 75%. Global Blockchain dropped to $1.40 and is currently in the $1.60s. The leader in the cryptocurrency space, hands down, is Bitcoin and is the best barometer of the sector. It is not easy to get charts and this is about the best I found for my purpose. This is apparently closing prices, but there is no close because Bitcoin trades 24/7. I believe the actual intraday peak was over US$20,000 and the low on Jan. 17 was under $10,000. When something drops 50%, the run up or bull market is over. This chart clearly shows a bear market.
I highlighted Dec. 8 when I thought it was still going higher and the 19th when I believed it was too frothy. I believe the crypto craze has peaked. The main reason is because it is too competitive with government issued fiat currency. Like fiat currency, cryptocurrency can be created out of thin air. It has no value other than the confidence and credibility of who is backing it. The crypto bulls will argue that it has to be created with computers doing calculations, therefore work is performed and that produces an underlying value. To me, it is just a number in your phony-electronic-virtual wallet.
Government authorities did not give it a lot of attention until it started to attract $billions. China has banned ICOs, has stopped trading on major exchanges and is initiating proposals to stop bit mining. Currently, China is the largest bit miner in the world so this is significant. China believes bit mining is a waste of their precious energy grid and only contributes to the pollution problem. Another major cryptocurrency player,
I will continue to watch the space and will make another point clear. Blockchain is an underlying technology of cryptocurrencies and it does have some good, useful value. I believe the Blockchain technology will survive and thrive even though it was, and still is overhyped. The best way I found to describe Blockchain is a transaction and accounting method for measurement.
Cryptocurrencies can be a threat to fiat currencies just as gold can. However, gold has been used as a currency for so long that it is already embedded into the system. That is why governments/central banks have adopted it and hold large reserves of gold. If cryptocurrencies evolve to become a lot more credible, governments will probably just create their own out of thin air as they do their fiat currencies.
"Bitcoin looks like the history of fiat money in the United States and elsewhere," Alan Greenspan told CNBC in early December, comparing it to the 1775 Continental currency created to help the U.S. fight the British for Independence. That currency was worthless by 1782. "Humans buy all sorts of things that aren't worth anything," he said, pointing to an eventual decline in value. "People gamble in casinos when the odds are against them. It has never stopped anybody."
Gold vs Crypto
There seems to be some buzz about this even though it appears to me that cryptocurrency has less credibility than fiat currency. I find it amazing how everyone can get wrapped up in a mania and jump on board. In December, Ron Paul, the former congressman, started an online poll on Twitter asking whether people, if given the option of taking a gift worth $10,000 and had to hold on to for a period of 10 years, would take bitcoin, gold or dollars (treasury notes). Over half (54%) of the respondents showed support for bitcoin. Gold was second at 36% and 10% for dollars. I find this quite astonishing when you consider Ron Paul has been a loud supporter of gold so his followers would be swayed this way, I would think.
A substantial disadvantage crypto has compared to gold is that it is subject to cyberhackers. Over 14% of Bitcoin and Ether have been compromised, according to Lex Sokolin of Autonomous Research LLP., noted in a Bloomberg report. A gold bar or coin cannot be hacked, but you have to ensure your original purchase is from a reputable dealer as there are a few fake coins and bars around.
In my last update I commented that all markets were moving higher and for the first time in a decade the world economies are all doing well. This will certainly bring on the next wave of inflation forces that "gold bugs" will love. Bloomberg reported the underlying pace of U.S inflation unexpectedly accelerated in December. Excluding food and energy, the so-called core consumer price index increased 1.8% from a year earlier. Commodities, US$, Oil, Treasury notes and Gold are all showing signs of inflation and are on the verge of major break out signals.
There is commodity inflation too, but you have to know where to look for it. Ever since the CRB index was hacked up into a black box computer model in 2005 that adjusts prices to the down side, it has been rendered useless to measure long-term trends or historic comparisons. I now use CRB BLS Spot Index or the BLS Raw Materials as reliable indicators for longer-term comparisons. The BLS Spot Index includes food stuffs along with industrial commodities. There is no energy or precious metals component, so I believe it provides a strong base or underlying measurement of commodity inflation.
The current rally in Commodities is the strongest we have witnessed since the 2011 peak. This chart is until end of December 2017 and the quote today on the index is 437, up about 15% from the 2015 low.
Interest rates are on the rise and this is reflected in this chart of the U.S. 10-year treasury bond. Many are already talking about a breakdown and on the yield side the chart equates to around 2.6% yield. Dropping below the line takes out the 2014 bottom.
Trump got his wish of a lower dollar last week as we can now see a breakdown on this weekly chart. Speaking of Trump, last week the GOP released the highly anticipated fake news awards. I am not sure if Trump started the "fake news" saying but he definitely was the one to make it popular.
Below is a monthly chart on oil as I wanted to show a longer-term pattern. In 2018, oil has rallied to $64 and is now a clear breakout and confirms the inverted head and shoulders bottom.
Gold has yet to breakout and looks destined for another test of $1,360 resistance.
I believe gold will punch above $1,360 in 2018, but markets are yet to be convinced. Gold stocks believe the gold price is going nowhere, and they remain stuck in this narrow trading range between 180 and 210 on the HUI Gold Bugs Index. I have been commenting on this for the past year, but am now convinced a breakout to the upside is just around the corner. The other positive on this chart is a very solid base has been formed in this trading range.
There is nothing I see on the HUI chart that points to a breakout, but the preceding charts are alluding to it.
Gold stocks represent good value probably because the market is paying attention elsewhere with ridiculous valuations on marijuana, cryptocurrencies and the S&P 500. We got stopped out of most of our producing gold stocks in 2017 and now I want to start adding some back on the Selection list.
I spent some time on the weekend looking at major and midtier gold producers and find I just come back to picks I have made in the past. The best seniors are Agnico Eagle and Kinross and that is because they are the only two with good growth prospects. Midtier, Eldorado Gold is a disaster and Goldcorp does not have enough of a growth profile to be of interest. Production at Barrick Gold is falling and Newmont will soon take over the lead as the largest producer, but not because of good growth but the opposite from Barrick. We made very good money with Sibanye (SBGL) a few years ago but it was a good thing we got out in 2016. I like the acquisition of Stillwater in 2015, but where it mines gold, South Africa, is in political turmoil. I see no sense in buying a Gold stock with so much political risk when other bargains abound.
I am going to add Kinross Gold Corp. (K:TSX; KGC:NYSE), Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), midtier, Alamos Gold Inc. (AGI:TSX; AGI:NYSE) and Paramount Gold Nevada Corp. (PZG:NYSE.American) to the Selection List.
We bought Kinross (KGC) TSX:K in 2015 at $2.60 and were stopped out at $5.10 last year. The previous stop out in 2016 was $5.40 and bought back at $4.65. The stock is currently around $5.30 so we are buying back a little higher than the 2017 stop, but I am betting on better timing. For sake of all the calculations on stop out and buy backs, I am just calling it a wash. I am picking Kinross because of attractive valuation and strong growth with their Tasiast expansion.
The Tasiast mine is an open-pit operation located in northwestern Mauritania, approximately 300 kilometers north of the capital Nouakchott. Tasiast processes ore via an 8,000 tonne per day mill and dump leach. Work continues on enhancing the performance of the existing mill and optimizing the operation. The high price Kinross paid for the asset was a thorn in its side throughout the gold bear market, but now it is destined to become a world-class asset.
The phase one expansion project at Tasiast is currently two-thirds complete and is expected to increase mill throughput capacity from the current 8,000 t/d to 12,000 t/d, significantly reducing operating costs and increasing production. Phase one is expected to reach full commercial production in Q2 2018. This will almost double annual production to 400,000 gold equivalent ounces.
On September 18, 2017, Kinross announced that it will be proceeding with phase two of the two-phased Tasiast expansion to increase mill capacity to 30,000 t/d, and produce an average of approximately 812,000 Au oz per year with all-in sustaining costs of $655 per Au oz. for the first five years of mining. The project is expected to generate strong cash flow and transform Tasiast into a large, world-class mine with lower costs. Initial construction for phase two is expected to begin in early 2018 and commercial production is expected to begin in Q3 2020.
Kinross has also initiated plans to extend life on two of its key assets, Round Mountain, Nevada, and Fort Knox, Alaska.
At Round Mountain the company is proceeding with the Phase W project, pending completion of the permitting process, which is proceeding as planned. Phase W is expected to extend mining by five years and increase life-of-mine production by 1.5 million Au oz. This is one of Kinross' top performing mines located in one of the best mining jurisdictions in the world.
Fort Knox is one of Kinross' largest producing mines and a center of excellence for the company as one of the few cold weather heap-leach facilities in the world. In 2016, the site poured its seven millionth ounce of gold, 20 years into its mine life. Kinross gained mineral rights to the adjacent Gilmore land in December 2017. Kinross has initiated a feasibility study to analyze a potential layback of the current Fort Knox pit to access known mineralization on Fort Knox and Gilmore land and potentially extend Fort Knox's mine life.
As a result, Kinross added 2.1 million gold ounces in estimated Measured and Indicated resources and 300 Koz in estimated Inferred resources at Fort Knox. Fort Knox now has 1.3 million ounces Proven and Probable reserves along with 3.2 million ounces M&I resources.
2016 Mineral Reserves and Resources (not including Fort Knox addition)
Proven and Probable Gold Reserves: 31 million Au oz.
Measured and Indicated Gold Resources: 30.3 million Au oz.
Company Outlook: Kinross is tracking toward the high end of its 2017 guidance for production (2.5 million to 2.7 million AuEq ounces), and the low end for both production cost of sales ($660 to $720 per AuEq ounces) and all-in sustaining cost ($925 to $1,025 per AuEq ounces). The company expects to be within its capital expenditures guidance of $900-million (plus/minus 5 per cent)
Balance sheet: As of Sept. 30, 2017, Kinross had cash and cash equivalents of $992.1 million, and available credit of $1,512.2 million, for total liquidity of approximately $2.5 billion. The company has no scheduled debt repayments until 2021.
Kinross has a very good track record for consistently delivering on results and its large reserve/resource base gives good leverage to any rise in gold prices. The balance sheet is in great shape and with good cash flow, it can easily fund all its expansion plans without further dilution.
Tasiast will add around 600,000 ounces to annual production that will more than make up for around 100,000 ounces loss from Kettle at end of life. Chirano in Ghana produces around 200,000 ounces per annum and is slated to reach end of life in 2020, but exploration in the area could prolong the mine. The company's biggest challenge will be to ensure further growth when its Russian mines, Kupol and Dvolnoye, reach end of life in 2021. This operation currently produces 550,000 to 600,000 ounces per year. Tasiast's expansion will replace this production, but I believe Kinross is an aggressive company and it will not sit around for three years without making some kind of acquisition to grow production.
The above chart highlights Kinross' attractive valuation compared to peers. With the stock chart, I note there is an uptrend in place and it is supported by the 200 day MA, but the price has struggled lately to move above US$4.50. If we get a good close well above $4.50 ($4.65 to $4.70) then a test of the upper trend line is likely.
I will highlight some info on Agnico Eagle in my next report and for now will dive right into Alamos Gold.
Alamos Gold TSX & NY:AGI Recent Price C$7.60
Shares outstanding: 389 Million approx.
Richmont Mines has often been a very lucrative pick in this newsletter and I always liked the company for its quality assets and was well run. When Alamos merged with Richmont, it certainly made it worthwhile to look into further. Alamos has always done a good job with its Mexican assets but they never had enough appeal and growth to interest me. That changed with the acquisition of Richmont and the plunge in the stock price.
To buy something of high quality, one usually has to pay a higher price so Alamos made a friendly deal to acquire Richmont in an all-stock offer valued at about $770-million (U.S.). Since the acquisition was announced Sept. 11, 2017, the stock dropped from $10.25 to $7.50. The comment often heard among investors is "sticker shock," believing that the price paid to buy Richmont was on the high end compared to current multiples and recent transactions. That aside, the company is well positioned to outperform intermediate peers given its attractive, self-funded growth profile, clean balance sheet, and catalysts at development assets.
Transaction highlights from news release:
- Acquisition of a high-quality, free-cash-flowing mine in a world-class jurisdiction: Island gold is a long-life, high-grade underground mine with growing production and first quartile cash costs, located in Ontario, Canada.
- Solidifies position as a leading intermediate gold producer: The combined entity is expected to have diversified gold production of over 500,000 ounces in 2017, anchored by three core, low-cost, long-life operations in Canada and Mexico.
- Superior production growth and cost profile: Island gold's near-term production growth complements Alamos's existing peer-leading growth profile, while lowering the near- and long-term cost profile of the combined company.
- Improved cash flow generation to support peer-leading growth pipeline: Island gold provides immediate cash flow accretion and stronger operating cash flow to support internal growth initiatives of the pro forma company.
- Stronger financial position and flexibility: The combined entity will have increased financial flexibility with enhanced free cash flow, no debt, and a strengthened balance sheet with cash and equity securities of approximately $229 million (U.S.)
- Revaluation opportunity through enhanced capital markets profile: The combined entity will become a top 10 gold producer in North America, with nearly 60% of its production in Canada, peer-leading growth, a strong balance sheet, proven management team and increased trading liquidity providing a strong revaluation opportunity through its enhanced appeal in the market.
John McCluskey, president and chief executive officer of Alamos, stated: "Our combination with Richmont reflects our core strategy of creating long-term value through operating high-quality assets. The Island gold mine is a high-quality asset in every respect. We see excellent potential for reserve and production growth from one of the highest-grade, lowest-cost gold mines in Canada. With this production base, growth and balance sheet strength, Alamos will be the leading intermediate producer and presents a compelling revaluation opportunity for both Alamos and Richmont shareholders."
I would bet Mr. McCluskey did not expect a downward revaluation, but that is now our opportunity. Let us have a closer look at its assets.
Alamos is a Canada-based intermediate gold producer with diversified production from four operating mines in North America, including the Young-Davidson and Island Gold mines in northern Ontario, Canada, and the Mulatos and El Chanate mines in Sonora, Mexico. These are long-life mines, projected to produce between 480,000 to 520,000 gold ounces in 2018 with a low $950 all-in sustaining cost and declining through 2020. Alamos met production guidance for the third consecutive year and with 10% growth in 2017 driving record performance. Growth is forecast at 28% for 2018.
Mine Production est. 2018 AISC
Young - Davidson, Ontario, 200 - 210 koz. US$850/oz.
Island Gold, Ontario, 90 - 100 koz. US$825/oz.
Mulatos, Mexico, 150 - 160 koz. US$900/oz.
El Chanate, Mexico, 40 – 50 koz. US$1,200/oz
The company has a leading growth profile with six low cost exploration and development projects in Mexico, Turkey, Canada and the United States. Three feasibility studies have outlined over 400,000 ounces per of high margin production growth.
Alamos has a very good presentation so I am going to use a couple of the slides. This first slide gives some more detail on the newly acquired Island Gold mine.
Alamos is in excellent shape here, retiring the last of its debt in April 2017 and holding US$235 million cash. It has an undrawn credit facility of US$400 million, so US$635 million in liquidity.
Alamos' four producing mines have 6,517,000 ounces of Proven and Probable reserves and development projects bring the number up to 10,073,000 ounces. Measured and Indicated resources add another 7,087,000 ounces. This slide gives a good summary of its production and growth profile.
When you put together the key components, Alamos is a compelling buy:
- Strong management team with proven track record to deliver.
- Diversified North American production in stable jurisdictions.
- Long mine life with growing production and low costs.
- Leading growth profile among midtier gold producers.
- Strong balance sheet with no debt.
- Share price at low for the past year and at support on chart.
The stock looks to be in a down trend with lower highs but it has very strong support around US$6.00, testing that area five times in the past 15 months. It appears to me like a wedge formation with a breakout in the cards. I expect this to be to the upside with first major resistance in the $7 to $7.50 area.
I recently had a good update with Paramount and want to add this back on the Advanced Junior section of my Selection list. We got stopped out last year at $1.35 and can buy back just a little cheaper.
Paramount Gold Nevada NY:PZG Recent Price US$1.30
Shares outstanding: 23.1 million
PZG is an old favorite but it is an entirely different company now. We made huge returns with this stock in a bear market when Coeur Mining acquired Paramount for $146 million at the end of 2014. It was an all stock deal for Coeur shares, plus shares in the new Paramount spinoff. Like most miners, Coeur shares were languishing around $4, but after a bit more weakness in 2015, Coeur stock soared to $16 in 2016. We ended up stopped out at $12, so made about 300% on top of the 25% premium we got on the Coeur takeover.
The stock in the new Paramount spin out is tightly held and I believe one of the lowest values per ounce for an advanced project.
FCMI Parent Co. holds 19.9%; Seabridge Gold holds 9%.
Last year, mostly late 2017, insiders bought over 1.5 million shares.
PZG is headed up by President Glen Van Treek and has strong support from the Seabridge Gold group with Rudi Fronk (co-founder, Seabridge) as chairman and Mr. Gonzalez-Urien on the board from Seabridge.
Mr. Van Treek was formerly the Chief Operating Officer and V.P. Exploration of Paramount Gold and Silver Corp and served in this role from January 2011 through the April 2015 merger with Coeur Mining, Inc. He has over 25 years of progressive global experience in all stages of mineral exploration. Prior to joining Paramount, for ten years he held various senior positions at Teck Resources Ltd. and most recently he managed the production geology, resource modeling and exploration programs at Teck's Quebrada Blanca mine in Chile. Prior to his experience at Teck, Mr. Van Treek held positions with Placer Dome and other junior exploration companies. He is a graduate geologist from the University of Chile.
Paramount has two main projects, Sleeper in Nevada and Grassy Mountain in Oregon.
Sleeper Gold, 100% owned, 15,500 hectares
The Sleeper Gold Project is a former high-grade open pit gold producer located off a main highway approximately 25 miles NW of the town of Winnemucca, Nevada. The famed Sleeper mine was operated by AMAX Gold Inc. ("Amax") from 1986 until 1996, producing 1.66 million ounces of gold and 2.3 million ounces of silver. Paramount has assembled a district-scale project with significant unexplored gold potential.
Paramount conducted drill programs from 2010 to 2013 that increased and upgraded the NI 43-101 resources and demonstrated strong exploration potential on nearby targets. Measured and Indicated resources within pit constraints total 3.143 million ounces gold at 0.33 g/t along with almost 29 million ounces of silver. Paramount filed a PEA in late 2015 and updated it in Sept. 2017 that highlighted:
- Low Initial Capital of $175 million for a 26,600 tonnes per day operation
- Estimated annual production of 92,400 ounces of gold and 91,800 ounces of silver
- Low cash operating cost of $529 per ounce of Gold Equivalent produced (2015 report)
- Base Case has a $290 million pre-tax net cash flow, a $126 million net present value at a 5% discount rate and an internal rate of return of 28.4%
- Quick capital payback period of 3.5 years based on after tax cash flows (2015 report)
- Confirms the potential to add mineralized material
Sleeper has been put on the back burner as the company is focusing on bringing its high-grade Grassy Mountain project to production.
Grassy Mountain, 100% owned, 9,300 acres
The Grassy Mountain Gold Project is located in Malheur County, Oregon, approximately 22 miles south of Vale, Oregon, and roughly 70 miles west of Boise, Idaho. Paramount acquired the project in July 2016 that fit its strategy of acquiring advanced mid-stage undervalued assets in the U.S.
Paramount will build upon the Preliminary Economic Assessment (PEA) which was completed in 2015. The PEA contemplated a 10-year underground mining operation with low cash operating costs driven by a high average underground gold grade of 5.32 g/t. The PEA estimated average annual production of 53,000 ounces of gold and 82,000 ounces of silver, yielding robust economics at a $1,300 per ounce gold price and at a $17.50 per ounce silver price. The project contains a total Measured plus Indicated mineralized inventory of 1.7 million ounces of gold and 4.9 million ounces of silver.
Paramount's current focus is to put the 500,000 ounces of high-grade, underground resources into production and use that cash flow to advance Sleeper. Gold recoveries look to be around 95% and capex to build the mine should be quite low at < $120 million. Paramount is currently working on a Preliminary Feasibility Study and I expect the results of this in Q1 2018.The PFS will establish the parameters of a mining and milling operation, define capital and operating costs, convert resources to reserves, and advance the project through the permitting process with the BLM, DOGAMI and local agencies of Malheur County.
Paramount is in good shape with about $7 million in cash. The last financing was for almost $7.4 million at $1.40 per share closing on October 12, 2017. Both FCMI Parent Co. and Seabridge participated.
Paramount has a very low valuation for a company with advanced stage projects in the U.S., especially with one advancing to production.
Valuation: 23.1M shares at $1.30 = $30M - $5M cash (assumes some burn) = US$25 million.
Paramount has 4.8 million M&I Gold ounces (ignoring silver) valued at a mere US$5.20 per ounce.
If we assume Sleeper at lower grade is worth nothing, the 1.7 million M&I ounces at Grassy Mountain are valued at only US$14.70 per ounce.
The way I see it, Paramount is undervalued based on their Grassy Mountain project alone and Sleeper provides very high leverage to rising gold prices. In addition, we can buy the stock near two-year lows.
In a better market during 2016 when it acquired Grassy Mountain, the stock almost hit $3.00. Insiders bought around 1.5 million shares around these prices in late 2017 and I believe we should buy now too.
Ron Struthers founded Struthers' Resource Stock Report 23 years ago. The report covers senior and junior companies with ample trading liquidity. He started his Millennium Index of dividend stocks in 2003 - $1,000 invested then was worth over $4,000 end of 2014 and the index returned 26.8% in 2016. He retired from IBM after 30 years in customer service, systems and business analyst, also developing his own charting software. He has expertise in junior start-ups and was a co-founder of Paramount Gold and Silver.
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1) Ron Struthers: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Alamos Gold and Paramount Gold. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
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Charts and images provided by the author.
Struthers' Resource Stock Report Disclaimer:
All forecasts and recommendations are based on opinion. Markets change direction with consensus beliefs, which may change at any time and without notice. The author/publisher of this publication has taken every precaution to provide the most accurate information possible. The information & data were obtained from sources believed to be reliable, but because the information & data source are beyond the author's control, no representation or guarantee is made that it is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Because of the ever-changing nature of information & statistics the author/publisher strongly encourages the reader to communicate directly with the company and/or with their personal investment adviser to obtain up to date information. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial adviser & is not acting as such in this publication.