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  Pickings slim in resource sector

BENJ GALLANDER and BEN STADELMANN

Friday, April 7, 2006

The Prospectors & Developers Association of Canada (PDAC) show in Toronto is one of those events we attend annually to get a feel for activity in the commodity patch.

Around the start of this millennium, the show was pretty darn quiet. However, since then, year after year, the show has become busier and last year it was buzzing. And this year — Holy commodities, Batman!

The show was way bigger, yet every area felt denser with throngs of people. As one of the exhibitors stated, "I haven't seen this level of activity since the Bre-X blowout."

The question: Is it time to be contrarian on the commodity sector, or is it bursting out in the throes of momentum?

In a column in June 2004, we asked virtually the same question about resources. Many of the companies that had previously been on our Stock Watch List had tripled and quadrupled, while some fit into the ten-bagger category. Money to finance their operations was being thrown at them in frenzied fashion whereas previously they could not raise a plug-nickel.

We commenced the article with, "When is a mania a mania? What are the signs that a boom is about to turn into a bust? Unfortunately, crystal clear answers to these questions are not readily available, or there would still be a bumper crop of dot-com millionaires in the world instead of a meagre bushel."

At that point, we concluded that the resource sector had room to run and continued to buy more.

In July 2005, we talked about how one of us had collected a gaggle of juniors. Overall the results have been excellent but as always, this field is a crapshoot. TVI Pacific traded at around a dime when the article appeared. It was dumped at 18 cents.

South American Gold has remained stuck near the 7-cent level. They have been working through a bevy of problems including an avalanche that interrupted operations. However, they continue to work with Rio Tinto, and their potential seems compelling if possibility can be turned into reality. However, a fully diluted share count of 500 million-plus is not attractive.

Two of the companies mentioned are mutating dramatically in their quest to conquer. Twin Mining has had big dreams for years, leaving largely unfulfilled expectations. Their current plan is to incorporate a subsidiary, Diamondco, so that they can divide their diamond assets from their gold assets. They then hope to raise $5 million in a private placement. The company was originally purchased at about 34 cents a share in 2003 and then again at about 12 cents late last year. It currently trades in the mid-teens.

Band-Ore Resources is joining forces with Sydney Resources in a move that provides synergies in the Timmins area as they will be in control of a huge land mass. They will also have a presence in Mexico.

If the deal is approved, the two companies will reorganize into two new companies to be called West Timmins Gold Corp. and Northern Sierra Minerals Corp. Current shareholders will receive one share in each company for every two shares they currently own.

Band-Ore has done about a triple since its purchase less than a year ago and there remains significant upside for the new entities if the price of gold remains robust.

Placer Dome is working with Band-Ore in Northern Ontario.

One that both of us liked is producer Glencairn Gold, which has moved up about 60 percent to the 66-cent level. The company had a net loss of $4.1 million in 2005, slightly less than half of 2004. Output is expected to more than double in 2006 to almost 100,000 ounces of gold, with the average price received likely rising substantially from last year's $448 (U.S.).

Production costs are expected to be about $312 an ounce. After years of searching, finally it appears that profitability is within the enterprise's grasp.

Discovering superior pickings in resource stocks is not easy given current valuations. To us, this is an ideal time to play momentum and leave some money to ride with the madding crowd. At the same time, pulling some profits from the table to the boring sidelines is wise.

We would be remiss if the storm clouds of an economic downturn were not mentioned. If this does occur as we suspect, later this year or in 2007, this sector will not rest unscathed.


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