A must listen interview with the legendary resource investor Rick Rule and the importance of focusing on the highest quality gold juniors:

http://www.kitco.com/news/video/show/PDAC-2013/251/2013-03-05/Will-be-Survival-of-the-Finest-Rick-Rule

One company that has received a huge amount of attention in the gold sector is Centamin, which operates Egypt’s only producing gold mine and is a company I have followed closely over the last decade.  Centamin is currently subject to a rather spurious court case, from Hamdy Fakharanyan Egyptian lawyer who is questioning the validity of Centamin’s licence.  This lawyer is a well known trouble maker in Egypt and it is highly probable that Centamin will win the case, which is increasing looking like a waste of everyone’s time. The company has stated that they have the relevant licence documentation. The ironic thing is Centamin’s licence can only be changed by an Act of Parliament not a small time administrative court.

In situations like this, it is important to focus on facts. Centamin floated on the stockmarket with a resource of around 1m oz and has now increased this to around 14m oz and reserves of nearly 10m oz. To put this into context, its Sukari mine is the 24^th largest gold mine in the world and there is still plenty of exploration upside.

Last year, the company produced 262,000 oz, which was above their forecast of 250,000oz.  There doesn’t seem to be many mining companies that meet expectations these days, but what is even more impressive is that this was achieved despite a temporary suspension of mining operations.  In the last quarter of 2012, the mine produced a record 85,000 oz. For 2013, the management is forecasting around 360,000 oz, as they work towards increasing to 500,000 oz.  Cash costs are a very respectable $700/oz.  In Centamin’s latest corporate presentation there is a slide, which compares their Return on Investment Capital (ROIC) with peers in the sector. Centamin’s ROIC is an impressive 23%, which is over double most of other companies.

Before Centamin first encountered these issues last year the share price had recovered to around 100p (their all time high is 200p).  The share price is currently 54p, which puts the shares on a PE ratio of 4.  Now whilst this is clearly due to the political risk in Egypt, this discount to other miners seems too steep.  Once the court case is resolved then hopefully the perceived political risk will reduce.  The next hearing is 6^th March and it looks increasing likely that the case will be resolved by the end of March.  Centamin can then focus on ramping up production.  Full Year results are due on 27th March and will impressive growth in earnings.

A profit sharing agreement (PSA) with the Egyptian government is due to kick in shortly and this should boost relations further.  Centamin have highlighted that over the next 20 years, the Sukari mine should generate around $8bn in government revenues.  Egypt does not have the required skills to run this mine without Centamin and given that the terms of the PSA are already in favour of the government, it is hard to see how they will nationalise the mine.  Throughout this saga the Egyptian Mineral Resource Authority (EMRA) has provided valuable support to Centamin and they clearly have a good working relationship.

Quite clearly, Centamin is not going to appeal to all investors given the political risk.  However, it is an excellent operation with a world class deposit so worth keeping an eye on. If Sukari was in another country, the share price would be 3-4 times the current level.  It is worth highlighting that the CEO (Josef El Raghy) owns around 7% of the company.  Given the current market capitalisation of around £500m, he has a huge amount of “skin in the game” and his interests will be aligned with other shareholders.

Sociedad Quimica y Minera de Chile (NYSE: SQM) is the final company in the top ten stocks and as an agriculture play offers something different to the other stocks. Translated literally, SQM stands for the “Chemical and Mining Company of Chile”. It is an integrated producer and worldwide distributor of specialty and commodity fertilizers (mainly potassium chloride derivatives), iodine, lithium and industrial chemicals. Sociedad Quimica y Minera de Chile, according to 2011 figures, is the world’s largest producer of potassium nitrate (49% market share), iodine (37% market share) and lithium (31% market share).

SQM has two main production sites, one located in the Caliche Area, where it obtains its nitrates and iodine, and the other in the Atacama Salar, where potassium chloride and lithium are extracted. Using an inorganic chemistry process, it produces potassium nitrate using the sodium nitrate of the Caliche Area with the potassium chloride of the Atacama Salar. In 2011, exports represented 89% of sales to more than 100 countries. The company is legally controlled by Julio Ponce, via a series of investment companies, three of them listed in Chile (Pampa Calichera, Norte Grande, and Oro Blanco).

SQM, headquartered in Santiago, Chile, was founded in 1968 and re-privatized in 1988. The company has an international presence with commercial offices in more than 20 countries. Shares of SQM began trading as an ADR in the international markets in 1993. Series B shares trade in ADR form on the NYSE with a 1:1 exchange ratio.

According to the broker, Santander, Iodine and potash should continue driving SQM’s growth. They expect iodine prices to be in the range of US$50-55 per ton in 2012-14, as demand is increasing and new supply takes time to come on stream and will be late. The historical range is $25-$30 per ton. SQM should also contribute more than half of the new iodine supply. For potash, the exposure to Brazil and the granulated mix should keep prices high, while the expected new contracts in China and India should relieve the Latin American market of supply from Canotex – the Canadian potash producer. Iodine accounts for 36% of gross margins, whilst Potash accounts for 25%.

Demand for Iodine, despite the world economic crisis, continued to increase 5-7% in 2012, while supply is constrained by the lack of significant projects coming to the market.  Regarding the supply side, SQM should add 2,000 tons of capacity by 2014; Algorta, another Chilean company, 1,000 tons; Cosayach has halted production due to water right problems; and Japanese production is falling due to the country’s limited and finite capacity. It is becoming more expensive and tougher to develop new projects in Chile due to water and energy scarcity and increasing labour costs.

SQM trades on a 2014 PE of 17 and whilst this might look at expensive at first, it has historically traded at a PE of 25. The current rating seems an attractive entry point for what I believe is one of the best ways to play the agriculture sector.  The company has consistently generated a high Return on Equity (ROE) of around 30%, is on a Free Cash flow (FCF) yield of 8.5% for 2014 and a respectable dividend yield of 2.8%. Although SQM has a market capitalisation of around $15bn, it is capable of growing around 10% pa for the foreseeable future. Another positive, is that SQM only has a small amount of debt.

Over the last ten years we have seen regular bursts in food prices and supplies have become depleted. As the global population grows and becomes wealthier, demand for food will continue to rise. Whilst rising prices impact consumers and poorer nations, higher prices encourage farmers to increase food production. This will result in more investment in increasing farm productivity. One of the prime beneficiaries is likely to be Latin America, where conditions for growing crops are perfect.

SQM is a play on the growth of Latin American agriculture. According to the Inter-American Institute for Cooperation on Agriculture (IICA), Latin America has 42% of the world’s potential for agricultural production and it still isn’t using all of its farmland. The UN’s Food and Agriculture Organisation has said Brazil has around 350 million hectares of arable land that is not being used to produce food.

The World Bank has estimated that around a third of the world’s spare farmland is in Latin America. Some existing farms are dependent on old style techniques and machinery and have not invested much in R&D but this might now be changing due to higher prices. Farmers are realising that higher food prices will lead to opportunities for exporting countries. Latin America now supplies a third of China’s agricultural imports and as their population grows their demand for agricultural imports is also likely to keep growing.

There are several ways of getting exposure to the growth of the agriculture sector. It is possible to buy direct holdings in farmland but there is the risk of fraud and even expropriation, particularly given the situation in Argentina at present. Investors can also buy shares in large listed landowners but again there are risks with this. Therefore, SQM is the safer and more diverse way to gain exposure.  Brokers estimate that around 30% of SQM’s sales go to Latin America, although this is expected to increase once farmers start spending more on production.

Conclusion

SQM is a company operating in a sector that has excellent potential for long term growth. It is a global business that should benefit from growth in the global population and the increasing demand for food.  The share price is some way off the 52 week high of $65, so the current price looks to be an attractive entry point for long term investors.

At the end of last year, I posted notes on a presentation I heard from Nolan Watson at London’s Mines and Money conference.  This is now available on youtube:

This is a must listen for all investors in the Precious metals sector.  There is plenty of growth for the streaming business model over the next few years and Sandstorm is my top pick in the sector and largest holding in my top ten stocks list.

Stratex International is a diversified exploration and development company focussing on gold and based metals in Turkey, East Africa and West Africa.  Stratex has a history of forming joint-ventures with major mining companies (including AngloGold Ashanti, Antofagasta, Centamin, Centerra, Teck and Thani Ashanti) and successful local private companies.

The recent sale of the Oksut gold deposit in Turkey for $20m upfront and up to an additional $20m to follow is a game changer for Stratex.  In many ways Stratex is the envy of many junior resource stocks as the company is now fully funded and does not need to rely on dilutive equity placings.

Stratex is listed on the London Alternative Investment Market (AIM) and has a market cap of around £25m (barely greater than their cash balance). The company was formed in 2004 and listed in January 2006.  The company provides something different to the others constituents of the portfolio as it multiple exploration projects, although partners fund most of this.  Most of the others are production and streaming companies.

Strategy

Stratex intends to generate revenues by developing defined gold resources into mines via production JV agreements with companies that have the technical and financial capabilities to put large resources into production. Stratex will also continue go-it-alone exploration to define new targets in Turkey, Ethiopia and West Africa and Joint-Venturing or selling resulting new discoveries to third parties whilst retaining royalty payments based on future production. In the current environment, Stratex is also in a position to pick up distressed projects from companies who cannot obtain financing.

Stratex has a proven track record and has to date discovered 2.26m oz of gold (1.6m oz attributable), 7m oz of silver and 186,000t of copper.  The diversified portfolio across different continents and countries drastically reduces operational and geopolitical risk.

Projects

The key driver for Stratex is the Altintepe project in Turkey, which is a high-sulphidation epithermal gold deposit.  Stratex has completed a total of 4,752.5m of diamond drilling across the property, and Altintepe has a resource of 593,131 oz of gold (grades ranging from 0.59 g/t to 2.44 g/t).  Stratex’s JV partner is Bahar, a private Turkish company who are about to start constructing the mine with an aim to begin commercial production by the end of 2013.  Bahar is funding 100% of this and Altintepe should be producing around 30,000oz of gold pa, of which Stratex will receive 45%.  I believe the revenue from gold production will be transformational for Stratex.   It is conceivable that Stratex’s profit will be in the region of $12-$13m pa and longer term it is possible that production could be closer to 50,000oz pa.

The second gold development project that Stratex has in Turkey is Inlice, which hosts high sulphidation gold mineralisation.  Stratex announced in November 2012 that it is considering selling the project as their JV partner, NTF, is no longer keen on taking it into production.  Although Inlice only has a small reserve of 59,600 oz of gold (resource is 69,000 oz oxide and 164,000oz sulphide) and forecast production of 25,000oz pa, the project has an excellent post-tax IRR of 178% based on $1,397/oz.  There is also potential for extension of the current resource base by including non-oxide resources.  Since the news release, Stratex has sold Oksut and does not need to monetise Inlice.  If, it is in shareholders interest I would not be surprised to see Stratex bring in another JV partner to bring Inlice into production.

The other main project in Turkey is Muratdere, which comprises three licences covering a substantial granodiorite-porphyry system. The system extends east-west for about 4,000m and has a width of between 200m and 400m.  Drilling has confirmed this is primarily a copper-gold system, with significant silver credits. Muratdere has a resource of 51m tonnes grading 0.36% copper (186,000 tonnes), 0.12 g/t Au (204,296 oz), 2.40 g/t Ag (3.9 million oz), 0.0125% Mo (6,390 tonnes), and 0.34 ppm Re (17,594 kg). It is open-ended to the east and west and at depth, suggesting considerable potential to increase the resource. On 20 December 2012, Lodos (a Turkish mining investment company) bought 51% of Muratdere for $1.7m. Lodos, has informed Stratex of its intention to exercise its option to earn to 61% of Muratdere through the payment of two tranches of US$250,000 each to Stratex and the completion of a 3,000 metre diamond drilling programme. Thereafter Lodos can acquire a further 9% for a total of 70% by completing a feasibility study.

In total Stratex have five exploration projects in Turkey including two other gold projects – Altunhisar and Hasancelebi, where exploration is being fully funded by Centerra and Teck.

In East Africa, Stratex has a total of eight early stage projects.  The company has first-mover into the region, which is under-explored with major gold and base metal potential. The Afar Project comprises eleven licences covering 2,884 km² of prospective epithermal gold exploration ground in the Afar region of north-eastern Africa, including the Tendaho licence in Ethiopia, host to the Megenta discovery, and the Oklila licence in Djibouti, host to the Pandora discovery. Under the terms of a JV agreement, Thani Ashanti (an AngloGold Ashanti Limited JV company with Thani Investments, Dubai) are earning into 51% of the Afar Project by spending $3m on exploration and development over two years. Thani Ashanti is committed to expending US$1 million in the first twelve months to include a 3,000 metre drill programme to test the Megenta prospect. Detailed mapping and sampling has been carried out at the Assal licence returning best values of 2.54 g/t, 5.07 g/t and 7.8 g/t and drilling is due to start this quarter.

Stratex also hold a 967 sq km licence for the Abi Adi project in the southern Tigray region of Northern Ethiopia.  This is part of the highly prospective Arabian Nubian Shield (ANS), approximately 80 km south of Stratex’s existing Tigray and Shehagne. Independent Ethiopian company Loz Bez Mining plc identified three targets within Abi Adi – Gidemi Berashua, Kurtumza and Daba Gumbah – after a first-pass stream sediment and rock chip sampling programme. All three targets are located around artisanal primary and placer gold workings associated with quartz veining in granitic intrusives. Under the terms of a JV with Loz Bez, Stratex are currently earning-in to an initial 75% of the project and are in the process of generating drill targets.

Perhaps Stratex’s most promising grass roots project is Blackwater, which is still 95% owned by Stratex. The licence covers an area of 299 sq km within northern Afar. Within the licence area, four separate zones of low-sulphidation mineralisation – Calcite, Airstrip, Black Water and Magdala – have been identified over a distance of 15.9 km. Stratex believes that the Black Water sampling results provide considerable prospectivity for the identification of further gold-bearing veins elsewhere in the four zones identified to date.  Phase 1 drilling on Black Water has been completed for a total of 4,745m within 33 diamond drill holes across four structures. Now that further detailed mapping and drill results have been interpreted, a new drill campaign is due to start in Q1 2013.

In 2012 Stratex set up a West African division.  Following the purchase of Silvrex (a private UK company) they now have two exploration properties.  Dalafin, in Senegal covers 636 sq km in perspective terrane and nine deposits of over 1m oz of gold have been discovered to date in this gold belt.  Major gold producers such as Randgold and IAM Gold operate in close vicinity and this is clearly highly prospective (although early stage). An airborne geophysical survey has been completed at Dalafin and a maiden reconnaissance drilling campaign is about to start.  Stratex also has four early stage licences in Mauritania.

Management

Stratex has an experienced board of Directors.  Dr Bob Foster is CEO and has 37 years experience as a geologist in exploration and has worked in Europe, Central Asia, South America and throughout Africa.  He was also a founding member of the management team of Pan-African Mining Pvt Ltd that developed the open pit Ayrshire gold mine in Zimbabwe in 1991-1996 and directed a major gold exploration programme for associated company Pan-Reef mining in during 1994-1996.

The Non-Executive Chairman is Christopher Hall has over 39 years of wide ranging experience in the mining sector. He is currently the in-house mining adviser to Grant Thornton LLP.  He has a degree in geology, has worked with Consolidated Goldfields in Australia and also worked as a mining analyst.  He has helped establish European Mining Finance, an international mining finance and investment company, which was the first resource company to list on AIM, serving as CEO from 1991-97.  He has been a director of numerous private and listed companies.

David Hall is the Executive Director for East Africa who has 30 years of experience in the exploration sector and has worked on exploration projects and mines in over 50 countries. From 1992, he was Chief Geologist for Minorco responsible for Central and Eastern Europe, Central Asia and Middle East and was Exploration Manager for AngloGold South America after this. He is founder and Non-Executive Chairman of AIM-listed Horizonte Minerals plc. He co-founded Stratex in 2004 and was instrumental in assembling the Board and management team that has led to the successful discovery of gold mineralisation in Turkey and Ethiopia.

Valuation

Following the sale of Oksut, Stratex will have around £16m cash and up to $20m (£12m) to follow from the sale.  There is clearly a huge disparity between the Stratex share price and the underlying value of the company, although this applies to numerous other junior resource stocks.  Northland Capital has a conservative price target of 12.8p per share, which gives 150% upside from the current price.  Stratex is barely valued at cash but based on Stratex’s attributable production at Altintepe of around 13,500 oz, profits could be in the region of $13m (£8m) based on a $1000 oz gold margin.  If one were to value Altintepe on a PE of 5, add in the cash of £16m then the market cap should be around £56m compared to the current £25m.  This gives a very conservative price target of 11.5p and places no value on any exploration projects.

Shareholders

Stratex has a strong institutional shareholder base.  AngloGold Ashanti is the largest holder, owning 11.51%, whilst Blackrock owns 10.9% and Tech Resources 7.65%.  The top eight independent shareholders own 49% of the company and the Directors own just under 5%.

Conclusion

Stratex now has a proven business model of monetizing assets with the sale of Oksut and part sale of Muratdere.  Although junior resource stocks are unloved and undervalued, the market has clearly overlooked Stratex.   The diversified projects across different countries, commodities and mainly funded by large JV partners makes this is a much lower risk commodity play than the £25m market capitalisation would indicate.  As Stratex is now cash rich it is possible that the market is taking a “wait and see” approach as to how they use the funds.

2013 should be a transformational year for Stratex.  I believe that production from Altintepe and the cash flow that will follow is the key driver that will lead to a big move in the share price.  Stratex is not a one trick pony though and it is possible that it could have cash from production at Inlice if they decide not to sell the project.  In addition, there are drilling campaigns across many of the projects that could unlock substantial value, should any of them return bumper grades.

Aureus Mining is exploring and developing gold deposits in highly prospective and under-explored areas of Liberia and Cameroon.  The company is listed on London’s Alternative Investment Market and the Toronto Stock Exchange.  This is one of a couple of stocks in the portfolio that is not yet profitable, but strong cash flows are not far off for Aureus.  I believe that the share price does not the production and exploration upside.

Aureus Mining’s main focus is exploration and development of the New Liberty Gold project in Liberia.  However, the Company also has a 100% interest in the Weaju, Gondoja, Ndablama and Leopard Rock projects in Liberia, and the Batouri and Ntem gold projects in Cameroon. The company is aiming to bring New Liberty into gold production in Q4 2014. It is also intends to progress exploration in both Liberia and Cameroon; and increase the gold resource of the company (measured, indicated and inferred).

Projects

The New Liberty Mine has a NI 43-101 compliant reserve of 910,000 oz at 3.3 g/t and a resource of 1.14m oz at 3.6g/t Measured and Indicated, and 590,000 oz at 3.2g/t Inferred.  It is 100% owned, open at depth and the licence area covers 457km².  This is the highest grade deposit in Africa and the resource should increase with more drilling.

The Feasibility study carried out in 2012 highlighted the attractiveness of the New Liberty.  It showed a pre-tax NPV of $234m (5%), a pre-tax IRR of 37% and payback in 2.2 years at an average gold price of $1,400/oz. Production of 120,000oz pa at 3.7g/t mined head grade for the first 5 years of the 8-year mine life is expected and initial capex is low at $140m, which is due to high grade.  Cash costs are forecast at $685/oz but Aureus is conducting optimisation studies to improve the project technically and financially.  Cash costs could fall to around $650/oz, which compares favourably with other African gold producers.

New Liberty is a relatively simple open pit operation with underground potential.  They will use gravity and CIL processing, the construction period is fairly short and the infrastructure is very good as the project is situated 100km from Monrovia, 80km by tarmac and 20km laterite.  The laterite road is in the process of being upgraded.

New Liberty is located on the Bea Mountain mining licence, in north-west Liberia.  The deposit is hosted in sheared and altered ultramafic rocks, and gold is associated with disseminated sulphides. The disseminated sulphide host body is more continuous than a quartz body and allows for easier exploration and mining. It is a highly sheared and mylonitised schist-belt, which trends east/south-east. New Liberty lies on Archaean rocks. These formations host approximately 25% of the world’s gold.  The West African Archaean rocks are under-explored, due to past political risk.

In November 2012, Aureus completed a successful equity placing of approximately $80m/£50m closed which now enabling them to proceed with their proposed development and construction activities at New Liberty.  The remaining funds will be financed through debt, which should now be fairly straightforward. Various institutions are currently reviewing the New Liberty Feasibility Study documentation and discussions are well advanced with a number of debt providers.  Funding should be finalised in Q1 2013.

Following the recent fund raising, around 75% of shared are owned by institutions. There are some big name resources funds on the shareholder register including RBC, Macquarie, JP Morgan Asset Management and Blackrock who hold between 5% and 10% of Aureus.

The Aureus management plan to use cash flow from the New Liberty mine to develop their other projects in the region.  4,000m of historical drilling has been completed at Weaju and a 7,700m drilling campaign began in 2012 with the objective of defining continuity of mineralisation along strike.  Generative work involving structural studies and geochemical surveys are also in progress to define new gold targets within the entire licence portfolio of 546km².  Weaju has reported spectacular grades of 3-33g/t and is located only 30km North East of New Liberty.  Although early stage, the geology is similar to New Liberty and it is possible that near surface ore could be trucked to the mill at New Liberty or a new mine could be developed if the resource is economical.

I strongly believe that the New Liberty near-mine targets could add to the planned 125,000oz pa and management’s longer term aim is to build Aureus into a mid tier producer.  The other early stage projects have shown very promising results.  Reconnaissance drilling at Gondoja includes results of 87m @ 1.4 g/t, whilst Ndablama, has shown results of 55m @ 2.2 g/t, 79m @2.2 g/t.  Leopard Rock has returned 4m @ 17.6 g/t and 9.4 g/t over 6 metres.

Country

Liberia is one of the more stable countries in Africa and this is another major positive.  It has had a democratically elected government since 2006.  Madame Ellen Johnson-Sirleaf is Africa’s first female Head of State and was re-elected in 2011. The region is relatively underexplored and US$18bn of foreign direct investment has been committed to date, mainly for the mineral, oil and agricultural sectors. Companies such as BHP Billiton, Arcelor Mittal and Chevron are operating there.

Liberia’s external debt decreased from $4.9bn to $250m (2007 – 2010). They have a sustained UN and US commitment and the IMF are forecasting large falls in Gross Government debt by 2012.

Management

One of the major plus points of Aureus is the experience of the Board of Directors.  This is a heavyweight board for a development company. The company is led by David Reading who is CEO & Director.  Mr Reading has over 35 years’ experience across the fields of exploration, feasibility, project development and mining having held senior positions with leading mining companies. He is the former CEO of European Goldfields and the former General Manager of African exploration for Randgold Resources. He was instrumental in the giant Loulo discovery in Mali.

The Non-executive Chairman & Director is David Netherway who is a mining engineer with over 35 years of experience in the mining industry. He was until the takeover by Gryphon Mineral Ltd (GRY-ASX), the CEO of Shield Mining Limited, an Australian listed company exploring for gold and base metals in Mauritania. Before this, he served as the CEO of Toronto listed Afcan Mining Corporation, which was successfully taken over by Eldorado Gold. Mr Netherway was involved in the construction and development of several other gold mines in West Africa.  He is currently the Chairman of Afferro Mining and Altus Strategies and a non-executive director of several other companies.

Non Exec Directors include Luis da Silva, who is CEO of Afferro Mining Inc. He has extensive international experience with multinationals Lafarge SA and Blue Circle Industries Plc. Mr da Silva is a graduate Mining Engineer. David Beatty is CEO of Rio Novo Gold Inc and has executed over $10 billion in M&A in over 70 countries. Adrian Reynolds has more than 30 years in the exploration, development and mining industry with a focus on gold. He was also part of the executive team at Randgold Resources that was responsible for compiling the feasibility studies for three gold mines.  Finally, Jean-Guy Martin is a chartered accountant with 35 years of experience. He recently retired from PricewaterhouseCoopers LLP and has advised multinational companies (including Rio Tinto, Bain Capital & Blackstone) looking to complete acquisitions and divestitures.

Valuation

Aureus has a market cap of around £100m (including £50m in cash), which based on a reserve of around 1m oz, values them at £100/oz.  Whilst this may not look cheap, the project will be in production next year and many lower quality juniors are now facing a struggle to survive.   The Canadian broker, Clarus Securities is forecasting eps of $0.41 (25p) in 2015, which puts Aureus on a PE of under 2.

I am surprised the market is attributing little value to the regional targets, which should add more ounces, given David Reading’s background as former head of exploration at Randgold. One broker is forecasting Weaju could add 15p to the valuation.

Conclusion

Aureus has a high grade gold deposit that has attractive economics and exciting exploration upside in an underexplored region.  Once debt financing has been finalised in early 2013, the New Liberty mine will be fully funded to production.  This should then ensure that there are no further dilutive equity raisings.  To raise $80m of equity in the current environment is a testament to management and project fundamentals, despite the placing being done on the back of a depressed share price.

Aureus is currently trading close to its 52 week low of 45p (the high was 92p).  This is partly due to the placing and also the negative sentiment across the junior resource sector. However, the equity placing should now have put a floor under the share price.  On a 2015 PE of under 2x the shares look too cheap and are likely to be significantly rerate in the next 12 months. If they are not then I would not be surprised if a larger company made an opportunistic bid for Aureus.

Great Western Minerals Group Ltd. (GWG) is a Canadian-based company which owns 100% in the Rare Earth Extraction Co. Limited, which owns a 74% equity interest in the Steenkampskraal mine located in the Western Cape province of South Africa.  In addition to an exploration program at Steenkampskraal, GWG also holds interests in four active Rare Earth exploration and development properties in North America.

As part of the Great Western’s strategy to pursue a vertically-integrated business model, the Company’s wholly-owned subsidiaries of Less Common Metals Limited (LCM) located in Birkenhead UK, and Great Western Technologies Inc (GWTI), located in Troy, Michigan, produce a variety of specialty alloys for use in the battery, magnet and aerospace industries. These “designer” alloys include those containing copper, nickel, cobalt and the rare earth elements.

Great Western currently has three projects in development, one of which (Hoidas Lake) has been advanced to the prefeasibility stage of development. They are currently evaluating spinning off the exploration properties outside of South Africa.  GWG’s goal is to put in place a “mine-to-market” strategy and become North America’s first vertically integrated rare earth elements producer. This explains why GWG acquired its wholly owned subsidiary and processing GWTI, in January of 2006, and LCM, in June of 2008.

Mine Supply & Separation

Great Western’s former producing Steenkampskraal mine is under development through refurbishment, as the company builds a rare earth mixed chloride plant and a rare earth solvent extraction separation plant near the mine. The company aims to ensure it can supply its downstream processing and intends to be one of the first to produce significant quantities of the more valuable heavy rare earth oxides, which are important materials for alloys.

The current NI 43-101 report for Steenkampskraal, filed on May 31 2012, indicates the presence of 13,823.64 metric tonnes of TREO, including yttrium, under the indicated resource category, and 14,147.76 metric tonnes under the inferred resource category, each using a one per cent cut-off grade.  The deposit is very high grade and will ensure production costs are low.  Whilst it is a small deposit, the grade and costs will ensure it is very profitable.

As drilling continues, I believe the resource is likely to increase substantially. The current resource is around 5-6 years mine life but historically has only been mined to a depth of 300 feet.  There are also other outcrops and showings within the permitted area that the previous owner has identified. I would expect further drilling to establish a mine life of at least ten years.

Great Western has done its cultural homework and South Africans have a vested interest in its success through the Black Empowerment program.  The mine is located far from the areas of strife and even major population centres.  The black empowerment trust receives 26% of the profits from the mine and this money goes into a trust for the mine workers.  Given the relatively small number of workers at the mine when it is up and running, this will be a substantial sum per person and have a large impact over time.

In January 2012 Great Western signed a joint venture agreement with Ganzhou Qiandong Rare Earth Group Ltd (GQD) of China for the construction of a rare earth separation plant near Steenskampskraal has been completed and signed. The newly created JV has since been finalising the process design and environmental components of the separation plant and move toward construction of the facility.

GWGQD will process the mixed rare earths chlorides under a tolling agreement. The Agreement provides that GWGQD will separate mixed rare earths into products usable by LCM, and third party customers.

Under the terms of the Agreement, GQD receives 25% of the shares of GWGQD for its contribution to design and construction of the facility, and $7.5 Million of GWG shares to be paid over three years contingent on the facility being fully commissioned and operating effectively, and fees and/or dividends for providing long term management support for the operation of the separation facility.

GQD has over twenty years experience of processing Rare Earth oxides in China and has been a significant supplier of metals and oxides to LCM.

Processing

At the LCM facility, GWG is now producing test batches of rare earth alloys using its new Ulvac strip cast furnace, optimizing melt conditions, with customers currently evaluating. The second strip cast furnace ordered from the same Chinese supplier is now fabricated, and is scheduled to arrive in the latter part of the first quarter of 2013. It is expected to be fully operational in the second quarter. This will double the current capacity of LCM from approximately 1,100 tonnes per year to just over 2,000 tonnes per year. The company conducted a tour of the LCM facilities for analysts last month. LCM should work its way up to a total of five or six Ulvac furnaces over the next two to three years.

For the three months that ended September 30, revenues from processing alloys rose to $4.79 million, from $4.21 million a year earlier.  However, losses widened to $3.6 million from $2.3 million as the company transitions to a producer of rare earth metals, and as it expands its processing facilities.

Financing

Snowden Mining in presently carrying out a Preliminary Economic Assessment (PEA) and this was due to be released this month. The aim of the PEA report is to further develop operational and financial projections based on an independent analysis of the mining of rare earth-bearing monazite, the extraction to mixed chloride, separation of oxides and metal and alloy production.  The company instructed Snowden Mining to extend the original scope of the PEA work to include a new resource estimate for the area of mineralization found at Steenkampskraal in recent months.

The PEA is crucial because not only will it include capex requirements and operating expenditures for Steenkampskraal, but also timelines for the next steps in the development and will, for the first, time, enable the company to discuss financial projections for the fully integrated model. Originally, production from the mine had been expected towards the end of 2013 so we await an update.

Earlier this year GWG raised $90m via a convertible bond issue. The Bonds bear interest at the rate of 8.0% per annum, are payable semi-annually, mature on April 6, 2017, and are convertible into common shares of the Company at a conversion rate of C$0.66 per share. The Bonds are secured obligations of the Company that have a first charge against the Company’s shareholdings in its various operating subsidiaries.

The net proceeds will fund the NI 43-101 for Steenkampskraal, develop the mine and construct the monatize processing and separation facilities.  In addition some funds will be used for equipment purchases, expansion of Less Common Metals Limited and for general working capital purposes. The PEA will provide more clarity on whether further funds are required.

Background to rare earths

Rare earth elements (REEs) are used in many alternative energy, lifestyle, and military applications. Alternative energy systems such as wind power generation, fuel cells, hydrogen storage, rechargeable batteries, and the permanent magnets used in electric vehicles all rely on rare earths. REEs are used as phosphors in many consumer displays and lighting systems, and are used in fluid cracking catalysts and catalytic converters in the oil and automotive industries. REEs are as vital for many military technologies including precision guided munitions, targeting lasers, communications systems, airframes and aerospace engines, radar systems, optical equipment, sonar, and electronic countermeasures.

There is some confusion about future supply and demand forecasts for rare earths.  The supply of rare earths is dominated by China, which provides 97% of the world’s production.  However, China only has 48% of the world’s known reserves of rare earths, according to the USGS Mineral Commodity Summaries 2011.  Due to industry consolidation and tougher environmental regulations, China has imposed export quotas on rare earths.

There are two major rare earth projects coming on stream outside of China from Molycorp and Lynas. The difficulty in rare earth supply and demand calculations is that each rare earth element has different end uses and applications and is produced in different amounts.  Therefore, certain rare earths, including, Neodymium, Europium, Terbium, Dysprosium, and Erbium (critical rare earths) will be in a supply deficit, with the more abundant rare earths such as Lanthanum and Cerium (the Light rare earths) will be in a surplus.

Great Western is in a good position as their deposit contains a high percentage of the critical rare earths. However, the key is to start producing these so they are in control of their supply chain as and not dependent on China.  The margins from GWG’s “mine to market” business model will really kick in when it is fully integrated. All of the heavy rare earths produced by GWG will be supplied to LCM and the excess lights will be sold on the open market.

Headwinds

Great Western is undoubtedly a company in transition and at a relatively early stage of development.  Unfortunately, the share price has continued to decline from a 12 month high of $0.65 to the current low of $0.20. This means the company now has a market capitalisation of around $80m. In my view these are the key reasons why the share price has continued to slide:

• The rare earth sector became overheated in 2009 & 2010 and sentiment is now extremely depressed.  Many junior resource companies have seen their share prices decimated over this time.
• A lack of understanding of GWG’s mine to market business model.
• Concerns over funding of the business model.  The GWG Management Discussion Q3 2012, issued on Nov 28 Page 9 states “The Company’s financial resources will not be sufficient to cover a significant portion of the funds required for construction of the RECI facility, the Separation Extraction Facility nor the working capital required to start up the facilities”
• The recent management resignations.  However, GWG has stated this is to move the company forward as they enter their next phase of growth and a new CEO is due to be appointed soon.
• The market is still waiting for the release of the Preliminary Economic Assessment (PEA) that is due imminently.

Conclusion

Great Western is at an early stage and currently loss making.  There is clearly execution risk and some issues that need to be resolved but I believe this is more than accounted for in the depressed share price.  The “mine to market” fully integrated model should enable GWG to generate high margins and substantial cash flow.  Byron Capital is assuming alloys continue to sell for at least $60/kg (based on a conservative $200/kg Neodymium/Praseodymium metal price) in the future, whilst cash costs will only be around $8/kg.

Byron have a price target of $2 and whilst this seems a long way off, the share price peaked at $1.20 in early 2011 so this is not improbable in the medium to longer term should GWG see their vision come to fruition.  GWG’s cash balance remains healthy at around $54m, but the PEA should confirm whether contingency funds are required. Byron have suggested that GWG could initially toll process its REOs, especially for Neodymium and Praseodymium content, either in China with GQD or elsewhere in the world, and defer the necessary $30m expenditure on the JV-built SX plant in South Africa.  The JV SX facility could be funded from future cash flows rather than from existing capital. Such action would likely only delay the JV SX plant for a year.

New Gold is an intermediate gold mining company and has a portfolio of four producing assets and two significant development projects.  The company is forecasting production of between 405,000 and 445,000 oz in 2012 from its producing mines – Mesquite, Cerro San Pedro Mine, Peak Gold Mines in Australia and New Afton.  Cash costs are forecast to be around $420/oz after by products ($700/oz total costs).  New Gold also owns 30% of the world-class El Morro project located in Chile and 100% of the Blackwater project in Canada.

By 2017, New Gold could be producing 1m oz pa and would then be in the large cap producer league.  However, production is likely to slowly increase up until then, so I would not be surprised if the company was to acquire further assets.  New Gold has a total of 20.5m oz in the measured and indicated resource category and reserves of 7.9m oz.  The company has a market cap of around $4.7bn and $230m in cash as at 30 June 2012.

One of my key investment criteria is management.  I find it very encouraging that the Board and Management hold 15m shares in New Gold, which are worth around $150m at the current share price. The Executive Management team is chaired by the experienced Randall Oliphant and the Board comprises of industry heavyweights such as Pierre Lassonde, the ex CEO of Newmont Mining and Vahan Kololian, Founder of Terra Nova Partners.

New Gold announced Q3 results at the beginning of last month.  Fully-diluted eps were $0.09 versus analysts’ consensus forecasts of $0.10.  The variance was due to lower sales (realised in early Q4) and slightly higher costs.  Gold production was 104,577 oz (sales 95,200 oz) and cash costs were $443/oz, down from $473/oz in Q2.  To hit the bottom end of their 405,000 oz target, New Gold will need to produce 106,000 oz in Q4. The other key news was the start up of the New Afton mine.  The company ended Q3 with cash of $148m (versus $230m at 30 June) and a total of $398m in debt.  Subsequent to the Q3 end, the company announced the early redemption of its C$55m of subordinated convertible debentures that were due June 28, 2014 and 73.7m warrants were also exercised, which brought in $66m.

Here is an overview of their projects in more detail:

Cerro San Pedro (Mexico) – New Gold owns 100% of the mine through the Mexican Company, Minera San Xavier (“MSX”).  The Cerro San Pedro Mine is located in the state of San Luis Potosí in central Mexico, approximately 20 kilometres east of the city of San Luis Potosí. The project property is a gold-silver, open pit, run-of-mine heap leach operation in the historic Cerro San Pedro mining district. At the end of 2011, the mine had 1.0 million oz’s of proven and probable gold reserves and 30.4 million oz’s of proven and probable silver reserves, with 1.8 million oz’s of measured and indicated gold resources, inclusive of reserves, and 55.9 million oz’s of measured and indicated silver resources, inclusive of reserves.

Mesquite (USA) – This is an open pit mine located in Imperial County, California, approximately 70 kilometres northwest of Yuma, Arizona and 230 kilometres east of San Diego, California. It is an open pit, run-of-mine heap leach operation. At the end of 2011, the mine had 2.8 million oz’s of proven and probable gold reserves and 5.5 million oz’s of measured and indicated gold resources, inclusive of reserves. New Gold acquired the mine in June 2009 as a result of a business combination with Western Goldfields Inc (‘WGI’). Prior to this, WGI acquired the mine from Newmont Mining Corporation in 2003 and subsequently completed a positive feasibility study in 2006. WGI commenced commercial production at Mesquite in January 2008. The mine is operated by the Company’s wholly owned subsidiary, Western Mesquite Mines, Inc. (“WMMI”).

New Afton (Canada) – The New Afton copper-gold mine is located approximately 350 kilometres northeast of Vancouver in the south-central interior of British Columbia. The property is only 10 kilometres from the regional hub of Kamloops and is easily accessible by paved road. New Afton achieved commercial production ahead of schedule on 31 July 2012. The underground operation is expected to produce, on average, 85,000 oz’s of gold and 75 million pounds of copper per year over a 12-year mine life. At the end of 2011, the deposit had 1.0 million oz’s of proven and probable gold and 1.0 billion pounds of proven and probable copper reserves, with 1.7 million oz’s of measured and indicated gold resources, inclusive of reserves, and 1.6 billion pounds of measured and indicated copper resources, inclusive of reserves.

Peak Gold Mines (Australia) – The Company’s Peak Mines gold-copper mining operation is an underground mine/mill operation located in the Cobar Mineral Field near Cobar, New South Wales, Australia and has been producing since 1992. At the end of 2011, the mine had 0.6 million oz’s of proven and probable gold reserves and 66 million pounds of proven and probable copper reserves, with 0.9 million oz’s of measured and indicated gold resources, inclusive of reserves, and 167 million pounds of measured and indicated copper resources, inclusive of reserves.  Peak has continually replaced annual depletion with new resources.

The Peak Gold Mines comprise five commercially active mines and a copper-gold processing plant. The deposits, all currently mined from underground, include, from south to north, the Perseverance, Peak, New Occidental, Chesney and New Cobar. The Peak, New Occidental and Perseverance ore bodies are accessed via a shaft and surface decline located at the Peak site. The New Cobar and Chesney ore bodies are accessed via a decline near the base of the New Cobar open pit. The Peak site hosts the processing facility and administration buildings.

New Gold has two development/exploration projects:

Blackwater (Canada) – In June 2011, New Gold acquired Richfield and its flagship Blackwater project. New Gold added to its property holding with the subsequent acquisitions of Silver Quest and Geo Minerals in December, 2011. Blackwater is a bulk-tonnage gold project located approximately 160 kilometres southwest of Prince George, in central British Columbia, Canada. Blackwater has a mineral resource estimate of 7.1 million ounces of indicated gold resources and an additional 2.5 million oz’s of inferred gold resources.   As part of the Silver Quest acquisition, New Gold also acquired a 100% interest in the Capoose Property, located adjacent to Blackwater, with an established gold and silver mineral resource. The Capoose indicated mineral resource is 0.4 million oz’s of gold and 26.6 million oz’s of silver. The inferred resource is 0.4 million oz’s of gold and 29.5 million oz’s of silver. There are currently 19 drills active at site aiming to expand the resource and New Gold is advancing the project toward completion of a feasibility study in 2014.

Blackwater is a huge project and will be fairly capital intensive costing $1.8bn to develop, including a 24% or $346m contingency.  However, gold production will be 507,000 oz pa with cash costs of $536/oz.  The IRR is estimated at 24%. There is year round access for drilling/development and Central BC is near infrastructure.  Despite the scale of the project, I am reassured by New Gold’s track record with putting mines into production.

I do not believe that financing will be an issue. New Gold’s free cash flow will grow strongly next year and in April this year they raised $300m through a private offering of 7% senior notes due in 2020.  They also did a further private offering for $500m in November via 6.25% senior secured notes due in 2022.   The most important factor is that none of this debt is due before 2020 so Blackwater should be producing at full output by then.

El Morro (Chile) – This is a gold-copper development project in Chile with owner-operator Goldcorp Inc, in which New Gold has a 30% interest. El Morro entered the permitting stage in November 2008, in March 2011 received approval for the Environmental Impact Assessment from the Chilean Authorities, and in January 2012, Goldcorp’s Board of Directors formally approved construction. El Morro is located in north-central Chile, Atacama Region, approximately 80 kilometres east of the city of Vallenar. The project is expected to have low expected cash costs and there is plenty of organic growth potential as the current resource is entirely within the La Fortuna deposit. New Gold’s 30% share of the project gives them proven and probable gold reserves of 2.5 million oz’s, proven and probable copper reserves of 1.9 billion pounds, and 3.0 million oz’s and 2.2 billion pounds of   gold and copper measured and indicated resources, respectively, inclusive of reserves. New Gold’s share of capital fully funded by Goldcorp and production is likely around 2018.

Conclusion

Over the last four years New Gold’s share price has outperformed the gold price, S&P 500 and XAU index by a wide margin and I would expect this to continue.  The company has exciting growth potential and is well financed.  The New Afton mine is now ramping up towards full production so free cash flow should increase strongly next year.  It is possible that a maiden dividend will also be declared.

The company trades on a 2013 PE of around 14 and Price to cash flow of under 10x.  This is not one of the cheapest gold producers but I believe the premium is justified given the company’s track record of meeting targets.  Their assets are also in politically stable jurisdictions and there are not many comparable mid tier companies.   The “game changer” will be the development Blackwater, as this will double production.  Whilst there is execution risk, the management and the board have the expertise to deliver.

Silver Lake is an Australian ASX 200 listed gold producing and exploration company with a resource base of 4.5m oz in prospective regions including Mount Monger, Murchison goldfields and the Great Southern district of Western Australia. Silver Lake aims to develop large production centres at these projects with multiple mines at each centre.

Silver Lake has just received approval for its proposed merger with Integra Mining.  This will create one of the largest Australian gold producers, with an expanded 6.6m oz resource base (they are aiming to increase this to 10m oz) and forecast production of over 400,000 oz per annum in 2014.  Silver Lake will also have reserves of 1.8m oz and mill capacity of 3.4m tonnes per annum in the 2013 financial year.  I like the prospective tenements and these are clearly underexplored so the company has a great opportunity to grow.  Following the merger, Silver Lake has a market cap of over A$1bn and is now likely to attract more interest from institutions

Integra’s shareholders have unanimously voted to support the merger with Silver Lake via a scheme of arrangement last week. This will enable the potential for significant operational synergies between the adjacent Mount Monger and Randalls gold projects in the Eastern Goldfields of Western Australia.

There are numerous benefits to this merger and I like the production profile of the company going forward.  From a financial standpoint, substantial costs savings will be achieved and increased cash flow will allow Silver Lake to internally fund growth plans.  The merger will also diversify the company’s operations, giving them multiple mines and mills. I believe that the stock will get re-rated once it has proved to the market that it has successfully integrated the operations.

Silver Lake floated five years ago and has grown strongly under the management of Les Davis. At first the market viewed the company as a one trick pony but the company has been transformed. The Mount Monger mine produced 83,000 oz in the Financial Year to 30 June 2012 at respectable cash costs of $668/oz.  Mount Monger is situated within the Kalgoorlie terrane subdivision of the Eastern Goldfields Province. Gold mining began in the Mount Monger area during the early 1900s. Mount Monger has additional multi mine potential underpinned by emerging open pit productions from Wombola Dam, Wombola Pit and Magic deposits.

Silver Lake intends to commission its second gold mine at the Murchison project and is expected to pour first gold in the March 2013 quarter.  Ore will be sourced from 14 open cut and 4 underground mines over an 8-10 year mine life and production of 100,000 oz pa is likely.  The initial capex has been very low at A$65m and the payback period should be within two years. Cash costs should be around $750/oz and there is the option to expand the mill from 1.2Mtpa to 1.8Mtpa for only A$20m.  A smooth ramp up and controlled costs are the key to this project in the short term.  This project has a resource of 1.9m oz at a highly respectable average grade of 2.9 g/t.

The company is also set to begin a Pre-Feasibility Study (PFS) at it Hollandaire deposit, a high grade copper discovery within the Eelya Complex, part of the Murchison project.  The current Inferred resource totals 2.8 million tonnes at 1.6% copper, 0.4g/t gold and 5g/t silver and includes a supergene zone averaging 4.7%. Silver Lake has received further assays from its current $20 million drilling campaign and highlights include intercepts of 5.4 metres at 4.5% copper, 0.6 grams per tonne (g/t) gold and 27g/t silver from 102 metres; 6.7 metres at 3.1% copper, 0.3g/t gold and 16g/t silver from 93 metres; and 13.7 metres at 2% copper, 0.2g/t gold at 6g/t silver from 254 metres – the deepest drill hole to date. Some of these intersections are the highest since grade copper hits since Sandfire’s DeGrussa discovery.  This could potentially expand gold production, copper and other base metal credits which could be processed at a marginal capital and operating cost at the nearby gold mill.  At present only 100 holes in a 50 square km area have been drilled and results from the PFS are due in the June 2013 quarter.

Silver Lake also owns the Great Southern project based near the town of Ravensthorpe on the southern coast of Western Australia and this covers an area of 2500km.  They acquired the project from Phillips Mining in June 2012.  The area has seen gold and copper mining since the start of the twentieth century in a location known as the Kundip. The unmined Trilogy base metal deposit also forms part of the Great Southern Project, but Silver Lake’s priority is to investigate and develop the copper/gold of the Kundip area. They are planning to re-evalutate all of the existing data with the view to having a copper/gold producing project by 2015.

The tables below show a breakdown of Silver Lake’s reserves and resources and a production summary over the next few years:

Conclusion

In my view Silver Lake is one of a handful of standout gold producers.  They have a clear path to growth (like Medusa – http://commodityshares.net/medusa-mining-strong-growth-ahead) and I see no reason why Silver Lake cannot grow production past 400,000 oz pa after 2014.  Management own 25.5m shares, which is nearly 7% of the company so have “skin in the game”.  For a producer that is solely focused in Australia, ongoing cash costs of around $750/oz are very reasonable and the impressive average grades should help contain costs.  As at the 2012 FY end Silver Lake had $68.8m cash/bullion on the balance sheet, which should rise to around $135m in 2013 and $380m in 2014.  The company has no debt.

Silver Lake is on a 2013 PE of 11x based on analysts consensus forecasts of 29c. However, this falls to 5x on 2014 consensus estimates.  This is too low for a quality gold stock based in a low risk jurisdiction, with strong production growth and exploration upside.  A PE of 10x is not unrealistic and this would see the shares double by 2014.  I see the major catalysts as integration of the IGR assets, timely ramp up of the Murchison project and organic resource growth.

Given my longer term bullish view on silver, I wanted to have two silver stocks in the portfolio.  The first pick was SLW so we could gain exposure to a quality streaming business.  I have eliminated explorers at present due to the difficult environment at the junior end of the market, whilst the majors have other issues.   Although they are well funded, many have not been run well and are not growing production.  Therefore I decided to focus on a mid tier silver producer with strong growth prospects.

First Majestic (FR) was founded in 2002 by president and CEO Keith Neumeyer and now has a market cap of over $2bn. It owns and operates four producing silver mines in the Mexico; the La Parilla Silver mine, the San Martin Silver mine, the La Encantada Silver mine and the La Guitarra Silver Mine.  The Company has a further mine under construction called the Del Toro Silver Mine which is anticipated to become FR’s fifth and largest operation.  Production from these mines is forecasts to be between 9.2m and 9.5m oz of silver equivalent or 8.4 to 8.7m oz of pure silver in 2012 (up from 1.3m oz in 2006 and 7.2m oz in 2011).   The company has stated that it wants to grow into a senior Silver producing mining company based on an aggressive development and acquisition plan with a focus on Mexico.

For me FR is the standout silver mine for several reasons.  Firstly, it is unhedged and has over 90% of revenues from silver, which makes it one of the purest silver miners around.   Secondly, the company has some of the best production growth potential in the industry and is expected to produce 16m oz in 2014, mainly due to Del Toro coming on stream.  FR own 100% of all their operations and being based in Mexico, I do not see political risk as a big issue.  FR is a low cost producer and their mines all have long lives.  In total FR has 163m silver equivalent oz in the Measured and Indicated category and 247m oz in inferred resources.   The management team is first class and the top 40 Senior Management have over 650 years of mining and management experience.

FR released Q3 results last month, which were in line with analyst forecasts and showed production of 2.2m oz of silver at average cash costs of $9.19/oz.  Average cash costs have increased 10% year on year due to the impact of the recently acquired La Guitarra mine, which is the subject of an operational efficiency and optimisation program.  Adjusted earnings per share were $0.25 and cash flow per share was $0.31.  Cash on the balance sheet was $70.9m

Here is an overview of the individual mines:

La Parilla – This is 100% owned and comprises of a 2,000 tpd dual floatation/cyanidation mill and underground mine complex which began operations in October 2004.  The property is located 65km due southeast of the city of Durango in the western part of Mexico.  The infrastructure is excellent and the mine is only 4km away from the main highway.  The La Parilla is complex of five mines surrounding the mill.  FR is currently focusing on exploration on the Quebradillas, Vacas, San Marcos, La Blanca mines and the Cerro Santiago, Viboras, San Nicolas, Sacramento areas.  Total production is 2.7-2.8m oz of silver (3.3m- 3.4m oz silver equivalent).  FR expect cash costs reduction and potential for further expansion.  They have recently expanded land holdings to 69,440 hectares covering several old mines.

San Martin – The mine is 100% owned and includes a 950 tpd cyanide mill and 500 tpd floatation circuit (in care and maintenance).  This includes a land package consisting of 7,840 hectares of which FR owns 1482 hectares of the surface rights.  The area has never been explored using modern exploration techniques.  The mine has been in production since 1983 and produces around 1.1m to 1.3m oz of silver per annum.  FR is looking at maintaining this, whilst focusing on expanding the resource.  The mine is located 250km of Guadalajara in Jalisco State and a NI 43-101 resource was completed in February 2009.  FR took control of the mine in June 2006 by buying a majority stake from First Silver Reserve and purchased the remaining stake in September 2006.  They are currently installing tailing filters to recirculate 80% of the water used in milling process and also developing La Esperanza, Rosarios and Huichola areas in preparation for increasing head grades and resource estimates.

La Encantada – The mine is 100% owned and is located in the “Sierra Madre Oriental” province of Mexico.  It has a newly completed 4000 tpd plant.  The mine is in the state of Coahuila and the access is through the road from Muzquiz to Boquillas del Carmen, Coah, through a 165 km paved road and a branch of 45 km dirt road, that takes approximately 2.5 hours to travel.  Annual production is around 4.2m-4.4m oz of silver pa.  The company is seeing improving metallurgical recoveries and projects reduction in diesel costs in 2013.  There is substantial exploration potential defined within the 4,000 hectare property.

La Guitarra – The mine is located in the Temascaltepec Mining District of Mexico, approximately 130km south west from Mexico City.  It is 100% owned (purchased earlier this year from Silvermex) and the land position covers 397 square kilometres (km).  The district has seen mining activity since the 1550s and offers production growth opportunities through modern development.  The 350 tpd Flotation Mill will increase to 500tpd by Q1 2013.  La Guitarra reported its first quarter of production for FR last month.  Immediate results have been seen in reducing average operating costs from $115/t a year ago to $65/t for this quarter.  Management is currently looking to expand towards 1,000 tpd by the end of 2013, which should see the mine producing over 2m oz of silver pa. An aggressive exploration program is planned next year, towards the goal of releasing a revised NI 43-101 resource by the end of 2013.

Del Toro – The mine is located in Chalchihuites, Zacatecas State.  Exploration is currently focused on two areas, the San Juan and Perseverancia areas.  Other areas with the project’s concessions will be explored in future drilling programs.  Exploration has been very successful in delineating a large resource base within a short period of time at a relatively low cost.  The deposit has a measured & indicated resource of 162m oz and a further 174m oz in the inferred category.  Del Toro is fully permitted for 4,000 tpd.  Phase 1 production is due to start now.  Currently, 96% of the required equipment for the floatation circuit and the 65% of the equipment for the cynanidation circuit has either arrived, installed, or is due to be delivered. The expansion plans will see 1,000 tpd cyanidation circuit to come on stream in Q3 2013 and then expand both circuits to 2,000 tpd by mid 2014.  The projected Capex of the mine is only $124m, which compares favourably with many other projects and the after tax IRR is a very impressive 49%.  Estimated operating cash flows by 2014 are around $60m and will add over 5m oz of silver to FR’s production (7.2m oz silver equivalent).

La Luz – The project is located 25km’s west of the town of Matehuala in the San Luis state of Mexico.  The property was bought by FR in November 2009 as a result of the purchase of Montreal based Normabec Mining and has 36 mining concessions covering 4,974 hectares.  FR believes this will become an important mine for the region and for the company.  At the moment, the project needs to be permitted and developed, with a construction decision made in 2014 and possible production in 2015.

As I write, FR has just agreed to acquire Orko Silver for consideration of 0.1202 of a common share of FR plus $0.0001 in cash per Orko common share. The offer implies a value a 69% premium to Orko’s 30-day volume-weighted average price.  Orko’s La Preciosa deposit is one of the largest undeveloped primary silver resources globally and will boost FR’s land position in the Sierra Madre Belt, one of the world’s most prolific silver and gold regions. At first glance I believe this deal is a good strategic fit as the mine should be producing shortly after Del Toro and La Guitarra.  La Preciosa, located in the State of Durango, is also close to First Majestic’s existing La Parrilla and Del Toro mines, so can employ its expertise in mine development and there should be many synergies.  FR know the area and have a great track record of acquisitions so I’m confident this deal will add value.  Orko has a 43-101 compliant Indicated Mineral Resource of110 Million Silver Equivalent Ounces with an Inferred Mineral Resource of 154 million Silver Equivalent Ounces (42% Indicated, 58% Inferred)

Conclusion

FR is an exceptionally well run silver producer that is growing rapidly.  It has a solid shareholder backing as institutions hold 47% of the stock and Keith Neumeyer owns 3m shares. Their mines are all have low cash costs and are long life assets.  I believe the recent acquisition of Orko Silver will prove to add value for shareholders and will deliver further growth from 2015-16 onwards that will need to be built in to analysts forecasts.  The shares trade on a 2012 PE of 23x but as we look forward to 2013, this rating falls to 12.5x, which is too low for such a quality growth stock operating in a politically stable country.  FR has one of the highest correlations of any silver stocks to the silver price and I would expect the shares to continue outperforming the metal and its sector rivals.

*All figures exclude Orko at present.