While we are waiting for the Paramo shoe to drop, pasted below is a recent analysis of the EOM prospects going forward by Larry Woods a very experienced Independent analyst. After repeated bureaucratic bludgeoning of GSL and then EOM we are all no doubt paranoid that good things can indeed happen to good miners. Mr Woods comments put the present global economic situation and the political climate towards mining in Colombia in prespective, particularly as it relates to EOM.


Markets, Fads and “Fashion”

Having survived as an independent analyst in the stock market for over three decades, I have long since come to accept that market sentiment and investor beliefs are much more driven by emotion than by intellect or facts.  Indeed, there are times when the degree to which this is true can almost drive one to alcoholism, to wit:

Macro Level

-    Even my goat can see that the US economy continues to fall ever deeper into depression...... er.... ah...... “recession”, yet the Dow, S&P, and other indexes flirt with historic highs.  This is due, of course, to a Fed-created tsunami of “confetti greenbacks” flooding across the globe (alas, primarily employed to rescue remarkably corrupt banks, as opposed to renewing infrastructure, which would have created badly needed employment and a legacy of improved roads, bridges, etc.).  Crime doesn’t pay?  Bahhhhh, Humbugg!
-    This year, the US government will spend 42% more than it brings in (i.e., a deficit of over a trillion dollars).  This staggering sum will be “financed”, not through government bond sales (as in days of yore) but through the simple expedient of the US Treasury printing the bonds and the Fed “acquiring” same (i.e., money printing).  How do you spell PONZI SCHEME.
-    The US “Fiscal Cliff” has once again been kicked down the road.  Unfortunately, it has not gone away, it simply grows ever larger. 
-    Within the European Union, Greece is completely bankrupt, Portugal is insolvent, Spain is teetering on the brink, Italy is......... “oh never mind”, and France’s deficits parallel those of the US (in percentage terms).  Can Germany afford to bail out the lot of them?  Not a hope, hence another “perfect storm” of money printing gathers impetus. 
-    Japan has been engulfed in a depression for close to two decades, in the process creating the developed world’s worst Debt-To-GDP ratio.  In response, this year, Japan will run an even greater deficit and will print an even greater flood of Yen .  We are not “flirting with currency wars”, we are now engulfed in them.  “The race to the bottom” is on. 

Meanwhile, in spite of record-low annual gold production, record-low new gold discoveries, record-high buying of gold by central banks, and record-high global physical gold sales, the quoted price of gold continues to wander “range-bound” below $1700. per ounce.  Thank goodness the CRTC is pressing its third “investigation” (in less than ten years) into the manipulation of precious metals (the “investigation” is close to 5 years old.....what a scandalous joke).  Thank goodness as well, there is “no inflation” .  (g)

I have come to admire the word “Notwithstanding”......and I think it fits the current situation admirably.  The investment “herd” is stampeding towards a very steep cliff.  It refuses to accept the meaning of the word “unsustainable”.  It also refuses to recognize that when fiat money printing becomes endemic, gold becomes the “only real money”.  Insider selling in the stock markets is now manic, stock PE’s are off the graph,  margins are approaching historic highs and “corporate “guidance” is as negative as I have ever witnessed.  Only fools forecast the timing of market turns but only greater fools ignore a plethora of evidence that such a turn is near at hand.  Methinks the market gods have been kind to those who play last minute “Musical Chairs”.  If ever there was a time to convert fancy printed paper into gold....................

In market “environments” such as this, “valuations” often represent “fashion” more than “facts” and the distortions can run in both directions.  By way of example, compare current bank stock prices with gold producer stock prices.  Fortunately, the market has a short memory and “darlings” can exchange costumes with “orphans” in a heart beat.  

Micro Level
This phenomenon is not restricted to market sectors...... in fact it can afflict geographic neighbors involved in similar activities.  Think not?  Consider Eco Oro and AUX (formerly Ventana Gold). 

As is well known by those interested in the Colombian gold exploration scene, the properties of these two companies are side-by side and both support gold exploration activities.  Of course there are major differences

Eco Oro controls a much larger property (five times larger), has been actively drilling for a much longer period, and has developed a large proven gold resource (more on this later).  It has spent much larger sums in its exploration efforts and has accomplished much more in both environmental and social activities.  So which company has the greater valuation? 

Eike Batista acquired Ventana for roughly $1.3 billion.  Since then, he has added two additional nearby properties (Galway and Calvista) bringing his combined investment to close to $2.0 billion.  Eco Oro’s current market cap is $110.0 million.

Of course a gold exploration company’s market value depends on both the quantity and quality of its accumulated gold reserves, as well as the factors that will affect its ability to profitably exploit those reserves, so let’s examine each.  In Eco Oro’s case, it first developed a 15.0 million ounce “open-pit mineable” ore body (grading roughly 1 Gm per ton, with approximately 20-25 % oxides).  Then it developed another 2 1/2 million ounce “underground” deposit within Angostura’s boundaries (at significantly higher grade) and a promising 250,000 ounce underground ore body at nearby Mongora.  Last week, the company provided the results of a deeper drill program at Angostura which covered the southern third of this area.  Those results were excellent and suggest that another 2-3 million ounces of gold (at even better grade) appear to be contiguous with the main Angostura ore body (and thus fully exploitable).  Simple arithmetic suggests close to 20 million ounces and keep in mind that the company has explored less that 10 percent of its controlled properties. 

With respect to AUX, we have only the 43-101 report provided prior to the Batista acquisition.  That report placed the developed ore body at 3.5 million ounces @ 2 grams per ton.  It is also well understood that the ore body developed to that point in time was both deep and hard to access (a 2 mile tunnel must be built).  It is true that serious drilling has taken place in the intervening time period and the resources developed at both Galway and Calvista (both rather modest) need to be added to AUX’s total ore accumulation.  Nevertheless, the known AUX gold assets appear to represent a fraction of those owned by Eco Oro...... and Eco Oro has much better access to its gold assets.

Some might argue that Aux is better positioned to acquire permits but this does not hold up to serious scrutiny.  To begin with, in the absence of hard data, both the size and quality of any additions to AUX’s known gold assets must be considered speculative at best.  It is also well understood that both companies are exploring the same extensive gold anomaly, hence the geology of their respective ore bodies will likely be similar.  Then too, AUX must answer the question of how the company‘s deep deposits will be economically accessed.  AUX must also establish its environmental and social credentials before it can even commence the permitting processes.The fact that AUX’s properties are located at an altitude that is a few hundred feet below Angostura will shortly become inconsequential as a new Mining Code  and proper Paramo boundaries (established under the disciplined guidance of the Humbolt Institute) make the current (insane) altitude limit an historical footnote.                                 

Some observers will argue that Eco Oro may never be provided with the opportunity to exploit the surface-mineable Angostura ore body, or that environmental activist pressures may prevent any company from extracting any gold from this area.  .  Perhaps, but history and current Colombian conditions suggest otherwise.  It is well known that the Colombian Government is becoming increasingly concerned about the refinancing of the FARC and the Drug Lords through illegal gold mining.  The government also recognizes that only through the encouragement of professional mining companies will this problem be sorted out.  It is also a fact that the Angostura area has been mined by indigenous miners for close to two centuries and has been badly scarred as a result.  Truth be told, one would be hard pressed to find a more intelligent or viable use for this territory and it would be completely mad to allow it to be exploited by the FARC or Drug Lords.  A famous phrase in the industry states that “Big gold NEVER stays in the ground”.  It makes sense to this observer that once mining commences in the Angostura area, sooner or later, all of its gold will be refined. 

As noted above, valuations can be seriously distorted in markets that ignore facts and follow fashion, both at the macro as well as at the micro level.  That said, intelligent investors know that fashions often change dramatically as seasons come and go.  

Larry Woods
February 2013