A Melman Minute By: Leonard Melman   August 26, 2008 Cross currents in the news background have left markets little changed on balance at about 8:30 AM PDT.  Thanks to concerns about the growth and future track of Hurricane Gustav, crude prices have moved higher, back up to near (all prices US$) $117 per barrel and, as crude has moved higher, so have the precious metals.  After bottoming near $806, gold is now trading at about $827, up almost $7 on the day, while silver is ahead by twenty cents and platinum by four dollars.  Both major mining share indexes were up about one percent.  Thanks to more favorable consumer sentiment numbers, the securities markets are higher, but their enthusiasm was somewhat tempered by a sharp decline in the average home price during the Second Quarter 2008 which saw prices fall a record 15.4% from the same quarter one year earlier.  At the moment, the Dow Industrials are up about 30 points while the TSX was ahead by nearly 25. Every so often, we see a news article which accurately summarizes an important segment that we follow and an article published by Canada's National Post contained such a well-documented item which, in our opinion, is well worth discussing in some detail this morning.  The article, written by Peter Koven, refers to conditions within the junior mining industry. He relates the difficulties being faced by a junior mining company which has recently succeeded in bringing their property into production.  However, instead of being rewarded by a substantial rise in their share price, the stock has actually fallen from a twelve-month high of near sixty-five cents to a current quote of one nickel! Mr. Koven relates some of the difficulties junior miners are encountering and it is the combination of these problems which we believe constitutes the reason for a loss of investor confidence in the junior mining field itself. First, exploration and operating costs have been rising sharply.  Prices of transportation fuels, energy costs, permitting procedures and professional help have been rising rapidly.  This factor alone is removing some projects from the 'economic' and into the 'non-economic' categories. Next, metals prices themselves, particularly base metals prices such as lead and zinc, have dropped sharply during the past 18 months.  This factor is also removing projects from the 'economic' category as well. In addition, political risk is rising rapidly in several foreign nations where country after country has been enacting laws relating to more rigid approval standards, higher taxation and more bureaucratic interference - often at great expense - during the entire permitting procedure process.  Also, in nations such as Venezuela and Bolivia, the threat of outright nationalization of projects lurks in the background.  Even at home in Canada and the USA, the political power of environmentalists and the aboriginal communities threatens to impede the efficient exploration and development of mining projects. Perhaps the greatest threat now facing the industry, likely due to the credit collapses which have afflicted the international financial community, but also due to growing pessimism regarding investments within the mining industry, is the difficulty of raising funds which are desperately needed to complete exploration and development and move projects toward successful production.  Because of the substantial declines which have taken place in many mining shares, raising funds through equity financing can result in ruinous share dilution, yet the alternative of debt financing is unavailable to most companies due to stringent money market conditions. As well-known investing guru Eric Sprott pointed out in an interview for the article, "I've seen a lot of companies where management is ponying up their own money because they can't raise any on the public markets.  The equity markets will have to turn around for these guys to survive because there's no such thing as debt financing for smaller companies anymore." (our emphasis) Mr. Koven points out that major mining companies are well aware of these difficult times for the juniors and are waiting in the wings to pounce on troubled company's holdings.  He notes, "That gives cash-rich majors like Barrick Gold Corp and Teck Cominco Ltd a once-in-a-cycle opportunity to pick up quality assets at bargain-basement prices." The biggest problem we see is reflected in Koven's comment that, "...investors have lost all appetite for risk...and the question is how long it will take before they return - and how many companies will die off meanwhile."  Canaccord Adams analyst Wendell Zerb noted, "...We've been in this period since May where we're waiting for a catalyst to turn it around.  It just hasn't come." However, the long term may not be entirely bleak as Koven reports that, "...China's gross domestic product grew at a 10.4% clip in the first half of the year, and India is not far behind."  Hopefully, such growth from highly populous countries will create new and growing demands for many of the raw materials involved in mining.  Our great question is how many companies will be able to survive these difficult times and then move ahead to growing prosperity. One other thought does occur to us and that is the old adage that you buy when "there is blood in the streets."  Perhaps this is indeed one of those times. In any case, risk is clearly at a high level and caution is called for in making any investment decisions.   ◄  Previous Minute                                                                                                          Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.