I think this could easily apply to KAL...Jim's MailboxAuthor:...

I think this could easily apply to KAL...

Jim's Mailbox
Author: Jim Sinclair
**Last updated 5:04pm EST**

Hi Jim,

As a young tad, I worked in several Canadian hard rock PM mines from jackleg drilling to drill core interpretation. I know the B from the BS regarding proven reserves and factors governing the viability of a start-up, but these juniors have me stumped. My modest portfolio is exclusively precious metal juniors with more than adequate proven reserves, and a mine in operation or close to it. I’ve been diligent in making sure that none of them are hedged yet still they are greatly underperforming in relation to the price of gold.

Does Jesse’s advice to “sit tight” apply to juniors with good credentials, and if so, what will be some signs of these juniors unhooking from the general market decline in the future? You and Dan are the major reason I have not and will not cut and run in the insanity of the present market.

Sincere gratitude;
CIGA Hardrock GH

Dear CIGA Hardrock GH,

The hedge funds are long the Barricks of the world and short ALL the juniors. The hedge funds have over-priced the big guys and under-priced the juniors.

Here is the question that needs to be answered:

With gold headed to $1650 what do you think your junior with 1,000,000 ounces of 43-101 compliant reserves and a deposit strike length of at least 4 kilometers would be worth? Here's a back-of-the-envelope estimate:

1,000,000 times $1650 minus a $300 total production cost per ounce.

In ground value: $1,650,000,000 (not including recoveries)

Cost of extraction: $ 300,000,000

Amortization of plant and equipment over say a 10 year mine life: $200,000,000

Value:

Value of the asset $1,150,000,000.

Now let's say the deposit goes to 5,000,000 ounces contained. In this case five times $1,150,000,000 is the value - all things being equal.

Does the enterprise plan to produce or will they sell the asset when it matures, say two to four years past initial production?

If they plan to produce for their own account, then the value is a combination of discounted present value times cash flow.

If they plan to sell the property, it is asset value. If the last sale of such an asset was at "x" euros times ounces contained, then the starting negotiation would be a premium above "x" euros times ounces contained plus a value for gold contained within other resource categories.

The hedge funds can play all the games they want but they will fail on valuations as gold goes to and through $1650. My personal money is wagered on my words.

So those that are demoralized should sell and stop the pain.

I am significantly committed and intend to continue my commitment with every cent I have, no margin.

Regards,
Jim