Beowulf Mining AIMs & Ambitions
March 2005
The Current Economic Picture for Metals & Minerals is Bullish
Some experts believe that for the first time since the 1980s the world’s major economies are growing in a synchronized fashion, led by the US and followed by China, India and to a lesser extent the European Union. This economic momentum, especially in the Far East, should continue well into 2005 and possibly into 2006 and is good news for producers of all basic commodities, such as gold, silver, copper and oil. China in particular is devouring vast quantities of these materials.
However, there is a problem on the horizon called debt. Much of the US recovery has been purchased on credit, mostly financed by Japan and China. In 2003 the Asian banking system purchased over $250 billion of US Treasury Bonds, which raised their holdings to over $1.2 trillion. These figures have never been greater.
It is against this background that we look back at the 1970s as an example of what the future may hold for investors. Then, as now, the American economy was experiencing current account and budget deficits, which led to a dollar crisis in 1971. Nixon, the then President had to suspend the Dollar’s convertibility into gold and thus allow the gold price to float.
In both 1970, and today the US Federal Reserve saw the virtue in a falling dollar so long as it was orderly. During the 70s the US Dollar experienced an eight-year bear market that drove smart money into alternative investments of value such as property, the Swiss franc and gold. Gold went from $35 an ounce in August 1970 to $800 in January 1980, although a significant part of this rise was due also to the Cold War escalating re the Soviet invasion of Afghanistan and Middle East turmoil caused by the Shah being deposed.
Ultimately the Dollar lost a lot of its value due to global investors losing confidence in the American economy. So the question today is: could it happen again and will that be good news for the mining sector? Warren Buffet clearly thinks so with his holding of silver and non US Dollar currency holdings.
3 Year Chart US Dollar Index
So far, the possibilities are similar. The dollar has been in an orderly bear market for about three years but the imbalances are now much greater. The US current account deficit is about 5% of GDP while their budget deficit exceeds $500 billion. The brunt of the dollar’s devaluation to date has been against the Euro, which has risen by over 50% from its low. The real issue is the trade deficit with Asia and the unwillingness of that continent to let their currencies float either naturally via massive Dollar/Yen intervention by the Bank of Japan, or revaluing the Chinese Yuan (not yet).
Japan spent over $250 billion in 2003 and a staggering $67 billion in January 2004 in an unsuccessful attempt to stop the yen from rising. Between the Japanese government buying dollars and the US Treasury printing them – the vote must go the Americans. The same holds true for China, which to date has refused to float its currency. The Chinese bank’s vaults are filling up with dollar reserves and at some point the economic as well as political pressure could become so great that it would be forced to revalue its currency against the dollar.
With inflation seemingly under control (although Govt statistics are becoming increasingly managed) around the world economic powers, the US Federal Reserve can afford to treat the dollar’s decline with some neglect. But just one moment – what would happen if one of the large foreign holders of dollars decided to ‘cash in’ its foreign exchange holdings as the French did in 1971? With total debt in the US at nearly 300% of GDP the Federal Reserve has boxed itself into a tight corner. It has a choice of raising interest rates, which it has started to do, and potentially tipping the economy (which is so dependent on a low rate environment) into another recession or letting the dollar fall. Our money is on the latter.
So we still believe that the bull market for gold, silver and other precious minerals which started in 2001 is very much alive and should continue for as long as it takes the Americans to address all its fiscal problems.
3 Year Chart Gold
The Valuation of Mining Companies
In most businesses a company sells its products or services for a profit. Companies can increase their profits by raising the price of products or services, increasing sales, or lowering costs. In today’s commercial and global world many companies have had to choose the latter.
Commodity based businesses have similar pressures, but they have no real control over their selling prices so are often faced with a constant battle to become more efficient by lowering the cost of production. BUT commodity producers have one key advantage that normal companies do not have. Commodity producing businesses have what is called BULL price phases and the effect that this can have is phenomenal.
High Mining Costs - Low Mining Costs
Leverage of profits is the key when analysing the potential in any mining company. Take two examples: Company A where it costs $200 to mine and refine an ounce of Gold, and Company B where the costs are $350 per ounce.
Company A
- With a Gold price of $400 the company makes an excellent profit of $200
- If the Gold price were to increase by 12.5% to $450, profits would increase by 25%
- If Gold moves to $500 (25% higher), profits increase 50%
Company B
- With a gold price of $400 the company makes a profit of $50
- If the gold price increases to $450 (+12.5%), profits would increase by 100%!
- If gold moves to $500 (25% higher) the company’s profits increase by a staggering 200%
It is obvious though that in times of falling prices Company A’s profits will stand up a lot better than Company B's, so it is therefore a more defensive stock when prices are falling. But the conclusion to this example is simple, if you expect higher gold prices then you get unbelievable profit leverage and in turn stock price gains from those mining companies that have a high cost of production.
An Example - Newmont Mining (NEM)
- Newmont is the world's best and largest unhedged* gold miner
- It is the blue chip of the gold market and is one of the constituents of the American S&P500 index
- Its mining output is over 7 million ounces of gold per annum
- In 2001 the price of the shares went from $14 to hit $50
- Yet back in 2001 this company had hardly any profits due to the price of gold, which was sub $300
- As gold started to rise the leverage factor kicked in and its market capitalisation has increased from $2b to over $18 billion
Newmont Mining 3 Year Chart
Since May 2003 we have kept an eye on a small OFEX mining and exploration company, Beowulf Mining. The company is still its early stage of development.
We have written about Beowulf on several occasions. The first when they were introduced at 1p in June 2003 and again when they were around 6p in May 2004. Exploration activity has increased with some excellent drilling results announced. All this originates from the Letter of Intent signed back in February 2004 with the US mining giant Phelps Dodge.
That is when we started to wonder if there was more to this than meets the eye. The answer was yes, and it lay not in Gold but in Copper. The joint venture ensures that all exploration for copper and subsequent mining on Beowulf’s Jokkmokk Licences will be financed and conducted by Phelps Dodge.
On the 23rd June 2004 the company completed diamond-drilling tests on the Jokkmokk joint venture and on a 27-metre intersection with 1.1% Copper Equivalent (0.6% copper and 1 gram per ton gold) found. Under the Joint Venture Terms, Phelps Dodge will have the right to earn up to 80% ownerships of any development projects on any of these licences by funding all exploration costs, including the cost of a full (bankable) feasibility on any deposit found.
6 Year Chart of Copper (Sterling per tonne)
Management of the Beowulf Mining
The professional and experienced team that runs both companies consist of the following directors headed by Dr. Robert Young:
Robert Young BSc MSc PhD DIC - Executive Chairman Aged 59, he holds a first class honours degree in geology and chemistry, a MSc in Mineral Exploration and Mining Geology and a PhD in geochemistry. He has over 30 years of varied experience in the mining industry in Europe and South East Asia. Positions held included director of Minerex Limited (Ireland), chief metals geologist for Shell Metals (Indonesia) and founding Director of Cambridge Mineral Resources PLC and Angus & Ross PLC.
Jan-Ola Larsson - Technical Director Aged 62, he holds a geology degree from Uppsala University and a PhD in geochemistry from Imperial College of Science and Technology, London University. He studied in London with Robert Young. He has over 30 years of varied experience in Canada, Brazil and Sweden. Positions held are Head of Geochemistry the Geological Survey of Sweden, LKAB Exploration Company and Barringer Research Ltd. Exploration Manager for Tetron Mineracao S/A and North Star Diamonds AB.
Edward Taylor - Non-Executive Director and Company Secretary Aged 56, he has worked in various accounting, human resources, administration and Company Secretary positions in the natural resources sector. He has worked for Hardy Oil & Gas (now British Borneo Oil & Gas plc) and LASMO (now AGIP (UK) plc).
Richard Newstone - Finance Director & Company Secretary Aged 55, he is a Chartered Accountant in public practice. He has previous management experience of coal mining in Scotland and in the past also worked on taxation aspects of the North Sea Oil Industry.
Gavin Burnell - Non Executive Director Aged 27, he has worked within the smaller companies equities market, particularly OFEX, for the last four and half years. He acts as a consultant to Ruegg & Co. Limited which has won OFEX Corporate Advisor of the Year for the last two years. He is also Managing Director of Woodland Capital Limited, an investment company specialising in investments in smaller companies, both private and public.
Conclusions
With most metal and mineral prices sharply higher over the past 2 years there is still a world shortage to be satisfied. Phelps Dodge and other billion-dollar exploration and mining companies have been forced to get more aggressive with their overseas projects in order to replace their US reserves. Therefore the huge vote of confidence shown by Phelps Dodge in smaller companies such as Beowulf looks very promising indeed and with a move to the London AIM market we expect the share price to be substantially above the present 8p with lots of drilling and data results to report during the rest of the year.
March 2005 © InvestorProfit
NOTE: As of May 2005 Beowulf Gold has changed its name to Beowulf Mining
See Also
Small cap mining and exploration companies are very speculative. Do your own diligence before investing and it’s prudent advice to spread your risk around a selection of companies in the sector.
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