Nice 'Links! – Almost 3 years ago we started building our overweight position in gold and precious metals.  Our thesis was (and is) that gold as an undervalued commodity – a commodity that hasn’t even kept pace with inflation over the last 20 years and has underperformed oil and the S & P 500 as well as many Blue Chip stocks – will rise in value.  In addition, gold is a hedge against a decline in the US market and US dollar, which we felt was at risk due to the high level of debt and bubbly housing market.  We have anchored our INTAC Global Hard Asset Portfolio with well diversified, top performing gold and precious metals asset managers from around the globe.  In addition, we have added a select group of direct investments in individual Junior Mining Stocks.


Producing Junior Mining Stocks represent the biggest leveraged play on an increase in the price of gold.  While our stodgy investment manager friend’s solitary gold investment of Tiffany cufflinks increases at a 1:1 ratio with the price of gold, Junior Mining Stocks have the benefit of operating leverage.  That is to say, that any increase in the price of gold flows directly to the company’s bottom line as profits.  In a well run, efficient, producing Junior Mining Company, the increase in net asset value relative to that of gold bullion can be exponential.

But aren’t they risky?  Absolutely!  But, like any investment you have to do your homework.  The cheapest, most professionally run, producing, Junior Mining Company that we have found is Castle Gold Corporation (TSXV:CSG).  CSG has low-grade, bulk heap leach gold production operations in Mexico and Guatemala.  Below are some notes from our latest homework report sent to our clients:

“On August 17th 99% of the votes cast by Morgain Minerals Inc. (MGM), and 97% of Aurogin Resources Ltd. (AUQ) shareholders overwhelmingly approved the merger of the two companies into the newly named Castle Gold Corp. (CSG).  MGM and AUQ shares were converted to CSG on a 2 for 1 share basis.  This has reduced the number of outstanding shares and increased the stock price.  This is a significant corporate event in two positions that we have been steadily building over the last 3 years in the INTAC GlobalPortfolios, as well as individual client Stock Accounts.  INTAC, through Mark Plaxton’s efforts has championed this merger and been a driving force in the development of the new Investment Promotions strategy for the combined company.  Management has approved a substantial budget to develop awareness in this undervalued stock using many avenues.  The goal is to increase the stock price and bring on institutional investors and fund managers to support the stock both through open market buying and through participation in future financing.  Like INTAC these managed funds must be long term investors that are willing to hold their position until CSG has appreciated significantly.  Future financings may be used to:

CSG is also cheap on a relative basis.  CSG’s Current Market Cap to Proven and Probable / Measured and Indicated Reserves / Resources ratio is:  $51.6 million / 1.42 million ounces or $36/ounce.  It is trading below competitors like:  Peak Gold Ltd. ($348/ounce), Wesdome Gold Mines Ltd. ($344/ounce), Claude Resources Inc. ($307/ounce), Uruguay Mineral Exploration Inc. ($159/ounce), Galantas Gold Corp. ($95/ounce), and others.  All of these companies have similar (or lower) resources, and higher mining costs per ounce.  This tells us that investors have an appetite for Junior Mining Companies and they are putting higher valuations on less profitable comp
anies.  We attribute this to the lack of investment promotion that has been done to date by CSG.

Secondly, the prospect of even greater upside in the surrounding property at both El Sastre and La Fortuna, make this stock particularly attractive because this potential upside is not priced into the stock – we are getting it for free!  We also have the additional upside potential of gold remaining above $575 per ounce and/or climbing higher, which is a major factor influencing our decision to invest in this sector.

This trade echoes Mark Plaxton’s call to buy Russian Oil in the late 90’s when oil was trading at $9 per barrel and Russian oil was trading around  $1 per barrel.  However, we believe that an investment in CSG at this level will prove to be an even better trade, and with less volatility.  It is our experience that trades like this only present themselves every 10 years.  Analyzing a block of the outstanding warrants (4.81 million) and the selling of stock that will likely take place to capitalize on those warrants suggests that there will be some downward pressure on the stock before the Investment Promotions team creates awareness in this company.  The management team has approved an early exercise incentive to 2.4 million warrant holders at the price of $0.58 up until October 19, 2007.  Therefore, we anticipate that this may be the last great buying opportunity in this stock before awareness of this stock pushes the price up to the $1.25 to $1.50 level where we anticipate management would feel comfortable doing an equity financing.

INTAC, INTAC’s management team (Mark Plaxton, INTAC Trade Advisors and yours truly), INTAC’s clients, INTAC’s friends and family, and the cleaning lady at INTAC all own Castle Gold Stock.  We may benefit as investors buy the stock – and all, or some of the INTAC related parties might sell their stock at any time.  Junior Mining Stocks are the most risky, volatile, and illiquid of risky equity investments.  Contents may be hot, handle with care, and do not mix with alcohol.  While we feel CSG is a good investment, it should only be part of a robust, well-diversified portfolio such as the INTAC Global Hard Assets Portfolio and the exposure to the Hard Assets asset class should be part of an overall long term strategy that reflects your particular risk/reward profile, such as one of the 7 INTAC Investment Philosophies.