BIG GOLD Big ProTs from the Gold Bull Market Volume IV, Issue 7 / July 2012 Best Buys While Stuck in the Waiting Room

BIG GOLD Big Prots from the Gold Bull Market Volume IV, Issue 7 / July 2012 Best Buys While Stuck in the Waiting Room

Dear Reader,

For the past 18 months, gold stocks have marched down a trail of tears.

They showed some life from mid-May to mid-June – GDX, the gold miners ETF, was up 21%, while gold In This Month’s Issue… rose 5.5%. That bounce stirred the animal spirits and Click on the link to jump directly to an article. demonstrated the kind of leverage we expect, but they still The Key to Higher Prices for Gold Stocks have much lost ground to recover. Since January 1, 2011, It ultimately boils down to one thing – and we’re GDX is down 28%, while gold is up 12%. convinced it’ll come to pass THE CASEY METALS EDITORS So what will move them higher, and when? Doug Hornig: Gold, the “New” Safe Haven There are many reasons we remain firmly bullish on gold Proposed US harmonization with the Basel III banking stocks, but until this one event occurs, we must continue to regulations signals a potential shift in how gold is classified – and how the mainstream could view it be patient. That one catalyst? Kevin Brekke: We’ve Been Here Before A rising gold price. Eighteen months of downtrodden gold stocks isn’t fun, but neither is it new Yes, gold stocks have performed poorly, but the gold price Louis James: My Favorite BIG GOLD Stocks has been range-bound since last October, giving investors An interview with the Indiana James of the gold little incentive to buy the equities. However, throughout industry, including BIG GOLD projects he’s visited the past four decades, gold equities lagging the metal have STOCK UPDATES been the exception, not the rule. In the current bull market Large Producers alone, the stocks outran gold from 2001 to 2007, as well as Goldcorp, Kinross, Yamana from the bottom of the '08 selloff through 2010. You can Mid-Tier Producers view plenty of other historical examples here. Randgold, Eldorado, First Majestic, AuRico Small Producers Gold stocks typically show leverage to gold. It would Zlamos, Endeavour, Silvercorp contradict the historical pattern – and common sense – for Royalties/Streams gold stocks to stagnate until this bull market ends. Franco-Nevada, Royal Gold, Silver Wheaton As such, the central questions are how, and when, gold Dividend Payers breaks out of its funk. Once that occurs and the price Newmont, Agnico-Eagle begins a new and sustained uptrend – and especially when BIG GOLD Portfolio it exceeds its $1,921 high from last September – gold Updated portfolio performance and recommendations stocks will lead instead of lag.

© Copyright Casey Research LLC - Unauthorized Disclosure Prohibited. Use of content subject to terms of use stated on last page. Relighting the Fuse on Gold Stocks There are many key catalysts that will propel gold higher – further quantitative easing, something the Casey editors are convinced will occur; the unresolved issue of how, exactly, the Fed will unwind its bloated balance sheet; and the runaway deficit spending that plagues not just the US but most G8 countries.

I think largely off most investors' radar is a groundswell of mass perception that will usher in a permanent shift in how the world views the metal. No one can predict when or how that'll occur, but we see no fundamental reason to alter our gold price projection: higher. Hey, what about the Hard Assets Alliance This month, I asked a few Casey Research staff members you mentioned last month? We will have to weigh in on the subject. Former BIG GOLD editor that review as soon as the website is in Doug Hornig uncovers a largely unreported shift in how tip-top shape. I can tell you this is an banking regulators may classify gold. Kevin Brekke compares impressive product, so stay tuned. the recent performance of gold stocks with those in the mid-1970s. And I interview the Indiana James of the gold industry, Louis James, on his favorite BIG GOLD stocks.

Last, we update all our equity holdings, including the price that triggers a Best Buy rating. If the market is going to hand us such bargains, I want a plan to exploit them.

Let's jump in…

Gold: The "New" Safe Haven By Doug Hornig

Doug Hornig, past editor of BIG GOLD, has been a gold investor for 20 years. His nose for investigative reporting recently uncovered a little-noticed proposal by FDIC banking regulators that could potentially change how gold is classified by financial institutions. It is this type of action that we think will lead to a shift in how the mainstream views gold.

As our readers know, there is nothing "new" about gold as a store of value and protector of wealth. Yet, part of the reason more investors aren't drawn to gold as a safe haven involves risk weighting.

All banks are required to maintain a stockpile of so-called Tier 1 capital. These are assets with the highest degree of safety, as defined by the Basel Committee on Banking Supervision. They were originally categorized by the Basel I Accords in 1988 and continued with its 2004 successor, the Basel II Accords.

The Accords attempt to unify financial practices worldwide through stringent capital management requirements structured to ensure that a bank has adequate capital for the risk it exposes itself to through its lending and investment practices. In general, the rules stipulate that the greater the risk, the greater the level of Tier 1 capital the bank must hold to safeguard its solvency and overall economic stability. The current ratio requirement is 4% of assets, and the US has adopted the Accords.

Both Accords defined Tier 1 assets as those considered the most rock solid: cash, Treasuries, and other explicitly guaranteed paper issued by agencies of the US or other governments. Basel I assigned gold to the lower-rated Tier 3, where it remained under Basel II.

BIG GOLD JULY 2012 2 This meant that banks were not inclined to hold gold as a low-risk asset. That was especially the case during a financial crisis, when they faced the difficult task of maintaining adequate Tier 1 capital ratios, or face the prospect of being shut down or taken over by regulators.

Gold Gets an Upgrade The new Basel III Accord – slated to take effect early next year – holds some significant changes. Among them, Tier 3 is eliminated and gold is promoted to Tier 1. US regulatory agencies appear to be on board with this change.

When regulators look at a bank's balance sheet, they rank assets according to a weighting system that assigns a risk percentage number to each asset. Thus, Treasuries and German bunds (the government's federal bond), for example, are Tier 1 assets that carry a risk weighting of zero percent. Though our readers may find this laughable, they are considered the pinnacle of safety. Gold, by contrast, currently carries a risk weighting of 50%.

But on June 18, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly circulated a Financial Institution Letter (FIL-27-2012) to FDIC- supervised banks that proposes to harmonize US regulatory capital rules with Basel III.

At the top of the proposed changes is the new list of "zero-percent risk weighted items," which now includes "gold bullion," right after "cash."

If the proposals are approved by regulators – and that seems likely since adoption of Basel III is a lock – then this is a momentous change for the gold market. Now banks will be allowed to hold bullion in their vaults and count it among their Tier 1 assets. That by itself would be bullish for the gold price, as banks that recognize gold's unique characteristics seek to stockpile more of it. But that's not all…

Gold Regains Money Status For one thing, Basel III also stipulates that a bank's Tier 1 holdings must rise from 4% of assets to 6%. Thus, banks may not only replace a portion of their existing Tier 1 paper with bullion, but use it to meet some of the extra 2% as well.

In addition, this vote of confidence from the highest monetary authorities gives further impetus to the remonetization of gold. In essence, what's happening is that henceforth gold will be considered "money" in virtually the same way as cash or bonds. And banks will be given the choice between holding more of their core assets in history's most reliable store of value vs. paper backed by nothing more than the promises of increasingly profligate governments and yielding less than zero in inflation-adjusted terms.

Finally, there is the impact on individual and institutional investors. As regulators and banks increasingly view gold as having safety on a par with the various paper alternatives, it is logical that they will also see the need to beef up their own holdings.

BIG GOLD JULY 2012 3 There are a number of positives for gold going forward, as we've detailed at length in past issues of BIG GOLD. Now, this major change in the financial world adds another. Though it remains speculation on our part, we believe that the net result of Basel III, and associated adjustments to US regulations, will be an increased recognition of gold's safe-haven status across all markets. And that translates into higher global demand for the metal next year, and a concomitant increase in its price.

Invest accordingly.

We've Been Here Before By Kevin Brekke

Kevin Brekke, our Switzerland-based editor, recently pointed out that the underperformance of gold stocks during a bull market is nothing new. Check out the historical comparison between gold equities today vs. the last great bull market, as well as what it means. As Jeff points out in the introduction, gold stocks as a group have been underwater for the past 18 months. While veteran gold investors are little concerned and see the markdowns as a buying opportunity, it's raised the ire of more than a few readers. The extent and duration of the selloff in gold equities has spurred much speculation about the health of the trend, summed up neatly as, "Does it mean the bull market is over?" Hardly. And for one fundamental reason that Jeff has stated more than once: the drivers for gold are far from over, which will eventually propel stock prices higher. But we also have historical precedence that shows lagging equities during a gold bull market are par for the course. To save a thousand words, I compared our current gold equities downturn with the one experienced during the middle of the last great gold bull market of the '70s. The similarity is hard to miss. From April 1973 through July 1976, gold stocks as a group initially tripled in value – and then gave it all back. You can see that the latest retracement is very similar in nature, though the initial climb was smaller and the downfall shorter. It goes without saying that sentiment for gold stocks during the two-year selloff that commenced in 1974 was abysmal. Worry grew as stocks got cheaper and cheaper – and then cheaper still. Even though the gold price was also falling, cries that the bull market in gold stocks was over grew. It seemed there was no money to be made in gold stocks.

BIG GOLD JULY 2012 4 Sound familiar?

Ultimately, the selloff did not end the trend. Gold resumed its climb in early 1976, and gold stocks mimicked the ascent. Then, in 1979, the mania started for both precious metals and the equities, culminating in the blow-off top of January 1980. In retrospect, that 40-month retracement was one big fake-out.

My personal takeaway from this chart: those with the courage to buy when others panic will be the big winners. Those who bought gold stocks in '74/'75 when everyone else was buying eventually made money – but those who bought when others were selling in '76 went on to make a killing.

Sit tight, follow Jeff's advice, average down, and you'll be all right.

My Favorite BIG GOLD Stocks: BG Interviews Louis James Before there was a BIG GOLD, Louis James was already kicking rocks for Doug Casey, helping him find the best early-stage picks for Casey's International Speculator. It was Louis who noticed there were two kinds of readers – investors who wanted more stable companies and speculators looking for 1,000% gains – and suggested that we give each type of reader what they wanted. This led to the birth of BIG GOLD. Perhaps more important, in today's weak market, is that Louis did the original due diligence on many of our stocks. He has the most intimate knowledge of how they are doing and what they are working on. So, I wanted his take on our portfolio and today's market.

Jeff Clark: Thanks for taking the time, Louis – you seem to travel constantly, so we appreciate it.

Louis James: We're all on the same team, Jeff, but you're welcome. In fact, my next due-diligence tour is to China, where I'll visit several companies, including Silvercorp, which is now in the BG portfolio. We've both been to the Ying mine, but neither of us has been to the new GC mine the company is building. I'll be sure to share my field notes with you for BIG GOLD (BG) subscribers.

Jeff: Great – can't wait. I imagine you'll also be trying to get a read on the Chinese economy, penetrating the veil of official statistics?

Louis: That's right. With China, you have to be there and observe. Official statistics are one thing; what you see on the ground is often quite different – but, of course, that's true around the world. The US spins economic PR as much as any other country.

Jeff: China has become so important to the global economy, we'll want to hear your take on the macro- level, but BG readers are gold investors – they might care less about whether copper and coal stockpiles are growing in China than about whether the Chinese will stop buying gold.

Louis: As well they should. Don't worry; I'll be asking questions from top to bottom – from ministers to the man on the street. I also plan to size up how things are really going in Shanghai, the New York of China. I'll try not to let my preconceptions color my outlook, but I admit that I don't expect to see any reduction of interest in gold. With China's housing bubble deflating and its biggest trading partner, Europe, disintegrating, I expect Chinese interest in gold to reach new highs this year. But we'll see. The data must speak for themselves.

BIG GOLD JULY 2012 5 Jeff: Okay, so, back closer to home, what do you think of the BG portfolio these days? We've taken a real beating lately, do you find that disheartening?

Louis: Not at all. The essential idea of the BG portfolio is to buy the best and most solid companies and ride their leverage to rising gold to the top of this bull market. We make additions and deletions along the way to take advantage of new opportunities or correct for failed ones. The idea was never to trade the fluctuations in the market. No one should think gold's bull run will rise in a straight line to the top.

I know you regularly remind people that there can and will be corrections along the way, and those should be treated as buying opportunities. As long as we – and our readers – remain confident that the gold bull market has yet a long way to go, we should greet these corrections with the same emotion as discovering that our favorite coffee is on sale.

Jeff: And you're sure last fall's $1,900 peak wasn't the top for this gold cycle?

Louis: Yes. The reasons you gave in the June 25 issue of Casey's Daily Dispatch look solid to me. I'm as sure as I can be of anything. Hmm… That sounds mushy. I'd say I'm as confident that we have not yet seen the top of this gold cycle as I am that the Greeks are not going to get their house in order, and that France has just taken a hard left turn for the worse – in other words, almost as confident as I am that the sun will rise in the east in the morning. And it's not just me: Doug Casey is going long in a big way right now, buying gold and silver and related equities.

Jeff: I'm glad to hear it. Do you have any favorite stocks in the BG portfolio right now? What would you put in your mother's IRA?

Louis: Well, as you know, I prefer the greater speculative oomph of the smaller juniors. But the bigger, highly profitable companies in the BG portfolio have gotten so cheap lately, I've been plugging your picks as well as mine in recent public appearances I've made. Honestly, I like the whole portfolio, and your current buys are exactly what I would recommend to more risk-averse investors than me – like my mother.

Jeff: C'mon, give us some specifics! Top picks?

Louis: [Chuckles] For starters, I'd have to go with Newmont (NEM). They've had setbacks like the Minas Conga debacle in Peru; that and the weak market has pushed the share price way down, even while the dividend, which is tied to gold, has gone up. That's a pretty solid bet, as is the growth they have on tap, without any big lucky breaks – but they could get lucky and get the $5 billion Minas Conga project back online, and other pluses that could provide major Push to the stock.

Jeff: Do you really think they will? Peru is looking pretty scary these days…

Louis: It could take a while, it's true. The current regime seems to have stirred up more anti-mining sentiment than it can handle, and I suspect it will get worse before it gets better. It's not a good time to be trying to permit a new mine in Peru. However, existing operations, especially in sparsely populated areas, seem to be sailing along with little or no social trouble.

But I've been to Newmont's flagship Peruvian operation at Yanacocha, which was built back in the bad old days of Shining Path guerilla attacks. That mine has exceeded projections, by the way, and keeps on going. The company has serious know-how specific to the region, and at the end of the day, Peru does need mining. It's not just an important part of the economy; it's the central pillar of the economy. In the end, reality matters, and I do think that in time, Newmont will prevail.

BIG GOLD JULY 2012 6 Jeff: Who else do you like?

Louis: I haven't been to their mines, but I find your analysis of Yamana (AUY) quite compelling. It was a major feat posting gains for investors at a time when most producers lost ground, and I like the growth profile. Similarly, I like your royalty plays in Franco-Nevada (FNV) and Royal Gold (RGLD).

Jeff: What about silver stocks?

Louis: I've been underground and through the plants of First Majestic's (AG) and Endeavour Silver's (EXK) main mines, and I like both companies a lot. Both are models of high-quality work, with safety of workers a top priority, and efficient, well-planned mining delivering the goods. Both offer excellent growth potential, with First Majestic being bigger and more solid, and Endeavour offering a chance at greater near-term gains.

Jeff: Anyone else?

Louis: I think you have two good underdogs in your portfolio: Randgold (GOLD) and Silver Wheaton (SLW).

Each day that passes without new violence erupting in Mali offers greater hope that things will remain calm there, and the post-coup Mali discount being given to Randgold will fade with time. I note that though the market has rightly put Mali plays on sale, the gold miners in the country have not been in the line of fire and have suffered no direct harm. It's hard for people who haven't been there and seen the combination of distance and lack of infrastructure to understand how far the gold mining is from the twin revolutions.

The problems the companies have experienced relate to closed borders and such issues that have been and are being resolved, not direct physical danger. Of course, Mali could still blow up in our faces, which is why Mali plays are on sale. But the longer Mali holds together, the closer we get to the point when investors accept that it's safe to get back in the water and share prices respond positively.

The whole Silver Wheaton scare seems overdone to me. Yes, it's disconcerting that they are being audited by the Canadian tax authorities, but that happens to companies all the time. It's not exceptional – and it's been going on for a couple years now. The company makes so much money, even at today's lower silver prices, that it could shrug off a fine from the tax man, even if that were in the cards, contrary to current evidence.

Jeff: Do you own any of these stocks yourself?

Louis: They are all on my shopping list, but the only one I own shares in at the moment is SLW. Readers can take that as an endorsement or a conflict of interest, as suits them best.

Jeff: Any parting thoughts?

Louis: Yes. There's a reason why Doug Casey is a contrarian. It's not because he's a daredevil who loves taking risks – he's only like that when it comes to things like racing cars or skiing. When it comes to money, he hates losing as much as anyone and does his best to speculate intelligently and not gamble wildly. There's a big difference between the two. I think this is crucial to understand in today's world, because mainstream investing is not as safe as it once was. Post-2008, Wall Street has just as much chance of blowing up as Mali does.

BIG GOLD JULY 2012 7 We are all speculators now – it's just that some of us realize it and seek to understand and act accordingly, while others imagine that things can go back to how they were and are not rethinking their premises as the changed situation demands. Lambs to the slaughter. Or, as Rick Rule says, in this business, you're either a contrarian or road kill.

Jeff: So what's your message to BIG GOLD readers?

Louis: Don't lose heart. You don't need me to tell you that the reasons you bought gold are still valid, you know it's true. Stay the course, and I'm sure you'll do very well.

Jeff: I'll drink to that! Thanks, Louis.

L: My pleasure, Jeff.

STOCK UPDATES We've made a number of modifications to our entry points in light of current market conditions, most notably the introduction of Best Buys for many positions. These lower price levels are intended for those who already own a tranche. Keep in mind they may or may not be hit.

[Click on the company name to link to the latest portfolio page comments. All symbols and stock prices US. All prices and percentages as of June 29.]

Large Producers Goldcorp (GG): Buy 1 Tranche; Best Buy Below $36. Guatemala, where the company's Marlin mine operates, formalized royalty rates at 4% for gold and silver. Management had already voluntarily agreed to the proposed royalty rates last quarter, so this is not a concern. Many analysts view the legislation positively, since it shows the government will live up to the previous agreement. The Marlin mine represented about 14% of 2011 production.

No news regarding the environmental permit for the El Morro mine in Chile (see portfolio page comments of June 28 and April 30). And no update yet about the ground conditions at Red Lake (see our comments of April 29).

There are many reasons why we like GG – low cash costs, low political risk, and the biggest projected growth of the seniors – and here's another one. Check out how well management has grown cash flow over the past five years. This trend will continue, a result of both greater production and rising gold and silver prices.

BIG GOLD JULY 2012 8 From its $50 peak at the end of February, the stock has fallen 25%, meaning current levels should be viewed as excellent entry points.

Kinross (KGC): Hold. No significant news or changes. The stock is cheap, but production issues and ongoing political and legal risks will likely keep it that way for some time. Do not average down, but don't sell either and lock in the loss unless you need the funds.

Yamana (AUY): Best Buy; Buy 1 tranche at current prices; Buy 2nd tranche at $14; Back up the truck if it hits $13 again. The company raised its annual dividend 18% last month to $0.26/share (1.6% yield), the sixth increase since 2010. And with big growth ahead, they may not be done. The company also proposed to buy Extorre Gold Mines; you can read our extensive comments about the potential acquisition on the portfolio page, including the political risk in Argentina.

Extorre has a personal story behind it. We got the shares for free when Exeter Resources spun out the company. Exeter was an International Speculator pick, and I sold my Extorre shares for more than a triple and with the profit was able to send my daughter to Italy to study for a semester. It was possible because of a spectacular return on a junior mining stock.

And this gain occurred in a market that was down substantially on the year. My friends, you can make money in a down or sideways market; they aren't all winners, but similar gains occur regularly in the junior sector. I encourage you to check out International Speculator((promo link)) if you have the interest – and I'll note that Louis James has several stocks he's identified as the next buyout targets.

BIG GOLD JULY 2012 9 Anyway, we're positive on the Extorre acquisition: they already operate in the area, will get it cheap (if it goes through), and the project is gold-focused. We'll also note that insiders are heavily buying AUY – over 1.2 million shares in May and June alone. We suggest following their lead.

Pan American Silver (PAAS; no longer covered on the portfolio page): For those holding shares, the governor of the Chubut Province in Argentina, where the giant Navidad project is located, submitted a bill to congress last month that isn't the most mining friendly. First, mining royalties would increase to anywhere from 3% to 8%. Second, 80% of a mining project's workforce must be residents from the province. And third, it maintains the existing law that prohibits open-pit gold mining that uses cyanide in mining processes, which Navidad will require. However, the governor did state, "We are defining areas where open-pit mining will be allowed."

In other words, we still don't know if Navidad will get permitted. Management cautioned investors that "the company can provide no assurance whether the proposals discussed yesterday will be presented to the Chubut legislature, enacted as law in Chubut, or whether the proposals will be subject to amendment by the Chubut legislature."

What do we think is likely? It's hard to imagine that the provincial government won't approve the project; the revenue to the province would be substantial, and the local jobs it would create would number in the thousands. Navidad would produce nearly 20 million ounces of silver annually the first five years, and mine life is 17 years.

However, it's possible the stock doesn't pop much if the final approval comes with too many strings or big revenue demands. This is reminiscent of what happened to Kinross in Ecuador; the massive Fruta Del Norte deposit was a gem and promised a big payoff for the company. Yet, politicians demanded such a big slice of the pie that it turned off investors (and terms are still being renegotiated). A resolution in Chubut seems close, but how the stock reacts depends on government demands, which could honestly go either way at this point.

Mid-Tier Producers Randgold (GOLD): Buy 1 tranche at or under $80; Best Buy/medium risk at $75. John Hathaway of the Tocqueville Gold Fund described Randgold founder and chief executive Mark Bristow as "the smartest manager in the gold mining business" at our recent Summit. That's an impressive testimony from someone who knows the best and brightest. Randgold has above-average political risk due to its West Africa locations, though as Louis outlines in the interview above, the fallout from the coup in Mali is dying down. The company will grow production 80% by 2015, so the stock will certainly climb higher over the coming years. If you're comfortable with the elevated risk, GOLD should be on the shopping list.

Eldorado Gold (EGO): Best Buy; Buy 1 tranche at current prices; Buy 2nd tranche at any price below $12; Back up the truck if it hits $10. No recent news from a stock I've been buying my mother fairly aggressively over the past two months. For those who like to keep score, her cost basis, after averaging down in mid-May, is now $12.16. Eldorado has one of the highest operating margins among both large and mid-tier producers. Add in one of the biggest growth trajectories among gold producers and the stock is deeply undervalued at current prices.

BIG GOLD JULY 2012 10 First Majestic Silver (AG): Best Buy; Buy 1 tranche at current prices; Buy 2nd tranche at any price below $14; Back up the truck if it hits $12. Construction at Del Toro is progressing on schedule, one of the company's big catalysts for higher production. Start-up is still scheduled for year-end, with full production expected by 2014.

The stock has above-average short interest at the moment, about 7.3% of float, though at least half or more is likely tied to the Silvermex (T.SLX) acquisition and thus temporary. [During a stock-for-stock merger, a merger arbitrageur buys the stock of the target company while shorting the stock of the acquiring company, so that when the merger is complete and the target company's stock is converted into the acquiring company's stock, the merger arbitrageur simply uses the converted stock to cover his or her short position. These short positions will thus dissolve when the merger finalizes.]

We'll point out that as of June 27, AG's forward PE is 7.8, the second lowest in our portfolio. Further, as previously stated, we think the company will institute a dividend plan, in part due to its growing cash levels.

Company cash levels will continue to grow with production. While much of it is being used to fund growth, cash flow will climb substantially higher over the coming years, too.

AuRico Gold (AUQ): Buy 1 tranche at current prices; Best Buy at $7. No recent news from this small but growing and low-risk gold producer. The stock is dirt cheap: thevaluation ratio is the lowest in our portfolio; the ratio of price to tangible book value is a mere 1.3, a level rarely reached by a gold producer; and the forward PE is 8.7. AUQ is the cheapest Buy in our portfolio; put it on your shopping list if you don't own it.

BIG GOLD JULY 2012 11 Small Producers Alamos Gold (T.AGI): Buy 1 tranche/average down at current prices. The big news with the company, and what prompted last Thursday's 9.1% selloff, were the results of the pre-feasibility study for Kirazlı and Ağı Dağı in Turkey. We won't repeat what we stated on the portfolio page (see comments dated June 28), but basically the market expected lower cash costs and a quicker start date from the projects. Capex was also probably higher than expected.

The thing is, the internal rate-of-return numbers are solid considering the higher costs, and annual production came in slightly above expectations. The combined projects will generate strong cash flow at $1,200 gold (what the study was based on), and management can build it from existing cash flow. It is low grade, so they have to watch costs, but we expect much higher gold prices by the time they enter production (2014 and 2017, respectively). Further, the nearby Çamyurt project has much higher grades and will reduce costs when it is added to output (it currently has 640,000 inferred gold ounces and is a top-priority project). To be sure, these are not giant projects, but the bottom line is that we disagree with the market's kneejerk reaction. Company-wide production will still grow, as management now estimate they could hit as much as 350,000 ounces/year by 2017, a 133% jump over last year's output.

Meanwhile, Alamos is one of the lowest-cost small gold producers. Here's how it stacks up to its peers when you add up all costs (mine operating cost, sustaining capex, and G&A).

Costs this low will keep Alamos a highly profitable producer. (By the way, the figure for AuRico is now much smaller since they sold three mines that were all high cost operations.) Given the future prospects for this company, we suggest averaging down with one tranche if your cost basis is higher than current prices.

BIG GOLD JULY 2012 12 Endeavour Silver (EXK): Buy 1 tranche at current prices; Best Buy at $7. Closing the El Cubo acquisition was delayed until July 13, and since the stock is trading well below the $9.06 level the deal was priced at, it looks like management will give shares to AuRico instead of cash. This means some dilution, so if the stock drops on the news, you'll understand why and will see it for what it is: a buying opportunity. We'll also point out that EXK has a forward PE of just 7.2, an incredibly low ratio for a silver producer.

Silvercorp (SVM): Buy 1 tranche at current prices. When will this darn stock rebound? asked several readers this month. I understand the frustration; I own a full allotment of shares, as do many Casey editors, and the stock can't seem to break out of its funk. We'll note, however, that it actually leads the pack in year-to-date performance compared to other primary silver producers (i.e., it's lost the least). Still, it's nowhere near the levels it should be trading at.

Are lingering China concerns to blame? Perhaps some. Are short-sellers up to their tricks again? No; short interest is actually smaller on SVM (<1% as of June 20) than many other primary silver producers. Is a weak silver price the culprit? Absolutely. Silver has essentially made no gains on the year. In fact, the current silver correction is the second largest since 2001; this explains why many silver stocks are struggling (and also means there's more upside with the silver industry than downside at this point). Company-specific bad news? No, there's nothing wrong with the company, and the growth we've pointed to previously is about to kick into high gear with the GC mine, something that will grow production by 90% by the end of next year (over fiscal 2011 levels).

One more potential issue is the company's exposure to base metals.

BIG GOLD JULY 2012 13 In a weak economy, base metal prices tend to soften. Of course, lead and zinc (and gold) keep silver production costs negative. Cash costs will rise if base metal prices fall, but costs are so low that this concern is minimal. I suggest tucking the shares in the back of the drawer until silver begins a new leg up. That will happen. Meanwhile, continue to be patient. If you don't own it or don't have a full position, it's a Strong Buy at current levels.

Royalties/Streams Franco-Nevada (FNV): Best Buy; Buy 1st tranche only at current prices; Buy 2nd tranche below $43; Back up the truck if it hits $40. Our top royalty pick. This is a buy-and-hold to the top of this cycle, so get the best price you can.

Royal Gold (RGLD): Buy 1 tranche at $70 only. The stock jumped 35% from May 8 to June 12. The company has near-term growth on tap, but wait for the stock to cool before adding any shares.

Silver Wheaton (SLW): Hold. No news on the tax issue (see the Company Updates section in the May BIG GOLD if you're unaware of the concern).

Dividend Payers Newmont (NEM): Buy 1 tranche at $48.27 or below for 2.9% yield; Buy 2nd tranche at $46.66 for 3.0% yield. Our top dividend recommendation (see the April BIG GOLD in the archives). Management announced last week that they have accepted a stricter environmental plan for the $4.8 billion Conga gold mine and would resume work on the massive project. Conga, the biggest mining project ever proposed in Peru, has been on hold since November because of ongoing protests by community groups who claim it would hurt water supplies and cause pollution. Management's concessions include building reservoirs that will guarantee year-round water supplies in towns that currently suffer shortages. Conga will produce between 580,000 and 680,000 ounces of gold annually, but doesn't enter production until late 2014 or early 2015.

Agnico-Eagle (AEM): Buy 1 tranche at $40 for 2.0% yield; Buy 2nd tranche at $38.09 for 2.1% yield. The planned shutdown at Kittila in northern Finland was expected to last up to 40 days, but operations resumed after just 18. Anticipated maintenance downtime for 2012 is still 44 days. Kittila is an important company asset with gold reserves of 5.2 million ounces and will produce 155,000 gold ounces at $650/oz this year. Most impressive is the 35-year projected mine life.

In our view, Agnico-Eagle has turned the corner, as evidenced in the impressive stock price rally from late April to mid-June. The dark days for this company are largely behind them. Buy for the strong dividend.

BIG GOLD JULY 2012 14 Hang in there, fellow investors. Gold won't be stuck in the waiting room forever. And when higher prices come, gold stocks will respond.

Jeff Clark, Senior Editor

P.S. How does someone make proper investment decisions in an increasingly politicized world? Find out at the just-announced Casey Research fall Summit, “Navigating the Politicized Economy.” There are solutions for investors, which our blue-ribbon panel will be discussing in detail. Check out the new approach to our Summits, as well as register for the early bird discount here.

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BIG GOLD JULY 2012 17