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Last week, I went to Mexico to check out a new gold project. It capped off a great week for gold when we got more positive news for the yellow metal and technical signals that now might be the perfect time to buy.
I’ll tell you more about that in a minute … first, let me tell you about the mine.
The San Francisco Mine is owned by Timmins Gold Corp (TMM on the TSX-Venture Exchange) and is located in Sonora State Mexico, about two hours outside of Sonora’s capital city of Hermosillo.
Funny enough, that part of Mexico has streets that are literally paved with gold — thanks to the San Francisco Mine.
See, the San Francisco first operated from 1996 to 2001, producing between 300,000 to 400,000 ounces of gold. But in 2001, gold crashed to $250, and the mine closed. Left behind was an old, large pile of crushed rock with an average grade of 0.5 grams of gold per tonne.
And that’s what is being used for road gravel.
A New Operator Could Uncover
3 Million Ounces of Gold …
Or More!
Years after the mine closed, it’s being brought back into production by a new company, Timmins.
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| The San Francisco is an open-pit operation. Here, you can see me next to Timmins CEO Bruce Bragagnolo as we stand in front of the main pit. |
The company is focusing on 611,000 ounces in reserves that it has already located. The total potential resource (which includes the reserve) would be in excess of 1 million ounces. And Timmins believes 200,000 ounces of that resource can probably be added to the company’s reserve with more drilling.
That’s not all … potential gold resources are scattered around the immediate area of the San Francisco mine. Timmins has identified at least nine interesting targets, with more to the North. If they can find just two or three more deposits like San Francisco … and that’s certainly possible … the company could have a resource of three million ounces or more!
Over the next year, Timmins will undertake a 25,000 meter drilling program to start filling in along the zone of mineralization. This will enable the company to meet its target of finding at least 200,000 ounces of gold a year to replace what they mine.
Here are four more things I really like about this company …
- Great Team. The team can be the most important thing about any miner. Timmins’ team should be able to shepherd their project into production.
- Right place — right time. Timmins is going into production at a time when other new projects have been delayed or canceled. If gold heads higher — and I think it will — Timmins’ timing could be excellent.
- Discovery potential. The company has large areas yet to be drilled on the 42,000 hectares of property they own around the San Francisco Mine. They also have other projects in the works — the Tequila Project in Jalisco State; Trincheras and Patricia, two claims to the west of San Francisco; Cocula, a Jalisco project that shows real potential, and more.
- Low cost. Timmins’ projected operating cost is $420 per ounce. That’s less than a lot of miners nowadays.
I’ve detailed more about the risks I see facing Timmins — as well as the opportunities for this company and its stock — in my new special report, Mexican Gold Explorer Poised for Production. Click here to get your free copy.
Of course, junior miners are speculative even in the best of times. And these are very wild times in the market.
Many junior mining stocks are trading at a market capitalization that is less than their cash holdings. Most are down over 80% from their 2007 highs, as risks rear up like icebergs.
Besides the bargain basement prices, there are a few other good reasons to give gold and gold miners a second look right now.
And three of those reasons have to do with weakness in the U.S. dollar, government debt and global economy …
Weakness #1—
U.S. dollar
It wasn’t long ago that the U.S. dollar seemed bullet-proof. And while it may be in a longer-term uptrend, it seems to be undergoing a tradeable correction. Yesterday, the Federal Reserve slashed its benchmark interest rate, which sent the greenback sliding. But a chart of the dollar shows it was already weakening, making what is called a “head-and-shoulders” top. You can see the series of price peaks in my chart.
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The dollar could bounce from here, but this kind of breakdown often points the way to lower prices … a move that could light a fire under gold prices.
Why is that?
Because gold is the anti-dollar; since the yellow metal is priced in dollars, they usually move opposite to each other.
It’s not just Fed rate cuts that are driving the dollar lower. The good-time Charlies in Washington have flooded the world with an extra $8.5 trillion as they try to bail out Wall Street’s fat-cats.
I get the $8.5 trillion from calculations done by Barry Ritholtz at the Big Picture blog. You can download his figures and check for yourself.
And in this whopping price tag, I’m NOT including the cost of the auto bailout — that will be extra, and small-change compared to what you’ve already shelled out so the executives at Citigroup and GE can get bonuses.
Weakness #2—
The big spending will continue
As a result of all the bailouts for banks, automakers and other new federal outlays, our nation’s budget deficit is expected to reach $1 TRILLION in 2009.
And that DOESN’T include the new stimulus plan that Barack Obama’s economic team is reportedly working on.
This is an economic-stimulus program that will be far larger than the two-year, half-trillion-dollar plan that was proposed just weeks ago. The final number is expected to be between $700 billion and $1 trillion over two years.
And if you think the bailout for Detroit’s auto makers will stop at $14 billion … or even $50 billion, think again. Best-guess estimates run from $70 billion to $140 billion by the time we’re “all in.”
All this spending will be underwritten by you, me and other taxpayers, and the spiraling debt should weigh on the U.S. dollar.
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Weakness #3—
A global increase in paper money
I like to rag on Washington for its free-spending ways. But writing endless checks in response to bank failures and economic weakness has been the response of governments around the world. Now, the Chinese are getting in on it, too.
China plans to spend $586 billion to stimulate its economy. And official Chinese sources said that the country will cut its own benchmark interest rate and increase its money supply by 17% next year as they try to kickstart their sputtering economy.
As governments around the world pump up the paper money supply, I think hard assets will start to look better and better. Gold might rally in every currency in the world as more and more paper chases a finite amount of metal.
Looking Ahead — More Volatility
Gold probably won’t go up in a straight line, just as the dollar doesn’t have to go down in a straight line. And the currency could turn around and head higher, thumbing its nose at me along the way.
But the short-term trend in the dollar seems down, and forces are lining up to rekindle the longer-term uptrend in gold. I wrote about those forces a few weeks ago in a Money and Markets column. And they’re part of why gold has moved higher in recent weeks.
3 Ways to Play Dollar Down, Gold Up
Here are three funds you might want to keep in mind …
PowerShares DB US Dollar Bearish Fund (UDN) is based on the Deutsche Bank Short US Dollar Index Futures Index. It is meant to mimic being short the U.S. dollar against a basket of currencies including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. If you think the greenback is going lower, this fund might fit the bill.
PowerShares DB Gold Double Long (DGP) targets twice the short-term percentage movement in gold.
Market Vectors Gold Miners ETF (GDX) aims to track the price and yield of the AMEX Gold Miners Index. It holds a basket of miners including Barrick, Goldcorp, Newmont, Kinross and more.
The GDX is an interesting play because gold miners have been hammered flat, much worse than gold itself. Take a look at a chart of the GDX versus the GLD, an ETF that tracks the price of gold …
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You can see that GLD is about flat, but the gold stocks in the GDX have been punished severely. If gold is heading higher, these stocks have snap-back potential.
It was great to get a hands-on look at a gold explorer that is about to become a gold miner. And you can bet the people I visited in Mexico were pleased as punch to see the yellow metal rally last week.
A higher gold price will make a lot of borderline projects profitable. And it will mean a lot more money in the bank for miners that are already thriving in today’s tough market environment.
Yours for trading profits,
Sean
P.S. Are you interested in finding out more about Timmins Gold, the company I visited in Mexico? I’ll send you my just-released 6-page report, Mexican Gold Explorer Poised for Production, FREE! Just click here right now to download your copy.
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