Just How Cheap are Resource Stocks – Let Us Count the Ways

(Note: charts not shown as mentioned here as … took up too much space.)

Right now it is no use to look at P/E ratios and the like when evaluating resource stocks. Why? Cause the E is about to decline big time. However, the P's have already declined discounting this. When a stock like Freeport Copper and Gold declines from 120 to 23 it has discounted a major slowdown in earnings and decreases in Gold and Copper prices (for the most part Copper).

YRI-T Yamana is trading at half of book value!!!

One way I like to evaluate resource stocks is to simply divide the prices of the stocks and especially, resource indices, by the prices of the metal. You see resource stocks are usually more leveraged than the prices of the underlying commodities. We saw this in gold when gold quadrupled from 200 to 2008 whereas the HUI index went up 13 to 1 from its low in 2000 to its high in 2008.

Why? Well let's look at it this way: say gold is 300 and your cost of production is 300; say gold rockets to 600 in a year but your cost of production has only gone up 10% or 30 dollars (due to inflation and other factors). Well at 300 gold you were making 0 dollars an ounce; at 600 gold you are making 270 dollars an ounce. Gold has doubled but you have gone from making nothing to 270 dollars an ounce.

Therein lies the leverage. Also as the gold price increases, gold, which is deeper in the ground and which may cost more to dig out becomes economic to mine. Again let's say a company has hard‐ to‐get gold that is going to cost 500 dollars an ounce to mine. Well at 300 it

makes no sense to mine that gold; whereas at 700 dollars you can. Therefore, your cash flow goes up and the size of your resource and value of your company goes up.

This is why gold stocks are more leveraged as the total value of what they have in the ground can go up as the price of the underlying commodity goes up. However, there is also a psychology to it. Stocks tend to go up faster than the commodity, as stated above, but they can get ahead of the commodity. We find that when stocks go up too fast in comparison to the commodity, it is a sign of a top; when they go down too fast, a sign of a bottom.

We find that there is an excellent case to be made for buying Gold stocks right NOW.

The indicators we watch are the HUI to Gold index and the XAU to gold index.

Again all you do is divide the price of these indices by the price of gold. The HUI gold index is an index of unhedged gold stocks.

The HUI gold index has traded about between .40 and .60 since 2003. Near the bottom of the market in 2000, it got below .20., actually to .14. From 2003 to 2007, when it got above .60, it meant that gold stocks were expensive, the rally was over done and a correction would occur. This happened at the 2006, 2003 tops in gold and gold stocks. At the bottoms in 2004, 2005, 2007 whenever the HUI to gold ratio got below .45, gold and gold stocks almost always rallied.

However, this mass liquidation has changed everything. The HUI to Gold ratio is currently trading at .22 or where it was in early 2002 when gold was trading at just over 300 dollars an ounce and the HUI around 80!! Therefore, HUI is trading at extremely cheap levels. When the HUI first broke 200 in 2003, gold was not even 500 dollars an ounce. It is 170 today with gold at over 700 dollars an ounce.

The XAU Gold Index

The XAU to gold index has traded at a strict range in the past 10 years of .28 to the upside and .16 to the downside. Whenever the XAU to gold ratio got above .26 gold stocks were expensive and they corrected; whenever it got below .19 and especially .18, gold stocks were cheap. This again occurred at the 2006 and 2007 summer bottoms for gold stocks. The lowest reading was .16 which was the 2000 low for gold stocks.

What has currently happened to the XAU is shocking. Hedge funds have had to dump large cap gold stocks to meet redemptions. Gold stocks held up until early July, then everything tanked. The XAU has fallen an amazing 55% since early July. The XAU to gold ratio currently is .09; that is the lowest level ever!!!!! It is 40% lower than at the 2000 bottom. This means that in comparison to gold, gold stocks are 40% cheaper now than in 2000 when gold was 250 dollars an ounce!!

This is why we think we are getting a huge buying opportunity. Also we have enclosed many of our listed stocks ‐ Silverstone, Agnico Eagle, Full

Metal Minerals ‐ all versus the price of gold and silver to show you just how cheap these stocks are.

Why has the commodity correction occurred?

Nothing goes straight up. However, there are other reasons. Of course there is the assumption that the global economy and thus the demand for commodities is going to decrease in the coming global recession. However, we do not quite buy that argument. As Jim Rogers points out in his book, Hot Commodities, the strength of an economy is not an underlying factor in the increase in price of Commodities. It is usually lack of supply and bad monetary policy that plays a part (Eg ‐ inflationary printing of money).

We have not seen any real investment or major finds for many commodities in years. We just mentioned numerous projects are being put on hold. Therefore the supply side of the story is there, and we all know about the Fed printing money to bail the economy out; this is going to cause HUGE inflation down the line.

I think much of this decline has to do with the recent rally in the US dollar. There are many reasons for the rally: the dollar was over sold; we are seeing hedge funds covering their massive short position; there is massive central bank buying; there is the appearance that the US is acting quickly about the financial crisis etc… However, regardless of the reasons, the reality is that since July, the dollar has gone up and

commodities have gone down.

I have enclosed a chart of the Rogers International Commodity Index. Note that while the Dollar was weak from late last year until July/08, this index went from 10.0 to 14.0 or up 40%. Since the US Dollar has rallied from 71 on the US dollar index at the low in July to over 86 as we write, the Rogers International Commodity index has gone from 14 to 7.50.

However, we think the rally in the dollar is near done; yes the dollar could go a few points higher and we could definitely see the Euro falling to 1.25 or even 1.20.

Once the reality of 10% inflation and 1 trillion dollar deficits sets in, we see the dollar headed a lot lower, especially when the next bubble (the US long bond) begins to deflate. Consider as well the lack of foreign investment (as previously discussed) that will occur in the coming years.

Remember in the seventies the CRB commodities Index went up 120%, then pulled back about 40% before continuing on another 100% run in the late seventies. Gold pulled back from 200 to 110 from 1974 to 1976 before rocketing to 800 in 1980. Big pullbacks can happen within the long‐term cycle; we just think this is a big pullback.

Now, we have seen massive liquidations from hedge funds in commodity stocks. This is why we think this is a great buying opportunity in commodity stocks; you are getting industries, still in the midst of a great bull market, on fire sale.

For example, I have also enclosed some charts of Eldorado, Yamana Gold, Goldcorp, Royal Gold, Cameco, Agnico Eagle since the early to late nineties. Note that these stocks went down 60 to 80% in the late nineties during the bear market in gold. However, that was a great buying opportunity. Stocks like Eldorado, Desert Mining soared from under a dollar to 7‐8 dollars a share. GoldCorp, Yamana, Royal Gold, Agnico went from 2 dollar companies to 20,30, 50 dollars companies.

I think now you are seeing the same opportunities in all gold stocks but especially the smaller producers. Stocks like Capstone trading at 1.00, Silverstone at .60 and Fortuna at .55 will be looked back in amazement. I have a new report on stocks that will prosper in the coming years coming out next month. I feel many of the companies that I put in this will be the new 20 baggers in the coming years.

Remember my friends there is a fire sale going on in Gold and Gold stocks right now. And that is when you make fortunes, when you buy that 1500 dollar TV when it is selling for 500! Buy these stocks cheap and then hold on for years and make some serious money!

Sincerely,

Dave Skarica ………. info@addictedtoprofits.net

Price (Watch) Current Price Current Rating

Large Cap

Agnico Eagle (AEM NY, Toronto) $36.50 (Aug 07) $30.50 **** Top Gold large cap ramping up production

CIBC (CM Toronto) $87.00 (August 2007) $50.50 **

Eldorado (EGO, ELD T) $4.24 (Nov 05) $4.00 *** Solid Producer Stopped out a t5.00 for gain of 20% readded at 4.24

TBT Bond Short (TBT NY) $61.00 60.00 **** way to play popping of the bond bubble

Yamana (YRI T AUY NY) $3.86 (Oct 05) $4.00 ** Top mid tier, production increasing botched takeover hurting stock

Marvel (MVL NYSE) $32.00 May 2005 $29.00 *** Iron Man a hit Hulk coming in June producing there own movies

S and P 500 Ultra Bull (SSO NYSE) $33.00 (Oct 2008) 29.00 *** Way to play market rally/bottom

Suncor (SU NYSE) 25.00 (Oct 2008) 22.50 *** Massively Undervalued

Freeport McMoran (FCM) 39.00 (Oct 2008) 24.00 *** Undervalued

West Jet (WJA T) 9.50 (Oct 2008) 10.50 **** Cheap Well Run Canadian Airline

India Fund (IFN NY) 22.00 (October 2008) 18.00 **** great way to buy India beat up Mid Tier

Aberdeen (AAB T) 0.58 (Mar 08) 0.17 *** Top Tier Royalty Play

Capstone Gold (CSG T) $1.00 (Oct 05) $0.92 Incredibly cheap

**** Top Silver Company, going into production, undervalued

Consolidated Thompson (CLM T) $1.47 (Oct 08) 1.47 Stop Loss 1.00 **** readded incredibly cheap play

Eastern Asian (EAS.v) *** $1.80 $0.50

Endeavour Silver (EXK 3.55 $1.50

Royal Gold (RGLD) 32.00 September 2008 23.00 *** Great Royalty company play

Petaquilla Minerals (PTQ.to) $2.40 $0.80 Buy Down here will also go into production

Paramount Gold (PZG Amex) $0.90 (Oct 05) $0.55 NO STOP *** Nothing has changed fundamentally at company

Small Cap

Evolving Gold (EVG V) $1.10 (APR 07) 0.20 ** hold off for now should bounce

Full Metal Minerals (FMM V) $0.20 (Oct 08) $0.20 *** Great Management, range of properties

International Pbx (PBX V) $0.40 (August 06) $0.09 ** should bounce with market

Largo Resources (LGO V) $0.35 (Aug 07) 0.12 *** top junior Buy on this pullback

Rimfire (RFM V) $1.25 (April) $0.20, doesnʼt need to raise cash, big deal in this market, trading at discount to cash

Riverside Resources (RRI V) $1.07 (April 2007) $.20 *** finally selling off buy under .30

Silverstone (SST V) $1.45 (Aug 07) $0.40 *** readded at 1.45 ANYTHING UNDER 1.00 IS A STEAL!

Unigold (UGD V) $0.46 (Oct 06) Sold at .15 for loss of 67%

Crowflight (CML V) $0.64 (April 2008) $0.17 *** Putting mine into production in Manitoba

Central Sun Mining (CSM T) (April 2008) $2.07 $0.20 ** financing fell through going to eat loss here

Xtra Gold (XTGR.ob) (April 2008) $1.37 $0.90*** Property in Ghana

Coastal Contacts (COA.to) April 2008 $1.06 $0.70 *** Sells contacts over internet

Micro Cap

Cityview (CTVWF) $0.07 $0.02 (Dec 06) Buy Down here on pullback not going ahead with oil but going ahead with Diamond properties which will get them cash flow

Thunderbird (formally MBA TBD) $0.30(June 06) $0.15*** Sold for loss of 60%

Underworld (UW.v) $0.90 $0.50 (april 2008) Similar mangement to FMM

Avion (AVR.v) 0.07 0.07 (Oct 2008) Going into production in new year 5 million in cash

Trading Positions

SSO November calls 2.00 1.45 way to play rally, extremely speculative

GeoThermals

Polaris Geothermal (GEO.to) $1.03 0.36 (March 2008) *** TOTAL STEAL

Nevada Geotherma NGP.v $1.05 0.60 (March 2008) ***

Sierra Geothermal (SRA.v) $.58 .15 (March 2008) ***

US GeoThermal (HRM) $2.30 1.20 (March 2008) ***

None ***

Mutual Fund Portfolio

None