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Last week I mentioned that some of our gold picks are fantastic buying opportunities right now. With near term production ramp ups pending with New Gold, Orsu Metals, and Rusoro, the future looks bright.
However many would disagree with this position in light of the fact that gold has taken a huge hit over the last week. It was only back in March when gold traded as high as $1011.25 whereas last Friday it hit $786.50.
At times like this when the gold market looks uncertain and many are calling the bottom of the U.S. dollar, one must remember why we got back into gold seven years ago. The major reason was that the U.S. dollar was trending downward given building trade deficits and budgetary overspending increases year over year. This has dug a deep financial hole in the U.S. that is near impossible to reverse.
This scenario hasn�t changed. A few years ago the outstanding public debt in the U.S. was $7.6 trillion. Today it�s $9.6 trillion and building by $1.82 billion per day!
Despite deepening debt, the Fed has also had to deal with supporting the world�s two biggest financial institutions, Fannie and Freddie. More recently an emergency act, Article 13(3) was used to bail out Bear Stearns � an action not taken since the great depression.
Compounding the economy further in the U.S. is that inflation is also rising rapidly due to higher energy costs. An independent agency, ShadowStats.com is suggesting inflation in the U.S. is 13.64% driven by higher energy costs.
As bad as the U.S. economy is, the European Union isn�t fairing too well either.
Spain for example has a credit crisis of its own along with significant unemployment. Spain has asked the European Central Bank to help bail them out. However asking other sovereign countries to help bail out another sovereign country within the EU will eventually fall on deaf ears. The northern countries within the EU are already supporting some of their southern neighbor�s current account deficits to the tune of 10% from Spain, 10% from Portugal, and 14% from Greece. The trouble is that the so-called richer countries like Germany are also feeling the pinch from a slower economy and inflation.
Consequently the euro is declining versus the dollar. This has prompted the market herd to buy U.S. dollars while exiting the euro. The logic here is that the U.S. dollar may not be great but the euro is worse. It has nothing to do with the fact that the U.S. currency is in fact getting stronger for logical fundamental reasons. As a result of this flawed perception, gold has been under pressure.
Up until recently, the euro has had a fantastic run versus the U.S. dollar, hitting an all time high of $1.6038 on July 15th. Now the euro is at a five month low and trending downward and many are saying the corner has turned for the U.S. dollar. That�s true versus the euro but not for gold.
But there�s no arguing with Mr. Market. The herd is running off the cliff yet again and at some point investors will wake up again and note that any fiat money system, U.S. based or otherwise, never fails to fail. Gold has real value. Paper money is backed by nothing more then the requirement of the taxpayers to support it through their hard work and taxes. In the European Union, the euro doesn�t even have that guarantee, they�re just printing paper.
Neither the U.S. dollar nor the euro look good fundamentally which bodes well for gold. The gold market is coming to the close of the summer quiet season and entering the main annual buying season during the last quarter of the year. Eventually the market will catch on and it�s the companies who are ramping up gold production and revenues that will benefit the most.
On Monday Orsu Metals came out with interim results for the quarter and the six month period ending June 30th, 2008.
Orsu Metals Corp. (OSU, TSX & AIM)
Orsu like the majority of other mining stocks has not been immune from the general fall out of the resource market. With the stock now trading near its 52 week low and the near term objective of cranking up gold production at Varvarinskoye, the next two quarters should be the turning point for Orsu.
Summary
Orsu Metals Corporation was created from a merger with European Minerals and Lero Gold which was completed in June. The deal brought together European�s Varvarinskoye mine which is ramping up gold/copper production with Lero�s exploration plays including the advanced stage Taldybulak copper/gold project, all of which are located in the Former Soviet Union (FSU).
Earlier this year European Minerals management was having some technical problems getting their gold/copper production up and running and their lack of cash flow was becoming a problem.
Lero�s management team has a depth of experience working in the FSU and given their technical know-how and access to cash, this merger was a good fit all around.
A key player in this deal is Dr. Sergey Kurzin who has been behind some of our major winners including UrAsia Energy which merged with SXR Uranium One and more recently the sale of Oriel Resources for $1.5 billion.
The ultimate success of Orsu Metals, and the potential for investors to see triple digit gains hinges upon getting the production up and running at the Varvarinskoye mine.
Varvarinskoye Gold-Copper Mine
Orsu�s $160 million plant in Kazakhstan is designed to produce 140,000 ounces of gold and 26 million pounds of copper annually over the first three years of operation, declining somewhat after that as grades decrease.
Lero�s added technical skills have helped fine tune the production process. At Varvarinskoye, four types of ore are mined which involve two types processes. So getting the production circuits running smoothly has taken some time. The floatation-circuit is now operating between 60% and 70% of design capacity. The leaching circuit grinding has shown the most improvement with hourly throughput going from 180 tonnes to 330 tonnes per hour which is 85% of the operating capacity.
The plant is still in the development and ramp-up stage however a major milestone was reached in July with the sale of US$9 million of copper/gold concentrate. Also the sale of gold dor� (pronounced gold doh-rey, a bar of semi-purified gold) is ongoing with 9,514 ounces valued at US $7 million having been delivered so far.
As I mentioned, the success of Orsu Metals is dependent on the company ramping up production. Due to the lack of cash when under the control of European management, essential equipment and supplies stalled the production ramp up. The new management is working toward achieving 80% overall production by the end of Q4.
The Varvarinskoye deposit has proven and probable reserves of 2.2 million ounces of gold and 254 million pounds of copper based on US$525 gold and $1.30 copper. Overall resources are 5.01 million ounces of gold and 607 million pounds of copper. The current mine life is 17 years.
20% of Varvarinskoye's production is hedged at $574 per ounce of gold as a condition of a financing agreement made by European Minerals management. However 80% of the production is unhedged and should be commanding prices above $800 given today�s price.
The copper is not hedged and with copper trading well above $3.00, the cash costs of production should be negative given capacity production.
The Varvarinskoye mine has simple metallurgy, strong economics and the potential for expansion. As Dr. Kurzin said in the Q2 report, �Undoubtedly, 2008 will be seen by many as a critical turning point for the Company.� If past successes have anything to do with it, I suspect it will be.
Taldybulak-Talas Copper/Gold Project
Orsu�s lead development project is the Taldybulak-Talas copper-gold target which lies within the prolific Tien-Shan gold belt. The immediate objective for Orsu is to advance this project toward a Definitive Feasibility Study (DFS).
In April Orsu completed an initial 43-101 compliant resource estimate. The indicated and inferred mineral resource is 4.6 million ounces of gold and 793 million pounds of copper. The gold equivalent of the deposit is 7.53 million ounces of gold.
Through Orsu�s own geological work and re-interpretation of historical data, the target size of their Taldybulak copper/gold project is 10 million ounces of gold plus almost 2 billion pounds of copper.
A continuous zone of significant copper/gold mineralization has been delineated with dimensions measuring 1,000 meters along the strike by up to 400 meters in width and 500 meters deep. The mineralization remains open to the west and at depth.
The potential for an open pit mine here looks realistic.
Gold Fields Joint Venture Option
In November of 2006, Gold Fields BV, a subsidiary of Goldfields Ltd., was granted an option to earn up to a 60% interest on the Taldybulak-Talas project and other licenses by spending $10 million. They may increase their interest by another 10% if they spend another $10 million on a feasibility study. A prefeasibility study is expected to start in 2010.
Karchiga Copper/Gold deposit
The Karchiga Copper-Gold deposit is a volcanic hosted massive sulphide deposit (VHMS) located in the extreme north east of the Republic of Kazakhstan, within 40km of the Chinese border. The project is within the Rudny Altai VHMS belt, ranked in the top four VHMS belts of the world with over 70Mt of contained metal.
In April, a 43-101 compliant resource estimate for the Karchiga VMS deposit was issued which showed that 374 million pounds of copper are contained in the project at a grade of 2.07% Cu.
The resource incorporates the 1,879m of confirmation diamond drilling completed by Lero Gold Corporation in Q4 2007 and 86 historical Soviet diamond drill holes and trenches totaling 10,330m.
There�s still an excellent exploration potential at Karchiga and in June a $3 million exploration program got underway designed to double the resource potential.
Conclusion
In the words of Dr. Kurzin, this could be the �Critical turning point� for Orsu Metals. The new management team has added the necessary cash and technical support to get the Varvarinskoye mine up and running up to an anticipated 80% capacity by year end. By 2009, the plant could be turning out 140,000 ounces of gold and 26 million pounds of copper. That would be a major success for the company and shareholders alike, making this stock a potential triple or more from today�s price.
An added speculative premium can be anticipated given completed Definitive Feasibility Studies from Taldybulak-Talas in 2010 and Karchiga in 2011. Both these mines have the potential to see production in a relatively short time horizon which gives the potential for much greater growth over the next three to four years.
Today�s market isn�t too interested in development projects. Companies with cash flow however get investors attention. And those companies in production who also have advanced development plays then become even more attractive to investors.
The next few months should give us an indication Kurzin and his team can produce another huge winner for us.
Disclaimer
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Orsu Metals
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