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Miraj International Investment
Limited
The Benefits of Gold Equitiesfor Portfolio Diversification
MIRAJ GOLD & PRECIOUS METALSPrivate Portfolio Discretionary Account Managementwww.miraj.com Tel: 514.876.0144 Fax: 514 875 8967
MIRAJ GOLD & PRECIOUS METALS Private Portfolio Discretionary Account Management
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Making the Case for Gold &Precious Metals
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“A strategic position in gold should prove rewarding over the long haul.”
Gold stocks - trading at their lowest level in 25 years when compared with the
underlying price of bullion.
- the least economically sensitive among commodities An environment of rising volatility favours large cap stocks over
small caps. From a fundamental perspective, we continue to favor gold
companies with improving production and cost profiles, gold reserve upside, active exploration programs and strong management teams.
Gold equities that we believe offer investors a combination of these characteristics
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Introduction:
Today’s investor must contend with- Low bond returns and negative real interest rates
- Unpredictable equities
- A sliding US$ and rising US deficits. The weak US economic growth is exacerbating trade deficits
- Geopolitical tensions, with deteriorating conditions in the Middle East, and North Korea nuclear stalemate
- The emergence of inflation / deflation
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Introduction: Making the Case for Mining Equities
Mining equities offer investors- 3x the performance of underlying commodity
prices- Mining shares have similar diversification benefits
to commodities- Returns through dividends. Typically around 0.5-
0.7% for gold equities- Value creation above the cost of capital through
exploration and project development, merger & acquisition, cost cutting, technological innovations
- Downside protection via low production costs, by-product revenues, natural currency hedges
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Putting Today’s Gold Price in Perspective?
In the early 1970’s, the US was stuck in the Vietnam war and started to print money- Today banking and financial crises and the Fed
has been printing money like crazy over the past seven years and now much more money is printed in trillions
Melt down of the global market
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Putting Today’s Gold Price in Perspective?
The US baby-boomers’ appetite for commodities is now being replaced by the insatiable Chinese- The US ran its first current account deficit in the early
1970’s at US $4bn a year it is now US $80 billion a month In 1971, Charles de Gaule gave the American’s
back their dollars and asked for the gold equivalent (at the time the US$ was convertible into gold) … effectively triggering a massive depreciation in the US$ which lasted from 1971 to 1979- What will happen when the Asians start selling their US $2
trillion in US $ reserves and investing in gold.
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Opportunity vs. Risk
Opportunities Consolidation Low Real Interest Rates Japanese Buyers Cash Flow Multiples
Remain Low Gold Stocks Offer 3 to 1
Leverage Over Bullion Price
China Powerful Domestic Policy
Risks Large Central Bank Sales
other than what agreed Very strong U.S. Dollar U.S. Government Stops
Deficit Spending High Real Interest Rates
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Life Cycle of a Mining Share
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The "Five M's" For Picking Gold Stocks
By using the Five M’s, Miraj investor can build a simple but powerful model to initially sort through the many hundreds of upstart gold companies to find better opportunities.
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1. Market Cap
We measure a company’s market cap against its production level, reserve assets, geographic location and other metrics to establish relative valuation.
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2. Management
Some of the most successful company builders in the gold-mining industry are “financial engineers” – people who have the relationships and understand the capital markets and who know how to hire the best geological and engineering teams.
We seek out solid management with a good track record.
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3. Money
The gold-equities market is efficient at judging reserves per share.
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4. Minerals
Gold companies have the highest industry valuations based on price to earnings, price to cash flow, price to enterprise value and price to reserves per share.
Companies operating mines that produce gold and a significant amount of another metal (typically copper) tend to have lower valuations than pure gold companies. But at the top of a gold price cycle, copper/gold deposits end up rising to the same multiples as pure gold companies.
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5. Mine Lifecycle
We analyse the mine’s lifecycle broadly.
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What MIIL Miraj Searches for:
Companies with the best portfolio of projects in the developmental pipeline and who are aggressively trying to grow their reserves through organic growth and M&A activities.
How much production and at what cost are they projecting to add next year, the year after.
Are they aggressively seeking to grow the company?
These gold mining companies are planning on raising production levels through organic growth and increasing their reserves by acquisition of other gold producing companies and post discovery resource definition juniors.
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We look for undervalued situations no matter what the gold price as the Miraj formula for investing in mining stocks. The common-sense rules of investing are as written in stone for mining investments as they are for investment in any other industry. We check out the balance sheet:
- cash in the companies treasury- cash flow from operations- working capital- free cash flows
What MIIL Miraj Searches for:
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Miraj’s Two Metrics
At Miraj we define an undervalued stock is based on two metrics.
1.Market cap per ounce. - The market capitalization of a company
is the number of shares times its price. You divide that by its ounces of production and its ounces of proven and probable reserves, and you see how the company’s data compares to the industry’s weighted averages.
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Miraj’s Two Metrics
2. Operating cash flow multiples. - Take the difference between the gold
price and the cash cost to produce an ounce, multiply that by the company’s production per year, and you get operating cash flow. Divide that into its market capitalization and you get its operating cash flow multiple. We look at that this much the same as one looks at earnings per share multiples in other industries.
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How does MIIL select which companies meet its gold investing objective?
Successful gold investing depends on many factors.
Chief factors considered by MIIL’s investment manager in gold investing:- the ore quality of metals mined by a company- a company’s mining, processing and fabricating
costs and techniques- the quantity of a company’s unmined reserves- quality of management - marketability of a company’s equity or debt
securities
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Miraj Investment Approach
The industry averages on December 29, 2008 for the 50+ gold miners we follow (which is everyone of significance) : the average market cap for an ounce of production was $3,634, an ounce of proven and probable reserves was $194, and the average operating cash flow multiple on forecast 2009 production, assuming $900/oz gold, was 7.4X.
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Miraj Investment Approach
Gold mining will be one of the few industries doing well in 2009. - Key cost is oil, which is about 25% of the cost
of running a mine. Oil’s price, as we know, is down about 75% in the $147/barrel high last July. At the average $400 cash cost per ounce mine, that’s a cut of about $75/oz off their costs. That result alone is going to give them an uptick in future earnings versus what they showed for third quarter 2008.
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Miraj Investment Approach
To recognize that currencies are also falling; many are down 20% to 40% versus the U.S. dollar. All the commodity nation currencies—the Canadian dollar, the Australian dollar, the South African Rand, the Brazilian Real, the Mexican Peso—they’re all down 20% to 40%. When your mining costs in those countries are translated back into U.S. dollars, they’ll be 20% to 40% lower.
When you put falling costs of production together with a rising gold price, you’ve got a winning combination for the stocks in 2009.
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A Mine Life Cycle Approachto Picking & Investing in Gold Stocks
Value Mineral Market Cap Mining Cycle
Increasing reserves Increasing
production Increasing cash
flow
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Miraj Portfolio Objectives
To enable investors to participate in the gold and to a lesser extent precious metals sector through direct investment in these metals
The primary objective of the Miraj Gold & Precious Metals Private Portfolio is to provide competitive long-term total returns that exceed returns on the appropriate benchmark, and at a lower risk
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Miraj Portfolio Objectives
Superior performance is to be achieved through investing in a global universe of stocks that have been thoroughly assessed for asset quality, long term growth potential, and financial and strategic soundness
This strategy emphasizes investment in major producers with a broad asset base, medium capitalizations, and with primary listings on mature stock exchanges with high liquidity
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Investment Strategy:Best in Class Companies
Clear and sustainable competitive advantage.
Proven management ability - a track record of achievement against specific objectives & management accountability.
Market leadership, or the distinct ability and opportunity to emerge as a market leader.
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Miraj Gold Favorites
The performance of mining company shares can be adversely affected by a host of factors such as stock market volatility, geopolitics, environmental issues, management capability, financial strength, mine life, productivity, increases in operating costs, energy supplies and hedging policies.
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Miraj Gold Favorites
From a fundamental perspective, we continue to favor gold companies with improving production and cost profiles, gold reserve upside, active exploration programs and strong management teams.
Selectively buying gold mining companies, very selectively, and we make sure those companies are not big base metal producers.
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Miraj Gold Favorites
Agnico-Eagle Alamos Gold Anatolia Minerals AngloGold Ashanti Aurizon Mines Avoca Resources Barrick Gold
Centerra Gold Central African
Gold Coeur d'Alene Eldorado Gold Gold Corp. Gold Fields
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Miraj Gold Favorites
Golden Star Harmony Gold Iamgold Jaguar Mining Kinross Gold Lihir Gold Linux Gold
Newcrest Newmount Mining Randgold Red Back Mining Royal Gold Sangold Yamana Gold
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One analytical method
Take the total resource (indicated and inferred) and determine how many ounces you as an investor are receiving per share or per dollar invested
Capital expenditure
A mine has great capital expenditure involved in the roads, buildings, machinery, housing, power and water systems. Additionally, in most cases the exploration costs were higher because the project had to be taken to feasibility and the mine put into production.
Other Considerations:
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Open Pit can be easier to put
into production and far less capital intensive than an underground mine.
Underground Mine To be economic, it
must have much higher grades for the project to be worthwhile
Open Pit vs Underground Mine
In any given situation:What type of deposit are we looking at?
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Thus Discovery Development
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10 Year Gold Production
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Value of M&A Activity
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Gold Market
Strong demand- Investment demand
ETFs= new investment vehicle
- Fabrication demand Supply constraints
- Lower production- Depletion rates- Lower central bank
supply
Financial market vulnerability- Economic
imbalances (rising debt levels, deficit levels)
- U.S. dollar weakness
- Inflation/deflation Geopolitical risks
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Equities for the Gold InvestorEquities may provide investment opportunities arising from:
Leverage- Mining companies’ profits are
proportionately more sensitive to gold price variability (profits are net of the costs of mining)
- Gold shares tend to outperform bullion in gold bull markets/under perform in gold bear markets
Security valuations- Equities may be “cheap”
relative to historical prices- Equities may offer value vs.
relative to underlying commodity prices
Corporate activity (value added through corporate management)- M&A activity- Technical expertise
Vertical diversification- Exploration- Development- Production
Flexibility Global exposure
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Investment Process
Seeks long-term capital appreciation Invests primarily in common stocks of gold-
mining companies- Stock selection emphasized with top-down overlay
- Identify low-cost mining companies who can build reserves and raise production levels
- Focus on unhedged producers (for gold price leverage)
- Tailor to commodity outlook
- Adjust leverage to bullion when needed
- Monitor exposure to political risk
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Investment Approach
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Evaluating Gold Stocks
Revenue Earnings Ounces Produced Ounces Sold
Gold Producers Stock Index Time Saving Layout Research already done
100% Independent and Unbiased
At-a-Glance Reports Detailed Business Summaries
Performance Ranking
Numbers Production and Reserve
Reports Production and Reserves for
each mine
For more information: Miraj Gold & Precious Metals
Private Portfolio Discretionary Account Management
Please visit our website: www.miraj.com
1155 René Levesque Blvd West, suite 2500Montreal (Quebec) Canada H3B 2K4
Tel: 514 876 0144 - Fax: 514 875 [email protected]