Gold ETFs Killing Gold Miners

Gold ETFs Killing Gold Miners

By: Marco G.

October 8^th, 2010

http://goombarhsedge.blogspot.com/

What does this title mean?  The author was perusing an article about commodities investing this past decade and came up with a startling revelation.  Since the advent of the large Gold exchanged traded fund GLD in 2006, the author has noticed a serious lagging of leverage for the large cap Gold miners.  Gold miners are not producing gains higher than that of the underlying Gold price.

Gold Miners Not Providing Leverage

As analyzed in my previous article, “Peak Gold or Gold Corp Overpays for Andean”, the major Gold miners are not providing leverage from the underlying Gold price.  Gold gains 10% in price and the miners gain 10% in price.  True the mining equity is marching along with the Gold price moves, but the equity should compensate the investor with more gains and leverage for taking the increased company specific risks of investing in a company stock.

Gold, the metal itself does not have company specific risks, whereas each mining equity carries a whole cartload of risks including country location, mining performance, governmental and environmental, geological happenstances and so on and so forth.

Mysterious Myth of Miners Leverage by Hardrock

As further support of this theory, examine the information presented by fellow Seeking Alpha contributor “Hardrock” here. 

One of his charts was so striking, that I have reproduced it here following:

Figure 1:  Source:  Mysterious Myth of Miners Leverage,  http://seekingalpha.com/instablog/415953-hardrock/84134-mysterious-market-myth-of-miners-leverage

The GDX has been underperforming the Gold price.  I am sure that the majority of investors out there would not be aware of this Gold stock underperformance and would be shaking their heads in confusion.  This runs contrary to established mining lore, where the equities leverage the price of the underlying metal.  This is startling information indeed and this has many implications for precious metal investing.

Ease of Investing in Gold ETFs

If you are like me, before you make any investment in a company, you spend days, in reviewing financials, analyst reports, websites and investment blogs trying to understand the company and their prospects for future growth.  Well, is not investing in the GLD ETF a whole lot easier?  No research or due diligence required.  Just put out the capital and you are done.

Monies that would have been put into investment in large Gold mines are now a lot easier put into the GLD ETF. 

Summary

Large Gold companies are now not providing any leverage to the underlying Gold price because of the ease of investing in the new Gold ETFs.  Welcome to the brave new world of precious metals investing.

Analyzing Great Basin's Golden Long-Term Prospects

Great Basin Gold (GBG) has moved higher on significant volume after their August 11th, 2010 report on the 2nd quarter. The stock price has surpassed the previous 52 week high of $2.09 on Wednesday, August 18th. The operative phrase for this author is in their presentation for the 2nd quarter:


Positive cash flow from operations expected with both projects generating revenue.

The author has holdings of Great Basin and revisits his previous article and analyzes the existing price movements for evaluation of the strategy going forward.

Moving Higher After Breaking Out From the Wedge Pattern

The chart below is a follow up of the price movement of GBG after breakout from the indecisive wedge pattern. The catalyst for the breakout as noted in the earlier article was the expectation of a great 2nd quarter report due on August 11th, 2010. Note that the stock price had a large move upwards on August 9th, 2 days prior to the quarterly release. The market is forward looking and leads. It was only on August 11th itself, that the price broke through the wedge line. The volume was light and suspect as commented by a reader on Seeking Alpha.


Figure 1 - Great Basin Gold's Narrowing Wedge and Breakout

The large volume did not appear until Monday August 16th, in the following week. GBG has now enjoyed movements upwards with volumes of 7 million plus shares on two days with indications of a third occurring today. Note that GBG trades on three stock exchanges, Johannesburg, South Africa, Toronto, Canada and the Amex in the United States. As GBG volumes are the greatest on the TSX in Toronto, this article is focusing on the stock play there. The other indicators of Price Oscillator, Moving Averages and Chaikin Money Flows are all positive for GBG. The author is pondering upon price movements for the future.

Analysis of Breakout

From looking the longer term chart for Great Basin below, the reader can see that the stock price was held in a trading range since their large private placement in March 2009 of 115 million shares and 57.5 million warrants.

Figure 2 - Great Basin Gold 3-Year History

The author has long wondered about the GBG share price movement and is beginning to conclude that it is not the share overhang but the warrants overhang, that was preventing the stock from moving upwards earlier. The rationale is that the warrants exercise at the price of $1.60 Canadian. The warrants when exercised puts a further 57.5 million shares into diluting the capitalization. The warrants would add another 17% more shares to the existing 338 million shares that were outstanding then. Therefore, in order for the stock price to move higher permanently, there was this 17% more value capping that had to be overcome, before the stock price could have traction.

The market needed a catalyst that there was definitely strong value in the stock to come prior to moving. This catalyst was the 2nd quarter report that states positive cash flow is coming with two operating projects. Therefore the GBG stock price cycled up and down within a trading range and in the tightening wedge pattern from March 2009 until now, there was this positive news propelling the stock out of the stuck trading range.

With the breakout of Great Basin’s stock price on good volume, this is indicating that the market now views positively the prospects for Great Basin in adding value to support the stock price. GBG stock is now not hindered by the thought of the dilution impact of the warrants exercising. The plus to this is that the warrants when exercised in October will be adding $90 million Canadian to GBG’s coffers. This cash boost should help fund further initiatives such as exploration and improvements that will further boost the stock price.

Moving Higher Relative to the Pack

In trying to understand the breakout that Great Basin has performed, the author ran the performance chart following.

Figure 3 - Great Basin Gold vs. the Pack for 10 days

I compared GBG’s recent price performance to the Market Vectors’s Gold Miners GDX, the Market Vector’s Gold Junior Miners GDXJ, Gold Corp GG and the gold ETF GLD. Great Basin, in green leads the pack with an over 10% movement higher within the last ten days. The chart confirms that Great Basin Gold is now moving higher on its own prospects, distancing itself from other gold miners and price movements of gold itself. This is definitely good news, as this indicates the market is valuing the prospects of Great Basin becoming a gold producer that will generate positive cash flow.

Moving Up on a Gold Down Day, August 18, 2010

As I am writing today, August 18th, it is shaping up to be a minor down day for gold with the price losing 0.5%. Great Basin’s stock price never let up and showed green from the bell, and is now up 3%. Volume was also indicating a large volume day. This again bodes well for Great Basin in confirming that the stock price is moving up on its own story. The market participants are accumulating in the anticipation of the positive cash flow.

GBG's Focus for 3rd Quarter

The following chart was presented at the quarterly results conference:

Figure 4 - Great Basin Gold's Focus for 3rd Quarter

The information in the chart indicates that we may expect two new resource updates coming for both their Burnstone and Hollister mines, among their many other operation improvement efforts. Good news on increasing reserves and resources will help to support a rising stock price for Great Basin.

Looking Forward for Great Basin

Fellow Seeking Alpha contributor, “HardRock,” has blogged an interesting prediction for Great Basin’s stock price going forward here. The chart in his posting is so inimitable, that I am posting it following:

Figure 5 - HardRock's Remarkable Forecast for Great Basin Gold

Examine the remarkable tail in the chart above. HardRock calls for a double of GBG’s stock price in four months. HardRock’s forecast is:


The forecast calls for breaking $2.00 Cdn in Aug, 2010 and $3,00 in Oct, 2010

Well, the first part of his prediction has come to fruition, breaking $2.00 Canadian two days ago. It remains for the market to determine what will happen come October, 2010.

Strategy Going Forward

The author has held for so long now, as documented here, and he is finally seeing some fruits of his holding. In short, going forward, the author intends to see through the eventual reward that comes to a company entering production and the ensuing profitability.

Disclosure: Author long GBG

Silver: Leverage the Laggard

Silver: Leverage the Laggard

Introduction

Silver is the poorer sibling of the leader of the precious metals – glamorous Gold. When one talks of the bull market for precious metals, one automatically assumes that one is talking about Gold. Silver is known as the sidekick, and as not truly a precious metal, as there are many industrial uses for it, so silver merely tags along for the ride. I will examine a few possible rides on the precious metal bull market via Silver.

Gold/Silver Floor

The bull market for precious metals is entering the main stage, since the Gold price broke the $1000 USD level again, this fall. The difference this time is that Gold seems to have some staying power and is staying above the one grand marker. There is a great article by a fellow Seeking Alpha contributor that gathers all the under-pinnings of the present Gold bull market. Here is the link to that article: http://www.washingtonsblog.com/2009/10/gold-big-picture.html. Here is a chart from Stockcharts that explains how the previous resistance for Gold and gold stocks that once broken turns around and becomes strong support.

Figure 1: Fall 2009 Chart of Gold Miners and Gold. Note that the resistance level once broken decisively turns into support. Source: http://www.stockcharts.com/

If there is any doubt about the $1000 USD level for Gold being a new support floor, you will note that the Gold price has also broken the $1100 USD barrier a few days ago on November 9, 2009. Checking back to the timing of the Gold $1000 barrier event, we see that the Silver price at that time was about $16 USD. We assume that the new floor price for Silver is now around $16. This is confirmed towards November month’s end, when the Silver price dipped to around $16 but did not penetrate it. Therefore the new floor support price for Silver is $16.

Figure 2: Silver Price Chart Fall 2009. Note the double test of the $16 level which is now the new Floor support price for Silver. Source: www.stockcarts.com

Gold Silver Ratio
There exists a methodology of comparison between the two siblings, a loose standard called the “Gold Silver Ratio”. The historic ratio over history may be thought of as 15 to 1. That is a millennium long ratio that compares the relative value of the two metals over history. For the recent history of this ratio see the Gold Silver Ratio comparison chart below.

Figure 3: Chart for the last 3 years of the Gold to Silver Ratio. Note the dramatic spike in October 2008 and the gradual descent of the ratio for this year, 2009. Source: http://www.stockcharts.com/

The present ratio value is about 65, that is the $1100 Gold price compared to the $17 Silver price. This shows that Silver is presently an extreme laggard to the leader Gold. The ratio spiked in October 2008 with the rush to safety in Gold driving the price high. This chart is telling us that the ratio is settling down and should come back to a more natural ratio of the 50 range in the near term. The author submits that there is a tendency in all natural systems for a revision to mean; that is the pendulum swings both ways, what goes up should in time come back to normal. That is unless there are fundamental structural basic changes that cause a new normal such as what we have touched upon for the precious metal bull market.

Silver Target price
With a precious metal up trend unfolding, what should be a reasonable target for Gold’s sibling Silver? This author sees evidence of a precious metal bull market happening, but he cannot predict the outcome or target price. Fortunately, the author in researching for this article came across a Point and Figure chart prediction, reproduced below.

Figure 4: Point & Figure Chart that filters out the noise; note the Target of $26. Source: http://www.stockcharts.com/

The algorithms driving the above charting of the Silver price data came up with a price objective of $26. This seems reasonable to me.

With the understanding of the precious metal trend, of the underlying floor price, of the tendency of revision to mean and a target price, there appears to be an opportunity here. The indicators are all pointing to a drastic increase in the price of Silver.

Silver is more volatile than Gold and may go beyond our projections, but that is a topic for another day. Note that the historic ratio of Gold to Silver is15, which calculates to give a price of $73 presently should the ratio linkage be valid.

Leverage with Stocks
With Silver at $17 and the projected increase to $26, that gives us a possible 50% gain by investing in the metal. Now, one may easily leverage that with investing in silver stocks. The short answer to why stocks leverage an underlying commodity price is that the increasing metal price increases the company profits while costs should stay about the same. A more comprehensive explanation of stock leverage over the commodity price by Mr. Greg McCoach is here: http://www.amerigold.com/investing/index.php?mod=cnt&act=cnt&id=23
Commonly accepted wisdom is that stocks provide two to three times the gains in the underlying metal price. There is the caveat of risk that should the metal prices slide, the downside for the stock price is also more severe.

The author is partial to silver stocks such as Hecla Mining (HL) and Silver Wheaton (SLW). Hecla is mainly a Silver producer that is continuing a turnaround in their operations. Hecla produces Silver from their Greens Creek mine in Alaska and Lucky Friday mine in Idaho. A bonus is the Gold production from Greens Creek. Here is a Seeking Alpha article describing the trials of Hecla: http://seekingalpha.com/article/119319-hecla-mining-caught-in-a-bad-market . Silver Wheaton is a royalty company leveraged to the Silver price. Silver Wheaton has only 26 employees and fifteen Silver royalty streams. Here is a link to a Seeking Alpha article that covers SLW: http://seekingalpha.com/article/172716-three-metal-miners-three-dynamic-business-models-three-great-quarters


Leverage with warrants
Another method for leverage is to use warrants that give rights to purchase an equity. There exists bullion funds that are traded similar to equities on the Toronto Stock Exchange TSX such as Silver Bullion Trust, SBT.un and Claymore Silver Bullion Trust, SVR.un. These two examples have warrants that also trade on the Toronto Stock Exchange TSX, SBT.wt and SVR.wt respectively. The particularly intriguing aspects of these warrants are firstly, they are in the money, that is the underlying security is above the exercise price. Secondly, the warrants are particularly good value, trading (as of November 13, 2009) at $1.30(Cdn) and $.87 (Cdn) respectively. Thirdly, the warrants give the right to purchase the equity at $10 (USD) and $12 (Cdn) respectively, which is a leverage of about 7 to 1. A note about risk with these warrants is that if not exercised by the expiry date they become worthless. The SVR.wt expires on January 15, 2010 and the SBT.wt expires on April 29, 2010.

Conclusion
These tactics are not without risk, and not something I would bet the house upon; however I have backed my deliberations with some dollars. The risk is having silver fall below the floor price that we have assumed. Then the investor is set up for a major loss; or if the investor still believes the story, then it will be a waiting game for the bull to come to fruition. Just remember the stock market is a “Great Humbler” and can be irrational for longer than people can withstand in their pocketbooks. So with the disclaimer out of the way, Hi-ho Silver and away!

The author is long the Silver Bullion Trust warrants, SBT.wt.


Important Disclosure
The information and opinions contained within this document reflect the personal opinions and views of the author and should be view as information for thought and entertainment only. The author may from time to time have a position in any of the securities mentioned. Any material within should not be construed as accurate or reliable or be utilized as advice for investment or business purposes. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. There are no guarantees of the accuracy or completeness of the information contained herein. These writing are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not receive or request compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

GBG –Jump to Mid-Tier Gold Producer!

Sunday November 8, 2009
GBG –Jump to Mid-Tier Gold Producer!


Introduction
Great Basin Gold is an emerging gold production company headquartered in Vancouver, Canada with operations in Nevada and South Africa. The company’s shares are listed on the TSX (GBG) in Canada, on the Amex (GBN) in the United States and on the JSE (GBG) in South Africa. The company is a focused developer with two new gold projects that are proceeding into mining. The Hollister mine is in the gold prolific area of the Carlin Trend in Nevada and the Burnstone mine is in Kimberly Reef area of the Witwatersrand Basin in South Africa. Great Basin Gold’s shares have been included in the Amex Gold Miners index (GDM) in the US and both the S&P/TSX Composite and S&P/TSX Small Cap Indexes in Canada.

GBG Projects

Hollister Mine – Nevada, USA

Hollister is a bonanza grade gold mine in Nevada that is just ramping up into production. The mine is based upon several high-grade epithermal gold-silver vein systems below the Tertiary cover. Bulk samples have been excavated and milled for validating and tuning up the production processes this year. Pre-production drilling has increased the mineral resource by 27% to 3 million Au equivalents as reported in June 30, 2009 M. D. & A[1]. The average grade of ore for the mine is over 1 ounce of Gold equivalents per ton mined.
Great Basin acquired the property in Elko County, Nevada from Newmont in 1997. Great Basin explored the property outlining excellent high grade veins until 2001. In 2002 Hecla entered into an earn-in and joint operating agreement with Great Basin to explore and bring the property into commercial production. In 2007 Great Basin purchased back the earn-in option from Hecla for $60 million US, thereby giving GBG 100% ownership of the project. At the time, a 6800 feet decline and 1000 feet of drifts through the veins had already been completed at the Hollister project.

Since 2007 Great Basin has completed a further 30,000 feet of underground development. A total of 26 discrete veins have been discovered including 2 new ones in 2009. Bulk samples have been excavated and treated at the nearby mills of Yukon Nevada’s Jerritt Canyon and Newmont’s Midas Mine. Subsequently in November 2008, Great Basin has purchased the Esmeralda Mine and accompanying mill. This mill is 280 miles distant from Hollister and the operating plan is to truck the Hollister ore there. The mill’s capacity is 350 tons per day, and management intends to modify the mill and upgrade the capacity.
Other than the Hollister mine and block (5% of the property), the property of about 27 square miles, also has many other gold prospects that have been and are currently being explored. The February 27, 2009 Technical Report states that “The greater Hollister claim block has significant exploration potential to host one or more additional high grade “bonanza” vein systems under the Tertiary volcanic cover.” Full production from Hollister is expected to produce 120 k ounces of Gold equivalents per year.

Burnstone Mine – Witwatersrand, South Africa

The newly developed Burnstone mine in the Witwatersrand basin in South Africa is the first new mine in the region for the last thirty years. The mine accesses the gold bearing Kimberly Reef at a relatively shallow depth of 300 to 500 meters. The target date for commissioning operations is June 30, 2010. The vertical shaft has reached the Kimberly Reef target at 360 meters and the access decline has also reached their targets for reef development. Presently, test mining is proceeding with the ore being stockpiled until the above ground infrastructure is ready.

In November 2002, Great Basin acquired the right to purchase 100% interest in the South African company Southgold Exploration (Pty) Ltd, which had the rights to the Burnstone Gold Property. The two-stage acquisition was completed in January 2004, giving Great Basin 100% ownership of the property. Tranter Investments a Black Economic Empowerment (BEE) company has invested in Burnstone, owning 26% which was then transferred to GBG, owning an estimated 15% of the company.

The Burnstone project is located in the Witwatersrand about 80 km southeast of the city of Johannesburg in South Africa. The project is situated close to paved highways, infrastructure, railroad and power lines. All of the required permits to complete the development of the mine and commence full scale underground mining have been obtained.

The Burnstone goldfield is defined by an 18 kilometer long, northwesterly trending mineralized corridor hosting the Kimberley Reef, one of four main gold-bearing units in the Witwatersrand Basin. At Burnstone, the central portion of the gold corridor has been uplifted by two northwesterly trending sub-parallel faults and as a result, a significant portion of the deposit areas along the trend occur at relatively shallow depths of 200-750 meters. Full production is expected to produce 250 k ounces of Gold per year

Quantitative Analysis

Gold Mineral Resources
Hollister Mine in Carlin Trend, Nevada USA – Reserves & Resources
Proven & Probable Au Equivalent Reserves
1,200,000 oz
Measured & Indicated Au Equivalent Resources
1,500,000 oz
Inferred Au Equivalent Resources
1,400,000 oz
Mine Life
10 years
Table 1: Hollister Mine - Reserves & Resources

Hollister Mineral Resource Estimate: March 2009
Resource Category
Cut-offoz/ton
Tons
Auoz/ton
ContainedAu oz²
Agoz/ton
ContainedAu Eq. oz
Measured
0.25
199,300
1.895
377,700
29.02
468,100
Indicated
0.25
911,900
1.008
918,700
4.13
977,500
Total Measured & Indicated
0.25
1,111,200
1.167
1,296,400
8.59
1,445,600
Inferred
0.25
1,035,300
1.340
1,387,500
2.72
1,431,500
Table 2: Hollister Mineral Resource Estimate

Burnstone Mine in Witwatersrand, South Africa– Reserves & Resources
Proven & Probable Au Equivalent Reserves
4,100,000 oz.
Measured & Indicated Au Equivalent Resources
10,900,000 oz.
Inferred Au Equivalent Resources
4,500,000 oz.
Mine Life
19 years
Table 3: Burnstone Mine - Reserves & Resources

Burnstone Mineral Resources Overall Property: October 2009
RESOURCECATEGORY
Cut-offcmg/t
Tonnesmillions
Au Gradeg/t
Contained AuOunces
Measured
400
43.9
6.08
8,569,500
Indicated
400
10.3
9.21
3,038,600
TOTAL MEASURED & INDICATED
400
54.1
6.67
11,608,100
Inferred
400
11.8
12.14
4,588,700
Table 4: Burnstone Mineral Resource Estimate


Estimated Gold Mining Production

Hollister Estimated Gold Production
2008 production
80 k Au Eq. oz.
Est. 2009 production
115 k Au Eq. oz.
Average annual production
120 k Au Eq. oz.
Average grade of ore extracted
49g/ton Au Eq. oz
Cash cost per oz. (USD)
$426
Total* costs per oz. (USD)
$559
Table 5: Hollister Estimated Production
Source: February 18, 2009 Hollister Technical Report by J. Oelofse, P. Bentley, and D. van der Heever[2]
*1 Total cost includes mineral taxes, federal income tax payable of US$78/oz, and depreciation and amortization US$55/oz on capital expenditure of $110 Million USD

Burnstone Estimated Gold Production
Average annual production
254 k Au Eq. oz.
Average grade of ore expected
4.3g /ton
Cash cost per oz. (USD)
$319
Total* costs per oz. (USD)
$495
Table 6: Burnstone Estimated Gold Production
Source: February 16, 2009 Burnstone Technical Report by D. van der Heever, J. Oelofse and P. Bentley[3]
* 1 Total cost includes mineral taxes, federal income tax payable of US$118/oz and depreciation and amortization of US$58/oz on capital expenditures of $224 Million USD


Stock Structure and Ownership
GBG Stock Structure and Price
Shares: Basic
334,000,000
Warrants
86,178,552
Options
17,559,599
Fully Diluted
438,000,000
Share Price (Oct 22, 2009)
Cdn $1.74
Market Cap – Basic (Oct 22, 2009)
Cdn $579,000,000
Fully Diluted
Cdn $762,000,000
Table 7: GBG Stock Structure and Price

GBG Ownership Information
Shares Outstanding
334,000,000
Institutional Ownership
44%
Top 10 Institutions
33%
Mutual Fund Ownership
13%
5%/Insider Ownership
1%
Float
99%
Table 8: GBG Ownership Information[4]
On October 29th, 2009, Great Basin announced a $110 Million bought deal public offering of convertible debentures[5]. This offering is set to close on November 17th, 2009. The purpose of the offering was to replace the Burnstone construction loans from the syndicate of banks. The newer financing is lower cost and more flexible without having to hedge any gold production from Burnstone.

Great Basin Gold Ownership of Properties
GBG Rusaf
Great Basin owns 100% of GBG Rusaf, formerly Rusaf Gold. The Company acquired Rusaf Gold Ltd. in April 2008. Rusaf holds interests in early stage mineral prospects, the Tsetsera Property in Mozambique, properties in Tanzania and Iturup (Kurils) Islands (Russian Federation).
In 2008 Russaf conducted exploration in three regional areas of Lake Victoria (North-West) early stage, Lupa (South-West) drilling at Nkolwisi, and Kikugwe (Central-South) soil sampling. Initial 43-101 reports are nearing completion. In 2008 Rusaf drilled 33 holes in the Kurils Islands. Analysis and initial technical documents are currently being completed for the Kurils project.

Kryso Resources
Great Basin holds a a 16.7% equity interest in Kryso Resources. Kryso is an AIM-listed mineral exploration and development company focused on projects in Tajikistan. Kryso’s primary goal is to bring the Pakrut gold project in Tajikistan, of which it has 100% ownership, into production. An internal prefeasibility study has been completed for the Pakrut project, with highly positive results, and a bankable feasibility study on a mining operation is currently underway.

Qualitative Analysis

Management
Chairman - Ronald W. Thiessen
Mr Thiessen is associated with Hunter Dickinson Services Inc., a company providing management and administrative services to several publicly-traded companies and focuses on directing corporate development and financing activities. He is also a director of Hunter Dickinson Services Inc.
Among R. Thiessen’s other executive positions held are as Chairman of Taseko Mines(TSX: TKO) and as President & CEO of Northern Dynasty Minerals (TSX: NDM), which is developing the massive Pebble Beach copper gold project in Alaska.
President & CEO - Ferdinand Dippenaar
Mr. Dippenaar is a recognized member of the South African mining industry where he has worked for 25 years. In 1996 he was managing director of Grootvlei and of East Rand Proprietary Mines. Harmony Gold purchased Grootvlei and he became marketing director of Harmony. Most recently he was the Executive Director of Marketing for Harmony, when he was appointed Director, President and CEO of Great Basin Gold Ltd. in December 2005.

Market Analysis
The Gold market has witnessed a strong recovery from the economic volatility of Fall 2008. Beginning in September, 2009 Gold started a strong uptrend and pierced the $1000 USD mark. Presently the Gold price is hovering between $1020 and $1060 USD.
Great Basin Gold undertook a massive $145 million financing in March of 2009. The financing was 115 million shares priced at $1.30 Canadian, each with one-half warrant priced at $1.60 and valid until October 15, 2010. This financing diluted the company stock by 46% and has left a significant overhang on the share price. The GBG stock has witnessed severe price volatility, rising and plunging from $1.20 to $1.70 all summer of 2009.
On October 29, 2009, Great Basin announced a $110 Million convertible debenture bought financing. This loan will pay back their existing construction loan facilities and they will not need the financing from the previously arranged syndication of banks.
As Great Basin takes positive steps in moving both mines into production the market should re-value the share price. Hollister with the Esmeralda mill is on the verge of full production. Burnstone is following the plan of commencing official production on June 30, 2010. With both mines producing, the planned annual output of GBG is around 350 k oz. of gold equivalents. This is from the Hollister cash cost of $426 per oz. and the Burnstone cash cost of $319 per oz. The cash flow will be robust and the profit margin will be very healthy if the price of Gold maintains above $1000 USD. Note that Great Basin has managed construction of the mines without hedging any of their future production. The future is very golden for Great Basin Gold as they maintain full leverage to the potential up trend in the gold price.

Exploration Potential

Hollister Exploration Potential
The Hollister area has excellent potential to host further high grade vein systems. The mine location is in the Carlin trend where they are surrounded by operating gold mines.
Above ground, there is the potential associated with the geologic cover (as reported in the June 30, 2009 M. D. & A[6]):
“Intersection of significant “Blanket-style” disseminated Au mineralization in the overlying Tertiary volcanics (HSD-64 31ft @ 0.78 opt / 9.3m @ 26.6 g/t Au)”
Drilling at the West Lateral location has already encountered intersections of 3 oz per ton over 2 feet as announce in their.
Reported on October 27, 2009[7]:
“Drilling in the Blanket Zone has indicated grade continuity in mineralization and a body of disseminated gold hosted in Tertiary volcanic rocks above the epithermal, banded veins. Intersections range in thickness from 19.4 to 135 ft (5.9 to 41.1 m) and grades between 0.130 to 0.500 opt (4.4 to 17.2 g/t) Au.”
The claim area around Hollister is large and prospective (as reported in the June 30, 2009 M. D. & A):
“The integration of previous geophysical surveys (airborne magnetics, radiometrics, and ground Induced Polarisation and CSMAT resistivity surveys) with available geological and drilling data has continued. Follow-up targets of preserved mineral systems similar to Hollister that exist on the claims block are being prioritized.”
At the previous operating Esmeralda mine, there is potential to restart mining quickly where there are existing stope developments giving access to the high grade ore.
Also the GBG geologic review of Esmeralda has determined that the fault structural control is the most important indicator of deposit mineralization (as reported in the June 30, 2009 M. D. & A):
A property wide geological assessment has indicated significant untested down faulted epithermal vein targets immediately east of previous opencast and underground operations.
Burnstone Increase in Reserves
Development of this exciting project continues in line with plan and is on track for commissioning by end of June 2010. Another exciting aspect is the commencement of trial mining to determine optimal mining methods which gets underway during October 2009. The current mining plan has assumed the mining of only 4.1 million ounces of the 12.5 million ounces of the resource. The positive results from the ongoing surface and now underground exploration programs continue to add resource ounces which could positively impact on the future development and production profile in the Burnstone region.[8]

Upside Potential

Great Basin as an Acquisition Target Scenario
Great Basin boasts 14 million ounces of gold in reserves and measured and indicated categories. In this environment of $1000 gold price and depleting reserves for the top tier gold miners, Great Basin makes for an attractive acquisition target with their new mines and ample resource ounces. The prevailing price paid per gold ounce for acquisitions is about $125. Multiplying $125 per ounce by 14 million ounces gives a possible price of $1750 million for Great Basin. $1750 million divided by 460 million shares fully diluted gives us a share price of $3.80 for a possible buyout. The share price for today, November 6, 2009, is $1.60 which gives us a possible 137% gain for buyout.

Great Basin’s Share Price Versus Gold Sales
Great Basin in 2010 at full production should be producing about to 380 k ounces of gold equivalents per annum. With gold at $1000 per ounce, that production will come to $380 million USD in sales. Top tier gold miners are valued at about 10 times gold sales. If we use 5 times valuation for being mid-tier, that valuation of Great Basin works out to be $1900 million. $1900 million divided by 570 million shares (including the convertible debentures), gives a share price of $3.33. That is a 108% gain from the price of $1.60 today.
With a disciplined management, Great Basin looks capable of achieving the upside targets for shareholders.

Current Status*

Hollister Property
• Increase to 1.5 million Au equivalent ounces in measured and indicated categories and 1.4 million Au equivalent ounces in the inferred category1.
• 18,026 Au equivalent ounces extracted by trial mining during the quarter and 60,554 Au equivalent ounces extracted for the year to date.
• 14% decrease quarter-on-quarter in cash production cost per Au equivalent ounce to US$324.
• Further positive results received from underground infill drilling program confirming planned stope grades.
• Permit obtained from the BLM to construct west Alimak raise.

Burnstone Property
• Increase to 11.6 million Au ounces in measured and indicated categories and to 4.6 million Au ounces in inferred category2.
• 1,439 ft (436 m) of on-reef development to date.
• Foundation for metallurgical plant completed and civil works commenced.
• Depth of 1,188 ft (408 m) below surface reached on vertical shaft with 435 ft (85 m) remaining to shaft bottom and 716 ft (217 m) of station development completed on 40 Level at October 28, 2009.

Esmeralda Property
• Successful refurbishment and commissioning of mill on September 9, 2009.
• Completion of desk top due diligence study on underground mining potential.

* Source: Management's Discussion And Analysis Quarter Ended September 30, 2009 posted November 6, 2009 on www.sedar.com[9]

Summary & Recommendation
The economics of Great Basin’s Hollister and Burnstone mines are robust yet conservative. The company is a relatively low cost producer with cash production costs per ounce of $426 for Hollister and $319 for Burnstone. The all in costs (including taxes, depreciation and amortization) per ounce are estimated at $559 for Hollister and $495 for Burnstone.
The new Hollister mine in Nevada is already producing ore in trial mining. Estimated production for 2009 is 115,000 gold equivalent ounces. Development drilling is reporting and confirming the high grades to be mined. The commissioning of the Esmeralda mill for the Hollister ore was successful.

The Hollister pre-production work has also increased the resources by 27%. Drilling prospective areas around the mine have discovered two new veins as well as finding long lengths of mineralization in the overlying Tertiary volcanic ground cover above the veins. The Hollister claim area is considered extremely prospective for further economic mineralization.
The economics of the new Burnstone mine in the Witwatersrand compares favorably with the South African industry averages. The planned average grade to be mined is 4.3 g/ton compared with the South African industry average of 3.4g/ton. The cash cost margin of Burnstone is 60% compared to 30% average for the South African industry. The decline and shaft are in place with trial mining and stockpiling for the ore. The target date for production is June 30, 2010.

Great Basin announced on October 13th, 2009, an increase to Burnstone’s substantial resource. The current Burnstone mining plan is based on only 4.1 mm oz. of the 11.5 mm oz. Measured & Indicated resource base. There is a further 4.6 mm oz. of the inferred category in the mine area. Surface and underground exploration in the area is continuing and will likely add to the reserves and resources.

Great Basin has a critical trait for success, a management track record of delivering on their projections. Great Basin reported aggressive cost management of the Hollister project and improvements in the mining dilution and methods have reduced their costs from plan[10].
Obviously, the previous management relationship with the renowned mine managerial firm of Hunter Dickenson shows in the disciplined and competent nature of their operations.
The outlook for Great Basin’s share price to rise as they enter full production is positive. As examined in two upside scenarios of acquisition or price to sales the possible upside for GBG shares is at least 100%. The time frame for these scenarios to unfold is short, possibly within a year.

Great Basin offers a unique blend of a new low cost sustainable long life mine in South Africa combined with a cash cow of a bonanza epithermal mine in Nevada. The writer after examining the available information, has come to this favorable conclusion. Great Basin will soon transform from a mine developer in 2009 and will jump immediately into a mid-tier gold producer status in 2010. This is in the midst of a solid up trend in precious metal pricing. For the astute investor, this transformation will result in a significant re-rating of Great Basin Gold’s share price.

References
[1] Great Basin Gold, “Management's Discussion And Analysis Quarter Ended June 30, 2009”, August 18, 2009, [Cited November 6, 2009], available from http://www.sedar.com/

[2] Great Basin Gold, “ GBG Hollister Technical Report”, February 27, 2009, [Cited November 6, 2009], available from http://www.greatbasingold.com/simple/operations/f/GBG-Hollister-tech-report-revised-27Feb2009.pdf
[3] Great Basin Gold, “ GBG Burnstone Technical Report”, February 27, 2009, [Cited November 6, 2009], available from http://www.greatbasingold.com/simple/operations/f/GBG-Burnstone-tech-report-revised-27Feb2009.pdf
[4] GBG – Great Basin Gold, “Institutional Ownership Information”, [Cited November 6, 2009], available from http://moneycentral.msn.com/ownership?Holding=Institutional+Ownership&Symbol=CA%3AGBG
[5] Great Basin Gold, “Great Basin Gold Announces C$110 Million Bought Deal Public Offering of Convertible Debentures”, October 29, 2009, [Cited November 6, 2009], available from http://www.greatbasingold.com/index.html?lf=1;pcat=2009;pg=25;ai=1290
[6] Great Basin Gold, “Management's Discussion And Analysis Quarter Ended June 30, 2009”, August 18, 2009, [Cited November 6, 2009], available from http://www.sedar.com/
[7] Great Basin Gold, “Great Basin Gold Provides Hollister Exploration Results And Operational Update”, Stockhouse.com, October 27, 2009, [Cited November 6, 2009], available from http://www.stockhouse.com/News/CanadianReleasesDetail.aspx?n=7503922
[8] Great Basin Gold, “Great Basin Gold Provides Hollister Exploration Results And Operational Update”, Stockhouse.com, October 27, 2009, [Cited November 6, 2009], available from http://www.stockhouse.com/News/CanadianReleasesDetail.aspx?n=7503922
[9] Great Basin Gold, “Management's Discussion And Analysis Quarter Ended September 30, 2009” , November 6, 2009, [Cited November 8, 2009], available from http://www.sedar.com/
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