Gold, Silver, Platinum & Diamonds

August 16, 1999

Southern Era just discovered what it's like to get worked over by elitists, namely De Beers. Southern Era has a high grade diamond-rich kimberlite pipe, with a two year life. The company was muscled out of a majority of its stake in one of the world's most glittering diamond finds in So. Africa.

De Beers ended up with 60% of the property, when after discovery, a group of So. Africans popped up, claiming to be heirs to the property, stating they had never given up mineral rights to it. Southern Era brought court action, while De Beers surreptitiously bought out the so called heirs. Faced with this formidable opponent on its own turf Southern Era agreed to give away a 60% majority to bring the dispute to an end. This is how elitists do business in So. Africa. If they don't own it, they steal it.

Both Venezuela and Placer Dome are still trying to extricate themselves from their dilemma. A judge on the panel, that gave Placer title to Cristinas 4 & 6 concessions at the expense of Crystallex (KRY), was found by U.S. authorities to have been bribed. Negotiations are in process between Placer, KRY and the Venezuelan government. Venezuela does not want to appear to have a corrupt judiciary. Placer officials don't want to go to jail and Crystallex just wants what rightfully by law is theirs. The key to the solution is the new mining law. If it has wording to the effect that if a party does not have a concession on the date that the law is enacted, then the party will have to go through the appropriate procedures to obtain that concession. Since the owner of that property has a superior right as against third persons for the rights to the concessions on that property, Placer would be out of luck as KRY exercises its right to the concessions by virtue of holding title. All Placer has is work contracts, and they are expired. If they wanted property they'd have to reapply. Whoever owns title controls the property.

Our conclusion is the government wants the matter to go away. Placer can walk away by simply saying we no longer have title to work the property and the criminal aspects of the situation will disappear. Venezuela certainly doesn't want a trial depicting it as a nation of crooks. And Crystallex will be able to proceed mining 4 &6. If our synopsis is correct we'd sell Placer and buy Newmont or perhaps short Placer. And we'd buy Crystallex on speculation that this is the easiest way out for all parties. We have no financial or other arrangements with any of these companies. much less the Marxist Chavez government.

Gold Fields of S. Africa is hunkering down and is making contingency plans for $230 to $250 per ounce gold prices. They reported a 29% drop in June quarter profits. They are cutting exploration and expansion. The quarter saw output up 7%, but price received was $276 an ounce. Cost per ounce fell from $251 to $248 an ounce. This is one of the better run mining companies and now even they are having problems.

Durban Roodepoort Deep is discussing with trade unions the closure of three loss-making shafts at its West Wits mine. It would mean the loss of 260 jobs. Thousands more face layoffs.

Well other newsletters are starting to catch on. One we read on August 9th spoke in regards to a Dow Jones release that mirrored liquidity problems in the gold market and the panic selling of spreads. Some participants were heavily short and didn't have the metal to cover their positions as six month lease rates rose to 350 basis points, or 3 1/2%.

Even more shocking to the newsletter was that Alan Greenspan said, U.S. commercial banks ended 1998 with outstanding derivative positions of $33 trillion, of which $29 trillion were privately arranged OTC contracts, outside the venue or control of any regulatory agency. This compares to about $460 billion of total equity for the American commercial banking industry. Greenspan estimated OTC derivative positions globally are about $80 trillion. Other estimates are $100 trillion. The BIS says, $50 trillion in just interest rate derivatives. The newsletter said, wild ago when we were the only newsletter in the world that stated derivative positions worldwide were over $150 trillion, and that the FED, BIS, IMF, World Bank, bankers and Wall Street professionals were either stupid or liars.

Placer Dome will cut 40% of its work force or 2,900 jobs, including 29 senior managers at Western Areas. Some 80,000 jobs are at risk in S. African mines. Over the past 10 years mine employment has been cut from 12,000 to 6,000. Placer invested $344 million in Western Areas and South Deep, a new project due for production in 2002 at $185 an ounce. We told you that this was an inopportune investment for the company before the fall in gold prices manipulated by central banks. Placer is a short irrespective of their $1.7 billion in cash.

Canada sold another 2.5 tons of gold in July.

The IMF is backing off selling gold because they know the U.S. Congress will not approve the sale. This while fabricator demand remains strong, mine closures are now occurring and exploration expenditure has been slashed some 50%. We can now report a genuine miracle. Merrill Lynch forecasts gold to rise to $290.00 an ounce in 12 months.

Big mergers are likely among major producers in the gold industry. If prices were to stay in their present range there would be major pressure to combine. The average total cost of production, including depreciation, overhead and exploration costs, is about $320-$330 an ounce. At that cost 40% of gold production is uneconomical. 50% to 60% of companies are losing money. Total mine supply could drop off 40% within the next two years. The most probable merger would be between Newmont and Barrick, North America's two largest producers, which could generate synergies from their assets in Nevada and Peru. Newmont has $1.2 billion in debt and Barrick has a strong financial position. The downside for Barrick is that its position as the lowest cost producer would be eroded if it were to make the acquisition. The mystery gets even more exciting as South African and Australian producers all make probes and express interest in merging with a North American group. Our guess is within the next six months mergers will begin and there will be major concentration in the industry. It's part of the world monopoly syndrome.

Fed has done all it can to fix US economy's non-structural issues, now it must hike rates