Van Eeden picks three (November 10, 2005)

Paul Van Eeden is a noted analyst and newsletter writer who has written extensively on the price of gold. He contributes a weekly article to precious metal dealer Kitco Inc.’s website, and offers investment advice to subscribers through www.paulvaneeden.com.

The Northern Miner asked Van Eeden to recommend three mining stocks that could easily be overlooked by the average investor, but that offer some serious upside.

Van Eeden obliged, offering what he thinks are the hidden gems of the junior mining exploration sector.

Esperanza Silver (EPZ-V) makes the list, in large part because Van Eeden likes its prospecting deal in Peru.

Earlier this year, Esperanza agreed to contribute 40% of the costs associated with its San Luis property while Silver Standard Resources (SSO-T) agreed to kick in the balance.

The deal gives each company a 50% interest in any project acquired as a result of prospecting efforts, which, Van Eeden says, gives Esperanza shareholders some leverage.

Perhaps the best part of the deal, according to Van Eeden, is the stipulation that Silver Standard can earn an 80% interest in any project by financing it through to production.

That scenario would leave Esperanza with a 20% carried interest for contributing almost nothing. Esperanza chief executive William Pincus explains that his company must put up an initial $700,000 to Silver Standard’s $800,000. After that initial investment, however, capital costs would be covered entirely by Silver Standard.

“That’s the kind of exploration business I like to own,” Van Eeden says. “One that uses its own intellectual capital and someone else’s financial capital to create value for shareholders.”

While Pincus enjoys such praise he says that not everyone is pleased with the deal. From another perspective, it leaves Esperanza with only 20% of the deposit.

While channel samples from the outcrops at San Luis look good — gold and silver mineralization has a weighted average grade of 31 grams of gold per tonne and 830 grams of silver per tonne — Van Eeden cautions not to read too much into channel samples, especially if one hasn’t visited the project, and he hasn’t.

Still, Van Eden says exploration is off to a good start and drilling is slated to begin early next year.

Meanwhile, the second phase of drilling is about to begin on Esperanza’s namesake property in Mexico. A drill rig is scheduled to arrive soon for a 3,500-metre drilling campaign.

Esperanza shares have gained roughly 110% since late August and were trading at 77 in Toronto on Nov. 9 compared with 38 just over two months ago.

Van Eeden’s next pick, Mirasol Mining (MRZ-V), fits with his philosophy that an investment portfolio should be viewed as a portfolio of people rather than stocks.

He bought into the company last year when it was still private because he heard good things about Mirasol’s president and chief executive Mary Little.

“When it comes to these small exploration companies,” Van Eeden says, “the core of my investment philosophy is to invest in people.”

But it isn’t only the people of Mirasol that have impressed Van Eeden. He also points to Mirasol’s use of ASTER mineral mapping — a system rarely used on the scale at which Mirasol is using it. Van Eeden says ASTER is likely the best technology for satellite mapping.

Mirasol combined its geochemical database and detailed structural analysis with results from ASTER to delineate eight exploration targets, all in the Santa Cruz province of Argentina. Those properties cover more that 85,000 hectares, which haven’t been subject to artisanal mining.

“Most exploration companies just trade old projects among each other and hope that they’ll find something others have missed,” Van Eeden says. “There are very few companies that have the ability to come up with new projects.”

He also likes Mirasol’s business strategy, which is to focus on project generation. He says joint- venture partners will likely come in once exploration starts.

“This is outright the most intelligent strategy for small exploration companies,” Van Eeden says. “While it is still very early days for Mirasol I have high hopes for the company.”

Tracy Hurley, a spokesperson for Mirasol, says the junior is focusing on five properties. The most advanced is the Sascha project, a 4.5 km fault system where surface sampling has returned intermittently high grades of gold near surface. Mirasol has plans to begin a 1,000-metre first phase of diamond drilling.

Mirasol’s shares closed at 24 in Toronto on Nov. 10.

The reasons behind van Eeden’s third choice can be broadly summed up as: “What’s good for Newmont Mining (NMC-T, NEM-N) is good for the investor.”

The American major agreed to put in $7 million over four years to earn a 51% stake in Grayd Resources‘ (GYD-V) La India project in Mexico.

Van Eeden’s bullishness on Grayd, whose shares were trading at 24 in Toronto on Nov. 10, is largely built on the due diligence that Newmont put La India through before investing.

In just three months, Newmont mapped the property, took 735 surface samples, did 1,000 line-km of airborne geophysics and 20 line-km of ground geophysics.

“It amounts to what some companies achieve during a full year of exploration,” Van Eeden says.

He explains Newmont’s interest in the project by way of La India’s similarity with Newmont’s Yanacocha mine in Peru. Both mines are Tertiary-aged, volcanic hosted, with high sulphidation.

While Newmont only owns 51% of Yanacocha, it’s the company’s largest cash flow generator.

“It is much too soon to know if La India is going to turn up anything interesting,” Van Eeden says. “But if Newmont is prepared to spend as much as they are … then I’m prepared to take a shot as well.”

Grayd’s president and chief executive, Marc Prefontaine says more extensive drilling will begin in at the end of November. Newmont is funding 3,000 metres of drilling at a cost of $1 million.