Report from Romania

The Daily Reckoning PRESENTS: Our friends at Casey Research are constantly looking at resource companies to see which ones warrant their investment dollars – and it’s a tough job. So, recently, instead of relying on what the mainstream press or mining periodicals had to say about one certain company, they sent Louis James, their senior researcher for International Speculator to Romania to see for himself. His report, below…


For some time now, here at International Speculator, we have been following Gabriel Resources (T.GBU), a company there is much to like about.

For starters, there is the sheer size of the company’s Rosia Montana mega-deposit in Romania (more on that in a moment). Then there is the fact that Gabriel has a new and very determined management team that is taking a hands-on approach to shepherding the deposit toward production.

Every ounce of that determination will be needed; if you believe everything you read, the community of environmental activists would rank Rosia Montana as one of the most hated mineral development projects in the world. There are web sites dedicated to blocking the project ( and even celebrities speaking out against the development.

Being speculators, and recognizing the potential size of the prize if the broader investment community was to change its view on the prospects of Rosia Montana coming into production, we decided to see for ourselves what was actually happening on the ground in Romania.

Unlike the majority of our field work, in the case of Rosia Montana our due diligence didn’t involve kicking rocks on the deposit to verify that the company is indeed on to a major deposit. Of that, there is no question. That’s because Rosia Montana, which has been mined back to the Roman era, has been drilled extensively in recent decades, leaving no question about the world-class nature of the mineral asset. The project has:

· 10.1 million ounces of gold in Proven & Probable reserves, plus another 14.6 million ounces in Measured & Indicated resources, and another 1.2 million Inferred ounces.

· 47.6 million ounces of silver in Proven & Probable reserves, plus 64.9 million ounces in Measured & Indicated resources, and another 3 million Inferred ounces.

· Projected production of 635,000 ounces per year during the first 5 years, at a total cash cost of US$181 per ounce, for an IRR of 18%.

So it’s not the geology but the politics of trying to build a mine in the face of environmental opposition that has GBU selling for about $30/oz of gold in the ground, versus a more typical $100/oz for the kind of resources it is known to possess.

Make no mistake; large, well-defined gold deposits like Rosia Montana are extremely rare and exactly the sort of thing resource-hungry major mining companies are likely to buy at a substantial premium.

All of which, under normal circumstances, would make Rosia Montana equally attractive to institutional investors looking for the next big play. But they’re not going to risk their capital as long as Rosia Montana looks too politically hot to touch. Should their perception change, and they come to believe that the political risk has been resolved – say, when Gabriel gets its mining permit – expect the herd of institutional investors to pile in, sending the GBU shares to the moon. It’s our intention as speculators to beat them to the door.

Which brings us back to a realistic assessment of Gabriel’s political prospects. Is the political risk in Gabriel beginning to subside? That’s what we determined to investigate. But none of us, not even Doug, speaks Romanian, and it would defeat our purpose to simply go on a guided tour offered by the company, with a company translator posing all our questions for us. Fortunately, thanks to our international network of contacts, we were able to find a native Romanian-speaking researcher willing to help us with the investigation.

First, our researcher attended public hearings in Bucharest, at which Gabriel’s representatives gave presentations on environmental, safety and other issues – a particularly thorny one being that the company wants to move the town of Rosia Montana itself. The environmentalists in opposition had salted the audience with a dozen young people in dressed in green T-shirts who disrupted the meeting whenever the company people said anything they disagreed with – or didn’t want people to hear.

But it was much ado about nothing: our researcher observed that of the nearly 200 people present, almost all had some professional interest in the matter. They weren’t really there to learn, but to witness, or to try to influence. Net result: no one left more in favor or more in opposition to the project than when they arrived.

Next, our researcher went to the town of Rosia Montana to assess the situation first-hand. For the third year now, anti-mining groups with global networks (and financial support) hosted a festival near the picturesque town, in theory to save the earth and the poor subsistence farmers of Rosia Montana from being kicked out of their cottages by the evil mining company. The festival features live music, which does indeed draw a lot of people – but our researcher found that these young people (he estimated most were still teenagers) were more interested in smoking and listening to the music than eco-politics.

What about the poor subsistence farmers? Rosia Montana is a mining town. The last two mines in the area were shut down earlier this year by the government, because they were state-supported work projects that were trashing the environment. Romania has to clean up that sort of thing in order to join the EU, which it is working very hard to do. There is no significant employment in the area (a neighboring town had a factory once, but it was shut down 16 years ago), and the severance pay the ex-miners in the area are getting runs out at the end of December.

The environmentalists have suggested that the local community survive by weaving baskets and carving wood to sell to tourists, which seems to us to be somewhat disconnected from reality. These people are desperate and they want to see the Rosia Montana deposit creating jobs again – but this time with modern mining technology that won’t be so damaging to the environment. And that is exactly what Gabriel proposes to do (the deposit area is currently a toxic disaster, due to the employment of primitive mining techniques over the last 2,000 years, particularly during the Soviet years).

So, it’s no surprise that our researcher found that about 80% of the locals are only too happy to sell their houses, either to move on to greener pastures elsewhere, or to move into the new town the company is building and take jobs with the company. His findings are supported by the fact that the mayor of Rosia Montana was elected on a pro-mine platform. And the hold-outs? Gabriel says they can stay and the company will work around them (no little old ladies need be dragged from their cottages on TV).

Our researcher’s sense of the politics of the project on the national scale was that the national government is in favor of the project – Romania’s president has gone on record in the press saying that the project will be developed – but that much of the intellectual community is reflexively opposed, though few have apparently been to Rosia Montana or taken the time to understand the local economy.

In short, politics has held the share price of this company down for years, but the political tide appears to be shifting. There is opposition, but that opposition is out of touch with the needs of the local community – and even of the environment, because the Romanian government doesn’t have the money to clean up Rosia Montana, something Gabriel has committed to helping with.


Louis James
for The Daily Reckoning
September 20, 2006

P.S. Of course, troublemakers could still derail progress at Rosia Montana, so there is still risk in the play, but for once, the needs of the locals, the environment, and a responsible mining company are lining up. We believe Gabriel will get its Environmental Impact Assessment (the largest and arguably most important component of its mining permit) approved by the Romanian government later this year.

If they do, mine construction, new jobs, environmental clean up, etc. could all start rolling early next year. From there, it’s off to the races for GBU shares, which will then represent ownership of what is truly a mountain of gold. It’s a speculation, to be sure – but that’s what we do at Casey Research, and we’ll be following this story for our subscribers in the pages of the International Speculator. Click here to see the latest issue:

International Speculator

We are fey, dear readers. We seem to have the second sight…

It is only to be expected, of course, as our blood is Celtic. But still, even we are taken aback by our prescience.

Yesterday, we suggested that an implosion might be awaiting the hedge fund industry…and today, we see that, indeed, an implosion – and a ripe one – has already occurred:

“The gamble that went spectacularly wrong,” trumpets the Sunday Times, referring to hedge fund Amaranth Advisors’ recent sensational slip-up.

It seems that traders at the Connecticut firm were gambling that the difference between futures prices for natural gases in the summer and winter would continue to widen, as they had since the beginning of 2004.
But instead, they narrowed…sharply…. leaving the fund frantic for cash to cover its margin calls – those nasty but necessary requests by brokers to their clients, to pony up money on losing positions not paid for in full.

The bad bet left the luckless Amaranth with a hit of a several billion – yes, billion – dollars and a year-to-date performance that has gone, apocalyptically, from a 22% gain to a 35 % loss, in a matter of days. To put the matter in perspective, Long Term Capital Management, whose collapse sent seismic waves through the New York Stock Exchange in 1998, was facing paper losses of $2.5 billion, when a posse of financial top guns – including the Federal Reserve – rode in to the rescue.

And, Amaranth is not alone. Two high-profile hedge funds have already folded this year from losses made in trading the commodity markets. What else is in store?

We do not know, of course. We merely take a look at the cards spread out in front of us and hint to our readers to take care, if we see danger written in them. But we are not fortune tellers; we do not tell anyone when and how they will meet their fates – we leave that to Madame Zuleika, glittering in scarves and incense at the carnival booth. But, occasionally, even we have to wonder…

We wonder all the more when we read that the biggest hedge fund of them all continues to flourish. Goldman Sachs’ third quarter numbers came in so strong that the stock shot up by more than 4% that day and is now hovering within striking distance of its high, this spring, of $170.

Goldman Sachs is already the world’s most profitable bank and the numbers set a new Wall Street record. Already Porsche salesmen in New York are rubbing their hands in glee over those ten million dollars bonuses with which Goldman directors are apt to reward themselves.

But whence this feast in the midst of hedge fund famine?

Not from its trading division, we know. Goldman’s traders posted a 7% decline. Instead, it is its Investment Banking and Asset Management Services that have boosted the numbers. Both are up 27% and 20% respectively. And, $30 billion of new assets have also flowed in.

Well and good. But who are these lucky new clients, and what is the source of all this new money? Here, we consult our crystal ball, turn over the cards and find…the jokers: Goldman’s Asset Management services are now in the service of hedge funds….the new money is pouring in from “alternative” investments, which pay higher fees than traditional products (we wonder why!)…and Goldman’s non-compensation expenses rose 29% versus only 2% growth in net revenue.

Goldman may be booming now, dear readers. But, we know what follows booms…

And now we read that President Bush intends to nominate Robert Steel, a senior director at Goldman Sachs, to the position of Treasury undersecretary for domestic finance. Former CEO Hank Paulson is, of course, already Treasury Secretary. The mavens at Goldman must also know what follows booms…and are stacking the jury in advance of their day of reckoning.

Apres Hank, the deluge….

Now, we turn to our currency counselor for the news:

Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“I think a ‘batten down the hatches’ approach would serve us best, until we see exactly what kind of government is put in place in Thailand. And did you know that this Thailand’s 18th coup in 60 years? So, this stuff is commonplace for Thailand.”

For the rest of this story, see today’s issue of The Daily Pfennig


And more views:

*** The FOMC meeting began at 8:30 this morning, and the central bank is scheduled to announce whether or not they are continuing their “pause” in interest rate increases. The general consensus is that the tightening cycle is over.

Gold futures moved higher today, up $4.10 to $587.30 an ounce for December delivery. Although our favorite yellow metal recovered some of its losses from previous days, the gains were capped as traders awaited a Federal Reserve decision on interest rates, reports MarketWatch.

*** Housing posted a decline of 6.0% in August, following a 3.3% drop in July. Year on year, the drop is worse – 19.8 percent below August 2005 levels and at their lowest level since April 2003. Building permits are also down – 21.9 percent from August 2005 levels. Only the Northeast of the United States rose. The Midwest, South, and West all fell in August

One would call this a sharp decline, would one not, dear reader? Yet, paper after paper assures us solemnly that the numbers fit the “soft landing” projected by the Fed. We wonder what hallucinogenic they have been ingesting…as for us, we are asphyxiating on laughing gas…

A helpful reader pointed out this piece in the Washington Post:

“A leading retail trade group predicts that holiday sales growth will lag behind last year’s in an early forecast that set a tepid tone for the most important shopping season of the year,” reported the paper on Tuesday.

“The National Retail Federation (NRF) estimated Monday that sales during November and December will grow 5 percent, to 457.4 billion dollars, compared with a 6.1 percent increase last year. Average growth over the past 10 years was 4.6 percent, the group said.

“Ellen Davis, NRF spokeswoman, said the cooling housing market is partly to blame for the anticipated spending slowdown. Consumers are feeling a little less flush, she said. ‘Housing prices have a psychological impact on homeowners,’ she said. ‘There may be a perception that you’re not as well off as you were.'”

“All along you thought that plummeting housing prices were having a real, negative financial effect on people,” notes our dear reader. “It turns out it’s only psychological. Cheer up guys!”


*** Yesterday, we recounted the tale of the luckless Chancellor Lamoignon, the “great Malesherbes,” of French history. A child of the Enlightenment, he protected Jews and Protestants, opposed the dissolution of Parliament, and used his botanical knowledge to fill his vast estate with exotic trees and shrubbery…but it did not stop him from feeling the sharp edge of the guillotine at the hands of those other students of the Enlightenment – the vigilantes of revolutionary France.

The kiss of the “red widow” was promiscuous – it took peasants and princes, viscounts and vagabonds, writers and even leading revolutionaries.

Georges Danton, for instance. Danton was one of those who voted for the death of the king and also played a large role in the creation of the Revolutionary Tribunal. He was also one of the original members of the Committee of Public Safety and a commanding and wildly popular orator.

Yet by 1794, the tide had turned; the Jacobins considered him too moderate, and even former friends like Robespierre could no longer defend him. Danton was condemned and executed.

“Ah, better be a poor fisherman than meddle with the government of men!” he is said to have remarked.

A similar fate met a leading Girondist, the remarkable Madame Roland, at whose salon on the Rue Guenegaud, in Paris, the leading lights of the revolution had once gathered, as they shaped the theories they planned to enact in flesh and blood. For taking a stand against the worst crimes of the revolution, Madame Roland fell out of favor with her former guests and was condemned to die. Her end was legendary. Before placing her head on the block, she bowed to the clay statue of Liberty in the Place de la Revolution and then uttered the line for which she is famous. It bears remembering in these days of orange alerts, Guantanamo, and perpetual war:

O Liberté, que de crimes on commet en ton nom! (Oh Liberty, what crimes are committed in thy name!)