-- Weekly Market Update for the Week Commencing 7th May 2018

Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

The BULL market in US Treasury Bonds that began in the early 1980s ended in mid-2016, but there will be many years of topping action in bond prices and bottoming action in bond yields before major new trends get underway. A major decline in government bond prices will unfold during the 2020s. (Last update: 11 September 2017)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.), gold-denominated prices and inflation-adjusted prices. This secular trend will bottom in 2020 or later. (Last update: 11 September 2017)

A cyclical BEAR market in the US Dollar began in 2016-2017. (Last update: 11 September 2017)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak in 2020 or later. (Last update: 11 September 2017)

Commodities, as represented by the CRB Index, commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2020 or later. (Last update: 11 September 2017)

Copyright Reminder

The commentaries that appear at TSI may not be distributed, in full or in part, without our written permission. In particular, please note that the posting of extracts from TSI commentaries at other web sites or providing links to TSI commentaries at other web sites (for example, at discussion boards) without our written permission is prohibited.

We reserve the right to immediately terminate the subscription of any TSI subscriber who distributes the TSI commentaries without our written permission.

True Fundamentals Summary [Notes: 1) The date shown next to the current True Fundamentals Model (TFM) signal is when the most recent change occurred. 2) Charts of the Gold and Equity TFMs are included in the "Charts and Indicators" section of the TSI web site]

Last week's posts at the TSI Blog

An update on gold's true fundamentals

Summary of current thinking/positioning

1) The Dollar Index is close to a multi-week top, but it is set to make additional gains prior to its counter-trend rally coming to an end.

2) By reversing upward following a brief drop below its $1309-$1363 trading range, the gold market has signaled that a short-term bottom may be in place.

3) The SPX is about to either confirm an end to its correction or escalate the significance of the January-2018 top by breaking to a new low for the year. The former outcome is now by far the more likely, but the possibility of a trend-ending plunge to a new low for the year can't be ruled out.

4) The multi-year upward trend in commodity prices that got underway in early-2016 appears to have resumed. If so, the Australian and Canadian dollars should be relatively strong over the next few months.

5) There is no evidence that the Swiss Franc has bottomed, but taking a 3-6 month view this currency's risk/reward looks very attractive.

6) There remains a risk of the T-Bond breaking out to the downside in the near future, but the bond market is probably within a few weeks a multi-month bottom.

7) Holding a cash reserve of around 30%.

The T-Bond may be close to a bottom

A week ago we explained why the real yields on long-dated US government bonds may be close to their highs for the year. There's also a good chance that nominal yields are close to highs that will hold for 3-6 months, meaning that the prices of 10-year and 30-year bonds are probably close to lows that will hold for at least 3 months.

The COT situation is the main reason for thinking that the bond market has reached or will soon reach a multi-month bottom. For 10-year T-Note futures, the COT situation has been very bullish for the past few months, but now the COT situation for the 30-year T-Bond is also very bullish. In particular, the total speculative net-short position in T-Bond futures is now close to where it was when the market was bottoming during Q1-2017, and small traders now have their largest net-short position in T-Bond futures in more than 9 years. The net position of small traders is indicated in the middle section of the following chart.



Apart from the T-Bond's inability to follow through on a downside breakout late last month (refer to the chart displayed below for the details), there is no evidence yet that a meaningful price low is in place. Consequently, there's still a realistic chance of a trend-ending plunge to new multi-year lows prior to the anticipated multi-month bottom. However, we expect that if a 3-6 month bottom isn't already in place then it will be put in place within the coming four weeks.



Commodities

Oil and Gas Update

Iran Sanctions Uncertainty

The Obama Presidency's lone positive contribution to the world was the Iran nuclear deal*. As explained in the article posted HERE: "The deal restricts certain Iranian nuclear activities for periods between 10 to 25 years, and allows for more intrusive, permanent monitoring. It also forbids Iran from pursuing nuclear weapons in the future. In exchange, Iran was relieved of crippling economic sanctions." Unfortunately, there's a high risk that on 12th May Trump will at least partly undo Obama's single piece of good work, with significant consequences for the oil market.

12th May is the deadline for Trump to decide whether to re-impose oil and banking sanctions on Iran. Despite the evidence that Iran has complied with the Deal, Trump has stated that he will revive the sanctions unless a better deal is negotiated. In effect, the US government is threatening to renege on the deal.

It's possible, but unlikely, that all parties to the original deal will arrive at a new agreement before 12th May, which is why there is a high risk of oil and banking sanctions being re-imposed on Iran. If this risk materialises it could crimp the global supply of oil, since Iran is a significant oil exporter.

Anticipation of the aforementioned oil-related sanctions is undoubtedly part of the reason for the speculative enthusiasm for oil revealed by the COT data and the upward bias in the oil price over the past two months. It's therefore likely that the associated effects on oil supply have been largely discounted already, this setting the stage for an important price top during the days around 12th May regardless of Trump's actions.

We suspect that news and anticipation associated with Iran sanctions will lead to the oil price making a multi-month top within the next two weeks. In particular, if it is announced that oil sanctions will be re-imposed on Iran then the price top likely would follow an upward spike during the hours/days immediately after the announcement. However, we won't be inclined to enter a bearish speculation on the oil price as long as oil's physical supply-demand situation remains bullish.



    *The deal is officially called the Joint Comprehensive Plan of Action, or JCPOA. It was signed in 2015 by Iran, the US, China, Russia, France, Germany and the UK.

The natural gas (NG) market continues to drift

Despite the amount of NG in below-ground storage in the US being 40% less than it was 12 months ago and 28% less than the 5-year average for this time of the year, the US NG price continues to drift. As illustrated by the lower half of the following chart, this downward drift in the NG price combined with the upward trend in the oil price has pushed the NG/oil ratio to a 3-year low. That is, NG is very cheap relative to oil.



We continue to think that the NG market offers an attractive risk/reward over both the short-term and the intermediate-term. As mentioned two weeks ago, one way to get positioned for a potential rally in this commodity is to buy the First Trust Natural Gas ETF (FCG).



Zinc Update

In February of this year the per-pound zinc price traded in the US$1.60s -- its highest level in more than 10 years. It has since pulled back and last week broke below support at US$1.40 to reach its lowest level since August-2017. Is this a normal correction or the start of a major decline?



At this time there's no way of knowing the answer to the above question, but given the continuing bullish term structure in the LME futures market we think it will turn out to be a normal correction of similar magnitude to the correction that occurred during the first half of last year. If so, the short-term downward trend has almost run its course.

The recent price decline was partly a reaction to roughly 100K tonnes of zinc being added to LME warehouses. This sounds like a lot of metal, but in the context of the global zinc market it isn't a big deal. The following chart puts the recent increase in the LME zinc inventory into perspective.



The Stock Market

Last week we were concerned about the precarious positions of most US stock indices relative to critical support levels and the possibility that the stock market would be roiled by a trend-ending plunge in the bond market.

On the surface, very little has changed. However, short-term risk has diminished, for two reasons.

The first reason that short-term risk has diminished in the stock market is the increased probability that long-dated US government bonds are close to multi-month price bottoms. This was discussed earlier in today's report.

The second reason is that the TSI Put/Call Indicator (TPCI - the 10-day MA of the equity put/call ratio divided by the 10-day MA of the OEX put/call ratio) generated a rare buy signal last Thursday (only the fourth buy signal in the past 5 years). This indicator is shown in the bottom section of the following chart. It generates a buy signal when it moves above 0.80 and a sell signal when it moves below 0.30.

The green arrows on the top section of the chart mark the three other TPCI buy signals that happened within the past 5 years. In each case, the SPX was significantly higher two months after the signal.



The US stock indices remain close to critical support levels. For example, the first of the following daily charts shows that the Dow Transportation Average spiked below its long-term channel bottom last Thursday and the second chart shows that the SPX spiked below its 200-day MA on the same day. Neither index sustained Thursday's intra-day downside breakout, but nor did it rebound by enough to get out of danger. Also, there could still be a trend-ending plunge in the bond market prior to a multi-month bottom. This means that the short-term risk of a stock market breakdown hasn't disappeared, but in our opinion it is no longer worth betting on.

We are going to retain, for now, the QQQ put-option position we purchased for our own account last Monday, but only because the position is small and provides some low-priced insurance against something unexpected.

Tesla (TSLA), again

Despite the horrendous financial results reported by the company and the 'unhinged' behaviour of CEO Elon Musk during a conference call with analysts* after the close of trading last Wednesday, TSLA held short-term support at $280 and ended the week at $294. Considering the news backdrop this was a good performance, but the situation is little changed. Resistance lies at $310 and support lies at $280.



    *Musk cut-off analysts who tried to probe for more detail on the company's production and capital situations, calling the questions "too dry" and "boring". At one point he even advised against buying TSLA shares.

Europe

Just a quick note that the EURO STOXX 50 Index (STOX5E) appears to have bottomed 100-150 points higher than we expected. Some consolidation is likely over the next 2-4 weeks, but a test of the 2015 high (around 3800) is likely during the second half of this year.



This week's significant US economic events [Notes: 1) The most important events (to the markets) are shown in bold. 2) A list of global economic events can be found HERE]

Gold and the Dollar

Gold

When we posted the Interim Update last week the US$ gold price had just broken below the bottom of its $1309-$1363 multi-month trading range, thus falling into line with the DX's preceding upside breakout. We wrote that gold's downside breakout probably wouldn't lead to much additional weakness, but that it likely paved the way for a drop into the $1250-$1300 range. However, we also wrote:

"This Friday's closing price will be informative, as gold must end the week below $1309 to confirm its downside breakout. By the same token, if the price is able to recover and end the week above $1310 then the most reasonable assumption will be that the mid-week drop below $1309 created a short-term bottom."

As it turned out, the price was able to recover and end the week above $1310. Therefore, at this time the most reasonable assumption is that last week's 2-day drop below $1309 created a short-term bottom for the gold market.



The fundamental backdrop remains gold-bearish, but it should turn bullish during the early part of a multi-month T-Bond rebound and a multi-month T-Bond rebound likely will begin within the coming few weeks. Also, due to a 94K reduction over the past 6 weeks in the total speculative net-long position in Comex gold futures, we now view the sentiment backdrop as slightly bullish for gold.

Perhaps the biggest thing in gold's favour right now is the continuing similarity between the metal's performance after the 8-year cycle low in February-1985 and its performance after the December-2016 low. The similarity was bolstered last week when the decline in the gold price stopped at the 200-day MA.

To illustrate what we are referring to, here is a chart comparing the performance of the gold price during 1984-1987 with its performance since June-2016. The blue line on the chart is the 200-day MA. On this chart comparison we've matched the February-1985 cycle low with the December-2016 low.

The note on the chart indicates that today's market could be at the equivalent of mid-June 1986. If so, a multi-month bottom has just been put in place and we are about 6 weeks from a break to a new 12-month high.



Now, even if the 1985-1987 Model is valid (our view over the past year has been that 1985-1987 is the most appropriate historical parallel to the present gold-market situation, mainly because it is a period during which gold had an upward bias in US$ terms for 2-3 years without being in a genuine bull market), there is no good reason to expect that the current market will mimic every twist and turn of this historical period. Therefore, don't bet the farm on an upside breakout in the gold price happening exactly in line with the timing suggested by the above chart.

Last week's gold-price low of US$1302.30 now becomes a critical support level. A daily close below this level would suggest that the gold market is much further from an upside breakout than implied by the 1985-1987 Model.

Last week's silver-price low of US$16.07 is equally important. A daily close below $16.07 could precipitate a rapid decline to around $15.00, but regardless of whether or not there is a final wash-out decline we expect that silver will trade above $20 by year-end.

Gold Stocks

As discussed above, there is evidence that the US$ gold price made a short-term bottom last week. However, there is no evidence at this time that the gold-mining indices have bottomed. It won't necessarily be the same story this time around, but the gold-mining sector, as represented by the XAU, made new lows for the year after the US$ gold price bottomed in mid-June of 1986. In fact, in 1986 it wasn't until the gold price broke to a new 12-month high that the gold-mining sector reversed course and began to trend upward.

That being said, the gold-mining sector has been stronger over the past 6 months in both nominal terms and relative to gold bullion than it was during the first half of 1986. That is, the gold-mining sector has performed better over the past 6 months than it did during the same part of the mid-1980s cycle. This could mean that a final plunge to a new low will be avoided during the current cycle.

Turning to the following daily chart, the HUI broke below its 20-day MA last Monday and then rebounded over the remainder of the week without negating Monday's minor bearish signal. From a technical perspective it is in 'no-man's land', having recently held up well while being unable to generate evidence of a multi-month bottom.

Our guess is that the HUI will test its March low prior to the start of a substantial rally, but on both a short-term (3-month) and an intermediate-term (6-12 month) basis we view the risk/reward as bullish. This is because although the HUI could drop by up to 10% prior to a sustainable low, the upside potential is much greater.



The Currency Market

The Dollar Index (DX)

Last week the DX solidified the preceding week's upside breakout. It also broke above its 200-day MA.

At the same time, the DX is now very 'overbought' on a short-term basis. It likely will make significant additional gains before reaching its rebound peak, with lateral resistance at 95 now appearing to be the most plausible target for the peak. However, we suspect that a high that holds for a few weeks was put in place on Friday 4th May or will be put in place this week.



From a technical perspective, the most important negative for the DX is gold's failure to confirm the DX's strength. Whereas the DX achieved a clear-cut upside breakout from its multi-month trading range and ended last week above its 200-day MA, the US$ gold price successfully tested its 200-day MA last week and could not sustain the mid-week break below the bottom of its multi-month trading range.

We view gold's reticence to confirm the DX's strength as evidence that we are dealing with a rebound within a cyclical decline as opposed to a new cyclical advance.

The Euro

We mentioned a few times over the past three months that a routine correction could take the euro down to around 1.16. A decline of that magnitude would be a test of last year's major upside breakout.

Given the euro's bearish COT situation (speculators were still massively net-long euro futures as at last Tuesday), an extension of the correction to around 1.16 is the most probable scenario. This likely would coincide with the DX rising to around 95.



The Australian Dollar (A$)

After the A$ broke below support at 0.76-0.765, the December-2017 low of 0.75 became a likely target for a low. This support level was tested last week and initially held.



It's only with the benefit of hindsight that price tops and bottoms can be reliably identified, so at this stage we don't know if the A$'s short-term decline has ended. A reliable sign that it has ended will be a daily close above the 50-day MA (the blue line on the above chart).

Based on the A$'s performance over the past few years, once a rally begins it should last at least two months. Also, once a rally begins it will be reasonable to remain 'long' until the daily RSI(14) rises to 75 AND there is a daily close below the 20-day MA (the black line on the above chart). To put it another way, it should make sense for bullish A$ speculators to exit in response to the first daily close below the 20-day MA that follows a rise in the daily RSI to at least 75. This likely would result in exiting 1-2 points from a short-term top.

Updates on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Company news/developments for the week ending Friday 4th May 2018:

[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%, NSR = Net Smelter Return, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Blackham Resources (BLK.AX) advised that metallurgical testing had indicated that "transitional" ore from the Wiluna pit was amenable for processing through the current CIL plant. This is a change from the Expansion PFS completed last year, which assumed that transitional ore would be processed through the sulphide circuit.

The effect of this change on overall project economics has not been determined, but the effect will be positive because processing the transitional ore through the CIL plant results in a higher recovery and a 30% lower processing cost. In other words, this is good news.

We think that the stock market is under-estimating the improvement in BLK's prospects. In addition to the greatly improved production performance since late last year, over the past 6 weeks there have been positive developments regarding this calendar year's production from the high-grade Golden Age Underground mine, the Wiluna Tailings and the above-mentioned change in the expected processing method for transitional ore. And once its balance sheet becomes strong the company will be able to push ahead with the Expansion Project, which should more than double the annual production to circa 200K ounces.

  *Golden Arrow Resources (GRG.V) published a report showing its financial position at the end of 2017. The report shows working capital of C$16.3M at 31st December, down by about C$3M since the end of the preceding quarter.

GRG's financial position remains strong, but the company will have to raise additional money within the coming few months to fund its share of the capex for the Chinchillas silver mine in Argentina. As previously advised, we expect the company to raise about C$10M via equity or debt or a debt-equity combination.

The Pirquitas-Chinchillas project, which is owned 25% by GRG and 75% by SSR Mining, is expected to have average annual production of 6.1 million ounces of silver, 35 million pounds of lead and 12.3 million pounds of zinc. Consequently, in addition to offering exposure to silver, GRG offers exposure to lead and zinc.

Production is forecast to begin ramping up during the second half of this year and to achieve the design rate next year.

  *Premier Gold (PG.TO) reported some spectacular results from holes drilled into three deposits at its South Arturo gold mine in Nevada. Some of the best results were 42.7m of 11.20 g/t Au, 61.0m of 6.96 g/t Au, 68.6m of 15.92 g/t Au, 45.7m of 21.68 g/t Au, 36.2m of 7.95 g/t Au, 79.7m of 5.21 g/t Au and 35.7m of 16.54 g/t Au.

South Arturo was a cash cow for PG last year and is likely to be a cash cow for the company during 2019-2020.

  *Ramelius Resources (RMS.AX) published its quarterly report for the March-2018 quarter.

The company had previously reported record-high gold production of 58.7K ounces. Somewhat surprisingly, this above-plan production result coincided with an AISC that, at A$1233/oz, was about A$50/ounce higher than expected.

Costs are projected to be much lower in the June quarter, though. Gold production guidance for the June-2018 quarter is for 58K-62K ounces at an AISC of about A$1090/oz.

FY2018 production guidance has been improved from 195K-205K ounces to 205K-215K ounces.

List of candidates for new buying

From within the ranks of TSI stock selections the best candidates for new buying at this time, listed in alphabetical order, are:

1) AAU (last Friday's closing price: US$0.80)

2) ALK.AX (last Friday's closing price: A$0.28)

3) BLK.AX (last Friday's closing price: A$0.069)

4) EGD.V (last Friday's closing price: C$0.40)

5) GRG.V (last Friday's closing price: C$0.50)

The above list is limited to five stocks. It will sometimes contain less than five, but it will never contain more than five regardless of how many stocks are attractively priced for new buying.

Addition to the TSI Stocks List: Aura Minerals (TSX: ORA). Shares: 43M. Recent price: C$2.15

We wrote in previous commentaries (most recently in the 2nd April Weekly Update) that ORA.TO would be added to the TSI List as a long-term position if the stock traded at C$2.05. It traded at this price on both Thursday and Friday of last week and therefore has been added.

ORA is a profitable gold miner with a healthy balance sheet that is currently producing gold at the rate of around 140K ounces/year from mines in Honduras and Brazil. It is 55% owned by Northwestern Enterprises, a private company.

About 60% of ORA's current production comes from the San Andreas project in Honduras. San Andreas is an open-pit, heap-leach operation with annual gold production of around 80K ounces. The project has an M&I resource of 1.7M ounces grading 0.5-g/t.

The rest of the current production comes from the Ernesto Pau-a-Pique (EPP) gold project in Brazil. This operation has a relatively small total resource of around 400K ounces and comprises an open-pit plus two underground mines.

Of ORA's non-producing assets, the most valuable at this time appears to be the fully permitted, construction-ready Almas gold project in Brazil. It is estimated that for a capital expense of US$93M, Almas could be developed into a 52K-oz/year gold mine with an after-tax IRR and NPV of 34% and US$147M, respectively, at a gold price of $1250/oz.

ORA also owns two mines that are presently on care-and-maintenance and will potentially be brought back into production in the future: The Aranzazu copper mine in Mexico and the Sau Francisco gold mine in Brazil. Aranzazu is the more interesting of these, especially with the copper price above US$3/pound. In March of this year ORA arranged a US$20M loan facility and an off-take agreement with Louis Dreyfus Company Metals for the restart of operations at Aranzazu.

We roughly estimate the value of an ORA share to be C$6.90, which is more than three times the current share price. This assumes that a) the 140K ounces/year of current production is worth US$1000/oz (much lower than average), b) the Almas project is worth 50% of the NPV estimated in the Feasibility Study completed in 2016, c) the company has net working capital of US$30M, and d) ORA's other assets are worthless.

In other words, we think that ORA has more than 200% of valuation-related upside potential. That's why it is now part of the TSI Stocks List.

If ORA interests you and you haven't yet taken a position, be careful when buying. Despite being a 140K-oz/year producer with mineral assets spread across three countries and US$30M of working capital, the stock is not as liquid as we'd like and can be difficult to trade. We expect that liquidity will improve as speculative enthusiasm returns to the gold sector over the next 12 months.



Deletions from the TSI Stocks List

Several months ago we imposed a quantity limit of 15 on long-term positions in the TSI Stocks List. Our goal was to eliminate enough stocks to reach this limit by the end of February, which we didn't quite manage. The addition of ORA has taken the quantity of long-term positions to 17, so we now have to remove two stocks to get down to our new limit. There is no problem with either of the stocks we are removing. We expect them to do well over the coming 12 months and will be retaining exposure in our own account for now, but something has to go if we are to achieve our goal.

The first deletion is Ramelius Resources (RMS.AX), a 200K-oz/year gold producer based in Western Australia. We estimate that RMS is worth about A$0.80/share (about 40% above the current price) and plan exit our own position in the stock if the price rises to near this level.

RMS is up by 50% year-to-date and up by 46% since its addition to the List way back in 2012.

The second deletion is Solitario Zinc (XPL), an exploration-stage miner with stakes in two high-grade zinc projects: the Florida Canyon project in Peru (30% XPL, 70% Nexa Resources) and the Lik project in Alaska (50% XPL, 50% Teck). We estimate XPL's fair value to be around US$1.00/share (about 150% above the current price), so a good argument can be made that it is a candidate for new buying. Our concern is that its 2018 work programs will not generate much in the way of market-moving news, causing the stock to remain very under-valued for the foreseeable future.

XPL is down by 31% year-to-date and down by 26% since its 2016 inclusion in the List.

Changes to the TSI Small Stock Watch List (SSWL)

The SSWL is a list of stocks that are too risky and/or illiquid to be considered for the TSI Stocks List. We don't track these stocks closely in the TSI commentaries, but they have favourable risk/reward ratios (in general: high risk versus much higher potential reward) and could be of interest to speculators who are able to do their own due diligence. Today we are making one addition to and one deletion from the SSWL.

The deletion is Sarama Resources (SWA.V), a microcap gold miner involved in a JV with Acacia Mining at an exploration-stage gold project (called South Hounde) in Burkina Faso. The project has an Inferred gold resource of 2.1M ounces.

Our view on this stock's potential hasn't changed. In particular, we expect that Acacia eventually will make a takeover bid for SWA. However, progress on the project has been too slow for our liking and a bid probably won't happen until 2019 or later.

The addition is the Australia-listed Breaker Resources (BRB.AX), an exploration-stage miner focused on the Lake Roe gold project in Western Australia. BRB has about 145M shares on issue (159M fully diluted) and A$7M of cash. It ended last week at an 18-month low of A$0.24, giving it a current market cap of A$35M (US$26M) and a current enterprise value of A$28M (US$21M).

BRB traded as high as A$0.80 last year and traded above A$0.70 as recently as January of this year. Why, then, is it now trading at only A$0.24?

The answer is that there were high expectations built into the share price regarding the initial resource estimate for the Bombora deposit at the Lake Roe project. When the initial resource turned out to be smaller than expected, the share price collapsed. Here's the price chart:



We've been following BRB for about a year due to the potential indicated by numerous holes drilled into the Bombora deposit, but until recently it didn't interest us as a speculation due to the high expectations that were built into the share price. Now, however, expectations appear to be too low, setting up an attractive risk/reward.

It's not like the initial resource estimate was a disaster. After little more than a year of exploration work following a greenfields discovery, the company has defined a total open-pit resource comprising 624K ounces with an average grade of 1.6-g/t (a good grade for an open-pit gold mine). It's expected that the resource will grow to at least 800K ounces by year-end and to at least 1M ounces next year.

For more information on the resource estimate and the project refer to the recent Q&A with Tom Sanders, the company's executive chairman. Sanders owns about 20% of the company, so he has a lot of skin in the game.

As further exploration increases the resource estimate and changes perceptions, we suspect that the stock price will rebound to at least A$0.50. In a more bullish gold-mining market it could even return to its 2017 high. At the same time, the initial resource should create a stock-price floor at around A$0.20. In other words, at the current price of A$0.24-$0.25 we perceive upside potential of at least 100% and downside risk of about 20%.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.goldchartsrus.com/
http://www.kitco.com/
http://bigcharts.marketwatch.com/