METALS BULL (STILL) UNABATED
EXTRACTS
by Larry S. Levy
Editor, Arts 'n Mines Newsletter
January 19, 2006

The following revisits our editorial, Metals Bull Unabated, from December 15, 2004. In that writing, we compared what $10,000 invested in selected assets may have returned over a 3-year period. The results of that presentation clearly showed that metals and mining stocks were very dramatically out performing the major U.S. stock indices. I concluded with the following observation:

"In my considered opinion, then, this bull market in metals and mining stocks (as well as the energy sector) is only getting started. One day soon, perhaps in the coming year, the broader markets will awaken to these factors, and a great rush will blow across the world in an boom witnessed by few living souls."

History shows this comes about once or twice per hundred years, and in “super cycles” lasting one to two decades. So if this is a super cycle in raw materials we are witnessing now, we are only in year four or five, depending upon one's frame of reference (with fundamentals better now than in the late 1970’s). As the following update demonstrates, I was correct about the bull market continuing in metals and mining stocks, but wrong (so far) about the hoped for awakening of the broader markets to the evidence suggested by these realities. However, as the facts of the metals and mining boom spread, I remain convinced that the huge shift in investor sentiment I have been expecting in this sector is still to be seen.

The meaning of the above should be obvious without comment, at least as to the history, but what of the future? Personally, I expect more of the same as demand for raw materials continues. Also, we can expect further pressures on raw materials prices (including mining and energy stocks) as the dollar weakens, and as uncertainly is sustained in global monetary systems.

Before closing on this subject, let us take one more look at the subject of interest rates v. precious metals prices. A common misconception is that rising interest rates hurt metals prices. Not so! Firstly, interest rates in the U.S. are not the major influence on metals prices they once were. We have lost our position as the driving economic force behind these markets, and for the first time since early in the Industrial Revolution. Secondly, where there appears to have once been a U.S.-based interest rate influence on metals prices, those changes significantly lagged the divergence between real and nominal rates, which is what really drives prices. Therefore, one is left to ponder if interest rate increases are not effectively symptoms of inflation (at least initially), as opposed to strategic responses against it.

Special Update on Cardero Resources for Financial Sense Online Readers

While it is against my usual policy to write about specific issues for public consumption, I find once I’ve done so, some follow-up becomes obligatory. In this regard, let us do some follow-up on my earlier recommendation of Cardero Resources (CDY – Amex $3.81, CDU.V in Canada $4.46).

One of the major difficulties in writing recommendations on speculative mining stories for a public audience is in confusing two issues. These are 1 ) the dilemma posed by assuming readers in general have a basis for understanding this market segment, and then 2) complicating the story by assuming readers need extra hand holding. This results in too overly simple analysis, and confusion. The fact is, the old rules of thumb are different in this game, and one unfamiliar with them should give the area some study before committing funds to what is both high risk, and potentially as wealth building as any of the top business stories of the day.

For those who have inquired on the subject, the expected time lapse between discovery and production is irrelevant to most shareholders in exploration phase mining companies. That’s because expectations are for some type of corporate transaction, or takeover once an ore deposit is shown to be viable for exploitation. And even in the most promising of ventures, volatility is the norm.

Cardero’s press release from earlier in the month gave us the first drill results from the Alisitos project. Returns were about as expected. They confirmed a new iron oxide-copper-gold (IOCG) district in Mexico, and as is the case with most mining prospects, further work will be required to outline an economic discovery. The market, however, appears to have expected success right off the bat, and sold the stock down in the following days, though it has recovered a bit since. Again, this is rather typical of the sector, and not a suggestion of failure.

In the short term, more lab reports will be out soon on the initial drilling program, and they should be similar to the first reports. Drills, however, are now being moved to other locations in the project area to follow up on what has been learned to this point. I fully expect better news going forward, although it may take more rounds of results before things begin to get really exciting. Given the number of targets here, and the very high probability for success as suggested by the history on such deposits, I have no trouble continuing to recommend Cardero on this project alone. My confidence is underlined by the recent appointment of Professor Murray W. Hitzman, Colorado School of Mines, to the Cardero board of directors. Dr. Hitzman is among the world’s foremost authorities on IOCG deposits. http://www.cardero.com/s/NewsReleases.asp?ReportID=126393&_Type=News&_Title=Dr.-Murray-W.-Hitzman-Joins-Cardero-Board

More significantly, however, and given little credit by the market to this point, is Cardero’s iron sands deposit in Peru. The potential here is truly monumental given the size of the project, even in comparison to the massive nature of IOCGs. And, the sands also include titanium and vanadium as by products. Results from extensive surface sampling should be out any day now, but it is difficult to accurately project exactly when. Independent laboratories are exactly that - independent.

Drilling at Cardero’s copper-gold porphyry prospect in Argentina did not happen as earlier expected, so lab report there are still some weeks off.

In any event, there will be plenty of news flowing from Cardero over the next few months, and on many fronts.

Other Quick Notes:

Cardero holds a 100 percent interest in certain IOCG claims around the Anglo American joint venture area in Mexico. Drilling is pending.

In the coming several weeks, Anglo may be forced to declare its intentions to continue in the Alisitos joint venture. Although they are in the process of redefining the company, Anglo's election to stay in the partnership will be viewed as a major vote of confidence, and the market should respond enthusiastically. 

Cardero, in an atypical move for an explorer, is expressing interest in becoming a producer at the iron sands project in Peru. They are projecting production in as little as two years, should further studies on the sands continue to support the idea. I'm not sure Cardero can get to that point without being taken over first, or being presented an offer they (the shareholders) can't refuse, but it is possible, and it is also possible a prospective partner could come to the bargaining table bringing loads of cash.

Oh, and for what it's worth, I am not compensated by the company for my endorsement, though I am a biased shareholder, having acquiring my positions at retail prices directly thought a broker.

Thanks for your attention, your letters and your good words. God bless.

Larry

"The study of money, above all other fields in economics, is one in which complexity is used to disguise the truth or to evade truth, not to reveal it."
~ John Kenneth Galbraith