October 13, 2016

Gold & Silver Risk/Reward Prospects Are Very High Now

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NOTE: I am out of town on vacation the week of November 21. This issue of MSJ was
published early instead of Thursday, November 24. The next issue will be published on the
regular schedule, two weeks after Nov 24. I hope everyone has relaxing and enjoyable
Thanksgiving.

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There's a lot of strange things occurring in the global markets. Some type of earthquake is
going hit the global financial system. I have no idea what it will be or where it will come from
but the bond and currency (including gold/silver) markets are signaling a major disruption of
some sort. I suspect that the general systemic deterioration in credit plus the volatility in
currency and interest rate markets (Treasuries and sovereign debt) has triggered some credit
default swap and interest rate swap derivative problems, which can quickly mushroom into a
financial crisis (see 2008, or Long Term Capital 1998, for example).
The U.S. dollar has gone parabolic since the night of the election,with the dollar index soaring
11.4% through Thursday. A move like this, primarily against the yen and the euro, is the
unmistakable sign of blow-up occurring somewhere in the banking system. A lot of fingers are
pointing at Italy or China. But the media has gone radio-silent on Deutsche Bank. Whatever
and wherever the problem is, I can guarantee you that most if not all of the U.S. too big to fail
banks are exposed to the systemic problems unfolding.
The Bank for International Settlements (B.I.S. - the Central Bank of Central Banks) is warning
that a strong dollar will bring about global financial instability. At the same time, $100's of
millions in Treasuries are being unloaded by large sovereign holders. The question I have is
what is driving the strength in the dollar, given that many of the major holders of U.S.
Treasuries are unloading them, this includes Saudi Arabia now, according to the latest capital
flows report issued by the Treasury?
I find it impossible to believe that these sovereign Central Banks would dump their Treasuries
yet hold the dollars received in settlement. Conversely, my colleagues and I are having a
hard time identifying the big buyers of the Treasuries being unloaded. The selling at least
explains the big spike-up (price decline) in 10yr and 30yr Treasuries.
The yen has plunged 10% vs the dollar since election night; the euro has fallen 6.2%. The
other components of the dollar index (pound, Canadian$, Swissy, Swedish krona) are down
vs. the dollar significantly less. In other words, the primary driver of the move in the dollar
index is the drop yen and the euro. The euro has dropped 10 days in a row (as I write this on
Friday evening). The only other time it dropped more than this (11 days in a row) was in
September 2008, just before Lehman officially collapsed.

The spike in the dollar and the hit on gold and silver is reminiscent of the movement in the
dollar and gold in the summer of 2008. And the spike-up in interest rates at some point is
going to torpedo the stock market. The volatility in the currencies and gold is a signal that
some type of disruptive event is going to hit. I believe that, just like in 2008, the take-down in
the price of gold is being done in advance of another planned implementation of QE. Yes, I
know it looks apparent that the Fed might follow-through on its standing threat to hike rates
albeit likely a meaningless 25 basis point. The Fed Funds and 3 month T-bill rates have all
but priced-in a 25 basis point hike. In other words, the drop in the price of gold is not
attributable to the anticipation of what has been a very well-telegraphed move in interest
rates.
The decline in gold and silver has been largely a function of aggressive "attacks" in the paper
markets in London and NYC. The lower price level has triggered voracious physical gold
buying India, China, Russia and the eastern hemisphere physical markets in general. The
most visible indicator of this is the premiums to spot gold being paid in those markets.
Despite the intentional currency disruption in India designed to curtail gold demand, premiums
in India last week were as high as I can ever recall seeing them. Same with the premiums
being paid on the Shanghai Gold Exchange and in Viet Nam (Viet Nam is a surprisingly large
consumer of gold - premiums there were pushing $100 over spot last week).
In addition, a large amount of kilo gold bars was observed leaving the Comex and likely was
headed for either India or China or both. Russia also reported an increase of 1.3 million ozs.
of gold in its Central Bank reserves in October. This after it was rumored a few weeks ago
that Russia was going to sell some gold. Anti-gold misinformation has flowed freely lately.

The graph on the previous page is a 1-yr daily of the gold price represented by the Comex
continuous contract index. I would estimate that, since election night, at least 70% of the
downside action in the gold price has occurred after the Asian markets have closed for the
day/evening (after 5 a.m. EST). 80% of that 70% has occurred at or after the Comex gold pit
opens at 8:20 EST. I actually did the exercise of looking at a 30 minute graph back to
election night to reach this conclusion.
As you can see, the RSI and MACD indicators reflect an extreme "oversold" condition. While
the price has plunged below the 200 dma (red line), during the past 15 years during bull runs
in gold, whenever the price of gold divided by the 200 dma is 5% below the 200 dma, it's
marked a bottom in a price correction.

The graph above is a product of guy named Eric Hommelberg, who used to provide in-depth
statistical analysis of the gold market. The "R-Gold" indicator is nearly flawless when gold is
in a bull market trend.
To be sure, I have no idea whether or not the banks will be able to push the market lower from
here. I suspect based on the rapid decline in the open interest in Comex gold contracts that
the banks "commercials" have reduced their net short position by a significant amount and
that the hedge funds "managed money" have cut their longs and increased their shorts. I
believe this occurred primarily between Wednesday and Friday this past week. Unfortunately,
we won't have a glimpse of this theory until next Friday when the COT report covering Wed
thru Tuesday next week is released.
Company updates - I have received several inquiries about some of the companies featured
in MSJ that have taken quite a beating over the past several weeks. One thing to keep in
mind is that all of these stocks have had a huge run-up since bottoming in early January. Rye
Patch, for instance, traded below 8 cents ($.078 print) on January 21, before running up to 37
cents on July 1. It closed at 18 cents on Friday. There has been no news released which
would have precipitated the sell-off. In my opinion, the decline is a product of holders who
bought RPM below the current level selling it to take profits during the market sell-off. In other
words, the sell-off in all of the MSJ stocks is a product of the market and not in connection
with any negative developments.

A couple readers have asked me about Precipitate Gold (PREIF, PRG.V). Since featuring
PRG in the August 4 MSJ, the Company has further advanced its Juan de Herrera (Ginger
Ridge) project by continuing to define target drilling zones. It also took in another $1.2 million
capital via the exercise of warrants by Strategic Metals. The Company announced the
commencement of its Phase 2 drilling program on November 7. It had been delayed due to a
hurricane in the Caribbean which disrupted the delivery of drilling equipment. As CEO Jeff
Wilson explained to me in an email:
In preparation for drilling we wanted to complete an extensive ground geophysical
survey over the drill target area in advance of drilling (to give ourselves the best shot at
drill success). In an effort to do that, some issues came up that cause delays in our
timelines to drilling. The primary reasons:
1) A delay at customs in getting the geophysical equipment into country;
2) Although drilling equipment and contractors were ready and able to commence
drilling at Ginger Ridge, Ginger Ridge was the initial target of ground geophysics so
after the delay at customs our drilling had to wait until the geophysical crews had
completed their important survey and cleared off the target area; and
3) Taking safety precautions in advance of hurricane Matthew, where although the
worst of the storm did not impact our property in the DR, as the Hurricane hit Haiti the
related winds and rains were enough of a safety concern that we elected to shut down
operations for a few days.
If you believe that the market is going to continue on its bull trend, now is the time to add to or
start positions in companies like Precipitate. PRG has plenty of cash and is drilling in an
area in which it has a good probability of making a meaningful discovery. Assuming the
market recovers - which I believe will happen soon - PRG stock will move up quickly if the
assay results show positive results. My best guess is that we'll start seeing results in mid to
late December. I would not be surprised if the Company holds off until after the holidays to
begin releasing results for obvious reasons.
Another reader asked about Pure Gold (LRNTF, PGM.V). It's had about a 30% pullback. Pure
Gold is one of my favorite juniors right now. They keep releasing incredible drill assays. PGM
had been holding up remarkably well until late October because of the phenomenal drill
results the Company has been reporting. The sell-off is a function of the sell-off in the entire
sector, which I think is over. Pure Gold is showing indications that it might be sitting on a
massive gold deposit.
I wanted to share a reader inquiry because it is representative of a lot of similar inquiries I've
been getting over the past several weeks:
I have about over 90% of my assess in physical bullion (gold and silver combined). I
have a sizable amount in a gold exchange which I can convert to physical while I let
the price ride with the spot market before I either cash in or request physical. And then
I have an even larger investment in mining stocks (about 4 times as much).
I am torn as to whether I should cash in my gold and buy more mining stocks while
they are just recovering from the recent hit or just hang on to the gold in the gold
exchange. What will happen to the mining stocks in the next stock market crisis. Will
they really go in opposite directions to the regular stocks or will they tank together?
What do you recommend doing?

My response:
Really good questions. I think a 4:1 ratio of mining stocks to bullion is plenty. On the
next move higher I might convert some profits on the miners and move the money into
physical and lower the ratio to 3:1.
If you have spare cash to invest right now, I think it's a great time to buy the dip on the
miners. Pure Gold has had the crap beat out of it and they've been producing a steady
stream of very positive assay reports.
As for what happens with the miners when the stock market goes south, I think the
miners will move inversely, though maybe not for the first leg lower in the overall stock
market. I've always had the view that when stock eventually cliff-dives, a lot of the
money moving out of stocks will seek the safety of gold, driving gold/silver higher,
which in turn will pull the miners higher.
We saw this in Nov 2008-March 2009 until the Fed's QE started levitating the stock
market. Then they went up in tandem until the powers that be decided they had to do
something about the gold and silver. I think this next time around the move down in
stocks and move up in the pm sector will be even more dramatic. UNLESS the Fed
goes crazy with the money printing, in which case stocks will go up but the pm sector
will move up even more percentage-wise.
Silvercrest Metals (SVCMF, SIL.V) - Silvercrest announced a C$10 million dollar "bought
deal" financing. This means that there was enough demand to pre-sale the entire deal before
it was formally issued. This in and of itself is an indicator of the high upside potential of this
company, especially given the current market conditions. The Company also announced new
discovery veins at Las Chispas. In exploring the historic underground workings of the mine
that was there, geologists discovered areas with exceptionally high-grade samples.
I contacted Mike Rapsch at the Company to ask about the Phase 2 drilling. Here's his
response:
Yes, the phase 2 drill campaign has already started this month. We have started with
surface drilling at the Las Chispas area, and we are expecting the underground drill rig
to arrive at site this weekend. For now, 2,000 metres are scheduled to be drilled from
the underground at the Babicanora target.
Varela is another parallel vein in the Las Chispas area historically, it had very little
work done on it, mainly because it being too low grade for the old miners (avg. close to
500 gpt silver). The old miners cut-off grade in numerous areas were 1,000 gpt. This is
a great opportunity for us, because we are able to drill out the unmixed area of this vein
to see if we start seeing the same grade continuity as seen underground.
That said, drilling at Varela won't start until January of next year, because we are going
to bring in a man portable drill rig on site (third rig) so we can not only drill Varela but
the two other identified veins between Varela and the William Tell vein.
SVCMF in my opinion "got ahead of itself" when it ran up to $3 (SVCMF). I would use this
sell-off in the stock to add to existing holdings or to start a new position.

Banro Corporation BAA / BAA.TO

Company: Banro Corporation
Ticker: BAA, BAA.TO

Current Stock Price: $0.195 (11/18/16)

52wk high: $0.48 - 7/12/2016
52wk low: $0.15 - 1/14/2016

Shares outstanding: 303.5 million primary

Ownership: Baiyin 16.5%, Gramercy approx. 10%
Banro is a Canadian-based emerging mid-tier gold company with two wholly-owned
producing gold mines and two wholly-owned exploration projects in the Democratic Republic
of Congo (DRC). The Company has over 15 million ounces of gold resource, which includes
proven/probable reserves of 3.2 million ozs, a measured/indicated resource of 7 million ozs
and 5.1 million ozs of inferred resource.
Banro's roots in the DRC were established in 1996. Its two producing gold mines are highgrade open pit operations with underground potential. The Company is on target to produce
up to 230,000 ozs of gold in 2016. Banro controls the largest gold exploration land package
in the DRC, with 2600 sq kilometers covered in exploration permits.

The graphic above shows where Banro's property package is situated in the DRC and it
details the Twangiza and Namoya mines and the Kamituga and Lugushwa exploration
projects. To date only 12% of Banro's land package has been explored using modern
techniques.
Twangiza Mine
The Twangiza mine is Banro's first producing mine. It commenced commercial production in
September 2012. Twangiza has proven and probable reserves of 3.18 million ozs. I has
another 4.69 million ozs of measured and indicated ozs and 370k ozs of inferred resource.
Twangiza is on track to produce about 120,000 ozs in 2016. At this point, it has 14-yr mine
life which will likely be extended with further exploration of the land surrounding and beneath
the open pit area.

The 3.18 million reserves are oxide-based. A large portion of the measured and indicated
resource is non-oxide material. Banro has developed a method to process the oxide material
and the non-oxide material by blending them together. The significance of this is that it will
enable BAA to reclassify a lot of the measured/indicated resource into the proven/probable
reserve category, which should boost the Company's market valuation and takeover value. It
also improves the overall economics of processing the ore by lowering the cost of production.
Namoya Mine
If you refer to the graphic on the previous page, you'll note that Twangiza and Namoya are
situated on opposite sides of BAA's land package. The Company has declared this area to
be the Tangiza-Namoya gold belt
The Namoya mine is a high-grade open-pit heap leach operation that was put into commercial
production on January 1, 2016. The mine will produce about 110,000 ozs in 2016. The
significance of a heap leach operation is that is has lower operating costs. Namoya contains
1.36 million ozs of proven/probable reserve, 1.62 million measured/indicated ozs and 5 million
inferred ozs.

The property around and underneath the Namoya open pit operations contains a lot of high
value targets. The graphic above shows the mineralization that has been identified
underneath the open pit (dark red areas). The grading of this mineralization is roughly 50%
higher than the ore-grade in the open pit operation. Even more interesting is the fact that
because of the way the Namoya is situated on a hillside, it won't be necessary to build large
underground shafts to access the ore. Instead the Company can access the ore with lateral
holes, making the ore extraction lower-cost relative to a typical underground operation.
Both Twangiza and Namoya offer significant upside advancement potential. The Company
has primarily focused on optimizing the existing operations of both mines. But both properties
contain significant exploration targets for reserve replacement plus they both still have a lot of
options to increase production output and to cut costs.

Exploration Projects - Kamatuga and Lagushwa

Banro had been focused on upgrading production at Twangiza and Namoya but it now can
spend some upgrading the resource at Lagushwa and Kamituga.
Lagushwa has a little over 1 million ozs indicated and inferred (oxide) and another 3.2 million
ozs of inferred contained in non-oxide material. Kamituga has 320k ozs of inferred surface
mineralization and 600k ozs of inferred underground mineralization.
Currently the plan is to continue with exploration to identify new drilling targets and upgrade
the resource. Both properties are fully permitted.
Ownership of the Equity and Financial Risk
Banro has a complicated capital structure which is likely why the market cap is signficantly
lower than comparable 200,000+/yr gold producing companies. It currently has $204 million
of long term debt, $194 million of which is due within the next four months. Offsetting the risk
of repayment/refinancing is the fact that most of the debt is owned by Baiyin and Gramercy.
Baiyin NonFerrous Metals Group is China's largest nonferrous metals producer. Gramercy is
an emerging markets investment manager based in Connecticut. It invests in all parts of a
company's capital structure. Baiyin owns 16.5% of the stock and Gramercy owns a little less
than 10%.
$22.5 million of the debt is a term loan that is due at the end of this month (November).
Baiyin and Gramercy each own 50% of it. While nothing is guaranteed, it is likely to rolledover, or extended, at the end of November. The Company is engaged in ongoing negotiations
and was not at liberty to disclose the nature of those negotiations. As a former junk bond
market professional, I believe the risk that this piece of debt is not extended is mininal.
The biggest chunk of debt is a $170 million bond deal bearing a 10% interest rate that is due
in March 2017. Baiyin and Gramercy own a significant portion of this. Again, in my opinion,
given the share ownership position of Baiyin and Gramercy, they are incentivized to make
sure this debt does not undermine the Company's value as a going concern.
If the capital markets are healthy enough in early 2017, it is likely that Banro will go to market
with a refinancing deal. Given where mid-B-rated high yield deals are being issued currently,
Banro would likely be able to float a deal that would cut down the cost of interest on this debt.
If the capital markets fall apart, which is a possibility per my earlier market commentary, it is
likely that Baiyin and Gramercy would structure some sort of restructuring package that likely
be somewhat dilutive to shareholders. This possibility is likely a big part of the market
"overhang" that is on Banro's market cap.
Offsetting the debt-load is $900 million in assets and $386 million of book value. Banro also
has $9.4 million in cash, another $10 million in restricted cash (held against future debt
payments), $22 million in receivables and $20 million in stockpiled ore, gold in process and
gold bullion. Not including the restricted cash, Banro has $30 million in liquidity.
Political Risk?
Another risk overhanging the stock is a mispricing of the political risk operating in Congo.

Banro has been exploring and operating in the DRC since the mid-1990s. The Company
operates under a mining convention of the DRC that gives the Company a "tax holiday" for
the first 10 years of declared commercial production. In other words, it pays no corporate tax
for 10 years once a mine is put into commercial operation. This gives BAA six more years of
tax-free operation from Twangiza and a little more than 9 years with Namoya. In return the
Congo Government receives a 1% royalty on the gold produced.
While there is civil unrest in Congo, this is confined largely to the city of Kinshasa, which is on
the other side of the country from where Banro operates. Banro is the largest employer in the
two provinces in which it operates. Banro's operations are huge economic benefit to the local
communities. Because of that and because of the amount of resources that Banro invests in
the surrounding communities to upgrade the quality of life, Banro has a "social license" to
operate.
I would argue that, despite the common perception of western investors, the DRC is not as
risky politically as many other jurisdictions, like some South and Central American countries. I
believe that China's presence all over Africa plus Baiyin's significant stake in Banro is a
stabilizing factor politically that not reflected in the market cap of companies like Banro
operating in Africa.
Bottom Line

Banro's current market cap is about $60 million dollars. If you include the debt and preferred
stock to derive an enterprise value (debt + the market cap of the stock), the enterprise value
is about $320 million. The recent Kaminak deal valued Kaminak's gold resource in the
ground at $150/oz. Too be sure, there are plenty of reasons to discount this valuation as
applied to Banro. However, if we take just BAA's proven/probable and measured/indicated
resource of 10.2 million ozs, BAA's implied "gold-in-the-ground" valuation at $100/oz is over
$700 million.

Another way to look at it is vs. a couple of Banro's peer companies in Africa. Semafo similar
production numbers as Banro but has a $1 billion market cap. Teranga has similar profile as
Banro but its operations are smaller. Teranga's market cap is just under $300 million.
Banro is an emerging mid-tier producer with two high-grade mines plus two potentially highgrade projects that are already fully permitted. The existing mines have a long mine-life and
the two exploration properties have the potential to eventually double the size of Banro's
production.
In my opinion, the market is significantly mispricing Banro's associated political and financial
risks. Banro stock traded at $13/share before the 2008 blood-bath in the sector. It recovered
with the rest of the sector and eventually hit $6 in early 2012. It's very easy to argue that 19
cents/share is a steal right now. Once the debt overhang issue is resolved, I believe the
market will quickly revalue BAA's market cap to at least double the existing price.
For those of you who like to speculate with call options on large-cap companies like First
Majestic, Banro stock right now is very cheap option with no expiration date.

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Disclaimer: IRD is not responsible for any loss arising from any investment based on any recommendations,
forecast or other information contained here-in. The contents of this publication should not be construed as an
express or implied guaranteed, promise or implication by IRD or David Kranzler that the reader will profit from
the strategies herein or that losses in connection therewith can or will be limited. Any recommendations is
derived from objective fundamental macro economic and company-specific calculations and subjective analytic
assessment. I may or may not have personal stock positions at any given time in the company presented. I
always fully disclose whether or not I'm long or short at the time of publication.