Dundee Precious Metal, Inc. DPM/A CN
June 25, 2002 - 1:05am EST by
2002 2003
Price: 18.95 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 132 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Dundee Precious Metal, Inc. (Tickers: DBPMF or DPM.A)

DPM is a close-end fund which invests mainly in gold mining companies around the world, and it is listed in the Toronto Stock Exchange. It has a discount of 24,17% on NAV. The NAV is CN$ 24.99 per share. Additional detail can be found at company´s website: www. dundeeprecious.com . The company has 6,988,172 shares outstanding.

I believe that there are many forces acting in order to increase the price of gold and it also will force to eliminate the discount between the market price and NAV of Dundee Precious Metal.

An exemple of that is what happened to the discounts on NAV of close-end funds focused on small-caps. The discount is shrinking a lot since 2000. This is due to the enormous flow of money in this asset class, as is showed by the close-end funds managed by Royce & Associates.

This call is a qualitative one, by focusing on the forces which could disrupt the gold´s supply and demand balance and therefore increse the price hugely. My reasoning will be presented following three steps, the 1st one is the consensus view, the 2nd is the variant perception and the 3rd are the trigger events or catalysts.

The Consensus View

1) We are in a deflationary world, so there is no place for gold in this scenario;
2) There are better investment options than bullion or gold shares, it is a “barbarian relic”;
3) Gold is trading in this range for years and the sales program by Central Banks will maintain this range;
4) There are a lot of gold forward sales by mining companies and gold leases by Central Banks, so this put a down pressure on gold’s price;
5) Additional demand will be supplied by Central Banks’ gold sales program and other sources such as dishoarding;
6) Gold purchases by Japaneses is a temporary thing;
7) Gold´s price is being fueled by fear.

The Variant Perception

1) Dollar weakness fueled by an enormous current account deficit, so it will increase the cost of imported goods that will put pressure on inflation, but so far a strong dollar imported deflationary prices from the world;
2) Real interest rates are very low or negative, so contango is not any more profitable and the carrying cost of gold is very low;
3) There is an enormous liquidity in the world in order to avoid recession/deflation, mainly in Japan, which is looking for a safe port. In addition to that, Bush´s mammoth tax cuts and potential enormous government deficits in the next incoming years, is another recipe for inflation;
4) Funding new gold mines requires , at least, a gold price in the range of US$ 400.00 – 450.00 per ounce, therefore gold´s replacement price is much higher than the market price. If the gold price remains under US$ 300/oz., production will fall around 25% over the next 5 to 7 years;
5) Few gold mining companies are increasing reserves; so future supply will be lower;
6) Gold is trading at lowest price related to S&P 500, so it is one of the cheapest assets around. Gold tends to be counter-cyclical and investors buy it when financial assets begin to lose credibility or are overvalued. If a small amount of money is moved from financial assets to gold, the effect on prices will be dramatic. Besides that, the disillusionment with equities and index funds is spreading, last week CALPERS announced is likely to make an asset allocation switch out of stocks and into private equity;
7) The low interest rate environment is fueling a real estate bubble, but this can not last, so any interest rate hike to fight inflation will blow it and will take the stock market down further, so will be few safe havens for investors. Read a comment on it written by Jim Rogers in the last issue of Worth;
8) All gold leased has to be returned to lenders, so any gold price spike will force banks which are counterparties in these deals to buyback at higher prices in the market;
9) Big gold mining companies such as: Newmont and Anglogold are reducing their hedge books and forward sales, a movement initiated by the intermediate and junior gold mining companies;
10) The low price for gold in the past years enticed the proprietary desks of large investment banks to play derivatives games with gold in the short side. However, a high price for gold could reverse that and it will fuel gold´s price further.


Trigger Events/Catalysts

1) A continued reduction of hedge books by gold companies through buybacks in the market and reversion of gold positions by proprietary desks which will fuel gold´s price;
2) Japaneses continue to buy huge quantities of ;gold , in the 1Q02, Japan bought 41 tons of gold which is 7 (seven) times more than the same period last year;
3) Inflation from Japan, which was mentioned by the Prof. Michael Pettis ( from Columbia University and a Managing Director of Bear Stearns) in the article “The Great Inflation”.
4) Most Central Banks outside G-7 are carrying their reserves in US dollar or dollar denominated financial assets, but the dollar weakness and the low interest rate could force then to switch to gold.
5) Gold´s price is below replacement value because actual price is not enough to cover extraction costs, capital costs and exploration expenses (reserve´s replacement costs), so mines are being closed, investments in exploration are very low so the future supply is diminishing.
6) A collapse in the real estate market which will affect stock market provoked by an interest rare hike to fight inflation or an increase in unemployment/mortgage defaults.
7) Industry consolidation will cut further gold supply, because many marginally/unprofitable mines will be closed in order to boost profits/ROI.
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