The World Class Deposit Index

Since the founding of Resource Stock Guide, we have created and tracked about a dozen different RSG stock indices. Our indices are based around three primary resources (gold, silver, uranium) and stocks are grouped by company type (Exploration I, II, Junior, etc).

The indices help us determine which stock group performs best. During various stages of the gold bull market, different groups become market leaders. The RSG Indices also aid with the understanding of valuation averages for each group. Yet another unique characteristic is that they allow us to perform technical and valuation analysis of each group as a whole.

Our indices help investors focus their attention on small groups of companies with a very high potential. The indices reveal the highly leveraged companies that are likely to perform very well in a continuing gold bull market.

We have also created a number of indices based on other principles. Now is a good time to introduce one – the World Class Deposit Index ($WCDI). This index has the potential to outperform HUI, XAU and Gold by a wide margin in the coming months.

How the Index is Constructed

All performance and valuation data below are listed as of November 4, 2007.

Each company in the World Class Deposit Index ($WCDI) is required to have at least one large undeveloped deposit (with a multibillion dollar value of underground resources). They could be junior producers, or exploration companies with established gold, silver, uranium and base metal resources. Such companies are typically very attractive acquisition targets, especially when they can demonstrate an economic viability of their deposit.

The World Class Deposit Index ($WCDI) is capitalization weighted and consists of 16 stocks. The combined market capitalization of the components is almost $10B. The largest are First Uranium (FIU.TO) and Aurelian Resources (ARU.TO), while the smallest are Mines Management (MGN) and Copper Fox (CUU.V).

The combined value of the deposits held by these companies is truly vast: 170Moz of gold, 1,020Moz of silver, 636Mlb of U3O8, 31Blb of copper. There is also significant exposure to molybdenum and vanadium (V2O5).

In total, the companies in the index contain almost a half trillion dollars worth of underground resources valued at today’s metal prices. From the bar chart below, the biggest deposits belong to First Uranium, Continental Precious Minerals, Northern Peru Copper, Seabridge Gold, Copper Fox Metals and Terrane Metals.

Index Performance

$WCDI, which is expressed the US dollars, has been a spectacular performer since 2006, returning almost 150%. It was especially strong between March and May of 2006 in the latter stages of the 2005-2006 gold bull run.

During the last four months, including the nerve-wracking summer volatility, $WCDI is actually lagging the Gold Bugs Index (HUI). It fell sharply in August on a liquidity crunch, and while $WCDI is now making new highs, it is yet to overtake HUI in the chart below.

Finally, the following chart shows that $WCDI is a profitable place to be during the bullish runs. At the same time, corrections can be difficult to weather. In short, volatility is high and this creates a lot of opportunities.

It should be noted that part of the strength of $WCDI in recent months is attributable to the strength in the Canadian dollar. Since $WCDI is expressed in the US dollars, it reflects performance to the US investors. As our Canadian investors are all too aware, the performance of precious metal mining equities on the Canadian exchanges has been rather lackluster. The effects of the Fed’s dollar devaluation policy are clearly at play here.

Index Components and Valuation

The 16 components in the index in the alphabetical order are:

The 38% average return on the US exchanges in the table above is compared to only 13% average return on the Canadian exchanges. Both returns are based on equal weights of all index components. Since $WCDI is capitalization weighted and larger companies such as Seabridge, Northern Copper Peru, First Uranium and Aurelian Resources have been big winners, the year-to-date index return of 51.5% is higher than the equally weighted return of 38%.

Production for most World Class Deposit Companies is still far in the future and valuations placed by the market for a unit of resource underground are very low. Enterprise Value per Gold Equivalent Ounce is on average $28.2 compared to $200+ for major gold producers such as NEM, GG and ABX.

The more expensive stocks such as Aurora and Aurelian are heftily valued for a reason. Resources for both are expected to increase substantially in the future. The more undervalued stocks, such as Copper Fox and Terrane have substantial base metal exposure. Others have geopolitical / regulatory risk such as Banro, Crystallex, Gold Reserve, Greystar, Mines Management and Nevsun. Nevertheless, we see all of these as high quality companies that are significantly undervalued compared to many of its peers and especially producers.

Risks

Since every company in the index contains vast established resources, a large amount of risk due to exploration has already been eliminated. These companies are less dependent on a continuing flow of good news from drilling; nevertheless many also have a substantial upside due to future expansion of their existing resource base. What is more important is the companies’ ability to reach their milestones in economic studies and permitting.

A problem with developing big resource deposits is a high upfront demand for capital. Capital expenditures can range between US$100 million to over US$1 billion (Copper Fox ~US$1B, Terrane Metals ~US$800M, Sabina Silver ~US$500M).

In many of the World Class Deposit companies’ low valuations indicate that a number of risks (political, environmental, economic) are mostly priced in. This is good news for us.

Despite large returns in the $WCDI over the past year, we believe that this group of companies continues to offer one of the best risk/reward ratios in the secular resource bull market.

Focusing on the Stocks

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