| March 3, 1999
Preliminary Report GLAMIS GOLD (GLG-NYSE)
Summary Glamis Gold has recently completed a major acquisition which will position the Company to triple production from an estimated 110,000 ounces during 1998 to about 330,000 ounces in 2001. Cash cost of production should decline from the current $202 per ounce to about $180 in 2001. The Company's gold reserves, conservatively estimated to be 4 million ounces*, are selling for about $17.50 per ounce net of its cash position. We believe the acquisition is very timely given the depressed nature of the gold market. It is particularly encouraging that Glamis has been able to maintain positive cash flow during 1998 under extremely depressed gold prices. Obviously, any substantial increase in gold prices will translate into much higher earnings over the next two years. Based on the Company's internal fundamentals, including large reserves, low cost and rapidly increasing production, we see the potential for a doubling in stock price even in a flat gold price environment. A pristine balance sheet featuring $40 million in cash and no debt further reduces downside risk. In our mind, the situation presents the best of both worlds; with relatively low risk, the potential for significant appreciation in a flat gold price environment and the possibility of big gains if gold rises from the current extremely depressed levels. Gold also represents a hedge against inflation, market turmoil and Y2K problems. *Reserves would expand substantially with gold prices
higher. Today's depressed
Overview Gold is the most depressed and hated market sector. Many smaller gold producers are selling below their cash values. Speculators continue to borrow gold at extremely low interest rates and sell into the market in order to purchase other equities and bonds. The depressed price is self-fulfilling and has lead to a huge short position. As contrarians, we believe in buying when a particular stock or sector is treated with utter disgust. We believe this is the case with gold stocks in general and Glamis Gold in particular. These days, people buy what is popular, leading to historically ridiculous valuations in these stocks and sell what is unpopular, leading to the opposite effect. It is a question of when, not whether, this seemingly mindless game will call in its bets. Interests rates in the US have been
on the rise in reaction to our overheating economy. At some point, when
demand for commodities rises as supplies are declining, inflation will
begin to rise. The world is not getting larger and population is increasing.
Depressed economies will turn up at some point; increasing demand for all
commodities. Over the last two years, inflation has been kept in check
by declining commodity prices. Commodity prices do not need to rise too
much, only remain flat, for this disinflationary impact to cease.
Conclusion GLG should outperform the overall market based on its internal growth and the relatively high valuations of the overall stock market. Gold prices should begin to trend upward as inflation gradually increases. Any surprises in the inflation rates could lead to very substantial increases in gold prices. This could lead to a huge rally as short covering becomes frantic. It is not inconceivable to see $400 gold in the next eighteen months. If this is the case, GLG could rise to the $8-10 range due to the current “lean and mean” cost structure featuring strong operating leverage. In other words, every extra dollar in gold prices drops directly to the bottom line. We don't pretend to be able to forecast
gold prices. Further weakening of gold prices would hurt GLG, but the downside
seems limited due to low production costs and the Company's cash position.
The upside scenario seems to be much more probable. We don't see people
painting their cars with gold and making their plumbing out of gold. The
time to buy is when prices are low and right now we see the price of GLG
as being in the toilet.
About the author: Thomas O'Brien is a private money
manager who holds a BA in Geology and an MBA in Finance. He was previously
a geologist with Phillips Petroleum Co. and an analyst with Merrill Lynch
in New York City. Mr. O'Brien and affiliates of Mr. O'Brien hold a large
position in the common stock of Glamis Gold. As of this writing, O'Brien
and/or affiliates were continuing to purchase the common shares of GLG
in the open market. This is not a complete analysis of any company or industry.
The information contained herein is believed to be reliable but there is
no guarantee as to its accuracy. This is not an offer to buy or sell
any security. Mr. O'Brien was not compensated in any way by Glamis Gold
regarding the preparation of this report.
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