Our Model Portfolio Goes Into Minefinders (MFN) Big Time

Our model portfolio of around $30,000 purchased 2,800 shares of Minefinders (MFN) last Friday at a cost of $10.36 near the close. Our goal with each purchase is to achieve at least a double. Minefinders just started production in February of this year and is extremely undervalued in the marketplace. Their lifetime cash costs at their Dolores Mine will be around $300 per ounce of gold equivalent. The Dolores Mine shows reserves of 2.4 million ounces of gold and 126 million ounces of silver (per the Minefinders September 10, 2009 presentation at the Rodman and Renshaw conference). This company is turning into a cash flow machine rapidly paying off their debt. They have other mining properties that they have yet to develop. Their minable reserves in the ground are only valued at a third of what a bigger mining company reserves would be valued at. The analysts are just discovering Minefinders and so far they are positive. The stock appears undervalued because of problems with the Dolores Mine startup. But the mine operation is now ramping up very nicely, with future surprises after the third quarter of this year likely to be positive.

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Our position at the end of the trading day: 2,800 share of Minefinders (MFN) X $10.39 = $29,092.00 plus other and cash of $987.10 for a total in our model portfolio of $30,079.10.

Our case for Minefinders (MFN):

In 1980 one ounce of gold would buy the Dow for $850. The Dow was at 850, gold was $850 an ounce. We could see gold and Dow parity again, perhaps at the 5,000 number. The place to be in the future is gold and silver and oil. The dollar is going down and will be replaced as the reserve currency. Residential real estate in the US topped out in 2006 and the stock market topped out in 2007. The commercial real estate market may be the next to fall. 125,000 retail stores may be closing in 2009, creating more unemployment. The G20 countries have pumped a lot of liquidity in the system, but the employment picture is still bad. But for people with money to invest, what do you do now?

Our bet is on one of the most undervalued and safe junior mining companies, Minefinders (MFN). Minefinders operates the Dolores Mine in Mexico. Commercial production started this year and the start up bugs are being worked out. Minefinders recently had a stock offering to pay some debt down and build a mill that will result in higher production. They have no need now to go into the credit market for financing or to issue new stock. Their financing is in place, and they do not hedge production. Their large trucks and equipment are brand new. Minefinders is an open pit mine that stacks crushed ore on leach pads that are sprinkled with cyanide. Their recovery rates look good and there does not seem to be any major problems with the ore pads. Dolores has a mine life of at least 15 years, but probably much longer as additional reserves are defined and mined out. The Dolores Mine shows reserves of 2.4 million ounces of gold and 126 million ounces of silver (per the Minefinders September 10, 2009 presentation at the Rodman and Renshaw conference).

We like their Dolores deposit. Many mines are just liars standing over an open hole. An investor has to be very wary of buying any junior miners. If you get the urge to buy a penny mining stock, its best to lay down and hope the urge passes. But Minefinders is the real deal. We believe the only surprises now will be good ones. Their Dolores Mine could make them an attractive takeover candidate. Today's closing price of MFN at $10.39 is a very attractive price. We believe at today's prices MFN is worth $18. If gold shoots up to $1,325 an ounce, MFN could be trading easily at over $20 by the end of this year. If gold and silver prices go up as much as we think, MFN may go to $50 a share perhaps as early as the end of 2010.

If the stock market keeps climbing and does not crash, Minefinders will keep up with the market. But if the market does crash in the next month, it should still go up and do well in a bear market. The underlying economy has severe problems. We may see the stock market return to the market lows we saw in April, perhaps even a down day of over 1,000 points. Whatever the stock market does MFN will do well. The dollar will keep declining and gold and silver prices will go up much higher than they are now. We are buying a company which is substantially undervalued compared to a major gold producer. This is a company that will be in positive cash flow with their peso denominated cost per ounce going down over time while their revenue per ounce should be dramatically going up.

While most stocks are now fundamentally overvalued, MFN is substantially undervalued. We will be seeing a flood of investors seeking the safety and security of the gold mining stocks in the near future. MFN is largely unknown by the investment public. Its not widely followed by the security analysts. That is rapidly changing, today, CIBC started covering this stock at Sector Outperform with a Canadian $15 target. But once this company gets discovered in the coming gold and silver mining boom, look out. We know the FED has supplied so many dollars to the system that the dollar will keep going down. We have heard several respected investors, economists and mine operators calling for $5,000 an ounce gold in five years. The Dolores Mine will still be a young mine then. With operating costs at well under $1,000 an ounce (Mexican peso will go up to the dollar) Dolores will be a cash flow machine. In that scenario, MFN will easily be a $100 stock in five years, protecting your investment capital from the ravages of a declining stock market and a devalued dollar.

Links:

The Bull and Bear Financial Report with a featured article on Minefinders

Pay Dirt Magazine article on the Dolores Mine

Minefinders corporate website

Minefinders presentation at the Denver Gold Forum (Sept. 14, 2009)

Minefinders presentation at the Rodman and Renshaw conference (Sept. 10, 2009)

Minefinders presentation at the Latin American Mining Congress (May 6, 2009)

BNN Interviews Mark Bailey (January 22, 2009)

Message board posts on the internet about Minefinders

Bullet points on why Minefinders (MFN) is the most undervalued small-cap mining/exploration company:

* We think gold and silver prices will continue to go up from here and since Minefinders is in production it will impact their bottom line immediately.

* Minefinders is very undervalued on the basis of gold and silver in the ground compared to other mines, owned by larger mining companies. Minefinders is traded at $100 an ounce for its proven and probable reserves in the ground while the average company has a valuation of $300 an ounce for its proven and probable reserves in the ground.

* The cost per ounce will come down as they are able to get into the higher grade ores now because the village has been relocated that was just below where the high ore grade is and as they reach steady state recovery rates. Also, some one time costs will disappear. Life of mine cash costs are estimated to be $300 an ounce.

* They have other properties and prospects in Mexico and after working there 15 years are developing an expertise in Mexico.

* They do not hedge their production, any gains in gold and silver prices will go directly to the bottom line.

* They are an attractive take over candidate.

* They have new equipment, specially designed for the Dolores site, which should keep breakdowns to a minimum.

* They are already in positive cash flow, and should show a profit in the third quarter of this year. Their 10 million dollar loan has been paid off and they are now paying down their 50 million credit line. They are trying to get debt free ASAP and then become a debt free company.

* There is no more need to issue stock or obtain debt financing. Therefore there should be no dilution going forward.

* They are practicing good mining methods. We believe they may have higher recovery rates than they have forecast on their leach pads, which would have a large impact on the bottomline. Their ore appears to be very amenable to heap leaching. The true recovery rate for gold and the slower leaching silver will not be known for some time.

* With positive cash flow and Dolores maturing in the coming years, they will be able to buy properties in Mexico that other juniors may not be able to finance and that the majors may deem to small a mine property.

* Because of delays with village relocation and the road blockage, the need to mine low grade ore at the beginning of the year, one of the screens being a lemon, projected costs per ounce turning out to be way to low for the first 2 quarters of 2009 and other problems some people perceive management as being inept. There are problems with any mine start up, and Minefinders is no exception. We believe the 3rd quarter numbers may fall short of expectations, but the 4th quarter numbers will be better than people expect. We think we finally can make a fair evaluation of the company. We believe the surprises forward will be good ones and that the share price is very undervalued.

World of Wallstreet blogger compares Minefinders with two other heap leach operations.

What World of Wallstreet had to say about Minefinders:

"Minefinders (MFL.TO, MFN) is a Mexican heap-leach that is just shifting into production. As such, it is subject to startup problem risk. This could be what has been affecting its stock price recently. In contrast to most heap-leach miners, Minefinders has a significant amount of silver production. All of the metrics are based on gold-equivalent oz where one silver oz is valued at 1/80th of an oz of gold. I expect Minefinders to move into production relatively smoothly. One of the things I like about Minefinders is that its relatively liquid (e.g. today it traded roughly 2 million shares across the AMEX and TSX for a total of 10 million $ of trading). Another thing I like is that it usually trades with a high beta to the price of gold. As such, I consider it to be an undervalued trading vehicle. Right now its being sold off. This either indicates as yet unannounced startup problems or some big leveraged holder(s) that are dumping to raise capital as the general market tanks. This stock is publically supported by Jim Puplava and John Doody, two widely followed gold market commentators. At this point I have a small trading position (still above water) and expect I'll liquidate it either after it turns back up or when I turn less bullish short-term on gold. Minefinders is cheaper relative to the previous two stocks, but this makes sense given the startup risk. Minefinders has recently raised money that it expects to use to purchase another project to take into production. As such, one might want to be looking for a Mexican heap-leach project with a couple of million oz in the ground to invest in as a Minefinders takeover target. "

For more information, check out the message board posts on the internet about Minefinders. Check out this article as well.