Financial Sense Junior Gold Mining Index Review by Frank Barbera 01/14/2008

General Comments

Before getting to the numbers for the week just past, we take our usual look back at performance for all things Precious Metals related for the year 2007. As can be seen in the table below, large cap gold stocks turned in a solid performance, gaining 40.48% on the year, with Gold up nearly 31%. While some may suggest that the word ‘solid’ is a bit of an understatement considering the S&P was flat last year and in the end, 40% is still one heck of a return. While that may be true, for the Gold Stocks, a high degree of leverage is normally present in returns, with the high beta of the sector normally producing two to three times the total return seen on Gold. A good example that comes readily to mind was 1993, when Gold gained 17.35%, and the XAU gained 85.00%, nearly five times the percentage performance of the underlying metal. In more recent years, some of that leverage has been missing, as 2007 ended up as a slightly ‘less then’ good year reminiscent of 2005 when Gold gained 18.19% and the XAU gained 29%. 2006 then opened with a series of nasty sell offs in the Gold Stocks. Perhaps most telling, most disturbing and most inexplicable of all was the miserable performance seen in the Junior Market in 2007, which despite a nearly 31% gain in Gold, a 15% gain in Silver ended FLAT. Dead Flat. One of the great mysteries of our time? Who knows, but certainly an amazing turn of events as the FSO Junior Mines is composed of 40 high quality companies all of which have a palpable pulse. In a different reality, one would have easily anticipated a better then 50% gain in a Junior Index given the 31% rise in metal prices.

Yet it was that kind of year for Small Caps, where on a fundamental level, almost all of the companies represented by the FSO Junior Index made excellent progress in forwarding there underlying projects toward the end goal of production. Looking purely at the statistics, one could look back and suggest that with the companies moving forward, but the stock prices stuck in neutral that 2007 was a year of value creation in the Junior segment, ironic, because coming into the year, there was already an abundance of good values. Hence the cheap got cheaper.

While many may be given to speculate as to why the barrage of hot money besieging world markets failed to assault the ranks of Canadian Precious Metals Junior Mining stocks in 2007, many reasons could be put forth, but none quite register that genuine ring of truth. Yes, energy prices were high in 2007 and the cost of production for many small firms rose as typified by the year-end disaster at Nova Gold. Then again, there were geopolitical issues which sent occasional shock waves through Canadian Juniors operating in Latin America, where at various points in time legislation in Bolivia, Peru, Argentina, Venezuela and Ecuador threatened higher taxes, or to even shut down mining all together. It can even be argued that from July on, the global credit crunch forced many a hedge fund to begin throttling down on risky plays, and as a result money shied away from the thinly traded small caps. Yet, despite all of these rationales and a host of others, somehow, money simply failed to flow into a number of these highly promising still developing young companies. In the table above, we update our readers on the weekly changes for the FSO Junior Mining Index and its various sub-components and moving average values. On the next few pages, we update the current chart of the FSO Indices and components, along with the unweighted chart of the Development and Exploration Indices combined. Interestingly, combining the two indices still yielded a net loss for the year in 2007 of 18.06% making it a tough year for secondary mining stocks, any way you view it.