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Dec 12

Finding what others discard

ORA MORISON

Paramount Gold and Silver Corp. is stuck between a rock and a hard place.

The rock is what’s buried under the ground in Nevada and northern Mexico, where the company has found a supply of left over minerals at former mine sites. The hard place is the stock market, where uncertainties related to global events far removed from Paramount’s control are pinning down  its stock price.

Paramount faces the challenge of depending on an unreliable source of funding for its most important activity – exploration.

The company relies on issuing shares to fund expensive drilling and metallurgic testing at its Sleeper and San Miguel mining sites in Nevada and Mexico, respectively. For the fiscal year ending June 2011, Paramount spent close to $8 million on exploration, about eight times the next biggest cost and the largest single contributor to Paramount’s $28 million loss for the year.

But over the past 12 months, Paramount’s share price has fallen from a 52-week high of $4.40 in March to a low of $1.65 in November 2010. In the past four months, prices have hovered between the $2 to $3 range, and shares closed at $2.67 on November 30. At the same time, Paramount has announced new discoveries of gold and silver at the company’s two main sites, every few weeks since January 2011.

With a share price that seems to ignore new discoveries and has more than doubled and halved in value over the past year, Paramount faces the challenge of depending on an unreliable source of funding for its most important activity – exploration.

CONCENTRATE ON EXPLORATION

As an exploration-stage mining company, Paramount drills for leftover resources at existing mines before selling the property or partnering with another company for extraction. To attract a potential buyer or partner, Paramount has to show its mines hold enough gold and silver to make a profitable investment for a potential acquirer. This means Paramount must make exploration its major priority – drilling and performing metallurgic tests are necessary to prove the supply of high quality minerals beneath the ground is enough to make an attractive investment.

“All gold stocks have been hammered pretty hard in the last while.”

Eroding stock prices are not uncommon among smaller mining companies such as Paramount, John Nyholt, a partner in the Deals group of PriceWaterhouseCoopers, said in a phone interview.

“The junior gold miners index [on the New York Stock Exchange], has gone down 30 per cent since January 1, 2011,” Nyholt says. “All gold stocks have been hammered pretty hard in the last while.”

Paramount’s chief financial officer Carlo Buffone outlined two ways the company can approach its exploration budget in this volatile environment.

Under the first option, the board of directors can decide to budget based on the results they believe they will achieve, Buffone says. This means assuming the cash will come through and creating a large-scale exploration plan to maximize the resources discovered.

Otherwise, the board can take a more conservative approach.

“The board of directors might decide, ‘Let’s slow down exploration because our ability to fund is hampered by market conditions,” Buffone says. “It’s an ongoing debate.”

LOTS OF CASH ON HAND

Having upped its exploration budget for 2012, Paramount will pursue the first of those options. The company budgets for exploration based on the calendar year, and plans to spend $20 million in 2012 compared to the $12 million budgeted for January to December 2011.

For now, the company has the cash to do this. Paramount ended its first quarter on September 30 2011 with a cash balance of $10.5 million.  Exploration expenses for that quarter were $4 million, and expected to rise as Paramount gears up to either sell its properties or enter in to a joint venture.

Paramount’s strategy is to seek out institutional investors who are more likely to hold their shares for the long term.

“You really have to step up your drilling,” Buffone says.

Within the next four months, reports outlining the resource estimates at Sleeper and San Miguel will be completed and updated to include the most recent discoveries. At that point, Paramount will complete a preliminary economic assessment for each site – reports that essentially indicate how much money can be made extracting and selling gold and silver from each mine.

“That’s when producing acquirers start taking you more seriously,” says Paramount’s manager of corporate development, Chris Theodossiou.

Leading up to that point, Paramount’s strategy is to seek out institutional investors who are more likely to hold their shares for the long term, as opposed to individuals more susceptible to buy and sell with the bipolar ups and downs of the market.

“All shareholders are important, but an institutional investor typically means the people have a professional background in analyzing the company,” Buffone says.

Paramount’s management and board of directors currently own about 10 per cent of the company’s outstanding shares. Institutions hold 20 per cent, and individual shareholders own the remaining 70 per cent.

PITCHING TO INVESTORS

On November 29 and 30, Paramount’s chief executive officer Chris Crupi was at the JVTIR Metals and Mining Conference in Boston to make a presentation aimed at boosting Paramount’s analyst coverage and attracting more institutional investors.

Despite frustration with the state of the market, Buffone says Paramount needs to maintain focus on its this key group of investors.

“You’ve got to almost tune out what’s happening in the stock market,” Buffone says. “You still have to go out and market to who you think your investors should be. You still have to go and knock on the doors and tell the story.”

In 2012, Paramount’s story might expand to include the company’s other properties. Glen van Treek, Paramount’s vice president of exploration, says the company will take a closer look at its other sites in Nevada, called Mill Creek, Spring Valley and Reese River.

“We are conducting a review of those [sites] now to define the plan for 2012 but these are early stage,” van Treek wrote in an email while on-site in Nevada.
With or without the cooperation of the stock market, Paramount’s management seems determined to forge ahead.

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cwaddell