BERAL, INC.  
Andrew G. Racz  
Director of Research  
300 East 54 Street, Suite 26C  
New York, New York 10022  
Telephone: (212) 319-6949  
Fax: (212) 753-1944  

 E-mail: mlikar@aol.com   

 

Golden Valley Mines, Ltd. TSX Venture GZZ: C. 65¢ Yearly high: C. 82¢ March 31, 2007 Shares outstanding: 58,000,000 Fully diluted: 63,700,000 Robert McEwen owns: 10% Cash position   Stock ownership   C. 9M Management owns 15% R. McEwen owns 10% Quebec Labour Funds owns 10% Market value: $40M U.S. Less liquid assets 10M $30M

 

ANDREW RACZ: Mr. Mullan?

MR. MULLAN: This is an interview with Mr. Glen Mullan, president and CEO of Golden Valley Mines Ltd., April 18, 2007. Mr. Mullan, how do you think Peter Munk would wake up today if he was predicted that the price of gold was going to go up let's say threefold.

Q: How do you think he would feel? How do you think the chairman of Ivanhoe would feel if you tell him that the price of copper goes up or Rio Tinto's management were notified that copper and gold will go up threefold?

A: I'm at a loss for words. I'm not sure how to respond to your question.

Q: Well, you are president of a company which in a key position in the uranium industry, and so far the price of uranium on the open market has gone up sixfold in three and a half years. That puts you into a very enviable position.

CIBC World Markets Inc. has raised its price forecasts for uranium oxide by 40 percent, citing an environmentally driven renaissance in nuclear power and a gap between demand and supply for the metal. The firm's chief economist, Jeffrey Rubin, said yesterday that he now expects the nuclear fuel, which is currently fetching $113 U.S. a pound, to hit $140 this year and $160 in 2008.

The move comes amid developments that could bring a new transparency to "yellowcake" prices, which have already risen 15-fold in the past six years, by allowing speculators as well as industry participants to play the market through futures contracts for the first time. Until now, prices have been set behind the scenes, mostly in contracts between utilities and uranium suppliers. As well, it is only in the past couple of years that investors have been able to bet in these prices directly, by investing in a handful of funds that have gone out and purchased actual yellowcake.

On Monday, however, the New York Mercantile Exchange revealed plans to launch futures contracts for uranium oxide next month in collaboration with Ux Consulting Co. LLC of Roswell, GA, the key source of what little public information there is on prices. The contracts will be settled in cash, meaning no one will have to arrange to take delivery of the stuff.

The Nymex-Ux plan came just over two weeks after British energy broker Tullett Prebon (U.K.) Ltd. said it has set up a nuclear fuel derivatives desk to sell a variety of futures contracts B also to be based on the yellowcake price and settled in cash B to utilities, mining companies, banks and investment funds.

Mr. Rubin said there has been a "bellwether change" in North American attitudes toward atomic power. He cited environmentalist opposition that recently forced Texas's largest power utility to scrap plans for 6,000 megawatts of new coal-fired generating capacity in favor of building up to five nuclear power plants.

"It's one thing for California to ban coal-fired capacity, but it's a whole other ball game when Texas is canceling 6,000 megawatts of capacity for environmental reasons," he said when reached in Toronto.

As well, 21 new nuclear plants are slated to come into service in China and elsewhere in Asia by 2010, and twice that many more by 2020, he said in a commentary.

At present, mine production provides just 66 percent of the approximately 68,000 tons of yellowcake civilian reactors around the world required annually, while the balance comes from secondary sources. However, the report notes that one key secondary source, a program under which Cold War-era atomic warheads are converted to fuel purchased by U.S. power plants, is set to end in 2013, and Russia has already said it will not renew the pact. Mine production is slated to expand to 59,000 tons a year by 2010, from 42,000 last year, with 12,000 tons of the increase coming in the final year.

A: Well, we're an explorer, Mr. Racz, and regardless what the price of any one commodity is on a given day, we're an explorer first and foremost. Whether it's uranium, gold, nickel, copper, platinum, palladium, zinc, the fundamentals are essentially the same. It's supply/demand, and our business plan is conceived deliberately so that regardless of the vagaries of the metals pricing in the short term, there's a longer term time line that we apply to our exploration, financial strategies. So of course we're delighted to see the current robust pricing of all commodities, uranium in particular. But the business plan that was conceived in the late 1990s was conceived at a time when the metals were at their all-time low for most of them. Nickel was below $2.00 U.S. a pound in 2000. Uranium was right off the map in the year 2000. Similarly, copper, zinc, and most of the other base metals had much less attractive pricings, and the mining industry as a consequence was nearly stagnant. But for us that was a great business opportunity to design a business plan that could sustain those various cycles. So of course we're delighted to see that the mining industry is breaking upwards.

Q: Can you very briefly describe then your original business plan.

A: The original business plan offers access to several commodities. It's not a gold company, it's not a uranium company, it's not a nickel company. It's a mining exploration company. And to that extent, we have leverage to several different commodities, including uranium, gold, copper, zinc, nickel, but such that we can respond quickly without changing our business plan or operations that we can respond quickly to changing conditions in the market. The original plan was focused on multiple property opportunities, multiple commodities, and owning 100 percent of the assets.

Q: Then you diversified by taking in partners to provide the capital before the exploration, correct?

A: We only take in partners under certain conditions. We always try to drill properties while we own 100 percent of them at the earliest opportunity. So we drill grassroots properties every month while we own 100 percent. The partnerships that we do are on certain specific properties that don't meet those conditions. Any property that's not within three hours of our head office, well, we operate through a partnership. If we can't drive to it within three hours, we want a partner to pay for the work. So that's a fundamental tenet of our plan.

Q: How much money have you taken in from partnerships?

A: Over $5 million.

Q: And what is your plan for the next twelve to twenty-four months?

A: On uranium specifically we'll be drilling the Bear Tooth Island project in the Athabasca Basin, Saskatchewan. That's paid for by our partner Ditem Explorations. In the Otish and Mistassini Basins of Quebec, we'll be doing our basic grassroots exploration, reconnaissance geophysics, ground prospecting, detailed ground geophysics, prospecting of the historic reported showings. We are also doing the drill program on the Lexam joint venture. Lexam's budget is $750,000 for 2007, and they've indicated a willingness, or at least a capacity, to go beyond that if conditions warrant.

Q: Have you reached in any of these territories the pre-production level?

A: Negative. Not with Golden Valley Mines. We're not at pre-production levels.

Q: So it's all exploration with promise in the future to get to a different stage.

A: It's all exploration, very focused on early-stage exploration, grassroots.

Q: If you have to divide the various commodities, which one would be what percentage?

A: In terms of our property holdings, uranium represents 41 percent of our property portfolio, gold 40 percent of our property portfolio, nickel, copper, platinum, and palladium, both elements, 12 percent of our property portfolio, diamonds 3 percent property portfolio, VMS, volcano genic massive sulfites, namely copper/zinc, 5 percent property portfolio, and molybdenum, 2 percent current property portfolio.

Q: So basically you said that 70-80 percent is gold and uranium.

A: 81 percent is uranium and gold, yes.

China plans to set up a strategic reserve of natural uranium to ensure that the emphasis on nuclear power development is backed by a "stable and reliable" fuel supply. The reserve will be built by "sparing no effort" in identifying and exploiting domestic uranium deposits, while seeking international collaboration at the same time, according to the latest national nuclear industry development plan for years up to 2010.

Slightly more than 1 percent of China's total electricity needs are met by nuclear power plants but this is set to surge to 4 percent by 2020, as the country seeks to reduce its reliance on coal-fired, polluting plants, according to official sources.
The official said the State reserve, plus a system of commercial stockpiles in enterprises, will take shape by 2010.

Q: Is there some industry standards which value any of these properties?

A: I really can't reply to that with any degree of confidence or backup. Typically companies that are focused solely in uranium are trading at a premium right now. And similarly they've seen the gold sector in other markets over past decades respond more favorably, trade at multiples that are reflective of their particular niche in the industry.

Q: Gold, the production, the last statistic that overall worldwide production is down about 9 percent and it's not likely to recover in the future. So gold properties, if anything, will go up in value and you have a credibility of finding gold.

A: Right. But similarly, nickel or base metal companies traded at discounts through most of the past decades, and now most of them are trading at multiples.

Q: So that's a positive which probably several years ago I'm sorry we probably didn't take into account. I mean, I was very active in Dimondfield Resources, and the nickel price was by no means higher than $3.00.

A: That's right. In 1994.

Q: Yes. October 4, 1994. I had dinner with the chairman in Vancouver. I remember when the discovery happened. But let's jump a little bit. People have been speaking about uranium and now serious statistics emerge. There are 400 power stations, 100 may be built in the next few years, and I think what will happen is that world leaders and countries will admit that replacing oil with methanol or ethanol outright 10% in gasoline oil is a fantasy. And as a result, uranium will come into the picture as a realistic alternative to oil. If that's the case, and you have 500 power stations, each of them practically has to be purchasing uranium fifteen years in advance because you can't run a power station without an adequate supply for several years to come. Therefore, your potential uranium discoveries could have a very big value.

A: These are fair comments, and it's not dissimilar from the marketing that's used in the diamond sector where conflict diamonds trade at a discount to safe haven diamonds. You can apply the same logic to uranium, given that the primary usage now is energy and energy consumption, and the source of the uranium is becoming a political topic as well. Certainly Quebec as a province is dynamic, Quebec has always had its policy directed largely on energy, mostly hydro, but now it is the government that is one of the largest backers in the new pulse of uranium exploration.

Q: I mentioned today there is an article that NYMEX in New York will have uranium contracts traded. Many years ago I was a member of the COMEX personally, and I know when there is active trading. It started with silver in the early 1970s and the price of silver had gone up. I'm not talking about the Hunt run-up but the regular run-up to $10-11. Palladium, where it became tradable, and platinum had an enormous rise in the seventies. Now, the best you can say about platinum is it's needed for the automobile. When it comes to uranium, suddenly you enter what Sheik Yumani called in 1974 the coping with cheap energy, because he said on television, "Gentlemen, cheap energy is over." And he was right. Going up to 2007-08-09, I have in mind a possible major meeting, G-7 or heads of state, where a statement will come out saying, "Gentlemen, we need oil, we need uranium, and all the other alternatives are filling only a small gap. It means nothing." The 21st century is the century of uranium. The liberal environmentalists are wrong, and Professor Teller was right.
Now, when that happens, first of all the big companies will look around, and they will call you on the phone to ask for how much would you sell your company? Is it a plausible scenario?
A: I don't know. These are forward-looking scenarios that we don't spend a lot of time contemplating right now.

Q: How many companies in uranium are like yours?

A: Well, we're not a uranium company. We're a mining exploration company.

Q: Okay. How many uranium mining exploration companies have your reputation and your level of advancement?

A: There are hundreds of junior mining companies working in exploration.

Q: 240 in Canada, 120 in Australia, but the most productive are in South Africa and Zambia. And some people became very rich going to Africa. Having lived in Africa myself, I am pro-Africa. But all those productions are a fraction of what uranium is supposed to fulfill. What I am saying is that if the price of uranium goes to $150 to $200 on the spot market, and is traded on the futures market, you will get a helluva lot of money to join one of your partnerships to explore for uranium.

A: Fair comment.

Q: In that case, the value of your company is likely to go up. If everybody wants to buy your product or join you, the price goes up. That's pure economics. Let me turn to the present. Your company, if I'm correct, has fully diluted 60 million shares.

A: It is 63.7 million fully diluted.

Q: The price in Canadian dollars this morning is $.82.

A: Thank you. You're telling me something I did not know.

Q: Which means that the whole market capitalization of your company is $50 million Canadian.

A: Yes.

Q: Which is let's say roughly $40 million U.S. So we have a company that has many years of experience, past association with other companies. You have received monies so far from companies for drilling. You have unlimited extra possibilities of getting exploration territories or picking up some of the smaller companies. And you are in a key position for what the world needs today B liquidity means gold, uranium means energy.

A: That's right.

Q: One last question. How much cash do you have in the company?

A: Just over $9 million Canadian.

Q: And that's sufficient for you for a year or so.

A: No, that's sufficient for approximately four years at the current burn rate. We've tried to build a company that will survive the vagaries of the market gyrations. In good markets or bad markets, Golden Valley will be exploring. Some of the best opportunities are derived from the worst of market conditions. Right now we're using partnerships to increase our access to exploration, to afford more leverage, more opportunities. That's why we'll be drilling the uranium projects shortly into 2007, gold projects in James Bay in 2007, gold and copper projects in the Abitibi Green Stone Belt, Val D'Or, Quebec, to Timmons, Ontario, every month through year-end. So we hope to have over 80 holes drilled through 2007, of which Golden Valley pays for less than a third.

Q: Any of these exploration projects would you consider selling for the right price?

A: Well, we don't sell any projects. We offer partnerships where partners can leverage themselves in and earn interest by funding exploration, and by making certain share payments.

However, Kevin Bambrough, market strategist at Sprott Asset management Inc. of Toronto, which has invested aggressively in the uranium sector, said the futures market may siphon off some of the speculative money that has been pumped into buying physical yellowcake. "I think adding liquidity is usually a good thing overall, but I don't expect it to have too much of an impact on the global supply-demand picture, which ultimately will dictate where the price is going to head."

Bob Mitchell, who heads Adit Capital LLC of Portland, Oregon, and was one of the first fund managers to invest in physical uranium, figures nuclear power plant operators will likely try to use the futures to try to slow the fuel price rise. "But at the end of the day they're going to need uranium to put in their reactors to produce electricity, and paper profits and losses won't do that for them," he said.

Meanwhile, Peter Framer, chief executive officer of both uranium miner Denison Mines, Inc. of Toronto and Uranium Participation Corp., a publicly-traded closed-end fund that buys uranium oxide, also played down the potential impact. "It's just a bet on the yellowcake price, so it shouldn't have any more effect on the price than the trading value of UPC shares has," he said.

For instance, Athabasca, Saskatchewan, Bear Tooth Island, [Ditem] can early 50 percent by spending a million dollars in exploration over three years, 60 percent by spending $2 million more. So by spending $3 million, they can earn 60 percent over four years. We also bought two million 104 warrants. Ditem is trading at $2.00 right now. Lexam Exploration can earn 50 percent of our Quebec uranium properties by spending $3 million and Mr. McEwen himself, the president and chairman of Lexam and U.S. Gold, bought 10 percent of Golden Valley in January.

Q: At a very good price.

A: Well, he paid 334 then when it was trading at 304, and it's doing better than that now. You're telling me that we're at 804 this morning. I'm looking at geological maps more than I'm looking at market prices.

Q: Just for theoretical purposes, Lexam puts in $3 million B they can put in more, of course B and that particular territory is developed and it's very promising. You may be able to turn around just as a portfolio transaction to sell the whole property to Lexam or a third party and pocket let's say $20 million.

A: All of these scenarios are possible.

Q: In other words, if you, like the head of a conglomerate or a mathematician, can play with your individual projects, partners, drill, evaluate the market, and convert some of them into cash. In that case, the company instead of $9 million may have $30-40 million. And since we calculated that you have a $40 million U.S. market cap, the whole portfolio can be converted maybe to $100 or $200 million cash over the next two years.

A: It's entirely possible. Right now at this moment in time, we have about 2.5 million shares of other public companies that we hold as short-term investments. Those are shares that we have received for the property transactions that I described, and they're not included in the $9 million cash. There's all kinds of leverage.

Q: In summary...

A: In summary, we work in several commodities B uranium, gold, base metals. We're constantly drilling based on the fundamental concept that unless you're drilling, there's no opportunity for discovery. So we're financed $9 million cash. Management are the largest shareholders. We don't ask people to put their money down where we have not ourselves. We are the largest shareholders. We have a track record. We have another company that's done extremely well that we are also the largest shareholders of. Toronto Stock Exchange listed, completing a feasibility study. We're all long-time holders in our two projects. Golden Valley is not for people that are averse to risk. It's a high-risk proposition based on high rewards.

Q: Apart from your skills and your professional ability, the risk element is going in your favor and declining, not increasing.

A: Absolutely.

Q: Dimondfield had to be sold because the two chairmen had nothing to do with mining. You are a professional mining engineer.

A: Geologist.

Q: What I see is that you are sitting at the conference table and telling your board of directors that, gentlemen, we have 23 properties, this is how we stand, this is the number of offers we got. And if we take half of the offers, we will probably have cash well in excess of $40 million. We still have the other half to work with and we can buy new properties. So in other words, this kind of opportunity has only been available in the past to the giants, to Falconbridge, Rio Tinto, BHP in Australia, and several South African companies. As a holding company, smaller companies like you have never had the privilege of thinking like a giant.

A: That's entirely accurate.

Q: Thanks very much.