A Melman Minute — April 8, 2009

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NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday until about mid-March 2009. The working title of the book will be 'Just a Melman Minute!"

Despite the fact that there is a presumption that governments are created to help society function and to protect the rights of both individuals and commercial activity, it is the belief of your editor that in two specific areas, the greatest obstructions to the future profitability and viability of the mining industry are being created by various government actions. We believe those actions may be placed into two categories: over-regulation and over-taxation.

All of us who have been active in the world of mining investments for more than a few years cannot help but notice the contrast between the era before the 1980s and since. In that earlier time, a junior would buy the rights to a discovery (or develop one on their own), raise capital to initiate exploration, and begin the work of establishing the mineral value of the property. Most importantly, virtually all the monies raised went into the ground via activities such as sampling, evaluating assays, trenching and drilling. If the results justified such actions, the company would then proceed toward a bankable feasibility study, raising production monies and eventually, active (and hopefully profitable) production.

However, in the more recent era, the complexity of legal regulations which must be followed has grown substantially. Detailed bodies of law now exist that involve aboriginal rights; environmental requirements; plans for eventual reclamation of mined areas; worker safety; Fisheries and Oceans considerations; studies relating to the impact of mining developments on area biology and water purity; recreational usage and area community relations.

While there may be some justification for regulating portions of mining activity, there is no question that the collective effect of such bodies of law has been that most junior mining companies now find a growing percentage of their expenditures have nothing to do with true exploration and development and everything to do with filling bookshelves with expensive and frequently ignored volumes of government reports.

We look on the advent of the Obama Administration in the USA with some trepidation because one of the most powerful spheres of strong support for the new President came from the Environmental organizations and we believe that there will be yet another rush to add to the already-overwhelming body of law already burdening the American mining industry. For example, a complete re-writing of the Mining Law of 1872 that is unfavorable from the industry point of view is already in the works. We also cannot help but note that Canadian lawmakers frequently follow the path laid out by their American counterparts.

Regarding taxation, we believe the potential exists for trouble in that area as well. We have noted that many governments are seeking every potential source of revenue to enable the continuance and even expansion of the growing array of social welfare programs. Just this morning, San Francisco just announced they were considering imposing a heavy fee on taxi 'medallions' which had previously been granted without charge. Of course, according to the Wall Street Journal, the Mayor of San Francisco was in favor of this change, stating the action was required "...as a financial necessity with the city facing a $129 million budget shortfall for public transportation." Sales and Income Tax rates are on the rise in various states and provinces as are auto license fees, gasoline taxes, customs revenues and all manner of direct fees for government services.

Given this state of affairs, in our opinion, it appears reasonable to believe that taxes will also rise in the future on revenues and profits from successful mining, just as they will likely rise on other resource development industries as well.

A foretaste of what might be coming can be noted in two separate news releases. In the first case, the Province of Alberta just reported a budgetary shortfall of C$4.7 billion this year, the largest on record and a dramatic change from the annual budgetary surpluses which had been announced with stunning regularity for the past several years. The Canwest News Service article ended with this note: "While yesterday's budget contained no major tax hikes...the other shoe is expected to drop next year." (our emphasis)

We also observed that the U.S. government, in direct violation of their own recent anti-protectionist statements, has just announced they will impose a ten percent customs duty on some of Canada's softwood lumber exports. The Canwest article then notes, "...The action is renewing fears Washington is about to move aggressively to protect its resource sector during a recession that ha already eliminated 5.1 million American jobs." We wonder is that could possibly mean the imposition of duties and tariffs on Canadian mineral production destined for the USA?

Back to the environmental/regulatory front, a new and disturbing story has just come out of France. It appears that schools are now being set up to coach anti-capitalist, anti-free market demonstrators on just how to gain maximum media impact for their actions. Participants are schooled in such techniques as chaining themselves to trees; damaging genetically modified crops; withstanding police interrogations; blockading streets around important international gatherings (such as the recent G-20 and NATO meetings); producing color-coordinated banners and displaying them for maximum effect; and even teaching wheelchair-bound protesters how to demonstrate for more state aid.

We believe that these trends toward additional regulations and increasing future taxation are important considerations for the mining industry and company executives should continually monitor news events in order to develop appropriate strategies.

America's Greenback has been trading within a fairly large range since making its lows in the vicinity of 71 on the DX Index last summer, but we now appear to be entering a critical chart area. As can be readily observed, the index has established a pattern of 'rising bottoms' following successive relative lows at 71, 76, 78 and 82.5. At the same time, upward resistance has been occurring near 90. Should the DX Index break below 82; that could signal an important reversal to the downside. On the other hand, a break above 90 would likely be interpreted as bullish for the U.S. Dollar.

Markets today are relatively quiet ahead of the upcoming Good Friday and Easter holidays. As of 9:30 AM PDT, the Dow Industrials were up by about 40 points and the TSX ahead by 80. Precious metals were higher on balance, base metals were about unchanged and both mining share indexes we follow were also little changed. Crude Oil was up by $1.60 per barrel to $50.75 and the DX Index was down by .15 to 85.10. (All quotes US$ unless otherwise noted.)

NOTE: We plan to post a transcript today or tomorrow of our "On the Road to Hyperinflation???" presentation at the recently-concluded Cambridge House Calgary conference.

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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