In what amounts to a holiday shortened week, news flow has been rather thin. Emerging coal producer Royal Coal announced significant new deals with Novadx Ventures and Ikerd Group that will expand the scope of its operations. These deals enable Royal to nearly double production with minimal capital investment. Under the terms of the deal Royal will also gain equipment and rolling stock that will increase the fleet of vehicles operated by the company and expand the total production capacity. Further to these new production opportunities, Royal then announced a contract to sell 234,000 tons of coal for a fixed price of $85 per ton.

Royal will have enhanced production capacity, plus fixed contracts to deliver a large percentage of its output at attractive price levels. The company has struggled in recent quarters to generate high enough production to achieve operating efficiencies and these new transactions should contribute towards realizing a profit margin in 2012.

As 2011 draws to a close there are some noteworthy trends emerging that should carry over into 2012 which are worthy of discussion.

Political risk has been an important theme for investors to be aware of. This has come in the form of changes to tax and regulatory structure in some countries, the threat of outright nationalization of resource assets in others, and the pressure put on individual companies from special interest groups with environmental and aboriginal agendas that have occurred in many areas of the world. In 2011 we saw many examples of these risks play out.

Bear Creek Mining was forced to delay development plans at its Santa Ana deposit in Peru after local opposition to the project prompted suspension of the environmental permitting process. The market value for shares of East Asia Minerals collapsed after the company encountered delays to get an exemption from the protected forest development restrictions that prevent mining in some of the operating areas controlled by the company. Australia has unveiled a carbon tax scheme that will force larger resource firms to pay higher taxes for ‘pollution’ linked to carbon dioxide output and this added cost structure has reduced the economic potential for some development projects as well as hurting the market value for many resource stocks. These are just some of the big news stories that affected many companies during 2011 in terms of political risk.

The trend continued right to the end of the year, as this week deadly riots occurred in Indonesia over exploration activity underway by Australian junior Arc Exploration. The company has no development activity planned that would compromise the environment and has denied any participation at all in the rioting that killed at least 2 people, but it has been forced to withdraw at least temporarily in this climate of violent unrest. As more companies become active in more countries worldwide, it is likely that many more such headlines will be reported through 2012. These disruptions come at investors as a curveball, difficult to predict in advance, and with the potential to have dramatic effects on the market value of the companies directly involved.

Another theme to keep on the radar screen is the pending wave of mergers and acquisitions that is very likely to occur soon. There have already been several important mergers reported during the year as companies are making strategic decisions on how to proceed in an uncertain market. It should be noted that even while many high quality projects have advanced along the development curve, the market value of the companies involved has largely declined. This means that for the current time frame at least, it is often cheaper for a larger company to complete an acquisition of a late stage project than it would be to fund development throughout the process in-house. It also means that some companies are now sitting ducks for a hostile acquisition to come out of the woodwork and grab up some of the best candidates at bargain basement prices.

To avoid this kind of threat many companies are considering friendly transactions to find matches that will preserve some degree of leverage to their asset base while securing additional value for shareholders. The recently announced takeover of European Goldfields by Eldorado Gold is a good example of this, and probably many more to come in 2012.

This week yet another transaction is underway as Sante Fe Gold has secured the financing and signed a definitive agreement to acquire Columbus Silver. The all-cash deal values Columbus at 20 cents per share, a significant premium to the current market price. While this is a smallish deal overall, in the range of a $10 million acquisition, it stands as yet another example of a company in a difficult market that has opted to secure a stronger partner to carry on with the objective of advancing its property base. It is now in the hands of shareholders to approve the takeover and a vote is scheduled for early 2012.

A third key trend worthy of note is the financial strength for many of the producing miners. Investor sentiment within the sector is notorious for rapid swings but the operating performance for mining companies is more of a long wave phenomenon. Through the early bull market years many mining companies were investing heavily in exploration and development. There is a corresponding lag for these upgrades to generate improved efficiency and output from mines. We are now entering the window where the mines are reflecting those growth initiatives and hence many companies have been able to report increased production and lower costs. The guidance going forward through 2012 continues to indicate operating strength will be the key determinant of performance.

Adding to the impact of stronger operations, the prices for most metals remain well above historic averages. Again, investor sentiment is perhaps a lagging indicator as many speculators have abandoned the mining sector, trading volumes are low, and the outlook going forward appears bearish. Some historical perspective is appropriate however. It was not that long ago when there were celebrations going on in boardrooms for the miners as gold rose above $1000 and silver broke the $20 level. A few years ago, the concept of a sustained run above $2 per pound for copper was considered wildly over-optimistic. And most people had never even heard of many of the other essential metals that are now many years into a powerful bull market. So why the bearish sentiment now?

As much as the fundamentals for the mining sector have improved in recent years, even accounting for the correction to close 2011, the reality of investor psychology is largely unchanged. Swings from bull to bear sentiment levels, and back again, have always been part of the story. People seem incapable of adjusting to longer term waves and appreciating fundamentals that drive these cycles. Instead, many investors are apt to over-react to bad news, the interpretation of risk, and the short term market performance of their portfolios.

The trend for stronger operating performance, rising earnings, and growth in 2012 should recover some of the lost momentum for the mining sector. The fact remains that a tiny percentage of the total investment pie is currently allocated in the resource stocks and that is bullish. The likely recovery for the metals once this correction (and it is a normal correction within a long term bull market) has passed will also attract investors. Higher dividend yield for the producers is a third bullish factor. Suffice to say that the angst and bearish sentiment of the day could rapidly reverse yet again to trigger yet another wild fling of bullish speculation into next year.

Another factor that sent shockwaves through the markets in 2011 and will have an even greater influence next year is the trend for overall economic uncertainty and the related issues of sovereign debt. It seems the crisis rotates from one country to another and so far it has been mostly a European story, but watch for problems to emerge in Japan shortly. And the United States debt ceiling has been on the back burner for a few months but it will become a new flashpoint early in 2012 that has the potential to destabilize world markets yet again. Worldwide debt issues have also contributed to the reversal of the Central Bank sellathon in gold during the early part of this century. It appears likely that Central Banks will be aggressive buyers of gold again in the new year and that too should help support a more bullish regime for the yellow metal.

A final key concept for the resource sector will come down to the continued growth of emerging economies like China, India, and Brazil. China is one of the top three economies in the world with more than a billion people spread over a huge geographical area. There are still challenges ahead on the path to a stable, modern economy and many hundreds of millions of Chinese people still live modest, agrarian lifestyles.

No other nation in history has advanced development on a similar magnitude and so quickly. There are hundreds of different languages and dialects spoken in China. Cultural norms vary dramatically from one part of the country to another. It requires a minor miracle of logistics on a daily basis to manage food, housing, employment, transportation, education, and energy requirements for such a large number of people. Rather than fret the periodic downturns or episodes of overinvestment that have been reported in parts of China recently, perhaps one should consider just how orderly the process has been to this point. Growing pains are certain, but it appears the country has been able to keep the boom on the rails and that is a bullish factor in itself for the future.

While the larger western economies appear to be stalled or perhaps sliding back into recession, the situation presents opportunities and risk for the developing world. Exports are likely to decline for the countries that have built their growth on world trade and this will slow the pace of development. However, the competition for raw materials will probably also decline, allowing the emerging nations greater access to commodities that are essential to establish the infrastructure for longer term growth objectives. In time these nations are building a middle class that will support growth through the domestic economic activity. With such a larger percentage of the total world population accounted for in these nations that are still growing in terms of economic clout, this may serve as a counterweight to limit the downside from a slowdown in the western world.

Investment success in 2012 will demand that a rational perspective is employed to filter the news of the day and temper the short term noise that attracts the most attention. It is market volatility that affords the opportunity to buy stocks cheaply during a long term bull market. As bearish as the sentiment may be today, most of the trends that have been discussed above are bullish for gold and silver. Expect continued wild swings to be the story of the stock markets, but overall the direction for the metals next year should be up and the bull market story for the entire resource sector remains intact.

This also represents the perfect opportunity to wish the best fortune in the new year for all of the readers of this report. May the fear and uncertainty of the day be resolved to a brand new stampeding bull market for those with the fortitude to stand up to the risks and stay on board.

Michael Kachanovsky