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Inflation, Deflation and the Year Ahead

By Clif Droke, December 13

The inflation versus deflation debate has raged for years but since the credit crisis the debate has become highly politicized.  If the credit crisis taught us anything it is that the risk of deflation far outweighs that of inflation.  Yet there is an entrenched view emerging in political circles that is actively opposed to the government’s attempts at re-inflating the economy following the deflationary collapse of 2008. 

One of the most popular icons to emerge from the credit crisis is a long-time Congressman from Texas, Ron Paul.  Perhaps more than any other figure, Rep. Paul has done more to capture the imagination of the voting public which has concerns about big government. His loyal followers (“Paulites” as they’re called) share his view that government has become too big and cumbersome to be an efficient servant of the people (indeed, they charge that government is no longer a servant but has become a rather harsh master).  The “Ron Paul Revolution” as it has been called is aimed at shrinking government, restoring the Constitution and, significantly, reducing or eliminating the role of the Federal Reserve in the nation’s monetary affairs. 

It’s amazing to think that just 10 years ago the “abolish the Fed” movement was rather small by comparison and was viewed by the mainstream as the province of cranks and conspiracy theorists.  The movement was barely given even mainstream coverage at all except to highlight its more unsavory elements.  Yet today, in the wake of the worst financial catastrophe since the Great Depression, the anti-Fed party has become a force to be reckoned with.  The message of Ron Paul’s recent book, “End the Fed,” has resonated with millions of middle class Americans who view the central bank as one of the primary culprits of the nation’s economic woes. 

Fear of inflation is perhaps the prime motivator for Paul’s economic platform.  In an article spotlighting Rep. Paul’s quest for the chairmanship of the House Financial Committee, Businessweek magazine observed, “Next to the doorway in his Washington office are six framed German bank notes dating from the 1920s hyperinflationary era.  The notes are sequentially dated ‘to show how quickly the zeroes were added onto the bills’ as inflation skyrocketed, Paul says.”  Clearly, Paul sees inflation as a potential threat to the economy and it’s one reason for his fight against the Fed’s attempts at re-inflating through its quantitative easing program.  Many of his followers – millions of working class Americans who have witnessed the decline in the U.S. standard of living in recent years – also fear the return of hyper inflation. 

Rep. Paul isn’t the only one in Congress who is actively campaigning against the Fed’s attempts at re-inflating the economy.  His son, Rand Paul of Kentucky, recently won a seat in the U.S. Senate and won on a platform of campaigning against the central bank.  Another congressman, Rep. Mike Pence, accused the Fed of “masking our fundamental problems by artificially creating inflation.”  Another popular figure within the Tea Party wing of the GOP, Sarah Palin, demanded that Fed chairman Ben Bernanke stop his “pump-priming addiction” before it brings “permanently higher inflation.”  Clearly, the fear of inflation is another point of agreement among the burgeoning Tea Party movement. 

Setting aside the political rhetoric surrounding the inflation/deflation debate, let’s examine the problem of inflation from strictly an economic standpoint.  Inflation assumes a rather strong level of monetary, population and industrial growth.  Two of the classic benchmarks of true economic inflation are rising wages and rising interest rates.  The U.S. has seen neither in recent years; in fact the opposite holds true.  Rep. Paul would be the first to admit that America’s industrial base is in the midst of a long-term decline and the country’s demographic trend isn’t conducive for inflation since the number of retirees is increasing relative to the number of workers. 

The deflationary phase of the economic long wave has been underway for the last 10 years, greatly undercutting the standard of living for middle and lower class working Americans.  While opportunities still abound for the rich, the middle class is finding itself increasingly devoid of the chance for economic advancement thanks to the falling wages and diminishing industrial base which are part and parcel of long wave deflation.  Evan Thomas, writing in the Dec. 13 issue of Newsweek, points out that in 1970, the richest 1 percent made 9 percent of the nation’s income.  They now make close to 25 percent.  He also notes that CEOs who once made 50 times the average worker’s salary made more than 500 times as much as by 2001.  “The gap between rich and poor,” he observes, “is growing in ways that mock middle-class egalitarianism.”

It’s the growing disparity between the “haves” and the “have-nots” that is, in part, fueling the grassroots movement against government spending and the central bank’s efforts to re-inflate the economy.  A common worry is that further efforts at creating money will result in debasement of the currency and perhaps an outright dollar destruction.  Many leaders within the anti-Fed movement are old enough to remember the high inflation rates of the U.S. experienced in the 1970s, which culminated with a double-digit interest rate in 1981.  Memories of that chaotic, inflationary era are still fresh in their minds and motivate them to oppose the Fed at every turn.  To them, inflation is always just around the corner.

This abiding fear of inflation is understandable in view of the government’s attempts at increasing consumer prices.  This artificial inflation of retail prices is to be distinguished from the economic phenomenon of inflation.  True inflation can only occur when there is a large and vigorous working population.  It’s normally accompanied by a higher birth rate, i.e. well above the replacement level (in developed countries) of 2.1 births per woman.  True inflation, as stated elsewhere, is characterized by rising industrial output, rising wages and rising interest rates. 

The phenomenon we’re now witnessing in the U.S. – a preview of which occurred in 2003-2007 – is something I’ve previously termed “retroflation.”  Retroflation is a byproduct of the globally integrated economy.  Emerging countries like China, India and the Indonesian economy are experiencing something akin to true inflation which comes with high levels of industrial output.  Because those countries have a high demand for oil, metals and other industrial and agricultural commodities, they are effectively driving up the prices of commodities, which in turn increases the cost of goods and services in the developed world.  A rising PPI and CPI can easily be confused with true inflation, but without the economic underpinning of inflation (which the U.S. doesn’t have) this can’t be called inflation. 

Retroflation occurs in countries experiencing systemic deflation (i.e. falling birth rates and declining industrial output).  Deflation is at root a demographic phenomenon and retroflation occurs in countries like the present day U.S. when demographic trends aren’t favorable for a long wave economic boom, yet there is just enough productive output to justify rising retail prices.  Retroflation is the point along the economic long wave just prior to the beginning of hyper deflation, at which point prices begin to decline vigorously along with falling demand.

As an aside, an email I received from a colleague recently underscores the importance played by demographic trends in the deflationary phase of the long wave. “Its no secret,” he writes, “that certainly the Lost Decade of Japan is one of the worthwhile comparisons to consider for the present USA.  Two qualitative similarities to today’s America are: Crony capitalism and distrust of government was rampant in the Japanese lost decade, and declining demographics commenced with Japan’s lost decade.” 

Retroflation inevitably ends in a deflationary collapse.  This is owing to the fact that the overall demand level of a country in demographic/industrial decline is in a downward trend and this falling demand level must eventually bring pressure to bear on rising prices.  We got a rather graphic preview of this during the deflationary collapse of late 2008.  It should happen again in a more sustained fashion between the years 2012-2014 when the final “hard down” phase of the Kress 120-year cycle is underway.

The long wave deflationary trend in the U.S. can also be seen in the graph showing capacity utilization.  A distinctive downward trend of lower highs and lower lows is visible in this chart.  The declining trend in capacity utilization, moreover, closely corresponds to the demographic peak and subsequent decline the U.S. experienced beginning around the late 1960s.  In the last 40+ years covered by this graph, capacity utilization has dipped below 75% on four separate occasions: 1974, when the 40-year cycle bottomed; 1982, near the peak of the 60-year inflation/deflation cycle; 2002, when the Kress 12-year cycle was bottoming; and 2008-9, as a result of the credit crash.  A capacity utilization reading below 75% is considered to be deflationary and such readings are typically seen at the depths of recessions.  A straight-forward reading of the Kress long-term cycle series suggests that by 2014 we will see a capacity utilization reading below that of last year’s multi-decade low reading.

In the interim period between now and late 2011 when the last of the important yearly Kress cycles is scheduled to peak (the 6-year cycle), there is a good chance that the Fed’s re-inflation efforts will succeed in temporarily staving off the effects of deflation in the U.S.  The year ahead will present perhaps the last opportunity of the post World War II expansionary era for individuals and corporations to shore up their balance sheets, buy gold on any dips or corrections, and prepare for the hard deflationary winter ahead in 2012-2014.

Gold & Gold Stock TRADING Simplified

With the long-term bull market in gold and mining stocks in full swing, there exist several fantastic opportunities for capturing profits and maximizing gains in the precious metals arena.  Yet a common complaint is that small-to-medium sized traders have a hard time knowing when to buy and when to take profits.  It doesn’t matter when so many pundits dispense conflicting advice in the financial media.  This amounts to “analysis into paralysis” and results in the typical investor being unable to “pull the trigger” on a trade when the right time comes to buy. 

Not surprisingly, many traders and investors are looking for a reliable and easy-to-follow system for participating in the precious metals bull market.  They want a system that allows them to enter without guesswork and one that gets them out at the appropriate time and without any undue risks.  They also want a system that automatically takes profits at precise points along the way while adjusting the stop loss continuously so as to lock in gains and minimize potential losses from whipsaws. 

In my latest book, “Gold & Gold Stock Trading Simplified,” I remove the mystique behind gold and gold stock trading and reveal a completely simple and reliable system that allows the small-to-mid-size trader to profit from both up and down moves in the mining stock market.  It’s the same system that I use each day in the Gold & Silver Stock Report – the same system which has consistently generated profits for my subscribers and has kept them on the correct side of the gold and mining stock market for years.  You won’t find a more straight forward and easy-to-follow system that actually works than the one explained in “Gold & Gold Stock Trading Simplified.”

This article is written by Clif Droke and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about clifdroke.com, please visit:

Hyperinflation Watch – December 13

By James Turk, December 13

For several months I have been warning that hyperinflation of the US dollar is looming.  The ominous signs of this impending currency train-wreck are becoming increasingly clear. 

For example, crude oil is threatening to break above $90 per barrel.  Copper has broken through $4 per pound to a record high price.  The prices of many other commodities are also in uptrends. These commodities are not in short supply.  There is no shortage of oil or copper.  Rather, these high prices are the result of too much money printing, which if not quickly stopped by returning to a sound money policy will ultimately lead to hyperinflation.

Last week another important part of the hyperinflation puzzle fell into place.  Long-term interest rates surged, continuing their sharp upward path that began two months ago.  The 10-year T-note during this two month period has risen from 2.4% to end last week over 3.2%, a remarkable and therefore telling jump.

This rise in long-term rates lays bare the flawed logic of the Federal Reserve’s newly announced $600 billion so-called “Quantitative Easing” program supposedly designed to help the economy.  This new round of money printing is not going to help the economy, which has been hollowed out by years of debt financed consumption along with too little savings and production.  This money printing is serving only one purpose.  This central bank trickery is providing the federal government with all the dollars it wants to spend. 

So despite the fact the Fed will be purchasing $600 billion of US government debt instruments, T-bond and T-note yields are climbing, a clear sign that investors are rushing to sell their US government paper.  Why?  Because they know the purchasing power of the dollar is being debased by QE, and more importantly, will continue being debased.

I have discussed this reckless monetary policy before.  “The Federal Reserve has one mission.  It is to make sure that the federal government obtains all the dollars it wants to spend.  If the federal government cannot attract these dollars from the world’s savings pool, then there is only one other way to obtain them.  The Fed must print them.”

The following chart illustrates that the US government continues to spend and borrow recklessly.  Despite all the pump-priming by the Federal Reserve aimed at stimulating the economy and therefore increasing US government revenue, there has been no meaningful reduction in the deficit.

Federal expenditures remain far above federal revenue.  More worrisome is the resulting growth in US government debt – now nearly $14 trillion – much of which the Fed is turning into currency with its QE actions.  The transformation of government debt into currency by the central bank is the core cause of hyperinflation.

The dollar not only remains on the road to hyperinflation, the rise in commodity prices and bond yields mean that the dollar is picking up speed as it heads toward the fiat currency graveyard.  Remember, numbers don’t lie.  But the same thing can’t be said for politicians who refuse to accept reality or central bankers willing to experiment with the US economy just to test their chalkboard theories.

This article is written by James Turk of Goldmoney.com and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about Goldmoney, please visit:

GoldMoney. The best way to buy gold & silver

Wall Street Gives Uncle Sam Too Much Credit

By Michael Pento, 13 December

Despite the fact that the S&P is up over 80% in the last 21 months, US financial firms are currently tripping over each other in their zeal to raise their S&P 500 and GDP targets for 2011. JPMorgan’s chief US equities strategist, Thomas Lee, came out on December 3rd with a target of 1425 on the S&P for 2011, which would be a 15 percent gain. Barclays Capital last Thursday released a 1420 estimate. Not to be outdone, Goldman Sachs also recently released its forecast, and it sees a more-than-20 percent increase next year, to 1450. Meanwhile, PIMCO’s idea of a “new normal” has translated into a 2011 GDP forecast raised from 2-2.5% to 3-3.5% due to “massive” government stimulus.

In the midst of this collective ‘hurrah,’ very little attention is being paid to what is going on over in the bond market. With my due condolences to Fed Chairman Bernanke, the yield on the 10-year Treasury note has increased from 2.33% on October 8th to 3.29% today. And, if there is any notice at all given to that recent run-up in yields, it is merely explained away as a sign of robust growth returning to the economy.

In reality, growth doesn’t cause an increase in interest rates; it is either lack of savings or inflation that is responsible. To refute the ‘robust growth’ reasoning, turn your attention to the fact that the spike in yields just happened to coincide with the news that the unemployment rate jumped to 9.8% in November.

A slightly broader explanation for the surge in borrowing costs might be the failure of the Bowles-Simpson deficit commission to implement any cost cutting measures. Or, perhaps it was the intimation from Bernanke himself that QE III may already be under construction in his infamous interview on 60 Minutes. Or, maybe it is the fact that the $150.4 billion November budget deficit was the highest total for that month… ever, and was the 26th straight month of red ink! I often wonder to myself, where in the midst of all this good news do I summon a bearish attitude?

I think it’s pretty clear that ‘robust growth’ is going the way of ‘green shoots’ and knickers – right into the dustbin of history.

So, what will the increase in interest rates – ignored by all of Wall Street – actually mean for the economy in 2011?

For starters, the National Home Price Index already fell 2% in the third quarter of 2010. On a national basis, home prices are 1.5% lower year-over-year, and 15 out of the 20 cities measured were down over the last 12 months. On a month-over-month basis, 18 cities posted a price decline in September, compared to 15 MoM drops in August, and just 8 cities experiencing price reductions in the July report. Therefore, home prices, which were already headed lower before this recent spike in mortgage rates, are set to take another tumble downward. According to Freddie Mac’s weekly survey of conforming mortgages, the average rate on the 30-year fixed is at its highest level in six months. 30-year rates averaged 4.61% for the week ending Dec. 9, up from 4.46% last week. It’s the fourth week in a row that the mortgage rate has increased. The ramifications for the real estate market and bank lending are clear. Lower home prices will send more mortgages under water and force many more homes into foreclosure. Higher borrowing costs will lower the demand for borrowing and place more strain on the capital of lending institutions.

On top of that, household debt as a percentage of GDP still stands at a lofty 91%. It should be clear that with near double-digit unemployment, the last thing consumers can now tolerate is a significant increase in debt-service payments.

The rising cost of money is even worse news for the federal government and its chronically ballooning debt problem. According to the Federal Reserve’s Flow of Funds Report, total non-financial debt reached an all-time high of $35.8 trillion in the third quarter of 2010. In fact, household debt, business debt, and government debt increased at a 4.2% annual rate last quarter.

To put that record level of nominal debt into perspective: in 1980, the total non-financial debt-to-GDP ratio was 144%. In the height of the credit boom, at the end of 2007, that figure was 226%. Today, the figure stands at a mind-blowing 243%! So you can forget about all that deleveraging talk. The US is in fact still leveraging up, both in nominal terms and as a percentage of GDP.

I think the rising cost of money will become the story of 2011. Its effect on consumers, the real estate market, and government borrowing costs will be profound. Apparently, most major brokerage firms have no fear of soaring interest rates causing our economy to implode. However, it’s clear to me that the bond market has already started to crack due to inflation and massive oversupply from the Treasury. Prudent investors should think twice before overlooking what could be the initial holes in the biggest bubble in world history – the full faith and credit of the United States.

This article is written by Michael Pento of Europac and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Europac, please visit:

The Eurozone is in Bad Need of an Undertaker

By Ambrose Evans-Pritchard, 12 December

The EU’s Franco-German “Directoire” and the European Central Bank have between them ruled out all plausible solutions to the eurozone’s debt crisis.

Even if Angela Merkel, were to agree plans that amounted to a European debt union, the scheme would still be torn to pieces by the German constitutional court

There will be no Eurobond, no increases in the EU’s €440bn (£368bn) rescue fund, and no mass purchases of Spanish and Italian bonds by the ECB. Nothing. The system is politically and constitutionally paralysed. Spain and Portugal will be left nakedly exposed before their funding crunch in January.

It is entirely predictable that Angela Merkel and Nicolas Sarkozy would move so quickly to shoot down last week’s Eurobond proposal, issuing pre-emptive warning before this week’s EU summit that they will not accept “a bundling together of all Europe’s debts”.

How can Germany or France agree lightly to plans that amount to an EU debt union, with a common treasury, tax system, and budget policy, the stuff of civil wars and revolutions over the ages? To do so is to dismantle the ancient nation states of Europe in all but name.

Even if Chancellor Merkel wished to take this course – and even if the Bundestag approved it – the scheme would still be torn to pieces by the German constitutional court unless legitimised by radical EU treaty changes, which would in turn take years, require referenda, and face populist revolt in half Europe.

What the German people are being asked to do is to surrender fiscal sovereignty and pay open-ended transfers to Southern Europe, taking on a burden up to six times reunification with East Germany.

“If we pool the debts of the countries in the south-west periphery of Europe, we are blighting our children’s future: the debt levels are astronomic,” said Hans-Werner Sinn, head of Germany IFO institute.

Any attempt to prop up the status quo will cement the current account imbalances of EMU’s North and South, to the detriment of both sides.

“I doubt that the current leaders of Europe fully understand the economic implications of their decisions. They are repeating the mistakes that Germany made over reunification,” he told the Handelsblatt.

Transfers to the East are still running at €60bn a year two decades after the fall of the Berlin Wall. There has been no meaningful East-West convergence for the last 15 years.

To those who blithely argue that EMU is a good racket for German exporters because it locks in Germany’s competitive advantage, he retorts that a trade surplus is the flip side of a capital deficit. Germany has seen €1 trillion – or two thirds of its entire savings since 2002 – leak out to fund the EMU party, gutting investment at home. This is toxic for Germany too.

It is no surprise to eurosceptics that Europe should have reached this fateful point where leaders must choose between the twin traumas of EMU break-up or giving up their countries. Nor is it a surprise to an inner-core of schemers within the EU system, who have always calculated that they could exploit such a crisis to catalyse political union.

However, it is a big surprise to Europe’s leaders, and they do not know what to do about it.

Chancellor Merkel and President Sarkozy seem unwilling even to boost the firepower of the European Financial Stability Facility, though in this they may be right.

The drama has moved beyond the point where headline “shock and awe” pledges can achieve anything. Markets are already looking beyond the debt-stricken periphery to the creditor core, fearing that bail-out costs will themselves create a chain of contamination. Credit default swaps on France have risen above 100 basis points, where they linger stubbornly.

A Fitch report on the European Stability Mechanism (ESM) said the new rescue fund “could result in lower ratings” on the risky sovereigns because the EU would have instant debt seniority, leaving private bondholders exposed to the risk of bigger haircuts. To make matters worse, debt restructuring would depend on the whim of politicians. The incoherence of the rescue machinery itself is feeding the debt crisis.

So as EU leaders flounder, the task of saving monetary union falls to the ECB. Yet it too has declined the burden, refusing to go nuclear with bond purchases. “Each country needs to be held responsible for its own debt,” said Germany’s monetary avenger at the ECB, Jurgen Stark.

He was joined last week by Mario Draghi, Italy’s governor and candidate for ECB chief, who said it was not the job of a central bank to carry out fiscal rescues. “We could easily cross the line and lose everything we have, lose independence, and basically violate the Treaty,” he said.

Indeed. Maastricht forbids the ECB from buying the debt of eurozone states except for specific purposes of liquidity management. But this saga no longer has anything to do with liquidity. Southern Europe faces a solvency crisis.

The ECB has postponed its threat to pull away the lending props beneath the banking systems of the PIGS. Beyond that it has limited itself to tactical strikes in the small illiquid debt markets of Ireland and Portugal, buying enough bonds to ram down yields and burn a few hedge funds.

The effect has faded within days. It had little impact on Spanish and Italian bonds in any case. Spanish 10-year yields reached 5.45pc last week, far above 5pc level where compound arithmetic comes into play.

At the end of the day, debtor governments still have to persuade Japanese life insurers, Mideast wealth funds, or French and German banks, to put up real money to buy their bonds at a bearable interest rate.

Credit Agricole said last week that it would hold back at next week’s auction of Spanish debt because it is not yet clear whether the ECB will back-stop the country. “The risk is simply too large for our appetite,” it said.

So we drift on with rising yields into 2011, when Portugal must raise €38bn, Belgium €85bn, Spain €210bn, and Italy €374bn – according to Goldman Sachs.

Europe’s leaders still seem to hope that brisk global growth will lift everybody off the reefs. That too is wishful thinking. Recovery brings its own set of problems, and will make intra-EMU tensions even worse.

Germany will hit the inflation buffers and force the ECB to raise interest rates before the trickle down benefits of trade have begun to make any difference in the closed economies of the South. Floating Euribor rates that determine 98pc of mortgages in Spain have been shooting up already, even as wages fall. The vice is still tightening on Spain.

The reflex of the EU elites is to blame this structural mess on lack of statesmanship.

“There is something surreal about the unfolding financial crisis,” said Stefano Micossi from the College of Europe, the sanctum sanctorum of the European Project.

“Leaders grudgingly do what is needed to prevent disaster at the last minute before it is too late, and the next minute they go back to the behaviour that brought them against the wall in the first place. The eurozone is in bad need of a psychiatrist,” he wrote at VoxEU

“If the eurozone follows this path, either all of the sovereign debts become German public debt, or the euro will collapse,” he said.This is admirably candid in one sense, but is today’s crisis really just a failure of leadership? Was EMU not dysfunctional from the first day? Did it not inflict negative real interest rates on Club Med and Ireland in the boom years, driving them into distastrously pro-cyclical policies?

Did it not lock in chronic imbalances between North and South? Has it not left victim states trapped in debt deflation or slumps which have gone too far to respond an austerity cure, and from which there seems to be no escape on terms acceptable to Germany?

Should we blame the current hapless leaders, or the guilty men of Maastricht who created this doomsday machine? If the project itself is rotten, surely what the eurozone needs most is an undertaker.


NEWS: Orvana Reports Annual Results for Fiscal 2010

Orvana Minerals Corp. (TSX:ORV) announced operating results today for the year ended September 30, 2010. Dollar amounts are in U.S. dollars unless stated otherwise, and fine troy ounces of gold are referred to as “ounces”. Highlights for the year are:

  • Revenues of $32.3 million on sales of 28,341 ounces for the year ended September 30, 2010 compared to $56.0 million on sales of 63,230 ounces for the same period a year ago, with lower ounces of gold sold contributing to most of the decline, which was somewhat offset by higher average gold prices realized;

  • Net loss of $2.4 million ($0.02 per share) for the 2010 fiscal year compared to net income of $13.4 million ($0.12 per share) for the year ended September 30, 2009;

  • Cash from operations before changes in working capital was $2.5 million for fiscal 2010 compared to $22.8 million for fiscal 2009;

  • Capital expenditures were $37.5 million for fiscal 2010 compared to $7.7 million for the same period last year. Expenditures included $11.1 million on the development of the Upper Mineralized Zone (“UMZ”) of the Don Mario Mine, $23.0 million on the development of the El Valle-Boinás/Carles (“EVBC”) project, $3.1 million on the Copperwood project and $.3 million for systems improvements; and

  • Cash and cash equivalents amounted to $12.7 million at September 30, 2010 compared to $58.0 million at September 30, 2009.

“Results for the fourth quarter and the year ended September 30, 2010, are in line with our expectations and we will continue to produce gold at our Las Tojas operation in Bolivia until early in 2011. Our focus though is on bringing the Spanish EVBC gold/copper mine and the Bolivian UMZ copper/gold/silver mine into production early in 2011. In addition we are working towards a pre-feasibility study on our Copperwood copper project in Michigan.” said Roland Horst, Orvana’s Chief Executive Officer.

Orvana has $12.7 million in cash and cash equivalents at year end. Subsequent to the end of the year, Orvana entered into a US$50 million five-year term corporate debt facility with Credit Suisse AG. After fully funding its capital requirements at the EVBC project and the UMZ, Orvana expects to have accumulated cash reserves from its operating free cash flows. Orvana will continue to seek gold and/or copper advanced stage properties in politically stable regions, utilizing its mining expertise to increase long-term value for shareholders.

Don Mario Mine Operations

All dollar amounts (except per unit amounts) in the remainder of this news release are in thousands of United States dollars unless otherwise stated.

The ore from the Lower Mineralized Zone (“LMZ”) of the Don Mario Mine was exhausted during the last quarter of fiscal 2009 and the processing of the Las Tojas ores continued to the end of fiscal 2010. A total of 608,492 tonnes of ore were treated in fiscal 2010 compared to 331,506 tonnes a year ago as indicated in the table below:

        Quarters ended      
    Year ended                   Year ended  
    Sept. 30,   Sept. 30,   June 30,   March 31,   Dec. 31,   Sept. 30,  
    2010   2010   2010   2010   2009   2009  
Underground Tonnes                     153,212  
mine g/t                     11.49  
Las Tojas Tonnes 608,492   153,459   154,270   144,587   156,176   178,294  
g/t 1.73   1.41   1.66   1.70   2.13   1.87  
Total Tonnes 608,492   153,459   154,270   144,587   156,176   331,506  
g/t 1.73   1.41   1.66   1.70   2.13   6.32  
Gold recovery rate 82.2 % 73.5 % 79.5 % 83.3 % 89.0 % 93.1 %
Gold production – ounces 27,751   5,114   6,545   6,565   9,527   62,644  

Gold production for fiscal 2010 was 56% lower, at 27,751 ounces, compared to 62,644 ounces for fiscal 2009. This decline was due to processing of the tonnages from the lower grade ore of the Las Tojas deposit. The prior year results included the production from the now depleted higher grade ore of the Don Mario underground mine.

The following table shows the cash operating costs and total production costs for years ended September 30, 2010 and 2009. The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles (“GAAP”). The calculations below represent non-GAAP information, which should not be construed as an alternative to GAAP reporting of operating expenses, and may not be comparable to similar measures presented by other issuers (see “non-GAAP measures” below).

  Year ended September 30, 2010 Year ended September 30, 2009
  Costs Cost/oz. Costs Cost/oz.
Direct mine operating costs $ 18,237 $ 657.15 $ 15,331 $ 244.73
Third-party smelting, refining and transportation costs   153   5.52   273   4.36
  Cash operating costs   18,390   662.67   15,604   249.09
Royalties and mining rights   1,108   39.93   1,754   27.99
Mining royalty tax   2,263   81.56   3,916   62.52
  Total cash costs   21,761   784.16   21,274   339.60
Depreciation, amortization and accretion   3,716   133.90   9,948   158.80
  Total production costs $ 25,477 $ 918.06 $ 31,222 $ 498.40
  Gold production   27,751 ozs.   62,644 ozs.

Cash operating costs at $662.67 per ounce were dramatically affected by the decline in gold production resulting from the transition from the LMZ to the lower grade Las Tojas deposit. These costs are not representative of the expected costs of the operation of the UMZ.

Financial Highlights

Orvana’s financial highlights for the year ended September 30, 2010 compared to year ended September 30, 2009 are summarized below:

  Year ended September 30
  2010   2009
Revenue $ 32,344   $ 56,005
Net (loss) income   (2,431 )   13,400
Net (loss) income per share – basic and diluted   ($0.02 ) $ 0.12
Cash (used) provided by operating activities   (8,644 )   19,631
Cash and cash equivalents   12,700     58,036
Total assets   156,472     140,607
Long-term debt and obligations under capital leases   5,104     4,144
Shareholders’ equity $ 109,402   $ 110,367

The audited consolidated financial statements and Management’s Discussion & Analysis for the period ended September 30, 2010 are available on SEDAR and at www.orvana.com.


The forward looking statements made in this section are intended to provide an overview of management’s expectations with respect to certain future operating activities of the Company and may not be appropriate for other purposes.

Orvana’s focus is to use its cash resources and mining capability to build long-term value for its shareholders through organic growth and future strategic acquisitions of advanced-stage gold and/or copper properties.

In the short term, Orvana is focused on commencing production at both the EVBC gold/copper project in northern Spain and its Don Mario UMZ copper/gold operation in eastern Bolivia, as well as, advancing its Copperwood copper project in Michigan.

With the start up of operations at EVBC and the UMZ expected to occur in early 2011, Orvana expects annualized gold production to increase from about 28,000 ounces to approximately 120,000 ounces, early in 2012. Additionally, annualized copper and silver production are expected to increase substantially to over 12,000 tonnes and to 750,000 ounces respectively.

Over the longer term, Orvana will continue to seek gold and/or copper advanced stage properties in politically stable regions, utilizing our mining expertise to increase long-term value for shareholders.

The Company will hold a conference call on Tuesday December 14, 2010 at 10:00 a.m. (Eastern Time) to discuss the annual results. Following the presentation there will be a question and answer period for analysts and investors.

The conference call can be accessed at 1-416-695-7806 or the North American toll-free number at 1-888-789-9572, using the passcode 8416682 followed by the number sign.

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