Tanzanian Royalty rallied on the reputation of CEO James Sinclair. But the gold guru's actions cast doubt on the exploration company's fortunes.

GOLD EXPLORER TANZANIAN ROYALTY EXPLORATION HAS NO revenue, no earnings and no proven gold, as well as some accounting issues. So why do its shares trade at a premium to peers that seem to be in much better shape?

It helps that its chairman and chief executive, James E. Sinclair, is famous for correctly forecasting gold prices, and he is very bullish on the metal on his avidly followed newsletter-style Website, www.jsmineset.com. Over the years, Sinclair's views on gold have been sought out by newspapers like the New York Times and on cable-TV networks like CNN. Barron's has interviewed him and run his advertising.

Jim Sinclair, shown on the U.S. Rare Coin Investments Website, is bullish on gold prices. He expects them to rise to about $1,650 an ounce by 2011.

So it is surprising to learn that the widely known bull on gold has been a steady seller of shares of his own gold-related company. Tanzanian Royalty (ticker: TRE) is a small-cap Canadian outfit (including its predecessor) that has been looking for gold for a decade. None of its properties, all in Tanzania, have yet shown economically viable mineral reserves, as defined by regulators. Were it valued more like rivals with similar cash and gold reserves, its share price would be substantially lower than the current $4.05. TRE's market capitalization is $370 million. Some rival miners with more cash on their balance sheets than TRE and actual gold have market caps one-sixth that size.

Dubbed Mr. Gold by the media for prescient calls on gold in the late 1970s and 1980s, Sinclair ran his own precious-metals trading firm in those days. On his Website and in interviews, a bullish Sinclair today says gold will trade as high as $1,650 an ounce by January 2011 and says he would wager $1 million that it will. Gold was trading at about $881 an ounce Friday.

In an interview with Barron's last week, Sinclair disputed the view of TRE's shares as overvalued, saying the market cap was due to its less-capital-intensive structure and the potential of its properties. Moreover, he promised that a third-party evaluation of its important Kigosi property in Tanzania would be ready in "about six months."

While TRE puts out press releases on his share purchases, the CEO says he isn't required to put out press releases on his share sales.

In addition to Sinclair's devoted following -- he is sometimes referred to as "Uncle Jim" on Yahoo!'s TRE message boards -- shareholders could be speculating that he will sell TRE to a big miner. Though he was ousted as chairman of Sutton Resources in 1995, some remember that Sutton was bought by Canadian gold giant Barrick Gold (ABX) in April 1999 for its Tanzanian properties. Not everyone credits Sinclair for the deal, but some do.

There is no question that Tanzanian shares have done extremely well since Sinclair and his family became its largest stockholders in April of 2002 (as a result of a merger they ended up with about 25% of the shares, which trade on the American Stock Exchange, and on the Toronto Stock Exchange under the ticker TNX.Canada). TRE shares have soared about 711% since then. That trounces the 218% rise in the metal itself over the same period, though TRE has no gold reserves. Meanwhile, the American Stock Exchange Gold Bugs Index (HUI) composed of companies involved in gold mining -- many of which have gold in hand -- is up much less, just 198%. Since last summer, the credit crisis has hurt the juniors, as the small prospectors are called, on worries that they won't be able to get the financing needed to develop mines. In that time, TRE has fallen less than its peers.

Yet TRE faces the same business risks that rivals do, and continued financing is among the most important. TRE's financing is accomplished by the unusual method of private placements of its stock with CEO Sinclair, who then sells his shares into the market.

In a March 5 press release on this subject from the company, TRE reported that Sinclair has purchased another 189,036 shares for one million Canadian dollars (US$810,000) and that Sinclair's "total share placements to date aggregate C$22 million." TRE doesn't put out releases on his sales of millions of shares of the stock, though he has steadily sold TRE shares into the open market. He sold stock more than 50 times in 2008. Over the years, as the stock price soared, Sinclair and his family have reduced their TRE stake from 25% in 2002 to less than 3% now, company documents show. According to Canada's System for Electronic Disclosure by Insiders, or SEDI, his TRE stake has dropped to about 2.3 million shares as of March 12, from 3.9 million in October 2004.

Though company announcements claim he is financing TRE, ultimately the main financiers are mostly the retail shareholders who buy from Sinclair. In his interview, he repeated that he is a strong backer of the company and that he recently agreed to another $2.43 million private placement for TRE shares. But if Sinclair is unwilling or unable, for any reason, to continue these private placements, how will TRE finance its activities? With the credit crunch, the environment has become tougher for juniors dealing in speculative endeavors to get traditional financing through selling equity directly into the stock market. That is especially true for a company without any proven reserves, like TRE.

When Barron's asked why he was selling TRE shares, Sinclair replied that it was for personal liquidity. Asked why he didn't put out a press release on the stock sales, Sinclair replied, "Is it required?...I take no salary, no options, no warrants. I have purchased more than I have sold." But when asked to furnish that data, he refused and referred Barron's to the SEDI Website. The selling trend shown by SEDI insider-trading records is seconded by TRE documents: Sinclair had 3.17 million shares in August 2008 and 2.88 million in January.

Sinclair has declared he won't go to the public markets to finance the company, but it is probable that TRE couldn't easily get an investment bank to underwrite its shares because of that lack of economically viable mineral resources.

There is little institutional interest -- roughly 17% of TRE's 89 million shares are held by mutual funds, according to Bloomberg. TRE filings report that 83% of its shareholders are American, most of them individual shareholders who, unless they are familiar with Canada's SEDI, are perhaps unaware that Sinclair is selling shares after buying them.

These TRE shareholders might not know that Sinclair is listed as a "disciplined person" on the Website of the Canadian Securities Administrators, an organization of provincial securities regulators. On July 22, 1998, Sinclair was ordered by the British Columbia Securities Commission to pay $2,000 to settle a violation of "misrepresentation" in a press release having to do with Sutton. Sinclair called it a small "misunderstanding."

Unlike many peers, TRE doesn't appear to be followed by any sell-side analysts from brokers specializing in Canadian miners, so third-party information is scarce. TRE is an Alberta-registered corporation with headquarters in South Surrey, B.C., while Sinclair himself is based in Sharon, Conn.

If analysts looked at TRE, they would find its finances are stretched. For example, as of Nov. 30, the company had about $1.2 million in cash, not much more than the $1.17 million in salaries and fees paid to its directors for the fiscal year ended Aug. 31, 2008.

As Sinclair makes clear, TRE is a royalty company, not a mining firm. That means it will find lands with potential, then sell them off to bigger miners in exchange for royalties from mine production, if that occurs. As Sinclair noted, royalty firms need less capital than a junior miner, but $1.2 million is hardly enough. Even royalty firms must drill on properties to entice partners.

According to a TRE filing for the year ended last Aug. 31, TRE spent $2.37 million for exploration in fiscal 2008, just $267,000 more than fiscal 2007. For the past three years TRE has spent less than $8 million in exploration and written off roughly half of that in mineral-property value. By comparison, Barrick eventually spent some $400 million to develop its Buzwagi mine in Tanzania.

On its Website's projects-description page, TRE often promotes its own properties in Tanzania that are near Barrick developments and continues to list Barrick as a joint-venture partner in an Itetemia prospect. Barrick says it has no JV partnership with TRE.

Sinclair disputes that TRE doesn't have the cash for its drilling program: "We have our own drills and team." Sinclair also said the firm has one rig for all its properties, similar to some other companies. None of them, however, has the market cap of TRE.

Moreover, David Duval, a Vancouver-based mining technologist, says that before a gold mine can be developed, $20 million to $30 million in drilling and exploration costs are typical, depending on the property. Duval called Barron's, saying he had done so at the behest of Sinclair and that he is a consultant to TRE. Duval is also listed as a contributor and co-founder of Sinclair's Website: www.jsmineset.com.

Something else that might trouble investors is that TRE has been cited by its auditor KPMG for a "pervasive material weakness" in accounting controls. In TRE's annual report for the year ended last Aug. 31, KPMG, gave an adverse opinion on the effectiveness of TRE's internal controls: "The company has limited accounting personnel with expertise in generally accepted accounting principles to enable effective segregation of duties with respect to financial reporting matters and internal control over financial reporting." The company says it is attending to that.

But the greatest risk to TRE shareholders is its lack of gold reserves. TRE has put out many positive-sounding press releases since 2002 about its properties, but it hasn't discovered any economically viable gold resources as defined by a National Instrument 43-101-compliant document. The document -- established by Canadian authorities after the giant BRE-X Minerals fraud in 1997 -- is an officially sanctioned disclosure measure of "mineralization," or the presence of minerals like gold.

An NI 43-101 reports whether the property has "proven" minerals -- the highest measure of geological confidence -- or lesser reliability, like "probable," or "inferred," the least strong. No miner is likely to get substantial mine-development financing without such a document, and TRE doesn't have one.

Instead, press releases are issued about preliminary drilling results, but no gold mines follow. For example, TRE reported Oct. 13, 2004, a "significant gold discovery" in the Luhala property in the Lake Victoria Goldfields area. On Oct. 19, 2005, another "significant gold discovery" was announced in the Tulawaka region. Three to four years later, there is no news of any commitments to develop these properties into gold mines, or any of Tanzanian's leaseholds.

Sinclair is upbeat about TRE's probability of finding economically viable gold soon: "We have discovered about four grams per ton in Kigosi....We are going to have an NI 43-101 on Kigosi in about six months -- as soon as consultants finish their work," he says. "It could fall apart...[BUT]if all goes well, from the time the report is completed there will be a mine within 18 to 24 months."

"All of our extremely positive results are on the Website. If gravels continue to show the grades that are indicated now, I would move immediately to an open pit and underground mine," Sinclair vows.

That sounds optimistic, since gold mines often take three or more years to build after the finding of economically viable metal.

Despite having resource prospects that don't measure up to peers', TRE's valuation is golden compared with many. (See nearby table.) For example, TRE has its $1.2 million in cash, no gold reserves and its $370 million market cap. Meanwhile, rival MDN (MDN) whose market cap is $55 million, also has prospects in Africa, but $14.6 million in cash and 100,000 ounces of gold resources, according to broker Canaccord Adams. Semafo (SMF) has a market cap similar to TRE's but also has 4.8 million ounces of gold reserves.

Another way to benchmark TRE is to look at the S&P/TSX Metals & Mining Index (STMETL) of 35 stocks, many with real revenue and cash flow. The index's average price/book ratio is 1.35, but TRE, which is in the index, trades at about 17 times its book value of 24 cents a share.

Membership in such indexes and the International Stock Exchange Gold index (HVY) may boost TRE shares higher than they would be otherwise. In both indexes, TRE's weightings are equivalent to companies with many times its market cap and actual gold, like Eldorado Gold (EGO), which has 7.6 million ounces of proven or probable gold.

Speaking with Barron's, Sinclair repeatedly said that TRE's market cap is due to its less-capital-intensive royalty structure and the value of its leaseholds. "It's not me, it's the underlying assets. The company assets will have to stand on their own two feet and I think that it can." When it was pointed out that TRE has no NI 43-101, yet its valuation was much higher than companies with 43-101- compliant gold and actual gold, he replied: "I will come after you," and ended the phone call.

Rising gold prices have boosted TRE's stock value lately, but it needs to find some gold soon. Otherwise, its exploration failures so far and its dependency on Sinclair's financing methods will catch up with the shares.

While Sinclair has had success predicting gold prices, TRE doesn't have a good track record of finding gold in economically viable amounts. Without Sinclair, it is likely TRE's market cap and share price would be significantly less golden.

Barron's