“Distortion in the Gold Markets” Prospect Generators

By Travis Johnson, Stock Gumshoe, February 16, 2009

This ad comes in for the Extreme Value newsletter from Stansberry & Associates, edited by Dan Ferris. The name of the newsletter is no accident, Ferris apparently looks for deep value and hidden value stocks, not unlike some other traditional “value” stock pickers.

This time, he’s telling us that there’s a “distortion” in the gold markets — that even as gold prices are heading up, the prices of “prospect generators” are not keeping pace. These are the exploration companies that stake claims, buy up property, and do exploratory drilling to identify mineral resources … and then, in most cases, sell those claims to bigger mining companies who actually build and operate the mines, sometimes selling for cash and other times selling in exchange for ongoing royalties (or both), depending on the deal.

Ferris tells us that there are only about 25 of these prospect generators around (I assume he means publicly traded ones — there must be many more that are privately run). And he tells us that the important thing is finding a good and lean operation, with solid management and a great track record … and, of course, promising financials — which I take to mean good balance sheet, low debt, positive cash flow, etc.

So what are these prospect generators that he thinks we should buy? According to the ad, he’s got two:

The only two prospect generators you should buy

“… you’re mostly getting cash and securities for your money – with a diverse array of natural-resource exploration properties, and holdings in gold and silver bullion … you want to buy them as soon as possible…”

So what is the first one he thinks we should buy?

“PROSPECT GENERATOR #1:

“Trading for under $6 per share, this safe, super-cheap prospect generator gets you a portfolio of 26 different gold and resource projects in eastern Canada…

“Better yet, when you buy this stock, you’re not only getting interests in lucrative gold projects you’re also getting exposure to other valuable natural resource stakes — in uranium, iron ore, nickel, and potash.

“This exploration outfit has made a ton of money for its investors in the past…

“For example, in 2007, when the uranium market was going crazy, this small firm sold its founder’s shares of a very lucrative uranium project for $200 million — more than 30% more than the net worth of the entire company — and its share price shot up 200%…

“And that was just on one deal…”

So what is it? We toss that into the Thinkolator and find that we’re probably looking at …

Altius Minerals (ALS in Toronto, ATUSF on the pink sheets)

This is actually an intriguing little company — I’ve never looked at them before, but two things stand out: According to their last financial statement that I’ve seen, from the end of October, they have close to C$120 million in net cash with a market cap of about C$150 million, and a bit of royalty money coming in. Their biggest royalty right now, by far, is from Voisey’s Bay, which is the big nickel mine in Labrador (we’ve seen this one before — it’s also the biggest contributor to the results for International Royalty Corp).

Voisey’s Bay results have suffered over the past year or so as nickel and copper prices have collapsed, but thanks to increased volumes the royalty still went up, and it still produced a nice cash flow for Altius in their last fiscal year. Thanks to that, and to their big cash pile, they say they are in position to be “fully financed internally for the next several decades.” Voisey’s Bay results will probably fall further this quarter, but apparently this large mine, operated by Brazil’s Vale, is so low-cost that it seems unlikely that it would have to close down even with low nickel prices.

Haven’t looked into them in any further detail, but they appear to be a good match for the tease — they did sell off their holdings in Aurora Energy, the uranium miner that they created in partnership with Fronteer Development, in October of 2007, and they do still have a royalty stream on that uranium project … and the shares did go up about 200% in 2007, from $10 to $30. They’re under $6 as teased, at about C$5.20 today, and they have generally been bouncing around between C$4.50 and C$5.50 so far in 2009. And their properties are focused in Eastern Canada, mostly in Labrador and Newfoundland. I don’t know that they have precisely 26 properties, so I suppose that’s the weakest part of this match — they do have 13 current active joint ventures and additional properties beyond that, so it’s quite possible that the total number is 26 if you dig through and do the math (and, of course, one must always acknowledge the possibility that the Gumshoe is wrong … I can often be 100% certain, but not today).

I’m a little tempted by Altius, and I’ve seen them written up as a “value” investment before, but I don’t know them well yet. I’ll have to dig in and do a bit more research — I do like the array of current mining projects and the incoming royalties, even if Voisey’s Bay would be a much bigger winner if nickel was still at the China-driven highs of 2007 or early 2008. As Ferris noted, this is not just a gold explorer, and it’s probably more accurate to say that gold is a small part of their business. They do have a gold project that seems promising, the Viking project in collaboration with Northern Abitibi Mining, but in addition to Voisey’s Bay (nickel, mostly) they’re also into potash, iron ore, shale oil and several other resources.

And the current royalty holdings are just for Voisey’s Bay and that uranium resource, which is Aurora Energy’s Central Mineral Belt project. Aurora Energy, just FYI, looks like it’s in play at the moment, Altius’ old joint venture partner in the creation of Aurora is now trying to buy out the whole company (shouldn’t matter to Altius — they sold their equity already, so they hold just the 2% royalty on this project now).

From a quick glance, the balance sheet and their history of dealmaking appear very promising — most of that net cash probably comes from the sale of Aurora, and most of their ongoing cash flow comes from Voiseys’ Bay at this point, so they currently have a diversity of potential assets and a paucity of cash-producing assets. But still, I’m tempted — my rules say I can’t buy shares within three days of writing about it, but I may do some further research into this one during that time, see if it’s worth a little interest from the Gumshoe portfolio.

Do be careful if you share my initial optimism — this ad is hitting a lot of people, and the fact that I’m writing about it here means it will find more eyes still, so it’s entirely possible that the shares could move significantly just on the interest of these new investors. Moves like that are often temporary, of course, for these little low-volume small cap companies, but you never know.

There are probably some skeletons in there somewhere, too, so please feel free let us all know with a comment below if you’re familiar with Altius and can share an opinion. The filings can be found on Sedar, and they also provide most of the basic info, including some interesting analyst notes and media articles, on their website.

And I haven’t come up with a solution to the second one yet and I’ve run out of time, but I’ll share the clues quickly here — if I dig this one up soon I’ll share it as well, or if you have ideas for this one feel free to let us know.

PROSPECT GENERATOR #2:

“This company — run by one of the wealthiest and influential men in the Canadian natural resource industry — gets you a huge portfolio of gold, silver and copper projects in the U.S., Canada, and South America.

“Long-term holders have made a ridiculous amount of money…

“When this firm first got started about 10 years ago, in the first year alone investors saw a 540% return…

“And just recently, it completed a deal to sell off one of its resource projects in the U.S. to one of the biggest steel multinationals in the world — netting 336% on the deal…

“You can get into this stock for under $5 per share today…”

As I said, I don’t know yet what this one is just yet — and the clues are sparse, so I don’t know if I’ll get to it before it’s “official” or not. Ferris will be releasing it in his newsletter Tuesday evening, apparently, and discussing it with subscribers on a conference call at the end of the week with a “special guest” (teased as “RR”, which a betting man would say means the guest is going to be Rick Rule — so if you’re doing some digging, maybe this will end up being a company that Global Resource Investments, Rule’s firm, has raised money for).

So — in the bigger picture, should you be trying to “get rich with prospect generators?” They do sometimes look interesting, and certainly some are better than others, but it is perhaps important to keep in mind that the share prices of many of these firms can really move up and down in fits and starts as investors look for home runs — anytime you’re trying to hit it out of the park, of course, you’ll also end up with lots of strikeouts. Despite the fact that Ferris calls them safe, that adjective doesn’t necessarily fit for all firms of this ilk — it’s not at all unusual to see one of these little guys fall by 50-80% if one or two projects fail to pan out, or deals don’t work out as planned, or the vagaries of time lay waste to investor patience.

We saw that on the Altius chart, for example — it wasn’t magic that led those shares down from $30 in 2007 to today’s price of about five bucks, and there are plenty more examples if you research other prospect generators. I think I remember reading about Miranda Gold, for example, as one that was a pick of a different Stansberry analyst a couple years back, and those shares have been on a pretty steady tumble from two dollars to about forty cents, where you can buy it today. Matt Badiali, who writes about energy and commodities for Stansberry, has also spent the past couple of years extolling the virtues of prospect generators, so it’s certainly something that we’ve seen come up time and again, for good or ill. To be fair, the ad is clear in telling you that these are volatile investments, even if the price of the underlying minerals isn’t crazy volatile (as it has been over the past few years), so take your antacids first.

I say that not to dissuade you, or to tell you that these kinds of investments are pointless — just to share that despite appealing characteristics, they’ve certainly got plenty of opportunity to fail even if they do find a few good mineral strikes — as I said, Altius looks tempting to me, too, I do like those big net cash positions, but that doesn’t mean there isn’t bad news somewhere in there.

And there are indeed some huge gains to be had if you choose wisely, and perhaps get lucky, just like there are with many junior companies in the resource space, “prospect generators” or no — Aurelian Resources, often held out as an example of an amazing prospect generator, got bought out last year by Kinross Gold and certainly put a few dollars in many pockets, and there are other stories of windfall profits that get circulated over and over in this space. On the other hand, many of the stocks that you’d call “prospect generators” are far, far smaller than Altius, often trading for just a twenty or thirty cents a share with market caps of just ten or twenty million dollars — and quite a few of them raised money over the past few years, as all commodities were climbing inexorably higher and optimism was in the air, so we may also see more and more folks exploring for dearer resources with smaller payouts in the near future.

Fun stuff to dig around in, though — let us know if you find any lucky strikes!

Extreme Value hasn’t yet been reviewed by anyone on the reviews site as I type this, so please click here to jump in and share your opinion if you’ve subscribed to this one — or if you’re interested in other Stansberry publications you can see reviews of many of them here.


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33 Comments on "“Distortion in the Gold Markets” Prospect Generators"

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kirk whitehouse
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February 17, 2009 9:31 am

hi please can you advise what is the best ay to invest in gold and canyou get a monthly return on it or can you by puts
kirk

Gravity Switch
Admin
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February 17, 2009 9:35 am

Kirk, I can’t provide advice.

Gold doesn’t provide interest income, so the main ways that people try to get income from gold without selling it in my experience, are by holding a gold stock or ETF and selling calls against it, or by buying dividend-paying gold mining companies. GLD, the popular physical gold ETF, is optionable so both puts and calls are available.

F. Guignard
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F. Guignard
February 17, 2009 9:51 am

Hi sir,
About the #2 can it be Sprott resources (SCP-T) who sellPBS coal to Severstal, a russian steel holding ?

F. Guignard

Bob
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Bob
February 17, 2009 10:48 am

Hi, Travis, here’s a link to a distantly related ad for a Battery That Will Not Die, LOL. Can you give us your take on it?

http://us.mc828.mail.yahoo.com/mc/showMessage?fid=Inbox&sort=date&order=down&startMid=0&.rand=480888300&da=0&midIndex=1&mid=1_5521040_AGLJjkQAABaXSZq6dAE3vG1u590&prevMid=1_5526715_AGLJjkQAAMkVSZrHJQ3oRHbW0kk&nextMid=1_5519779_AGLJjkQAAVEoSZq1owhtlhOaZSU&m=1_5526715_AGLJjkQAAMkVSZrHJQ3oRHbW0kk,1_5521040_AGLJjkQAABaXSZq6dAE3vG1u590,1_5519779_AGLJjkQAAVEoSZq1owhtlhOaZSU,1_5517390_AGPJjkQAAXl%2BSZqu4wxSGg7rkk0,1_5516606_AF7JjkQAADRnSZqt8AlM%2BXr8J%2FA,1_5514947_AGTJjkQAABgXSZqstwsDAzzdOyo,1_5513780_AF7JjkQAARotSZqgtwHtojcENj0,

Barry Swartzberg
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Barry Swartzberg
February 17, 2009 11:28 am

You mention the Stansberry Publications in your comments. Have you seen this link and could you send me any comments directly on it:

http://briandeer.com/vaxgen/stansberry-fraud.htm

Thanks.

Tom Stark
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Tom Stark
February 17, 2009 12:11 pm

Travis: I’ve been in a junior gold producer in WA, Australia for some time now and I like it alot. Ramelius Resources(RMS.ASX) is the name of the Company and it is trying to grow into a producer.Its website is RameliusResources.com.au/. It is profitable, has no debt and will internally finance its expansion. It has determined reserves that are growing as rapidly
as they can drill. I could give you the whole picture, but its more easily gleaned from their website. Let me know what you think. Thanks

Gravity Switch
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February 17, 2009 1:33 pm

Perhaps, though I think of Sprott as more of an asset manager, I don’t know them well. I did take a quick glance, but haven’t dug into that one yet.

Gravity Switch
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February 17, 2009 1:37 pm
Well, so far this one is moving up like it’s a gold miner today — gold is about the only thing going up, along with Sirius XM Radio, so be careful, one would have to assume that the boost in price today is a result of the newfound attention for this small cap — if that’s so, the price may well be back down in the near future (or who knows, maybe Ferris is right in that this “distortion” won’t last for long and that these discounts can’t survive more attention). Don’t know where the price is going, just fair… Read more »
Elissa Stein
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Elissa Stein
February 17, 2009 2:50 pm

question for travis that has nothing to do with this article:

Hello, Gumshoe. When will you post 2009 tracking? Thanks. Elissa

SageNot
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SageNot
February 17, 2009 3:13 pm

http://finance.yahoo.com/q/ta?s=ATUSF.PK&t=2y&l=on&z=m&q=l&p=m50,m200&a=m26-12-9&c=

Altius Minerals looks like a coiled spring from the TA point of view. It’s already off over 20% from Dan’s entry point, which often happens with his deep value picks. But it’s been over $30. twice now in the last two years so you have miles to go before making any new highs.

I’m less skeptical when it’s a quality guy like Dan Ferris doing the fundamental digging, he’s that talented, IMHO!

Rog Blake
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Rog Blake
February 17, 2009 9:48 pm

Altius climbed to $30 because they were working on getting an oil refinery approved in Labrador. The deal fell apart in the end (no fault of theirs) and the stock dropped.

They are prolific deal generators. If there’s a way to make money in Newfoundland or Labrador, they will find it.

yossef
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yossef
February 18, 2009 4:14 am

hello travis.
the second company could very well be seabridge gold (sa). it made a huge run over the last few years,than crashed from over $30 down to under $10. it’s around $17 today, and it answers most of the other specifics in the add.
thanks, and keep up the good work

joost
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joost
February 18, 2009 10:09 am

thank you for letting me know your fax number and well done again

Gravity Switch
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February 18, 2009 1:43 pm

Well, since Ferris released his report last night I’ll call today’s 15% rise a “Ferris Bump” from his subscribers jumping on board — Altius is now up about a dollar (20%) from the price it held before the touting began.

Folks who tried to front run the recommendation must be pretty happy, but if you like this one (as I still do, but can’t buy yet per my rules), I’d imagine the shares will fall back at some point, assuming no big news in the coming months.

Michael Shank
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Michael Shank
February 19, 2009 10:11 pm

what about a recent email I’ve recieved from the motley fool about “Power Plays: 3 Ways YOU Can Cash In On The Wind-Energy Revolution.” ?

Greenstock
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February 20, 2009 3:09 pm
I was a Stansberry subscriber for 2 years 2006-2008. In the time I was a member they were pushing a Australian Gold Miner building the biggest mine in China. I have bought this company many times between $3.00 and $4.00 and sold at $7.00. SIOGF is the ticker here in the US. I got lucky a few months ago when it was down to around $1.50 and bought a bunch. It’s back up to $3.80 and will release year end statments and forward estimates on Tuesday. The first mine is finally up to full capacity, and a new mine will… Read more »
Ray D
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Ray D
February 20, 2009 4:04 pm

If it is Rick Rule on Friday’s call it could be Almaden Minerals Ltd. AMM-T.

Bear 2008
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Bear 2008
February 22, 2009 9:38 pm

Chinese attepting to turn Australia into a giant Chinese mining pit

The board of the world’s second-largest zinc mining company agreed to a cash takeover offer from state-owned China Minmetals on Feb. 16.

Were are the best opportunities for investors?

Charley Robinson
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Charley Robinson
March 23, 2009 4:01 am

Haven’t read all your writing but could it be NAK? Northern Dynasty Minerals? Supposed to own the largest untapped ore body on the planet, or something like that.
Just a thought.
I enjoy your work!
Keep it up!

John K
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February 17, 2009 3:16 pm

Any chance that # 2 is Tirex [Drilling samples in Albania] ?

Gravity Switch
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February 18, 2009 6:56 pm

Thanks for the reminder! I just have to get around to doing the data entry.

I’ll bet the gainers are still the few gold and silver stocks we’ve seen teased so far this year, but we’ll see, there have been a couple quick rallies that might have made some folks look wise. I’ll let you know when I’ve got them up.

Michael A
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February 17, 2009 5:09 pm

Everbank.com has a gold-backed CD which would allow you to earn interest while profiting from any rise in gold.

Gravity Switch
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February 18, 2009 12:23 pm
Yep, Everbank hasn’t offered a new issue of their Gold CD for a while, as far as I can tell (it was teased by several newsletters over the last couple years). These were what they called “Marketsafe” CDs and their website say they don’t have any available right now, for gold or anything else — they were essentially a way to get either your principal back, or your principal plus the difference between the price of gold now and the average price of gold over the next ten years, the small print made them a lot less sexy than they… Read more »
ponce
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ponce
February 17, 2009 6:27 pm

Yes, Ferris had good picks during real estate boom. But I believe this is the first time he ventures into gold. The old gold experts seem to be silent now that even the producers are are losing share values. I will take a wait and see for now.

Matt Laffey
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Matt Laffey
February 17, 2009 10:08 pm

Got any details on this CD option?The Everbank website only lists two metals holdings accounts, and a number of alternate curreny CDs. Thanks!!

Dave B
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Dave B
February 17, 2009 11:10 pm
I put $10k into the “gold CD” shortly after it came out a while back (2 years ago? 3?). They (Everbank) notes the price of gold at the time you “buy” the CD, and then notes another gold-price data point every 6 months thereafter. When the “CD” matures, in 5 years, you get back the average of those every-6-month price points. Everbank calls it a CD mostly because they guarantee you won’t get back less than your original investment, even if gold goes down. It doesn’t earn “interest” like a bank CD. I expect that what they do is take… Read more »
Gravity Switch
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February 18, 2009 9:29 am

Ah, that brings me back — that was a big “teaser” stock a couple years ago. Doesn’t match the “under $5” clue, though.

Gravity Switch
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February 18, 2009 12:49 pm

Sorry, “asset manager” is probably the wrong term — I was thinking about Sprott, the company that manages Sprott Resources. Sprott Resources strikes me as more of an investment fund in early stage resources, though the PBS Coal sale and the rest do match the clues for this one. Sprott Resources converted a bunch of their cash to bullion at the end of last year, FYI.

Gravity Switch
Admin
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February 18, 2009 12:51 pm

Nope, we’re dealing with the Americas only for this one. Boy, that’s a blast from the past, haven’t seen Tirex since they were a big teaser target late in 2007 — been tough times for them since then.

Gravity Switch
Admin
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February 19, 2009 10:16 pm

Don’t know that I’ve looked at that one yet, but since it’s the Fool I’d bet that one of them is Otter Tail, a stock they love (I own it too, for full disclosure) — that’s the last wind stock of theirs I wrote about, http://www.stockgumshoe.com/2008/10/power-plays-cash-in-on-the-wind-energy-revolution-motley-fool.html

ponce
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ponce
February 22, 2009 1:13 pm

I agree Sino has incredible prospect. It was the first foreign miner that was given a license to mine gold in China. I got in at 3.75 as long term investment that is why i did not sell when it went up more than $7. Of course I did not expect the Oct 10 stock massacre followed by the Nov 20. I am also holding on to Jinshan. These Chinese gold producers should be valued more than the MFN. However, Gumshoe said on Feb 18 above the tease is about the Americas. Search goes on!!!

Nancy
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Nancy
March 5, 2009 12:16 pm

The second stock Dan Ferris is talking about is Sprott. I saw his “special report” The symbol he gives is TSX:SCP. The gumshoe is right about the first stock being Altius.

ponce
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ponce
February 22, 2009 11:39 pm
Yeah, the Chinese is also trying to corner the uranium supply from Australia. Although the uranium stocks are now pulled down by the market crash, the supply/demand is getting worse. The Chinese has more than 20 nuclear plants in their plan. The existing world plants are using up the present inventory because production is not enough for the demand. BPH and Cameco are the largest producers but I am betting on the smaller ones for higher growth. UUU.To the third largest producer has big Japanese partners in developing Honey Lake the only additional approved site in Australia for development. Other… Read more »
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