This one may not be entirely loaded with secret stocks, since I suspect quite a few ardent Gumshoe readers have already figured out who they’re talking about as “Steve Jobs’ Mentor” … and therefore figured out which company they’re teasing … but, well, I’m still getting a lot of questions every day on this one, so we’re going to dig in for just a moment and check it out.
The pitch comes in from Jeff Yastine for the Oxford Club, whose teaser ads we’ve covered many times over the years (toward the end of the letter they even re-tease one of their oldies, the “Black-Ops Resource that’s 51X more valuable than gold” — we covered that one in January in a Friday File for the Irregulars if you’re curious). This time around it’s another resource-related stock, despite the technology implications of that Steve Jobs connection.
Here’s a bit of the ad to give you a taste:
“Days from now, the man who inspired the legendary tech CEO will FINALLY step from the shadows of his famous protégé…
“Here’s how you can make thousands when his story ‘goes public….
“For years, this brilliant, reclusive entrepreneur has taken a back seat to his protégé…
“Even though it was his apple farm where Jobs worked in college, inspiring the company’s name.
“‘He turned me on to a different level of consciousness.’ – Steve Jobs And when Jobs revealed in a best-selling biography that this man served as his “spiritual mentor,” he garnered no praise from critics.
“And despite achieving great success, like becoming a self-made billionaire and appearing on Forbes 400 list, he still lives in the shadow of his old protégé.
“In fact, I’d guess not 1 in 1,000 people on the street even know his name.
“But all that’s about to change…
“Because a special project that Jobs’ Mentor had been developing for 10 years is nearly complete.”
Oooh … sounds very secretive and exciting, doesn’t it? Don’t worry, you’re almost “in the know!”
More temptation first:
“… the company he founded – the future ‘Apple’ of its industry – is sitting on an estimated $340-BILLION fortune according to engineering consulting firm AMEC.
“What’s even crazier:
“Jobs’ Mentor originally spent just $5 million to fund his secret project…
“As The Wall Street Journal recently confirmed: ‘It could be worth some $300 billion…’
“No gadget or computer has ever seen this kind of return on investment… Almost nothing in history compares….”
And yes, the clues keep coming … we’re told that this firm is tiny (compared to Apple, at least) with a market cap of about $7 billion, and that they’re just about to start getting attention …
“… by November of this year, every financial media outlet in the world will be reporting on this.
“Which may explain why the investment houses are already quietly buying in on a massive scale…
“Goldman Sachs snatched up nearly 8 million shares of the company. Tradewinds has just over 5 million. Janus Capital Management took a hefty 24 million shares. And Fidelity purchased a whopping 25 million.”
So we can leave aside for a moment the fact that if it’s already been in the Wall Street Journal then certainly anyone who invests any amount of money has already learned of this special project. What on earth are they teasing?
Well, we learn that this secret “mentor” to Steve Jobs took an interest in mining and metals early on, developing a nickel deposit in North America, a rhenium mine in Australia, and a gold discovery in Kazakhstan, but that his thirst for something “historic” led him to our top secret stock pick today …
“The Company Took a Huge Risk and Hit the Jackpot! ….
“He was going to have to look for precious metals in places that other less-daring companies wouldn’t even consider.
“So when one of the world’s largest mining companies put up a “worthless” piece of property for sale, he decided to make a bid.
“It was located in a strange desert inside the borders of a safe (if undeveloped) democratic country. The temperatures ranged anywhere between -40 at night and 120 degrees Fahrenheit during the day.
“You could walk for miles in any direction and never see a human being.
“But this guy also knew to follow his instincts…
“He had seen the land… And knew the surrounding rocks were covered in blue dust – a good sign that large metal deposits sat beneath the surface. Of course, it was a long shot, but he was a gambling sort of guy.
“So he put up the modest offer of $5 million.”
So that’s where we get the “$5 million to $340 billion” bit … what, then, did they find in this godforsaken place?
“Forgotten Treasure Buried Beneath Asia’s Coldest Desert…
“The initial resource audit, performed by independent engineering consultants AMEC, confirmed 9.1 million ounces of gold and 4.6 billion pounds of copper….
“After several months, the confirmed resources were up to 13.8 million ounces of gold and 6.9 billion pounds of copper…
“Shortly after that report was released, the reserve of gold had swollen to 18.7 million ounces and the copper increased to 27.8 billion pounds.
“Then, 25.7 million ounces of gold and 59.1 billion pounds of copper!
“And based on the most recent estimate, the mine contains more than 81 billion pounds of copper and 46 million ounces of gold.”
So that’s where the $340 billion comes from — that’s roughly what that much copper and gold would be worth at today’s prices (though copper has risen a bit since the tease was written, it was $3.30 then and is around $3.60 now).
And yes, we’ll stop dancing around the point here and tell you that this is indeed Ivanhoe Mines (IVN).
Except it’s not anymore … they renamed themselves last month, so it’s now Turquoise Hill Resources (TRQ in NY or Toronto) — An appropriate name, since their major asset is the copper and gold mine that’s just starting up in Mongolia called Oyu Tolgoi, and Oyu Tolgoi is, roughly speaking, translated as “Turquoise Hill” from the Mongolian.
And Ivanhoe hasn’t just changed its name this year, it’s also finally been absorbed into Rio Tinto (RIO) — so TRQ is now officially a subsidiary of Rio Tinto, which owns 51% of the company, though it’s also, of course, publicly traded on its own. Rio Tinto had been the major partner of Ivanhoe Mines for a long period, with often disputed rights to take over the project — some court decisions over the winter, the culmination of a long fight over rights and financings and poison pills, led to the final settlement just recently of Rio funding Ivanhoe through to production and taking a controlling stake.
And, ironically enough, as part of the settlement … I assume because of the bad blood and the infighting … the company had to drop the Ivanhoe name long associated with Robert Friedland, the charismatic leader of Ivanhoe Mines. In fact, his name has essentially been eradicated from the company’s history books and cut out of the firm as much as possible. I don’t know if he owns any shares personally, but he is the person who is credited in this tease as “Steve Jobs’ Mentor”, and he’s now no longer involved in Turquoise Hill — he’s moved on to focus on some African mining projects with his Ivanplats exploration company that will probably go public once resource markets turn around.
Robert Friedland is certainly a fascinating figure — “mentorship” is probably a strong word for his relationship with Steve Jobs, but Jobs did really credit him, according to the Isaacson biography, for, as I interpret it, some of his ability to use force of will and charisma to lead people and “distort reality” … though the “reality distortion field” of Robert Friedland probably refers just as much to his work as an LSD dealer, the two met at Reed College after Friedland had gotten out of prison for his previous LSD career. There’s an interesting quick note on that here.
So yes, Friedland is the guy with the Jobs connection — and Jobs did indeed spend a summer at Friedland’s free love commune/apple orchard in his college years and get the Apple Computer name from that experience. But Friedland is probably not where he wanted to be at this point, astride one of the world’s largest market-changing copper mines at the point that it starts production — he’s certainly credited with much of the development, and I assume his billions of dollars will assuage the hit that his ego probably took, but it sounds like Rio Tinto is happy to be rid of him.
Which doesn’t mean that the stock can’t be a good investment, of course — it just means that the story isn’t quite as clean and tidy as it sounds from those snippets of the Oxford Club ad. Gasp! An ad that doesn’t tell the whole story? Egads!
The bigger deal with Turquoise Hill is that they’re ramping up for mega-production of copper now, they’re run by Rio Tinto with a major partner in the Mongolian government, which took essentially 1/3 ownership in exchange for letting the project move forward, and there seems to be some stability with the Mongolian government now that certainly wasn’t there a few years ago when Ivanhoe was trying to get permits and deal with threats of extremely high tax rates or royalties (though there’s still plenty of talk in Mongolia about “renegotiating” the Oyu Tolgoi deal).
You can imagine that the mine will continue to be followed extremely closely by all in the Mongolian parliament and, really, by pretty much everyone in the country, because Oyu Tolgoi itself is by far the largest capital investment in Mongolian history and will account for roughly one third of Mongolian GDP when it’s producing at the expected rate. Oyu Tolgoi is both the catalyst for Mongolia’s emergence on the world stage, and the flashpoint for political debate that essentially ends up being the argument for and against resource nationalism (ie, do we allow the private companies who found and developed this resource to profit from it, or do we seize it for “the people” … who always seem, interestingly enough, to want nicer palaces for the ruling party?). Mongolia is a democracy that has been pretty stable for years, it’s true, but that was before they had much money to fight over.
So the mine is just about ready to begin production of a considerable amount of copper and gold, building up to what they’re projecting as their “full speed ahead” production in about five years, and the mine is big enough to produce these massive piles of copper for probably 50 years, if not longer. What’s going to happen to Turquoise Hill?
Well, the short answer is, “whatever Rio Tinto and the government of Mongolia want to have happen” — you can see the latest update from the company here for their take on operations. You can see from that update that the major issues still to come are the financing package to finish the production ramp-up (they say they have enough equity funding, largely from Rio, but need $3-4 billion more in project funding to get through Phase 1), and the finalization of the plan for electrical supply — TRQ has promised to build their own power plant, probably using Mongolian coal, to power Oyu Tolgoi within four years, but until then they’re relying on power they want to purchase from China … the infrastructure is now in place, and China is likely to buy all the copper so they seem likely to happily supply the electricity, but the power purchase agreements are apparently also up for political approval.
So what you get with Turquoise Hill right now is a company that’s 51% owned by RIO, and which owns a few resources around the world but is dominated by their crown jewel, which is now 66% ownership of Oyu Tolgoi (the other 34% is owned by the Mongolian Government, who are apparently now full partners). And TRQ is at a pivotal point right now, as you would expect for a major mine that’s just about to begin producing — analysts think they’ll boost revenue by at least 500% next year with commercial production beginning in the first half of 2013, and that’s probably enough for them to turn a profit, so the shares have a forward PE of somewhere in the neighborhood of 50 right now.
No one is buying TRQ for earnings, though, they’re buying them for what they hope will be a sustainable and profitable mine that becomes a consistently profitable cash flow machine for decades — not unlike the massive Grasberg Gold/Copper Mine in Indonesia, which has been a company-maker for Freeport McMoran (and a profitable mine for Rio Tinto, which is a 40% partner) despite several waves of local controversy and political wrangling. And if the regulatory regime holds and production begins and they really ramp up to their next level of production in 2013, well, today’s price will probably turn out to be a ridiculous bargain.
Unless, of course, copper goes to $1 a pound. Which seems unlikely, given that inventories are low in London and the price has already dipped to as low as it was back in 2008. But you never know — the story for copper is all about global economic growth and infrastructure expansion, particularly in China, so be ready for the commodity price and the stock price of TRQ to react to anything that changes future expectations of copper demand in China.
I’ve never owned this stock and I’m not exactly champing at the bit to buy a large cap commodity producer right now (though RIO and VALE are dirt cheap and interesting contrarian ideas to consider these days), but I’ve been tempted by Ivanhoe from time to time as the easiest way to bet on Mongolia. They also control the SouthGobi coal project, a takeover of which by Chalco seems to have fallen through. In past years I couldn’t get a handle on the regulatory concerns and the fight for control that seems to have been going on forever, so maybe other investors are also seeing their charts clouded by those past developments and are missing an opportunity to buy a world class mine just as it begins development, that seems to be the argument of the Oxford Club folks. Do you buy it? Let us know with a comment below.
I confess to being an addict...I check my net worth, my spending and saving progress, and my portfolio (combined from several different brokerage accounts) using Personal Capital at least once a week, sometimes every day ... after all, it's free and brilliantly organized.
Personal Capital has great tools for tracking spending (they can cut your spending by 15%), but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.