Frank Curzio’s “Gold Fracking” — Sniffing out his “Aboveground Miners”

Friday File look at a teaser from Curzio's Small Stock Specialist

By Travis Johnson, Stock Gumshoe, April 13, 2012

I’ve been blathering about my own investments in these Friday Files for a couple weeks now, but for today we’re going back to sniffing out teaser picks … in this case, a teaser pick for “Gold Fracking” that Frank Curzio has been sending out pretty aggressively for a couple days in pitches for his Small Stock Specialist, and that’s getting Gumshoe readers into a bit of a lather.

Frank Curzio’s latest ad uses the time-honored approach of making up a new term to shroud his idea in secrecy — in this case, he uses the term “gold fracking” to entice readers, though of course the pitch has nothing to do with the hydraulic fracturing that’s led to the US boom in oil and gas production.

No, what Curzio’s teasing with his “gold fracking” (and he does eventually reveal this, though it’s not until about halfway through the letter) is precious metals recycling, particularly of extracting gold, silver, platinum and the like from the massive stockpiles of electronic waste that pile up every day from our discarded laptops, cell phones, etc.

And while this isn’t exactly a topic for daily conversation, neither is it completely unknown — there are a lot of companies trying to process that electronic waste, and other waste products that include valuable materials even in very small quantities (like the platinum in your catalytic converter) … heck, even the shady “cash for gold” folks have in some cases gotten in on the act, trying to buy up old industrial waste (cartons of old electronic circuitry, etc.) on the cheap so they can have those refined for their gold and silver content.

And yes, “finding” gold in recyclable materials is far easier, in many cases, than finding it underground and extracting it from rock — here’s a little taste of Curzio’s pitch on that point:

“… one tiny group of companies claim to have found a way to find massive amounts of bullion – without using a single drill, pick or shovel.

“The strange thing is…

“They also don’t employ any geologists…

“They’ve never even requested a mining permit.

“And yet, according to the U.S. Government Geological Survey, they’ve managed to find more gold – right here in America – than many of the world’s biggest mining companies, combined.

“When I first heard about this, I was skeptical.

“How could a group of companies a fraction of the size of Goldcorp or Newmont… with no exploratory team… find as much as 40x to 800x MORE gold per ton than anyone else?”

And some specifics to make the comparison between this “gold fracking” and actual gold mining …

“Government audits of this unusual ore have found that the concentration could be 40 to 800 times greater.

“That’s around 40 to 120 grams of gold per ton of ore… Up to 17 times more productive than even the top gold mines in the world!

“In fact, the highest-grade sample they’ve seen so far has been 1,500 grams per ton – more than 200 times richer than the world’s most productive mines.”

Most of this stuff has been known for quite a long time, though it’s getting a bit more attention with gold at $1,700 an ounce than it did a decade ago when gold was under $400 an ounce — which is probably good, because the increasing miniaturization of the electronic world is undoubtedly making it harder to extract gold from circuit boards and the like than it was back in 2001 when the USGS published this fact sheet about electronics recycling. Recycling of platinum group metals has climbed dramatically in recent years, but that’s almost all from catalytic converters — not surprising, since that’s also where the vast majority of the world’s platinum, palladium and rhodium supply are used in any given year, and automobiles have been a core part of the steel recycling chain for decades, anyway, so there’s a sort of “supply chain” for recycling the various components of junked cars in place.

But anyway, that’s the basic pitch — that the “special ore” (recycled electronics, etc.) that Curzio teases is far richer than the ore that mining companies dig out of the ground.

And, more than that, that these “gold fracking” companies are going to get a double boost — not just the boost of high precious metals prices, but also a boost from increasing regulatory pressure to recycle electronic waste, which will increase their input of “ore.”

Here’s some more of the tease:

“The tiny handful of companies we’ve identified have been quietly awaiting a landmark development that will expand their recovery of gold, silver, copper and platinum exponentially…

“They’re in the final stages. It’s only a matter of time…

“And that’s what has me so excited.

“Typically, the hardest task for any small and ambitious exploration company is to find enough metal-rich ore to begin mining…

“In this case, the exact opposite is true…

“Not only do these companies have a virtual monopoly on the richest ore in the world…

“There’s a huge back-log of this ore just waiting to be tapped.

“According to one United Nations Task Force, it’s estimated to be ‘in the order of 40 million tons, which is enough to fill a line of dump-trucks stretching half way around the globe.’

“At current market prices, that’s tens of billions-worth of precious metals… about to be flooded into this tiny industry, with an average market cap under $5 billion.

“To see this kind of potentially explosive growth is pretty rare, and very exciting.

“And some very powerful and influential investors have noticed…

“One of them is Bill Gates, the former CEO of Microsoft, the largest computer software firm in the world. According to filings from the Gates Foundation, he’s purchased over 2.6 million shares in one of these tiny companies.

“Another supporter is successful Silicon Valley entrepreneur, John Shegerian.

“He successfully launched and sold off several innovative companies… and has since plowed a small fortune into aboveground mining.

“Even more interesting…

“Billionaire take-over titan, Carl Icahn – has made it clear that he wants to add these stocks to his empire. He’s already snapped up 11.5 million shares of one company in this industry….

“In the next 12 months, an astonishing amount of metal-rich ore could flood into these tiny companies. Five times more than all the precious metals they’ve found, to-date!

“We’re potentially talking hundreds of billions of dollars-worth of bullion, flowing into a handful of tiny companies, including the two I’m following.

“In fact, strictly looking at the numbers…

“If there’s as much aboveground ore ready to tap, as preliminary studies suggest, then these tiny stocks could end up jumping 200% to 400%.”

And then we get to the “catalyst” for this — the government regulations that will force a much higher percentage of electronic waste to get recycled:

“You see, until now, these aboveground miners have only been able to tap a small fraction of the gold, copper and platinum that’s locked up inside millions of old cell phones, computers and circuit boards.

“That’s because historically, 81% of these outdated electronics have been simply thrown away.

“But now, governments from Europe and the United States to Africa and Japan are pushing forward regulations that will require record amounts of this metal-rich ore to be mined.

“In other words, all this gold, silver and platinum is going to get funneled to a few tiny companies that have the technology to recover it.

“The Wall Street Journal reports, the first of these regulations will take effect this summer – just a few months from now– and set mandatory collection targets for old cell phones, computers and other metal-rich electronics throughout Europe.

“The same thing is happening here in the U.S.

“According to a study by M.I.T., at least 33 American states have introduced similar legislation….

“It’s going to be an incredible windfall for the precious metal recyclers that are already dominating the business. I can’t imagine a stronger set-up… It basically guarantees a handful of advanced metal recyclers a huge surge in business… at the same time that gold, silver, copper and other metals are projected to soar in value.”

So that’s the basic idea — we’re going to see ever more electronics recycled, and the companies that are doing it now most of them “under the radar,” will see a windfall from increasing volumes and a kicker from rising metals prices.

Which is a long way to go on our trip to get some teaser hints about the stocks Curzio is recommending in this industry (it’s always a long way, of course, but I still like to complain) … so let’s check those clues now, shall we?

“The World’s Biggest Aboveground Miner of Gold, Silver, Copper and Steel… With 200% Upside Potential

“Last year, this company processed and sold nearly 15 million tons of above ground precious metals, worth $8.9 billion… impressive considering their market cap is only $3 billion.

“They own 250 facilities in 16 different countries… from the U.S. to Australia to Hungary to India… and just snapped up a stake in the top tropospheric miner in China.

“On top of that…

“This tiny firm also has locked up the rights to mine for precious metals in New York City, where the local government is kicking in $80 million to help them build a 100,000 square foot mining facility.

“Thanks to the slew of international laws that will funnel billions of dollars of metals into the aboveground mining business… the only question is how high this stock could run.

“To put it in perspective…

“If they only tap 5% of all the gold, silver, copper and iron that’s about to flood into the industry – it could more than double their annual revenue.

“Most of these positives are not factored into the stock. That’s why we believe there’s a great opportunity to buy shares today… which are trading right around book value.”

This one, sez the Thinkolator, is Sims Metal Management (SMS) — this is indeed the largest global metals and electronic recycler, though the vast majority of their business is the lower-end scrap steel recycling that is much more cyclical than electronics recycling. They were formed from an ill-timed merger in 2008 between Australian and US firms, and they still have about 70% of their business in North America, though part of their appeal is economies of scale that allow them to ship scrap to places like Turkey and China were steel demand is higher.

And though they’re not quite trading at book value right now, they are close to it at about 1.3X book, with a very reasonable forward PE of about 11 according to the Morningstar numbers (not many analysts, so take that with a grain of salt) — they don’t look as good on a trailing basis because they made some big writedowns on older acquisitions for which they overpaid before the recession. The scrap metal business has some pretty big competitors, including firms like Commercial Metals (CMC) — that’s the one Carl Icahn tried to buy out, but he gave up his bid a couple months ago — and pretty well known names like Nucor (NUE), but most of those are scrap steel mills that are more focused on processing scrap, Sims is much more of a recycling company with focus on collecting, sorting, processing and brokering recycled materials, so they don’t have the same direct exposure to pricing of steel goods (though of course, if steel prices drop the value of steel scrap also drops), and they also don’t have the emerging focus on electronics recycling that Sims claims.

Seems like an interesting idea, frankly — there is a trend toward more recycling, with the public health focus on the nasty chemicals in so many electronics that we don’t want in our landfills, and I don’t know if there will be an abrupt change in volume with regulatory changes (these things tend to be more gradual than investors surmise), but SMS does seem to be positioning themselves well for that market, and they do have a huge global network of processing facilities that they either own or are partnered with, so they seem to have an edge in infrastructure, at least, over many of their smaller competitors. Bill Gates did have a substantial stake in Metal Management, one of the firms that merged into Sims several years ago, but I don’t know if he still does — his foundation is not listed as a major shareholder at the moment.

SMS pays a dividend that has recently been decent, with a trailing yield of close to 4% over the last twelve months, but it’s hard to predict what it will be in the years ahead — they pay twice a year, typically with a smaller payout in March (and this year’s was slightly smaller than last March’s payout) and a larger one in October, but I wouldn’t assume that they are focused on consistent or growing dividends.

And what’s Curzio’s second recommendation? Here are our clues:

“An Aboveground Platinum Miner that could Rocket from $4… to $12

“This tiny $200 million company trades on the AMEX.

“On the surface, they appear to be a run of the mill steel processing company. And it’s true, in 2011, they produced 534,600 tons of this building block material.

“But what most people don’t know is… they’re also busy mining a much more valuable precious metal – platinum.

“And that’s what caught my attention.

“You see, platinum is 30-times more scarce than gold. And it’s very difficult to mine…

“Some of the world’s greatest platinum pits are in the most unstable countries, like Zimbabwe – which just slapped miners with an 8000% tax hike.

“But this tiny company we discovered has a major advantage… It’s able to recover tons of platinum group metals, including palladium and rhodium – right here in the U.S. – from mineral-rich electronic ore.

“They don’t have to risk severe power outages, outright nationalization, or labor strikes. They don’t even have to dig a single hole in the ground.

“I think it’s just a matter of time before Wall Street wises up to the potential of this tiny company… because although most of their profit comes from scrap steel… about 23% of their revenue comes from platinum group metals… which play a critical role in the automotive, fertilizer… even the oil refining industry.

“Based on their projections alone, this company is expected to grow earnings at more than 30% annually over the next few years…

“But when you consider this incredibly cheap valuation of this firm – which is also trading at book value – a 200% pop wouldn’t surprise me at all.”

Ah, now this one rang a little bell in the Thinkolator because we’ve processed similar clues before … this is the longtime Hilary Kramer recommendation Metalico (MEA)

Metalico is also a scrap metal company, and it is indeed far smaller than Sims, with a market cap of almost exactly $200 million. It also has a much heavier debt burden than SMS (not that unusual for these asset-heavy companies to carry a lot of debt, though debt is probably part of the reason MEA suffered so dramatically in the 2008-2009 collapse), though it is profitable right now and it does trade at just about exactly book value. There are only two analysts covering Metalico right now, and their opinions are so widely diverging that it’s hard to give them any weight — one predicts five cents in earnings for 2013, the other 60 cents, so the average would have them with an earnings drop next year (thus a forward PE of 12.5 versus the trailing PE of 11) but clearly if there’s that wide a range you can make your own guess. That same problem hits each quarter, too, so one analyst thinks they’ll earn two cents next quarter and the other expects 14 cents, so be careful how much weight you put on whether or not the company hits analyst estimates or on projected valuations.

Part of their recent quarter’s disappointment was due to lower volume in their platinum group metals recycling business — caused, it sounds like, by volatile pricing and intense competition, so higher volumes would undoubtedly be a boon to them even if they might not guarantee great riches. They’re currently projecting that PGM volumes will be lower again this year, but they’re also moving more heavily into automobile recycling, buying some auto salvage and dismantling operations to increase their access to recyclable materials “at the source,” so clearly that’s a focus (there are a lot of key recycling items in cars, not just catalytic converters and bulk steel but also tire rims, circuit boards and batteries, to name a few).

Both of these companies are in the metals recycling business, though both clearly have other large business lines (Sims does all kinds of recycling; Metalico is also one of the largest producers of lead products), and both, despite what might be some leverage from increased electronics recycling that could help extract more precious metals and platinum group metals, are substantially exposed to global demand for steel and other base industrial metals.

That may not be a bad thing, and it might be that the relatively tepid expectations for both companies can indeed be bumped up nicely by expanded “gold fracking” operations and a larger supply of circuit boards and other “ore,” but for now they’re both being valued by the market as cyclical companies that are not expected to show dramatic growth — which does cut into the risk a bit, and I confess to finding Sims kind of appealing after my first few minutes of research (I had never heard of that one before). I’ve built up quite a bit of skepticism over Metalico over the years, rightly or wrongly, that I’d have to overcome before I seriously considered those shares. If Curzio’s right and this trend turns huge and gets lots of attention from investors, these are indeed two companies that ought to show some boost from that, with Sims certainly more of a global leader and a more recycling-focused name, but neither company is going to be a “pure play” on gold from circuit boards (sorry, I mean “gold fracking”) in the next couple years.

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