“Buy Gold for $1” (a taste of the Friday File)

By Travis Johnson, Stock Gumshoe, February 26, 2010

Readers often ask me, “What do you get for joining the Stock Gumshoe Irregulars?” — so this is by way of a partial answer. The Irregulars, the paying members of Stock Gumshoe, get a little extra commentary: a new article most Fridays that I call the Friday File, and one analysis per month of an interesting investment idea (the “Idea of the Month” — picks which are, in all honesty, trailing the S&P on average thanks to a few real stinkers) … and, of course, you get the warm feeling in your belly from supporting all the work of Stock Gumshoe, your favorite website (right?). This is an example of a Friday File article, which can be examinations of teasers much like the free articles, though I’m usually a bit freer with my opinions to this smaller group, or followup on other investments I like, or something entirely different. This one was published to the Irregulars two weeks ago and has not been updated or revised except for the note at the bottom.

Today I’ve been getting a lot of questions from folks about the latest teaser for Mike Williams’ True Income newsletter from Stansberry & Associates. The ad is a pretty brief one, compared to others, and it focuses on something that I’ve written about before in this space — corporate debt.

Yes, I’m afraid I just went out and revealed the deep, dark secret before even sharing the tease with you — True Income is a corporate bond newsletter, mostly junk bonds, and this latest tease about buying gold companies “outside the stock market” for a dollar is clearly a teaser for investing in the corporate debt of mining companies. The $1 bit refers to commissions, different brokers work in different ways, but there are some brokers who will charge you $1 per bond (usually $1,000 face value per bond) by way of commission, though for most brokers the actual commissions from bond transactions are still earned on the spread, the market is less transparent than the stock market, and most brokers do the trades internally, so they’ll buy the bond from another investor and sell it to you for a slightly higher price than they paid.

Not that this makes a huge difference if you choose the right bonds, but if you’re a small investor and put just $500-$1,000 into each corporate bond investment, the “real” commission friction that your account faces will be a bit more than a dollar.

So we hear that there’s a gold mining company that is going directly to investors, and offering a guaranteed return of principal and a semiannual payment — that’s not unusual, that is pretty much what every other corporate bond offers (though the “guarantee” is based on their ability to pay and not go bankrupt, of course).

They give a few examples of extremely profitable trades in similar kinds of vehicles, including the debt of Gold Reserve (GRZ), the company that has been extraordinarily volatile because its assets are in Venezuela, and NovaGold (NG), another small gold exploration company that for quite a while was failing to enjoy the success of other gold miners. When these companies were depressed the fear was that they would go bankrupt if their primary assets, these potential mines, didn’t come to fruition, so the debt, like the equity, was priced to imply that there was a decent chance that they’d go under. When things turned around in both the gold and credit markets those worries turned around in some ways, and pretty dramatically repriced those bonds to reflect their enhanced creditworthiness.

So which gold miner is Mike Williams looking at now? We don’t get much in the way of clues, unfortunately — and corporate debt can be hard to find and invest in, particularly for relatively small issuers. I wrote about a couple possible gold mining bonds that might be worth a look for folks back in July (including Kinross, and that previously noted NovaGold bond), but readers told me that both were pretty tough to buy from some brokers. If you did manage to buy NovaGold’s debt at that time you’d be sitting on a capital gain of 25% or so, as well as the continuing coupon payments and convertibility features.

But on to the next one, right? Again, the clues are limited … but this is what we’re told:

Coupon payments will be due on Apr. 31, 2010, Nov. 30, 2010, Apr. 31, 2011, Nov. 30, 2011, Apr. 31, 2012, and Nov. 30, 2012. Which indicates, though perhaps doesn’t necessarily guarantee, that the bond’s term ends in November 2012, at which point you’re supposed to get back the principal, or the “face value” of the bond.

And this is the wording of the tease:

“As I write this, Mike has just contacted us about a gold company that’s recently opened its doors to investors.

“As you can imagine, the rush to get in has already started. He estimate at least 2,300 people are already in. And we may have only a short time left before the company’s needs are met… and the opportunity closes.

“You see, this company isn’t a gold explorer looking for some “pie-in-the-sky” gold strike. Instead, it’s a gold producer, with large gold reserves which they simply can’t get out of the ground fast enough.

“Because of this, they need more equipment… more manpower… and more capital to speed up operations. And if you’re willing to help them, they could reward you handsomely.

“Even better, in addition to your capital return (which is set right now at 100%), the company is legally bound to provide you with income checks for the next 3 years. How much you’ll receive, of course, depends on your particular situation… And as I mentioned, I can’t promise you that the gains you’ll see will be like the ones we’ve experienced over the past year.”

OK, so as I said, thin clues. And I found only one reasonable candidate, though it’s certainly possible that there are others. I think this is probably the Nov 30, 2012 convertible bond offered by Golden Star Resources — here are the details:

CUSIP: 38119TAC8 (sometimes gets the ticker GSS.GB in some systems)
Senior Convertible Note, 4% coupon.
Not rated (meaning, they didn’t pay the ratings agencies to give the bond a rating of BB or AA or whatever it might have been). My guess (and it is just a guess), given the current yield, is that this would probably be rated somewhere at the bottom of investment grade or the upper tier of “junk” if it did get a rating, but from a quick look it looks like this issuance is essentially the only long term debt outstanding for Golden Star.
Last price: $87.39 (per $100 in principal — these usually trade in increments of $1,000 of principal).
Five year note, issued in November, 2007 (“recently,” per the teaser? All depends on your perspective) and maturing November 30, 2012.

Golden Star Resources is a Colorado company whose operations are focused on producing gold mines and processing facilities in Ghana (the former “Gold Coast” colony of the British Empire, in West Africa), along with some additional exploration targets in Ghana, elsewhere in Africa, and in South America. The ticker for the common stock is GSS in NY, GSC in Toronto if you’d like to research the company further.

So why do I think this is the match? Well, it’s the only gold miner I can find with a bond maturing on November 30, 2012 or anytime near then — though the coupons (semiannual interest payments to bondholders) are actually payable on May 31 and November 30 of each year, not April and November. Frankly, however, I am a bit suspicious of that part of the teaser — it strikes me that it would be odd to have a bond that paid semiannually in April and November, since May and November would be the logical picks for that maturity (six months apart).

And the bond did fairly recently trade up to close to the principal amount, which is what I assume would be meant by the “capital return set at 100%” in the teaser — it might be that this spike in the trading coincided with True Income subscribers being told about the bond, but I don’t know that for sure. The bond is also convertible, so when optimism rises about the stock, the bond should rise in price as well — and GSS did get over $4 in December.

So this Golden Star Resources bond, assuming that you could convince your broker to find it for you (any broker can find it using the CUSIP, 38119TAC8, but on a quick check of the bond platforms from Vanguard and Fidelity it’s not one that has enough volume that you can trade it online through those brokerages — you’d probably have to buy a higher minimum amount and call the brokerage to place a trade), pays a coupon of $4 per year on each $100 in principal value. At the current trading, the bond sells for about $87 per $100 of principal, so that’s an effective annual coupon yield for the next three years (there are six payments remaining) of about 4.6%. But the kicker with most debt that’s trading at a discount to the principal amount is that you’re repaid the principal in the end — so at that final payment you get repaid $100 (not necessarily in cash, more on that in a moment) for “lending” $87, which is why, when you throw in that final repayment of principal in November of 2012, the FINRA calculation has the real annual yield to maturity at about 9% (you can see FINRA’s data page on this bond here).

So that’s decent, if not utterly remarkable — if you’re looking for 2-3 years of good “guaranteed” yields you could go with this, if you like the chances that Golden Star will make good on its debts … or you could go with something like one of the many MLPs (LINE comes to mind) that pay solid yields in this range, have predicted continuing high yields for at least a couple years, and offer some chance of compounding that value in the years to come, along with a bit of tax advantage. Being an MLP unitholder (or a Canadian royalty trust, or a depressed REIT that might also yield as much) doesn’t give you anywhere near the guarantee you get as a bondholder, of course — nor do you get to be in the front of the line in front of all the equity holders if the company collapses and the bondholders share whatever’s left.

But perhaps the most interesting aspect of this bond, whether or not it ends up being the one Mike Williams is teasing, is that it’s also convertible — each bond ($1,000 of principal) is convertible into 200 shares at the bondholders option, and at maturity the bond will be repaid, at the company’s option, either with the full principal amount in cash or a number of shares equaling the cash value at the then-current market price (actually, at 95% of the recent average price in the month before the maturity date, so perhaps at a bit of a discount).

So in reality, if you buy these shares you get a decent yield to maturity — but if gold skyrockets you could see some significant upside as well. In order to make it worthwhile to convert your bond into shares right now the stock would have to be over $4.35 or so … which is roughly 30% higher than the current price but right around where the stock was back in December at the 52-week high (and actually, 30% or so is just about the same premium that the convertible traded at when it was issued in 2007).

Is Golden Star Resources the first choice you’d make in betting on the upside for a gold stock? Probably not, but neither would it be the last. It is a current producer in a mining-friendly country, with increasing production and additional resources to explore. The common stock trades at a forward PE ratio of about 12, they’re not currently profitable but analysts expect a big jump in their revenue next year with increased production. And as far as the downside goes, this convertible bond issuance represents essentially all of Golden Star’s debt, as far as I can tell, so unless there are some secured lenders (mortgages, etc) the holders of these convertible bonds would be in great shape at the front of the line of creditors if it ever came down to that. Of course, if gold falls back to $300 an ounce Golden Star Resources’ assets won’t be worth much … but at the current gold price, they’re certainly worth far more than GSS has borrowed from investors (and, maybe, from you).

So there you have it — one more idea, courtesy, perhaps of Mike Williams, for getting exposure to gold without being all the way at the edge of most folks’ risk tolerance. Have a great weekend, everyone!

One final note: According to FINRA’s data this particular GSS bond hasn’t traded since February 4, though I still see the ad coming through with some frequency, so if their data is correct and complete (I assume correct, but I don’t know about complete) that makes it seem more likely that my research led me to the wrong bond. Which could mean that whatever bond this is is simply not in FINRA’s system or otherwise not easy to track.


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3 Comments on "“Buy Gold for $1” (a taste of the Friday File)"

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JP Storer-Folt
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JP Storer-Folt
February 27, 2010 7:15 pm

Hi:

Do you, or have you, published your comments in table form, vis-a-vis:

Name, symbol, sector, unusual/reason to look it up, recent price, etc..

I have an awful time keeping track of this type of info, and then there is also recommendations on the TV. For instance, in TO, on BNN, our business station (on all the time) where they have a session called “Market Call” in daytime and evening, with top picks by “experts” in the investing field.

Love your analysis/ratings of the investing sheets, as well as some of their blather. It just goes on and on tho !

Regards, JSF

Frank
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Frank
March 4, 2010 12:22 pm

Where can I find the Price on this bond?
On ETrade they didn’t list the price. They only ask how much in 1000’s of $ you want to invest for the quote.

Thanks,
Frank

biggfredd
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biggfredd
September 16, 2010 1:43 pm

Prolly because the price will be based on finding the quantity you want,

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