If there’s one asset class that attracts individual investors like lemmings every time it hits a new high, it’s gold.
And if there’s one thing that newsletter publishers know, it’s to sell the people what they want … whether they know they want it or not.
So today we’ve got a new high in the gold price (a nominal high, at least, in US dollar terms) … which means I have to write about a gold teaser today, or risk a horde of angry villagers with pitchforks and torches descending on Castle Gumshoe.
And what do you know, I just happen to have about a zillion copies of a Luke Burgess gold teaser filling my inbox right now, it’s for a new service he’s launching called Underground Profits — oddly enough, Burgess is better known to Gumshoe readers as the guy behind Hard Money Millionaire, which carries a retail price tag of $995, and unlike most newsletter editors who try to make their name and their mailing list with a low-cost newsletter and then sell folks up to the more profitable and exlusive letter, he’s going in reverse, Underground Profits is a $49 letter. There’s been a bit of this going around lately, with established editors starting new low-cost letters, perhaps there’s a new marketing strategy in place with the publishing cabal, or maybe they’re responding to economic weakness and having a hard time buying subscribers to the premium letters.
But the tease remains the same whether it’s a $5,000 or a $50 letter — they provide the hints and get the drool flowing, you sign up for your subscription and learn about the stock that has their editor in a lather.
Or, being a smarty pants, you come on over to Stock Gumshoe and find out about the stock for yourself. So let’s do that, shall we?
The latest teaser here is built on the contention that gold will keep going up, of course, and that small mining stocks — if you pick the right one — will provide dramatically leveraged returns that make the expected 100-400% increase in the gold price (over the next 2-1/2 years) look paltry.
The basic gold boom argument is familiar, and you probably either buy in or you don’t — it’s that gold has already had the fundamental price rise thanks to inflation and dollar devaluation over the last decade or so, and that the next stage is a mania of investment demand driven by new investors and, importantly, by Chinese government and individual saver demand. I hold some bullion and some gold mining stocks as well, though I’ve been trying to focus on gold mining stocks that carry less mining risk for my own portfolio (royalty and prospect generator-type firms, by and large) and I certainly wouldn’t bet the house on $5,000 gold by 2013.
I’m no mining expert, to be clear, but I can at least find out which stock he’s jazzed about.
So, this is a microcap Nevada gold company that Burgess says is following in the footsteps of Rochester Resources, a company that apparently skipped the expensive and time-consuming step of exploratory drilling and went straight into developing a mine … here’s how he describes it:
“You see back in 2005, a tiny gold company by the name of Rochester Resources Ltd. adopted a mining doctrine that’s unusual, to say the least…
“… in the 21 months after Rochester initiated the program, the company’s stock went from $.03 to $2.75.
“It skipped the Exploration Stage and moved from the directly into Development.
“This move was dubbed reckless by competing firms, as this hit-or-miss practice had been virtually unheard of since the initiation of modern exploration.
“But Rochester had a methodology that was anything but hit-or-miss…
“And based on painstaking geological and earth-penetrating radar analysis, the company was confident that it could skip the costly and time-consuming exploration drilling.”
I don’t know anything about Rochester Resources, but the chart backs that up — though it also says that Rochester had been well above $30 a share back around 2000 or so, collapsed to a few cents in 2005, then bounced back up to roughly $2.75 in 2006, and again fell back in 2008 to where it is now, roughly ten cents a share. That may involve a big change in the company, since they say on their website that “inception” was in 2006, and they do say that they followed an aggressive strategy of rapid mine development initially, though they are now doing what they say is their first exploratory drilling. So the story makes sense, at least, though I have no idea whether or not it’s really a unique tale or is applicable to the teased stock.
So let’s see what clues we get about this specific stock Burgess is teasing, and you can make up your own mind. Hints, please!
“Right now, a new mining-exploration company is getting ready to trump Rochester’s history-making 2006 run.
“This mining outfit is located in Nevada, dead center within a cluster of some of the most active gold mining sites on the planet.
“But with at least $345 million in assets, this tiny $9.3 million company is on the very brink of becoming one of the big players in the gold game.”
We also learn that the stock is currently priced (as of September 10, at least) at about 22 cents. I’d assume that’s Canadian, since the lion’s share of junior miners are listed North of the border, though it doesn’t make a big difference at this point.
Some more clues?
“Thanks to studies performed by a previous owner, this company expects an annual gold production of about 36,000 ounces.
“That means that with a projected $450/ounce price of production for gold, it has already shown the intention to deliver current stockholders 150% profits — each year — over at least the next eight years.”
And Burgess lists some of the mine’s neighbors, as part of his argument that the company is probably low-balling their estimates and will produce far more:
“Chimney Creek Mine – annual gold production: 222,500 ounces
Crofoot Mine – annual gold production: 82,000 ounces
Sleeper Mine – annual gold production: 256,000 ounces
Fortitude Complex – annual gold production: 254,500 ounces
McCoy/Cove Mine – annual gold production: 214,000 ounces
Barrick Goldstrike – annual gold production: 207,000 ounces
Newmont Gold Operations – annual gold production: 1,467,800 ounces”
And he includes assumptions of a big ramp up in the gold price to $3,000 to go along with expected production gains from this company, which adds up to his assessment that the stock could return 2,700% in the next two years.
He also includes a chart of the stock’s movement this year, and implies that the boost it got to 60 cents or so in the Spring was a result of their “exploration” announcements, that they’re currently in the “development” soft spot of the chart where they’ve plateaued around 20 cents for a few months, and that the shares should soon boom because they’ll hit the “production” phase where the stock climbs almost parabolically. He uses the chart of Goldcorp to make this point, showing a similar shape by comparison, and I’ve seen several other mining analysts theorize about the predictability of this kind of curve for mining stocks … but Burgess doesn’t exactly emphasize the fact that he’s comparing a one-year chart to a ten-year chart.
But anyway, we’ve got enough clues salted into that mix to feed it into the mighty, mighty Thinkolator — and after churning for a few minutes, we see the answer come out plain as day:
Ely Gold and Minerals (ELY in Canada, ELYGF on the pink sheets)
The stock was around 20 cents in late August and did at least briefly trade around 22 cents last week, and has moved up a bit over the last couple weeks to about 25 cents (Canadian) as I type. This is indeed a teensy, teensy stock — it’s trading at above average volume lately, thanks probably to Burgess, but that still means it’s only trading perhaps $30,000 per day, so if even a couple of you rush out to buy some shares, you’ll drive the stock higher (be careful out there).
And yes, it is a bit odd to see a newsletter that plans to have a low price and a mass subscriber list start out by touting a stock with a market cap of just $10 million (there are roughly 42 million shares outstanding, though that may not count the 3 million they just sold in a private placement — more on that in a sec — so at .25 that’s a $10.5 million market cap, teensy even for a junior miner) — if Burgess gets even a few thousand subscribers (heck, even a few hundred) right off the bat and many of them buy the stock, you would expect it to climb pretty dramatically, at least for a while. I’d stop far short of guaranteeing that this will happen — sometimes the expected bump doesn’t materialize, or dissipates much faster than I would have guessed, and this ad has been around for a few days already so I would expect to have seen more of a spike already (assuming the Thinkolator did its job correctly with this one).
But still, a relatively big push like this behind a teensy stock can cause some wild moves — and it makes me a little suspicious that this is part of the rationale, that they might claim credit for huge performance that is caused, in large part, by their own recommendation as a way to make a “splash” for a new letter … that’s just a surmise, of course, I know nothing of what’s going on behind the scenes at Angel Publishing. And if that does happen to be the case that they’re trying to boost the shares so they can claim credit for that spike, I would be part of the problem as well for sharing this idea with a few thousand of my closest friends (that’s you) … but that can’t be helped, and I’ll just have to assume that you’re all rational beings and will look at the stock on its merits, whatever they might be.
So what should we know about the company? Well, I hope I’ve made it clear that I’m not a mining expert, but despite the lack of exploratory drilling they do have a Mineral Resource Statement (not reserves, but resources) that does indeed include assessments of 36,500 ounces per year of gold production, at an operating cost of $450 per ounce and an eight year mine life. That’s for the Centennial Gold Deposit, which was explored by a petroleum company between 1960 and 1980, it’s on what they call the Mount Hamilton Property, which is 3,900 acres at the southern end of the Battle Mountain Trend, west of Ely, NV. So that’s all a match for Burgess, as is the stock price and chart, which makes me quite confident that the Thinkolator is right this time (as usual, naturally). All this, including an investor presentation, is on their website here.
When it comes to their “shortest possible timeline” plan for developing this resource, they do say that their goal is to have permitting in place in 2012 and begin production in 2013, which would be pretty quick. They have also just recently signed a deal to possibly bring on a partner for this mine, which would cut their costs considerably but also take away a big chunk of the upside of additional gold production. The partnership has been launched by a private placement, and gives their buyer, Solitario Exploration and Royalty (XPL in NY, SLR in Canada — also tiny, though quite a bit bigger than Ely), the right to earn an 80% interest in the project through further investment in development, prepayment of royalties, and completion of a bankable feasibility study and, perhaps, a project financing deal. The details are here if you’re interested.
As I alluded to above, this kind of deal, whereby Ely sheds some of the development cost and risk in exchange for junior interest and royalties, generally appeals to me, though it’s quite early and Solitario could certainly back out after doing their due diligence — and I haven’t looked at the details and might not understand them if I did, so I have no idea whether this particular partnership is a good idea. But I do like the concept, though of course I wouldn’t buy before my three day window expires (and I generally try not to get in the way of highly-touted microcaps if I can help myself — I also did notice that this stock has apparently been touted by at least one penny stock promoter in the past, which usually turns me off even if the company had nothing to do with the promotion).
What do you think? Interested in a little stock that looks like it’s going to get a mess of attention for an unpredictable period of time, and may have an interesting little mine in a few years? Or is it too small or scary? Sick of gold miners? Let us know with a comment below.