Thoughts from Myron — Ending the Month on Three High Notes

by takeprofits | January 31, 2014 11:06 pm

[Ed. note: Here is our latest contribution from longtime reader Myron Martin. He has agreed to our trading restrictions, and, as usual, we have not reviewed, approved or screened his stocks or ideas, and the opinions he expresses are solely his own.  Many of the stocks Myron covers are microcap “penny stocks” that can move dramatically with or without fundamental reasons, so please be cautious. Myron’s past commentaries can be seen here.[1]]

Public opinion as we enter 2014 seems to be divided between two factions. First, those who “see the glass as half full,” and fervently hope and pray that things will soon return to normal (whatever that is). That group hangs on every pronouncement from the President and the government that things are getting better, that the housing market is improving, jobs are being created, deficits are being reduced from previous highs, and we can soon expect our lives to improve as a rising tide lifts all boats.

Countering that rosy picture are what have been dubbed the “doom and gloomers,” who see the proverbial glass as “half empty” because government statistics are not reliable, and politicians lie and only protect the interests of their wealthy supporters (particularly bankers), whom they rely on to get re-elected in safe government jobs where they can prosper on inside knowledge and ensure themselves of a cushy retirement[2]. Quite a contrast in outlook, so maybe you are asking, where do I fall on that divide?

Long term, I am bullish about the future and consider myself a realist, meaning I am not swayed by political rhetoric, partisan politics, or self-serving commercial interests. My personal focus is “digging deep” to get at provable truth, based on history and mathematics as a foundation on which to apply common sense and sound logic and reason.

The opinions to which I give the most credence are those who have “been there and done that,” particularly successful businessmen and entrepreneurs who have been at the forefront of advancing our quality of life with innovation, critical or outside-the-box thinking, contrarians who are not afraid to take a stand against a self-serving establishment.

One can not help but wonder whether our situation as a nation would not be much better had more such successful people stood for office, as opposed to lawyers who love nothing more than enslaving the people by more and more confusing legislation, rules and red tape that hinder free enterprise and entrepreneurship that expands economies and provides jobs. I am all for less government and more private initiative to create jobs that add to our productive capacity, instead of the burdens imposed by mostly parasitic bureaucrats that suck the blood out of otherwise viable businesses with red tape and punitive taxes.

With that as a background, consider the reality check found here[3].

As a lead-in to this column’s focus on preparing for more difficult times ahead, I would first of all like to address our biggest enemy, irrational fear! That can take many forms. Maybe you have a reluctance to pull the trigger for fear you might lose money on a stock purchase, which is certainly possible. The important point is to expect it and cut your losses short while letting your winners run. Another fear many have is the government confiscating any gold[4] or silver[5] you might accumulate. The rational thing is to realize that the government is already confiscating your wealth through inflation and has been ever since the Federal Reserve Act was enacted in 1913. That escalated in 1971 when Nixon abolished the gold standard. In recent years we have approached the “end game” where the dollar is in danger of losing its status as the world’s reserve currency and the wealthy are accumulating “hard assets” to protect their wealth. This video makes a good case for why there is not likely to be a repeat[6] of the 1933 Roosevelt confiscation of private gold and silver holdings. 

While I can not promise every future column will have three choices to invest in (more than any other newsletter I am aware of in over 10 years in the business), currently there are so many undervalued companies to report on, I do not see myself running out of interesting companies to profile for the rest of the year. This time I am reporting on the number one gold stock in terms of volume of accumulation over the past quarter without a real serious breakout in price, though it is poised to do so once a takeover is finalized and investors realize what an incredible value it really is based on its assets. For balance, I am also profiling a not-well-known silver company that is considered by many analysts to be the lowest-cost silver producer in Mexico[7], with excellent management and reserves that can be ramped up in production once the market price justifies it. Finally, I am reporting on one company I do not yet own, but have been following for years, and that is poised to go into production of a base metal where as many as six major mines are likely to be shut down over the next couple of years with a predicted supply shortage developing. I refer to zinc[8], and as some of you may know, zinc and lead mines almost always produce silver as a by-product that lowers mining costs. With silver expected to at least double in 2014 according to the best experts in the business, this one justifies being early to catch the likely increases in silver and zinc pricing.

I first bought B2Gold Corp. (BTO.TO BTG)[9] exactly two years ago for reasons that have only become stronger with the passage of time. The name at first glance may sound a little strange, but not when you come to understand the story behind it. Years ago I also owned Bema Gold, who sold their previous holdings to Kinross Gold Corp. (K.TO KGC) for $3.5 billion in 2007. Based on subsequent but unforeseeable events, Kinross overpaid, which is why its stock price is now in the $5.00 range compared to the $21.00 at which I sold. The good news is that the successful Bema management team used the profits to launch a new company and repeat their success, i.e. “Bema 2.” They obviously couldn’t use the name Bema again, hence it just became B2. Just an interesting sidelight to the company, very capably led by CEO Clive Johnston. Do you hear an echo? Yes I like these “second generation” plays, much like Balmoral Resources, Ltd. (BAR.V BALMF), from my previous column[10], but this one is much bigger, already producing from three mines, with total production for 2014 estimated to fall in the range of 395,000 to 420,000 ounces of gold.

B2Gold is a very unique company, a hybrid if you will, because exploration and mine building/production are really two different businesses requiring different skills and mindsets, but with their previous experience, they already have the people in place to do both. And, with a cash flow of $100 million cash and credit, they are in a position to make good acquisitions in today’s depressed markets without overpaying, as so many bigger companies did in years past. This means that recent acquisition Volta Resources (I owned it before takeover, increasing my B2Gold holdings) is now a 100% owned subsidiary of B2Gold. As such, it can be almost immediately accretive, instead of write-downs as the majors are experiencing on assets bought in the last couple of years at high prices. For instance, the Gramalote mine being developed in Columbia in a joint venture with AngloGold Ashanti Ltd. (AU) ($14.71) as operator at 51% ownership (B2Gold owns 49%) is expected to add another 300,000 ounces a year, with 140,000 ounces minimum added to B2Gold’s production profile, and that is only one of several development projects in progress.

The Ojikota project in Namibia[11], to add a third mine there, where they are the third largest employer in the country, is on time and on budget. The expected mine life is 12 years, producing 112,000 ounces of gold per year, at a very low cost of $524 to $689 per ounce, due to a poor and low-wage country. Both the local and national government are highly supportive due to B2Gold’s high creditability because they have delivered on what they promised in terms of good jobs and local community support in respect to their first two mines.

B2Gold also owns Masbate, the largest gold mine in the Philippines, which has a 15-year mine life and has already produced over 500,000 ounces of gold to date, with a 16KM strike length for expansion, and higher grades have already been discovered. The development of the Volta advanced-stage assets in Ghana[12] and Burkina Faso will enhance production in coming years. In Burkina Faso, you have in the Kiaka project alone another potential 340,000 ounces of gold per year. B2Gold has an 81% interest in this mine that has a projected 10-year mine life with measured and indicated (M&I) resources of a total of 4.86 million ounces. The blue sky potential from all these resources could thrust B2Gold into the stratosphere of a solid major producer in just a few short years, with present reserves as follows: proven and probable reserves of 5,294,700 ounces of gold; M&I of 4,482,500 ounces; plus 2,996,600 inferred. As exploration continues some now inferred resources will hopefully be upgraded to reserves as exploration continues and additional new resources are also discovered. I rate B2Gold as a 3% portfolio position up to a $3.00 buy price.

Excellon Resources Inc. (EXN.TO EXLLF) (currently $1.28, bought at $0.55) has been in my wife’s portfolio since April 2012, and other analysts are finally catching on to the fact that this is an outstanding company from every aspect. Experienced management from a who’s who of the best companies in the extractive industries with legendary (Mining Hall of Famer) Ned Goodman on the board representing the investment of well-known mining investor Dundee Capital. The Sprott Group (billionaire Eric Sprott) is also a financial backer. With no debt, $15 million cash in the kitty and all-in costs of only $14 per silver ounce from a mine that is expected to produce for 100 years, things are looking very good. At 800 g/t this is a cash cow that has a recent report by professionals pegging it as the “#1 silver mine in Mexico,” which is the world’s number one silver producer.

The La Platosa mine is located in the heart of the Mexican silver district in Durango state, and one analyst went so far as to label it “the best silver mine in the world.” With such high grades and 70% silver content, margins are excellent due to zinc and lead by-product credits. The company is already cash-flow positive and with only 55,000 shares out, no dilution is needed for further development as the company continues exploration to expand the resource. Besides that, it has a $22 million loss carry forward that will defer taxes for years to come, and in 2013 it already produced 2.1 million ounces of silver at a cash cost of only $8.80. Excellon is well positioned compared to peers for a “first mover” advantage if the silver market explodes to new heights in 2014 as industry experts anticipate. I rate this one for a full 5% portfolio allocation.

Trevali Mining Corporation (TV.TO TREVF)[13] has a high-profile partner that makes for a strong foundation. I refer to Glencore Xstrata plc, which is the world’s largest commodity trader and zinc miner, and since 2010 has had an 8% stake in Trevali, with an off-take agreement for all the zinc they can produce. They are also the operator of their Santander mine in Peru[14], which was commissioned in August 2013. Recovery of all metals, zinc, lead and silver are attaining anticipated targets. At the Magistral North, Central and South deposits 33,000 metres have been drilled, but numerous high priority zones remain untested along a 14KM strike length. They also own the Tingo hydroelectric plant 15 KM away that not only supplies the 2000 t/d plant with cheap electricity, it has sufficient capacity to sell any surplus into Peru’s national grid.

Since ramping up, Trevali has excellent analyst coverage. Some examples:

• David Morgan[15] (the silver guru), recently stated, “TV is one of the few positive stories out there right now.”
• PI Financial commented, “Santander will be a stable source of cash flow”
• Raymond James, analyst, said it was, “among top performing resource stocks the past three months” and “transitioning itself from a mine developer to a metals producer” and also noted that the fundamentals for zinc are improving as several of the world’s largest producers will be mined out and closed by 2016.

Indeed, Trevali is positioning itself as the next mid-tier base metals producer, but it is not a one-trick pony. Among their other assets is the Ruttan copper[16]-zinc deposit in Manitoba, but their primary immediate focus is their Caribou Mine & Mill, in the Bathurst Mining District of Northern New Brunswick, where they are already fully financed for a second mine. With no major new discoveries since the 1990’s, current major producers are not being replaced fast enough to meet the expected demand. That puts Trevali in an enviable position to ramp up in time to fulfill any additional accelerated demand as other mines close. I like the fact they are well-diversified with a planned revenue base of 65% zinc, 15% lead, 12% silver, and 8% copper-gold with 70% of their resources being in Canada[17] and 30% in Peru, where their partner Glencore is well experienced and has a good relationship with government.

Their resources are impressive. In the Indicated category we have 2.7 billion pounds zinc, one billion pounds lead, 109 million pounds copper and 34.5 million ounces silver, which is equal to, or even superior to, some highly-touted silver stocks with equivalent prices just on that one asset alone. In addition, while inferred resources are not valued until upgraded with further drilling and feasibility studies, which takes additional time and money, it can be indicative of future potential and therefore worth noting, as I do here: 4.3 billion pounds zinc, 0.9 billion pounds lead, 638 million pounds copper, and 32 million ounces silver, with lots of “blue sky” exploration potential.

With 290,000 fully diluted shares I would expect a future rollback at some additional financing point if needed, but with a 52-week high of $1.13 and a low of $0.49, I would not hesitate to buy up to $1.25 if building a position. Since it may take some time for a big-time move in the price, my strategy would be to put in a “stink bid” for half of a 3% allocation and hope to pick up the other half in the summer doldrums if it has not moved up significantly by then.

As usual, I will not trade in any of the stocks mentioned for at least 72 hours to give all of you first dibs on acquiring a position, nor will I trade any of the ones I do own, as noted, B2Gold, Excellon and Balmoral. The mini-sleuther needed a rest after a hectic week of being snow bound, so with a full slate already will let him rest until next time.

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