What’s Nick Hodge’s “Proven Golden ‘Loophole'” that “Magnifies Gold & Silver Gains?”

by Travis Johnson, Stock Gumshoe | April 5, 2016 2:32 pm

What's the unknown gold "land bank" being hinted at by Hodge's Early Advantage?

Nick Hodge[1] is pitching his Early Advantage[2] newsletter (about $800) with a story about a “golden loophole” that he says provides your best path to profits in the precious metals business — and lots of readers have asked me about that “loophole” this morning, so we’re going to put the Thinkolator to work identifying the truth behind the tease.

The basic idea is that gold mining[3] is a terrible, expensive and difficult business… but that discovering gold and holding onto gold-rich lands and waiting for someone to want to buy your potential mine when prices are soaring again someday is a great business, with low costs and huge potential returns.

Which makes some sense, though it skims over the cost and time commitment, and high failure rate, of the discovery process.

But the ad also isn’t really hinting at finding a grizzled old prospector and staking him to a burro and some beans so he can make discoveries for you, and it’s also not really about buying the early stage “prospect developers” who are out scouting and claiming potential discoveries. It’s really more about buying the counter-cyclical land bank investors who are acquirers, not discoverers. The companies who buy up those discoveries before they’re fully defined and well before the mines are funded or developed, and just sit on those assets until the market turns in their favor to make those assets much more valuable again so some other sucker miner can get involved and actually build a mine.

So that’s the basic theory, at least — interested in finding out the name of the stock? Me, too, let’s get to the clues — this bit is from the order form and sums things up:

“The land banking strategy has routinely delivered percent gains ranging from the thousands… to the hundreds of thousands.

“Luckily, I’ve found a small company — backed by some of the best people in the industry — that sports a large, high-grade gold ‘land bank.’

“And hardly anyone else knows about it. Its value isn’t even close to being fully realized.

“But in the coming gold bull market, it will be.

“Just one of the NINE gold assets it has in its land bank was recently valued by an independent engineering report at $233 million — 17 TIMES more than what they paid for it.

“This firm is trading right now for less than $1 per share. But I don’t expect it to stay there for long.”

That’s probably enough to ID the stock, actually, since I happen to know this one, but let’s check a few more clues so we can be certain… here’s some more of the basic argument, which hinges on the “Peak Gold” assertion that there are many, many fewer big gold discoveries than there used to be, and that the big miners will be desperate to add reserves at some point:

“The risks of investing in ‘land banking’ companies is far, far, far less than your typical mining stock (which spends millions of dollars developing one or two mines that may or may not be winners).

“And now that ‘Peak Gold’ has arrived, big miners will be more desperate than ever for gold-rich land… and willing to pay substantial premiums for it.

“But you don’t need to go out and buy any land. Or buy “stakes” in any claims.

“Thanks to this ‘loophole’, you can safely double, triple, or even quadruple your money… even if you don’t know a gold mine from a rabbit hole.

“All you have to do is simply piggyback off others who have done it before… and have made a ton of money doing it.”

And then some more specific clues:

“The Single Best Gold ‘Land Banking’ Play You Should Buy…

“This CEO is a huge name in the business.

“He has been recognized by Fortune magazine on its “40 Under 40: Ones to Watch” list of North American executives.

“In his first public resource company he produced gains of 3,673% for his shareholders….

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“This is a tiny company that holds valuable resources in one of the greatest gold belts in the world… and it could easily become a 10-bagger down the road.

“It has a ‘land bank’ of NINE gold assets in Brazil[4], a mining-friendly nation that has attracted over $15 billion worth of investments in this space in recent years.

“In fact, this firm is financially backed by one of the wealthiest families in Brazil… and one of the wealthiest in the world for that matter.”

OK, so I can stop torturing you now — this is Brazil Resources (BRI on the Venture Exchange in Canada[5], BRIZF OTC in the US).

Which is indeed the baby of Amir Adnani[6], who also built Uranium Energy (UEC) and serves as CEO for that uranium[7] company. Before that he and his family started Blender Media, which is an investor relations/media company, so it should come as no surprise that both UEC and Brazil Resources have been pretty aggressive at marketing themselves, even using paid promotions that are very similar to the “pump and dump[8]” operations that we all hate (they aren’t really pump and dump campaigns, since they’re paid for by the company and they aren’t designed to let sleazy offshore funds cash out big and take profits, but they do pretty effectively “pump and raise money with secondary offerings or private placements”). That’s probably my biggest qualm with Adnani’s companies — it isn’t necessarily evil that startup companies who depend on raising capital by selling shares want to keep their share price up by promoting themselves to shareholders, but it doesn’t taste so great in my mouth.

Still, I do continue to have some warrants[9] on Brazil Resources because I expect it probably will be a rapid mover if gold prices recover dramatically OR if uranium goes on another crazy bull market run (their most popular asset over the past couple years, while gold was weak, was their Rea Uranium project in the Athabasca Basin).

Brazil Resources is often teased and hinted and and reported on by newsletters, particularly all those who talk to each other and poach ideas from each other — Frank Curzio[10] had a big teaser push for this stock for his Phase 1 Investor letter in 2014[11] when he was still at Stansberry, Brien Lundin has been a big fan[12] in the past, and the Doug Casey[13]/Rick Rule[14] cabal have gotten behind the stock several times and own the shares — Marin Katusa[15], who used to be at Casey, has even distributed information to his followers to get them in on private placements for Brazil Resources (including the most recent one, back in February).

And, indeed, Nick Hodge himself has teased the stock before, starting about a year ago — though at the time he said he was recommending it because of the Rea Uranium project’s potential (he called it “Obama’s Secret Pipeline”[16], if that rings a bell, and promised that this “$1 Stock is about to go vertical.”)

It hasn’t quite “gone vertical” yet, though it has doubled from the early January lows — which means it’s back to being a little bit of a win for Hodge, since he first teased the stock last May when it was near C$0.70 and it’s at about C$0.80 now.

Where will it go from here? Well, I stand by my thoughts of two years ago — the company is so promotional, and so tied in with newsletter groups, that I think it’s very likely it will move sharply higher if we’re really in a new bull market for gold (or uranium)… but if those commodity prices don’t rise sharply over the coming year, the stock could easily wither. They do have some work going on, they are doing exploratory drilling to try to increase the attractiveness of their projects for potential acquirers or partners down the road… but they’re not going to actually generate any earnings until things get hot enough for them to find those acquirers or partners. And in the meantime, they’ll probably continue to trade shares for projects, and to raise capital with new share offerings — over the last six years they’ve raised anywhere from $2-6 million a year to keep the company going.

And though there have been lots of big moves over the past five years, largely driven by headline deals or newsletter attention, there is a pretty clear and close relationship between the gold price and the share price of Brazil Resources, here’s the chart (both in US$)

And as you can see, that relationship with gold has continued through this year, with the stock surging as gold bumped up early in the year.

So over the long term, absent a big surprise deal for one of their properties, I expect it will still be outsized attention from the newsletter jockeys that keeps awareness high, and long-term advances in gold (and maybe uranium) prices that drive the shares higher (if it’s higher that they will go). But over the short term, the next year or so, my best guess is that the shares will mostly track with the gold price. Which might mean, since gold has turned over a bit lately and Brazil’s promotional campaign around their private placement is over, that the stock could turn down a bit after the run of the past few months. That’s just wild guessing, I left my crystal ball in my other trousers.

I did take some losses in my Brazil Resources Warrants late last year to harvest some tax benefit, and repurchased a small position in those same warrants early this year, so I continue to have a small “bet” on the table that Brazil Resources will be above a dollar or so by late 2018 (that’s when my warrants expire), but I wouldn’t call it an investment based on fundamentals — I’d call it a levered speculation on the potential of another blowout gold price surge in the next couple years. That’s fairly similar to my rationale for holding shares of another “gold land bank”, First Mining Finance, which I’ve written about a few times[17].

I wouldn’t bet the farm on either of those or on any small natural resources firm, but I like having small bets on levered “possibilities” as part of my exposure to mining — partly because it means I can have some appreciable exposure to a potential future bull market without a large capital commitment, even though that works both ways. Levered exposure in microcap companies means the risk of a huge percentage loss is far higher than if you just bought a big, profitable gold miner or royalty company — so instead of a large position on which you might hold a 25% stop loss (for example) to protect your downside, with these kinds of little guys I think it makes more sense to have a small position, give them a lot of room as you wait for your next bull market in gold, and assume that the potential for a 80-100% loss is quite real if you’re wrong or that bull market takes too long to arrive.

Being a “Land bank” kind of stock, without raising huge amounts of capital or taking on lots of debt to build a mine, might mean that there’s some floor to the shares if we assume that gold stays flat or recovers, since they’re not spending a lot of money… but since the companies are so small, acquisitive and dilutive (Brazil Resources has almost tripled their share count over the past five years to fund both operations and acquisitions), I still think it’s wise to assume the worst in sizing your position.

That’s what I think, anyway. How about you? Interested in Brazil Resources or anyone else as a “land bank” gold stock? Let us know with a comment below.

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