Peter Schiff’s Gold and Agriculture Teaser Picks

I cover Peter Schiff in this space from time to time, mostly because he sends out a newsletter every few months and includes some teaser picks that often sound interesting — of course, he runs a brokerage firm, not a newsletter, so he wants you to get a sales pitch from one of his brokers in exchange for the names of the stocks he’s teasing. That’s not my idea of a good time, so I thought I’d again sniff out these latest stocks for you — they’re from yesterday’s newsletter from Euro Pacific Capital.

If you don’t know Peter Schiff, he is credited by many with foreseeing the mortgage meltdown and the stock market crash in his book “Crash Proof” that came out a couple years ago (it’s being updated this Fall). Of course, he’s also accused of being a permabear and of predicting a collapse in the US financial system for a decade or more, and he can be utterly insufferable.

When it comes to investing he’s a long-term, buy-and-hold kind of guy, but his niche is buying stocks on foreign exchanges for US investors. He recommends mining stocks and foreign stocks and gold for his customers … in particular, he focuses on dividend-paying foreign stocks as a way to get out of the dollar, since he believes that the dollar will inevitably crash. He’s not quite as big of a government antagonist as his father, with whom he authored The Great Income Tax Hoax about 20 years ago (dad Irwin is in Federal prison for tax avoidance), and he actually has some political aspirations of his own — Peter Schiff may end up running against Chris Dodd for the Connecticut Senate seat, and the initial polls have him actually possibly being a legitimate contender (or at least, they have people really hating Senator Dodd, probably because of his prominent role in the bailout hearings).

I like listening to Schiff on occasion, but he can become unbearably conceited at times (his radio show includes a lot of “as I said” and “I told you so” statements) — Dennis Gartman, another well-known talking head pundit, recently slammed him a bit in a Canadian newspaper chat session too (“I put no credence whatsoever in what Peter Schiff has to say, for he has been singing the same bleak song for years and was wrong for a decade or more. Plus, Peter is terribly hot headed and is prone to loud, ungentlemanly screaming at debates.”)

Of course, Gartman can drive one crazy with his grammatical idiosyncrasies and his “more genteel than thou” bearing, too, and he’s a short term trader and a newsletter writer, not a broker, so he comes from a very different place than Schiff.

But boy did I get off track, eh? We were going to figure out what Schiff’s new picks are … let’s see what he says.

Schiff opens his newsletter with a good summary of how he feels about the US economy — you won’t be surprised to hear that he thinks the “green shoots” are weeds …

“For all the talk about ‘green shoots’ in the financial media these days, one might mistake CNBC for HGTV. However, what many see as the first promising sprouts of economic recovery are, in reality, the artificially generated, short-term gains from the most massive dose of fertilizer (government stimulus) that the country has ever seen. Few talking heads on Wall Street or in Washington understand the damage that such a flood of chemicals will inflict on the long-term health of our economic soil.”

So no big changes there — he continues to think that even if foreign stocks catch a cold from another crash in the US, you should buy foreign dividend paying stocks and “stay the course” (that’s a simplification, but basically accurate).

And he’s got two stocks for us to look at, both are Australia/New Zealand businesses, and Schiff is positive about the macro prospects for both of those economies (higher interest rates above the rate of inflation support their currencies, despite recent fears, and they are fiscally much stronger than the US and UK). Both are resource-based economies that are close to big Asian markets, and the recommendations both play off of that sector.

So what are they? Here’s the tease:

Company #1:

“This Company is a major global gold producer with operations in Papua New Guinea (PNG), West Africa and Australia. The Company operates one of the world’s largest gold mines and processing facilities on Lihir Island in the New Ireland province of PNG. It is also developing an underground mine and processing plant at the historic gold mining center of Ballarat, north-west of Melbourne in Victoria. The company presently has 2.2 billion shares on issue and a market capitalization of approximately A$7.5 billion.”

Other clues? Of course!

They finalized a merger with a “Perth-based gold producer” last Summer that expanded their operations, and they are producing gold … here are some more specifics from the tease:

“Strong production results of around 1 million oz gold annually. In 2008, the Company produced close to 0.9 million ounces of gold, with production in 2009 expected to exceed one million ounces. The main flagship mining operation produces about 0.8 million ounces of gold. The next largest operation produces around 0.15 million ounces. Mount Rawdon and Ballarat should each produce slightly less than 0.1 million ounces, respectively.

“Potential resource growth with low operating cash cost and a strong balance sheet. The flagship project is a high grade and low cost operation partially reaping full benefit from the flotation circuit, with cash costs of US$303/oz last quarter. More importantly, Bonikro and surrounding area offer great potential for resource growth through exploration. Overall, we expect the Company to produce gold around $350/oz with all operations combined this year. In addition, the Company has a strong balance sheet with a cash position of A$550 million and no debt.

“Exceptional leverage to gold price. Since the Company is able to produce gold at a cash cost of around $350, it offers investors a call option to the gold price. Any increase in gold price will increase the cash flow of the Company more than gold’s proportion. For example, a 12% increase in the gold price from $850 to $950 will increase the Company’s operating cash-flow, on a per oz basis, from around $500/oz to $600/oz, or a 20% increase. More importantly, the increase in gold price will also lift the value of their 25 million oz in reserves. As such, we view this Company as a promising investment in the Australian gold market.”

So … the mention of Lihir Island in Papua New Guinea might have caught your eye, but there were actually quite a few good clues in there. This is, of course, Lihir Gold. And unlike most stocks of Schiff’s that I’ve written about, this one is quite easy for US investors to buy — it’s traded both on the Australian exchange (LGL) and on the Nasdaq (LIHR).

Lihir did recently announce that they’re still on track to produce over a million ounces of gold this year, and they filed their annual report (20-F) with the SEC just a couple days ago, so there’s plenty of information available if you’d like to dig. The big merger was their purchase of Equigold last Summer, and analysts were largely enthusiastic about the deal (here’s one article from back then, just FYI). The vast majority of that production will continue to be from the Lihir Island mine, which has been putting out close to a quarter million ounces per quarter, while their three smaller operating mines together produced about 70,000 ounces in the first quarter of this year.

LIHR has failed to return to its highs of late 2007, just like many other stocks, and it’s still also well off the price it dropped to on the merger announcement (which was also right around the time that gold started falling from its prior $1,000+ peak last year). Still, it is a popular gold stock and a favorite of other analysts as well — as with most producing gold miners of any size, the performance of the stock ha almost exactly mimicked (though slightly underperformed) the GDX ETF of gold mining stocks. LIHR is in that ETF as well, just FYI.

I can’t tell you whether or not Lihir is any better or worse than Goldfields, or Harmony, or Yamana or Iamgold or the other similar-size gold mining companies — I do sometimes like to buy little gold miners to speculate, but if I were tempted to buy a big miner, and Lihir is on the lower end of the “big” list, I’d probably just buy the index and not worry so much about the performance of a particular mine, since almost all of them move with gold prices and sentiment and track the index pretty closely anyway.

Of course, that takes away part of Peter Schiff’s argument — that you should buy these shares in Australia to get your money out of the dollar. I’m not as vociferous about that, by any means, and I’d consider it silly for US investors to buy Lihir in Australia if you have to pay the much higher commissions of an international broker (Schiff’s firm charges 2-3% commissions to buy, I think), especially since the basic company is levered entirely to gold, which hedges against the dollar anyway … but that’s just me, I’m not terribly concerned with getting my wealth offshore, perhaps, in part, because there isn’t that much of it.

But of course, I’m not investing your money — that’s your job. If you’ve got an opinion about Lihir Gold, feel free to holler it out with a comment below. And of course, you can also share your thoughts about Peter Schiff here (or if you’ve been a Euro Pacific client, feel free to review them for us here).

And don’t go anywhere just yet! We’ve got another stock to sniff out …

It goes by the name, properly enough, of “Company #2.” Mysterious!

“The Company is one of the world’s leading crop protection firms. It produces products to help farmers protect their crops against damage caused by weeds, pests and disease. The Company has manufacturing and marketing operations throughout Australia, New Zealand, Asia, North and South America, as well as Europe, and sells products in more than 100 countries around the world.”

Well, that strikes a nerve with me — just a few months ago I sold shares of a major Australian grain company just weeks before they got a tasty takeover bid. Arg. But that was a different company, and a different time, so I’ll try not to hold a grudge … let’s see some of the details from the tease:

“FY09 headwinds are most likely a one-off, non-structural, seasonal disruption. The company recently lowered its FY09 net earnings guidance on account of weaker-than-expected sales, as well as increased price competition in the second half of the fiscal year, following a stellar first-half financial performance. A combination of distributors destocking, Australia switching to a post-plant weed control regime, delayed crop planting in the US, and lower application rates had created some short-term headwinds in the global glyphosate business, which in turn hurt the Company’s revenues in the second half of FY09. Huge foreign currency translation losses in its Brazil business occurred in the first half of FY09, likely a one-off phenomenon. Weaker demand for its products, due to the late-start seasonal planting, should return to a normal demand level in FY10.”

So to summarize, “things are looking up.” He teases that there will be room for “material earnings improvement in FY10,” so that sounds lovely. “Glyphosate,” by the way, is the active ingredient in Monsanto’s Roundup weedkiller, and the production of the generic version is a hugely competitive business, with lots of recent complaints about dumping by China.

And to wrap it all up for us?

“Short term negatives bring about potential for long term value creation. Shares have been penalized after the lowered guidance, making the company even more appealing. It is now trading at a significant discount to the major global peers across various valuation metrics. We are seeing great upside from the current levels. Offering 4% dividend yield, we view this Company as a promising investment in the Australian agriculture market.”

So who is this income-producing Australian weed-control stalwart?

NuFarm (NUF in Australia, NUFMF on the pink sheets, where it is very lightly traded — be careful).

NuFarm’s two biggest markets for its glyphosate (and other products) are the US and Australia, and they did just announce a couple weeks ago that they would be missing their earnings targets for this year by about 15%, thanks to delayed purchases, lower margins and tight competition, and generally lower sales. They do business all around the world, and yes, their Brazilian operations (Agripec, which they finished acquiring about two years ago) did take a hit from the currency moves.

I know very little about NuFarm, though it does seem like they’re pretty heavily levered to the glyphosate market, which sounds a bit frightening — both because of intense international competition, and becaus of the rise of glyphosate-resistant weeds (this chemical has been used for more than 30 years, so resistance is apparently getting pretty widespread now). They had a positive earnings announcement for the first quarter this year which drove the shares up nicely, but they fell back down quite hard on the pre-announcement of expected weak earnings for the second quarter, so if you believe the company’s assertion that their prospects for the year ahead are solid on the back of a stronger agricultural commodity market, then perhaps this is an opportunity to pick the shares up cheap. You can see their filings and recent presentations here for more information, if you’re interested.

NuFarm does pay a dividend — one interim payment, which they just declared at 12 cents, and one at the end of the year — last November’s payment was 23 cents, so the trailing yield based on that 35 cent payout and the current A$9 price is 3.8% (all those numbers are in Australian dollars). The current fair price for the shares would be about US$7.25 or so, but be careful to check the exchange rates when researching (or buying) these shares.