“61,000 Square Miles of a Valuable Resource for $3”

by Travis Johnson, Stock Gumshoe | June 26, 2007 12:15 am

This one came in with an ad for the True Wealth[1] newsletter from Dan Ferris[2], and of course they’d like to offer you a special “autorenew” option for $79 a year … and in exchange, you get this fabulous stock idea from Dan.

So what is it?

“…the North American natural resource company Dan will tell you about in this report trades for under $3 per share… but later this year, according to Dan, an upcoming merger could push this stock to $40 per share.”

So, this company focuses on a natural resource that’s in hot demand, but isn’t drilled or mined. (and the fact that it’s described in square mileage pretty much means it has to be timber[3] … but we’ll let them have their little subterfuge fun)

“Just about everyone in the world comes in contact with this resource on a daily basis. It doesn’t matter where you live… in a city, or in the country. Or where you work… whether in an office, a warehouse, or even in construction.” Yep, still timber.

The company is planning to merge with a manufacturer to improve distribution and cut costs.

And according to the ad, “For investors, that always means one thing… share prices going up to a whole new level.”

They mention that other companies who own this “natural resource ” have shot up by incredible thousands of percent. No mention of the time frame, of course.

And one final clue: “Besides owning 61,000 square miles of this resource, the company also owns eight hydroelectric dams. The company uses these to generate its own power, which keeps its operating costs low. Better yet, it turns the excess power it generates into cash – selling it to surrounding towns and cities.”

And a final tease to whet the appetite and make you reach for your checkbook: “after the merger goes through a little later this year, Dan expects the share price to conservatively triple in the next two years.”

“Conservatively triple.” I think that’s what I’ll call my rock band. If I ever learn how to play an instrument. Or sing.

So, what are we dealing with here? That’s actually a pretty decent dose of clues, so if we fire up the ‘ol Thinkolator 4000 we should be just fine … and indeed, we see that this company is …

Abitibi Consolidated (ABY), soon to be AbitibiBowater after their merger goes through. This is primarily a paper company, though they do also supply lumber from their massive timber holdings. The promised savings from the merger are exactly as teased, as you can see here[4].

This is indeed a sub-$3 company, but I’d call it a stretch to consider it a penny stock — even before the merger it’s already a billion dollar market cap company. Small, but but far from puny.

I don’t know much else about this company — but if you look at another Canadian company with a big timber bank and a bunch of hydroelectric capacity, Brookfield Asset Management, it’e easey to see why this combination of properties can be very appealing (of course, BAM is not a paper company at its heart like Abitibi is). I don’t know much about whether the actual paper business is appealing, though the oft touted paperless office is certainly not that close to reality.

The only somewhat similar company I know well is in my portfolio now, Rayonier, which is a smaller timber and specialty cellulose products company that owns land primarily in the Southeast (and happens to be structured as a REIT) This Canadian operation might potentially be a nice geographic offset to Rayonier, but I’d think it’s a stretch to imagine $40 anytime soon … and I’d have to learn quite a bit more about the company first. So far, I see a company whose share price has had a precipitous fall in the last few years, in a harshly competitive business, with wafer thin margins and massive loads of debt, whose earnings are very uninspiring … though one assumes that the value of their land holdings props up the share price to some degree. I have no idea whether their predictions about cost savings from the merger will come to fruition, but I think the cost savings predicted for any merger are usually pretty optimistic. Let us know if you’ve got thoughts on Abitibi … or AbitibiBowater, for that matter.

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