This new teaser from Dan Ferris for his Extreme Value newsletter wins the prize for “most questions sent to the Gumshoe” over the weekend … so I thought I better jump right on it this morning.
If you get any of the Agora or Stansberry free emails, or subscribe to any newsletters in those families, odds are pretty good that you’ve seen this email teaser ad over the last couple days. It’s about a gold resource in Newfoundland that Dan Ferris visited, and the huge potential he sees there.
“I just spent a week trekking through Canada to uncover this story. And what I discovered won’t stay quiet for long.
“In short, nestled in the backwoods of western Newfoundland, shrouded in fog and ice…
“Lies a private mountain literally bursting with gold.
“And when I say bursting, I mean there’s so much gold here you don’t even have to dig for it. It’s lying right on the ground.
“In my entire career, I’ve never heard of such of thing.
“And I certainly wouldn’t have believed it… if I didn’t see it with my own eyes. “
I have no idea whether or not it’s rare to find glints of visible gold on the ground, or if I’d even recognize it if I saw it, but apparently this is quite exciting. So we better find out what company this is, no?
“… it won’t be long before this discovery is headline news — if it’s not already by the time you read this.
“Right now, this stock trades for about $7.
“Based on what I saw — and what I know of this company’s plans — I fully expect it to reach $30 or more. ”
OK, so there’s one little teaser — the stock price. What else does Ferris tell us about the company?
He gives a little background on this potential mine first:
“The story is actually just as shocking as it is simple.
“You see, Newfoundland was uncharted territory for decades — essentially since the gold booms began in the 1840s….
“It was so bad that the government started offering incredible incentives to anyone who was willing to explore there…
“It was these incentives that finally caught the eye of Noranda, a major mining firm from Quebec.
“For a year, they explored that mountain in western Newfoundland where I just returned from. Noting in their journals the “visible gold” strewn all around.
“At this time, however, gold prices were low – about a third of what they are today….
“When Noranda and other original exploration groups abandoned the area, they left behind full, detailed, and publicly-accessible records of what they found.
“Jump ahead 19 years…
“Gold prices are hitting new highs every day…
“A tiny local miner goes down to the hall of records, looking to stake a claim…
“And finds the deal of a lifetime…
“According to Bloomberg, reserves for the 20 largest North American listed gold miners produce 7 grams of gold per ton.
“That’s an important number…
“Because by that standard, the first round of testing on this gold-covered mountain has produced shocking results — an average of 39.1 grams of gold per ton.”
OK, so that sounds pretty good. Any more specifics from this company?
“According to various analysts, including Charles Wyatt of the Mine Site journal, this mountain ‘has excellent potential to host a multi-million ounce gold deposit.'”
And, though he couldn’t be called a disinterested observer (he edits a different newsletter from the same publisher), Matt Badiali calls the results so far “Over the Moon… Spectacular.”
Then Ferris throws in some more details to help identify the stock:
“… the Newfoundland Government has started paying mining companies to dig up the ground again.
“This particular project, for example, received a C$100,000 grant from the government.
“Now, if you know me, you know that I only buy what I believe has built in profit potential…. investments with very little downside risks that I wouldn’t mind holding for the long-term.
“That usually keeps me away from tiny gold stocks like this one. There are simply too many risks — too many things that can go wrong — for me to feel confident about owning them.
“First, you have to spend a lot of time and money just looking for a potential mine.
“Then, you have to spend a lot of time and money drilling and testing…
“Sometimes you get lucky — and your shareholders get rich.
“Gains of 1,000% are commonplace for these types of stocks.
“But most of the time, you’re unlucky. The holes you drill come up dry. And your stock disappears.
“These variables are hard to control. So I usually stay away.
“But with this company…
“Let me put it this way:
“This outfit has no exploration work to do. They have no testing to do.
“It is all being done for them.
“Thanks to the early exploration projects back in the ’80s of this mountain, they knew exactly where to go… and they knew exactly how much gold was likely to be there (an estimated $2 BILLION worth).
“Now here’s the cherry on top:
“The mountain had recently been discovered by a prospector… And this tiny company purchased it from this prospector for just $30,000, actually only having to put up $5,000 in cash upfront. And even better … they’ve contracted out the additional “dirty work”… and can just sit back on their claim.
“In other words, they get all the potential reward of a big gold discovery — gains of 1,000% or more — with virtually none of the risks.
“No additional exploration costs. No analysis costs. And practically zero capital expenditure.
“And if the next results are as good – they won’t have to wait long for the payoff…”
Sounds good, right? But it’s also starting to sound a little bit familiar — Ferris has written about “prospect generators” and royalty companies before, and this appears to be one of them. He calls this the “Best Business Model in the World” and explains thus:
“This little gold miner I’ve been telling you about isn’t planning to mine a single ounce of this gold…
“Let me explain…
“In the precious metals business, the best way to make money is not as an explorer… or a producer.
“No, the best way to make money is to get a foothold on profitable mining royalties.
“And that’s exactly what this little company does.
“They don’t do any digging, production, or actual mining.
“Instead they simply scout out mineral-rich deposits, find a partner to do all the work, and get paid royalties as the metals come out of the ground.
“It’s an incredibly simple and lucrative business. Instead of getting paid on just one mine, these companies own stakes in dozens, sometimes hundreds.”
He goes on to provide some details for mature companies in the gold royalty space, like Franco-Nevada and Royal Gold, which are much larger and usually occupy a spot higher up the food chain, investing in projects that are discovered by others in exchange for a future royalty. This company, however, is a bit further down the chain — they invest in land and potential claims, explore them a bit and start to define potential resources, then partner out with an operating miner in exchange for royalties.
And we get one further little basket of clues:
“Before the market downturn, this little mining company I’ve been telling you about had basically gone on a straight line up from its IPO in 2003 at around $1.60 a share… to over $30.
“That’s a 1,775% return.
“It got beaten down, just like every other stock. Almost back to where it started. Which is why I fully expect it could climb another 1,775% again over the next several years. “
And that means we’ve got plenty to throw in the ol’ Thinkolator — which tells us that we were right to think it sounded familiar, this is …
Altius Minerals (ALS in Toronto, ATUSF on the pink sheets) [see free trend analysis for ALS]
So before I go any further, I should tell you that I own shares of Altius, too — I bought them not long after learning about the company, which coincidentally was back when I wrote about a previous Dan Ferris teaser back in February, back then he said there was a “distortion in the gold markets” and that “prospect generators” were the way to go, and I sniffed out Altius as one of those teaser companies. The shares are up substantially since then, they were around $5 and are now above $7 (both US — the return was amplified a bit in US dollars, but they’re also up nicely at home on the Toronto exchange).
And the warning that probably makes me sound like a broken record: This is, yet again, a very small stock, and one that certainly moves a bit when it’s teased or touted, so even if you’re interested I’d urge you to be careful if you’re buying shares — if they spike up a bit today or tomorrow after the marketing barrage from Extreme Value or the attention from this space, they’ll probably come back down.
What does Altius do? They are a fairly small company of geologists and finance folks, mostly, and they try to patiently stake inexpensive claims, develop resources enough to get other folks excited, and partner those resources out to other companies to do the work. I like them in large part because they appear to be very fiscally responsible — they try very hard to avoid issuing dilutive shares, they really do find deals on the cheap and they seem to think like contrarian investors, and they don’t have any debt.
And in addition to finding joint venture partners for their prospects and investing in royalties with some of their cash (they currently have far more cash than they really need), they also spin out projects into separate companies from time to time, as they’ve most recently done with Aurora Energy (a uranium company).
That “Newfoundland’s Golden Mountain” resource that we’re being teased about? That’s still very early in development, but it’s called Viking, and it’s being explored by their partner Northern Abitibi Minerals. The 39.1 grams/ton number is the average of six drill samples from one vein (the Thor vein) in one of the more prospective parts of the site, but it would certainly be an exaggeration to say that’s the expected average that they’ll be mining, that’s just the (very encouraging) result from one vein. The latest drilling results were announced last week [pdf file], and they’ve finished the drilling program for this year but I don’t know if we should be expecting “blockbuster” announcements about this project in the coming months or not — they’re analyzing the data now.
Altius is certainly exposed to gold through this Viking resource, and it would certainly help their bottom line if Northern Abitibi does manage to develop a nice big, profitable gold mine there — but it will be quite a while. According to the terms of their agreement Northern Abitibi Minerals has about two more years to spend it’s required amount in exploring the site in order to get majority ownership and control, and I guess the speed with which it moves forward will depend on continuing results and, probably, the price of gold.
But Altius is not really a gold company at this point, at least in my mind — when it comes to earnings they are a nickel company, with some uranium and gold (and other stuff) thrown in. Their major asset is related to a big nickel/copper mine: a 9% (or so) stake in International Royalty Corp, another royalty company (they bought a big chunk of that holding at about $3.50/share earlier this year, it’s now a bit over $4), and a 10% stake in a limited partnership that owns royalties on the Voisey’s Bay mine in Labrador that’s operated by Vale (a royalty on that mine is also International Royalty’s largest holding).
So Voisey’s Bay is where most of the regular incoming cash flow comes from (for the last reported quarter they had about $1.1 million in revenue, and $719,000 of that was from Voisey’s Bay royalties), and they actually just recently (a few weeks ago) made a claim that Vale has been substantially underpaying that royalty — so perhaps they’ll have more money coming in as a result of that claim, but for the most part their near-term earnings, absent corporate dealmaking, spinoffs, and sales, are mostly dependent on the price of nickel, and, to a lesser extent, copper that are coming out of that massive mine.
That Voisey’s Bay deal has been the most important one for Altius in the recent past, though they’ve also done well with other prospects (selling their equity stake in the Aurora uranium projects, on which they still hold royalties, brought in a large pile of cash). And it’s clear that I’m probably a bit biased on this one, since I own shares and would like to own more, but they do have a nice portfolio of projects that are still very early in development (including a new iron ore company that they’re setting up, as well as several prospects that are being explored by others, and several that are waiting for partners) — and they do have very little obligation to spend money, so they can use their big cash pile to buy into royalties or prospects that other folks have given up on, or that are underpriced. Their latest earnings press release gives a brief listing of all their projects and the current status as of July 31 — in the footnotes (pdf file), or you can review them on their website here.
Financially, Altius looks like it’s still in fine shape — they have about C$133 million in cash on the books as of July 31, cash that is just looking for a home, and on an earnings basis they’re just about break-even right now. The market cap is right around C$220 million, so if you take out that cash and the roughly US$36 million value of their International Royalty shares at today’s price you’ve got a market cap of about C$50 million for the Voisey’s Bay royalty, all of their other exploration properties, joint ventures, smaller stakes in spinoffs and other companies, and potential future royalties from projects that are in the very early stages of exploration and development. Do your own math and check my numbers, by all means, but that still sounds to me like a decent basis for a long term investment, even if you’re not convinced that “Newfoundland’s Golden Mountain” will soon be a huge winner for them. Perhaps not as much of a screaming “under book value” bargain as they were in February, in retrospect, but certainly not outlandish. Let us know what you think with a comment below.
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Full disclosure: In case it wasn’t clear from all the notes above, I do own shares of Altius Minerals. I will not trade in this stock or any other mentioned investment for at least three days.