OK, we’re coming into our very sloooow period of the year, and will be closing down for the holidays after another article or two… but this is a teaser pitch that needs answering. We haven’t had this many questions about a teaser campaign over a weekend in quite a while.
Dan Ferris edits Extreme Value for Stansberry, and he’s the odd man out in that group — he’s the one who likes long-term, deep value ideas and dividend compounding, and I think he’s the only one who eschews stop losses. I’ve seen him speak a couple times and have been covering his teaser campaigns for years, and I’ve learned about a few interesting ideas from him… so let’s see what he’s touting today as he drums up subscribers for his Extreme Value (which runs $750 a year).
It’s actually probably the most aggressive push I’ve seen from Ferris in recent years — it’s not just an argument that he’s found three great buys in the resource sector, and that they’re beaten down, but that they’re in a “perfect storm” because of the confluence of fallen commodity prices, tax-loss selling, the inevitable cyclicality in commodity prices, and the almost as inevitable short-sightedness of individual investors. Here’s a taste of the ad (you can see the whole thing here if you prefer):
“I’ve waited my entire life for this moment
“This situation is so potentially lucrative I’m putting my own money into it.
“It’s an incredible opportunity in the precious metals market- but ONLY if you act BEFORE December 31st…
“The situation unfolding right now is so potentially lucrative that I’ve taken some unusual steps to take advantage of it… not just in my research service, Extreme Value, but also in my personal life as well.
“For one thing, I’ve been pouring my money into a group of stocks that investors and the media absolutely hate. In fact, the biggest Wall Street bank just announced that it would shut down its trading desks that serve big chunks of this industry.
“That’s how much this tiny sector of the market is hated right now.
“You should also know that I’m doing something else I’ve never done before…
“I found a business partner and we’re investing our own money in a business venture specifically to take advantage of this situation.
“And I’m taking yet another big risk with my career.
“I’m staking my reputation as an investment analyst on the insight I’m going to share in this presentation.”
Thankfully, unlike some folks who pitch private partnerships or direct investments, Ferris is not trying to pitch us on his private investment — he’s just using it as an example of his bullishness during this trough (he hopes — it’s not actually a trough until it comes back up again).
His basic argument is that the natural resources sector is going to come blazing back over the next several years, as it has done over and over for decades… so his favorite ideas in natural resources are going to work out really well. That may well be true, though it is of course far from certain… but he also specifically notes that he thinks these stocks are likely to boom by 40-50% in a matter of a month or two as they recover from the end-of-year tax-loss selling that typically brings down most junior resource stocks in November and December.
He talks for quite a while about these cycles of boom and bust in natural resources, which I suspect most of you are pretty familiar with — we won’t go into the detail, but he shows the TSX Venture Exchange composite chart to show the long boom and bust periods, and argues that we’re coming close to another multi-year opportunity partly because he says the Venture (used to be called the Vancouver) exchange has generally had a “well-defined bottom” in the $500-1,000 neighborhood. That market did, FYI, just recently go below the 2008 lows at around C$675 or so.
Here’s some more from Ferris:
“And while these big cycles chew up most crowd-following investors, you can use them to make incredible profits in mining, agriculture, and energy stocks.
“You simply get into booms early and avoid the big busts.
“That’s what we’re doing today.We’re getting in to the next Mega Uranium, with virtual certainty about where they’re headed next…
“…even though it’s an unpopular idea.”
Mega Uranium was one of the boom stocks of the last uranium bubble, just FYI, with gains of several thousand percent. Here’s what Ferris thinks we should do — and it’s not “buy the super speculative picks” like Mega Uranium was…
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“Buy multiple rebounding resources at the same time. You’ll limit your risk and greatly increase your chance of capturing the biggest gains.
“Buy genius management. This is the most important rule. Insist on it. Invest with dealmakers who can spot and buy the resource opportunities that you would never be able to make on your own. And…
“Buy companies with an incredible margin of safety, when they’re dirt cheap. If you don’t do this, there’s a good chance you’ll get burned. You must buy ironclad balance sheets – companies that are highly unlikely to ever go out of business.”
He comes back to management brilliance pretty often when suggesting natural resources stocks — much like resources hotshots like Doug Casey or Rick Rule, who bet on people in natural resources because good management really stands out in a sector where bad management and terrible operations are the norm. Ferris sums up:
“I look for managers who are way smarter than me… and way smarter than their peers.
“This is the secret to getting rich in small-cap resource stocks.
“Invest with the dealmakers. They’re the beating heart of the resource industry. Let them find miners sitting on deposits worth 10-20 times their current market caps.
“Buy at the beginning of an explosive cycle. Use the December Anomaly to potentially get the lowest price. Then invest with the oracles of the industry. Let the world’s most successful resource investors make the deals on your behalf.”
And then, as with all teaser pitches that get us excited, he has to run down his favorite picks so we have something to slobber over… I suspect that these are going to all be names he’s touted before, just with a new “opportunity” as prices have fallen with commodities in recent months, but let’s check out the hints and get some names for you:
“Opportunity #1: The Next Great Royalty Company
“This company is, by far, the best opportunity I’ve ever found in natural resources.
“All this company does is identify the most lucrative mining prospects in the world, and trade a small amount of upfront investment for a percentage of all the revenue ever generated at that site.
“It doesn’t shoulder the drilling expenses, or battle with thousands of employees over wages. It partners with traditional mining companies that do that.
“The revenue collected is called a ‘royalty.’
“Acquiring royalty interests is one of the all-time great businesses. The upfront investment is small. And the income keeps flowing for the decades-long life of a mine.”
OK, well that certainly sounds familiar — let’s check the specific clues just to make sure…
“The company I’m recommending today is small and potentially volatile. And it trades on a foreign exchange in Canada. But it’s easy to pick up shares through almost any broker.
“As for my investment criteria – it doesn’t just meet them. It blows them out of the water.
“This company has exposure to gold, platinum, base metals, uranium, energy resources, and agriculture.
“It has an absolute fortress of a balance sheet.
“And most importantly, it’s run by the best resource dealmakers in North America.
“A few years ago this company made a $2 million investment in iron ore. That investment is worth nearly $9 million today. And that doesn’t include an estimated $700 million in royalties they expect to receive over the life of the mine they discovered.
“In the early 2000s, the company spent $650,000 on a uranium-producing site. In 2010 it sold the uranium asset for $210 million – a gain of 32,000%. And it still holds a royalty on every ounce of uranium that will be produced at the site, once they build the mine.
“It paid $14 million for a Canadian property that has since paid out $20 million in cash – and will keep on paying $3 million a year or more for at least the next 15 years, probably longer. All told, I estimate it will collect more than five times its original investment.
“And their latest big deal, just last year, increased their revenue tenfold in a single transaction. How do you think dealmakers like that are going to fare in the next few years?”
OK, so yes — this is Altius Minerals (ALS.TO, ATUSF), a stock Ferris has been teasing in his ads off and on for almost six years now, and one I’ve owned personally for almost as long (I first looked at it in detail after Ferris pitched it as a ‘prospect generator’ in early 2009). That first investment of theirs, the iron ore one, is what’s bringing the company down these days — they staked an iron ore property in the Labrador Trough, where many great Canadian iron ore mines are located, and spun it out into a company called Alderon (AXX), retaining some equity in Alderon and 3% gross royalty on the eventual mine.
Now they’ve had to write off most of the value of Alderon on their books (which is why their income statement has looked lousy of late), and investors have discounted away all those potential future royalties because Alderon won’t be producing iron ore in 2015 or 2016 as originally planned — the project is essentially on mothballs waiting for project financing, and financing is not going to come until iron ore prices rebound substantially and some optimism returns to that market, so it will likely be at least 2018 before they produce anything… and that assumes they do get financing and restart construction at some point next year. That equity stake that Ferris cites as being worth $9 million was worth $30+ million earlier this year, but investors value it at pretty much nothing now. It’s very hard to predict what will happen to iron ore prices, but they probably won’t snap back — prices are down because so much low-cost capacity came online following the China-inspired boom in steelmaking in 2007 and 2008 (the price soared back then as China built empty skyscrapers, which inspired new iron ore exploration), and that low-cost capacity isn’t going away — all the iron ore companies have been clobbered this year, and most of them see prices remaining low for a long time. The government estimate in Australia is now that the price will average $63/tonne in 2015 (they’re in the high-$60s now), which would be as low as they’ve been in a decade or so — and which would almost certainly mean Alderon is not going to jump out of the gate in 2015.
Still, I hold Altius and nibble a bit more on it from time to time because Alderon is not the full story. Alderon is where near-term growth in the royalty revenue was expected to come from, adding perhaps 30-40% to their revenue when that mine went online, but as I look at Altius I think the base level of royalty revenue is not really reflected in their shares now. Their royalty revenue comes in part from Vale’s Voisey’s Bay nickel mine in Canada, which was one of those fantastic early-stage royalty investments made by Altius CEO Brian Dalton many years ago, but mostly from the portfolio of royalty assets that they acquired earlier this year — and announced on Christmas Eve a year ago. Those royalties are on captive coal mines that are run by power companies in Canada, and on large potash mines operated by the Canadian potash cartel companies, and they should generate something like $25 million in cash flow per year at essentially no cost (other than interest on the debt).
Altius is in a bit of a slog now as they have to pay down debt that they took on to acquire these royalties and regain some financial flexibility, but they are pushing to cut that debt level and they do have management that has done well so far at working through cycles, buying on the downturn, and managing cash — they had a huge cash pile for six or seven years before making this acquisition (from that uranium deal, mostly — it sold a uranium project to Paladin for a windfall profit plus a royalty, that royalty isn’t going to produce anything anytime soon, Paladin is still drilling to explore the site, but might eventually be valuable), so the stock does not have that downside protection of $5+ per share in cash anymore… but their royalty assets should provide a stable and very solid base of revenue for decades. I don’t think the solidity and stability of those potash and coal royalties is reflected in the stock price, but it hasn’t been all year so I don’t know if that will change in 2015.
Ferris also persists in thinking that Altius will pay a dividend, which they have indicated is likely at some point:
“The next great royalty company expects to begin paying a dividend within the next few years. Based on my analysis, this dividend will be good for a 10-15% yield on current prices….
“… when the company announces a dividend, I wouldn’t be surprised if the stock gets another big boost. Investors have shown again and again that they’re willing to pay more for a dividend-paying stock.
“I think this unknown little stock will become one of the best income-producing investments in the world over the next 10 years.
“It’s currently trading at a 45% discount to its value by my most conservative accounting.”
I wouldn’t expect a dividend until they’ve meaningfully paid down their debt — this is not a management team that wants to be skating on the edge with their balance sheet, so while they certainly could pay a dividend now from cash flow I suspect it’s unlikely in the near future. They have a substantial stake in Virginia Mines that they seem likely to unload in order to pay down debt, and a year ago I would have said they were likely to ease out of their Alderon equity stake (that’s no longer really exciting with the stock down so far, but Altius’ stake is worth $10-15 million after the price rebounded in the last couple days… though, frankly, Alderon would probably be cut in half, at least, if Altius tried to sell their whole stake), and they are continuing to do the prospect generation work that they always do in partnering with mining companies who want to explore Altius’ staked properties or other assets, including the possible development properties they bought along with their royalty acquisition this year — that brings in occasional milestone or deal payments.
I think it will work out well for Altius in the long run, which is why it’s still a major holding of mine, but I expect a waiting game as they continue to accumulate royalty revenue, pay down debt, and make small long-term deals with an eye to cashing in on the next commodity bull market. There would probably have to be a strong shift in sentiment or a big deal announcement to bring the shares surging by 50% in the next few months.
What else is Ferris talking up for “end of year” buying?
“Opportunity #2: The best resource investors on the planet, by far
“The second investment I recommend you make right away is very similar. It has a slightly different business model with a lot of the same benefits.
“In fact, it’s an even closer fit to the investment criteria I mentioned before.
“On track record alone, it is the reigning champion of resource dealmakers.
“It buys and sells whole companies. A few years ago, this Canadian ‘private equity’ firm invested $55 million (USD) in a privately held coal miner in the eastern U.S. Just 11 months later it sold the company to a massive industrial company. Its share of the sale was $241 million in Canadian dollars, or about $200 million U.S. dollars. That’s a 263% return in less than a year.
“It forms and ‘incubates’ new companies. In 2008, these dealmakers partnered with experts in the oil and gas business to form a small energy company. In the midst of the financial crisis, it was able to buy up Canadian land at absurdly low prices. It invested around $45 million (CAD). In 2012, a larger energy player stepped in and bought the new company for cash and stock worth well over $100 million (CAD) – giving these dealmakers a nearly 155% return in a few years.
“It invests directly in a commodity. In 2008 and 2009, these dealmakers bought over 50,000 ounces of gold and over a million ounces of silver. Their timing was perfect. They had sold these positions by 2013, pocketing more than $35 million (CAD) in gains.
“… the company is currently taking in almost $800,000 (CAD) a month in dividends from a single earlier investment. They don’t rush in, but they’ve definitely got cash to spend.
“One more thing.
“I mentioned before that I found a partner and we’re investing our own money into opportunities that are similar to the ones I’m recommending to my readers.
“But I can only dream of running an investment outfit as good as this Canadian company. If you approached me looking to invest alongside me… this is where I’d tell you to put your money.”
So who’s this one? Well, oddly enough it’s the second “prospect generator” that Ferris teased in February of 2009, Sprott Resource Corp (SCP.TO, SCPZF). This is essentially a private equity firm in natural resources, managed by the folks at Sprott (a big Canadian investment bank founded by resource maven Eric Sprott, Rick Rule is also a Sprott guy now after his firm was bought by Sprott a couple years ago). And yes, they made perhaps the best deal I’ve ever heard of in natural resources when they bought and sold PBS Coals several years ago for a windfall profit of a couple hundred million dollars in less than a year. That was the “company maker” for Sprott Resource, it gave them the capital to make a lot of deals — some of which worked out well, some of which are now worth substantially less than they invested.
I owned Sprott Resource for a while, too, but lost faith in management’s acumen when they started and then canceled a hefty dividend within eight months last year — the stock stayed right around the $3 price where I had sold for a while, but has fallen back down dramatically now with the collapse in natural resources. They went through a management change a couple months ago and subsequently “fixed” their balance sheet by selling gold and paying off debt (that’s not reflected in their numbers yet, if was after quarter end) and they have made a few other transactions this year — including a partial exit of their big natural gas company (now called Long Run Exploration, LRE.TO) and a re-bet on those PBS Coals assets that are beaten down again, essentially betting that metallurgical coal (which is driven by steel demand, not unlike iron ore) will rebound.
I haven’t done the “sum of the parts” look at their assets in over a year, so I’m not sure where I’d put their value right now — at the moment, Sprott Resource is trading at about half of book value… but that’s based on their fair value assessments and the value of their publicly traded investments as of September 30. Their publicly traded investments are down an average of about 50% since September 30, presumably the “fair value” of their private investments has fallen similarly — Sprott Resource Corp itself was down more or less in line with those public investments, though it did bounce back a bit in the last week.
My initial impression is that Sprott is getting back on track a little bit, cutting leverage and trying to be opportunistic again, but the value of their investments really has to bounce back in order for them to start really growing again — much of that value is still in energy, so if oil and gas spike back up that’s probably the only real opportunity for an immediate bounce (absent a surprise deal of some kind), but I don’t really know all that much about their exact positioning right now… you can see their most recent investor letter and