“Distortion in the Gold Markets” Prospect Generators

By Travis Johnson, Stock Gumshoe, February 16, 2009

This ad comes in for the Extreme Value newsletter from Stansberry & Associates, edited by Dan Ferris. The name of the newsletter is no accident, Ferris apparently looks for deep value and hidden value stocks, not unlike some other traditional “value” stock pickers.

This time, he’s telling us that there’s a “distortion” in the gold markets — that even as gold prices are heading up, the prices of “prospect generators” are not keeping pace. These are the exploration companies that stake claims, buy up property, and do exploratory drilling to identify mineral resources … and then, in most cases, sell those claims to bigger mining companies who actually build and operate the mines, sometimes selling for cash and other times selling in exchange for ongoing royalties (or both), depending on the deal.

Ferris tells us that there are only about 25 of these prospect generators around (I assume he means publicly traded ones — there must be many more that are privately run). And he tells us that the important thing is finding a good and lean operation, with solid management and a great track record … and, of course, promising financials — which I take to mean good balance sheet, low debt, positive cash flow, etc.

So what are these prospect generators that he thinks we should buy? According to the ad, he’s got two:

The only two prospect generators you should buy

“… you’re mostly getting cash and securities for your money – with a diverse array of natural-resource exploration properties, and holdings in gold and silver bullion … you want to buy them as soon as possible…”

So what is the first one he thinks we should buy?


“Trading for under $6 per share, this safe, super-cheap prospect generator gets you a portfolio of 26 different gold and resource projects in eastern Canada…

“Better yet, when you buy this stock, you’re not only getting interests in lucrative gold projects you’re also getting exposure to other valuable natural resource stakes — in uranium, iron ore, nickel, and potash.

“This exploration outfit has made a ton of money for its investors in the past…

“For example, in 2007, when the uranium market was going crazy, this small firm sold its founder’s shares of a very lucrative uranium project for $200 million — more than 30% more than the net worth of the entire company — and its share price shot up 200%…

“And that was just on one deal…”

So what is it? We toss that into the Thinkolator and find that we’re probably looking at …

Altius Minerals (ALS in Toronto, ATUSF on the pink sheets)

This is actually an intriguing little company — I’ve never looked at them before, but two things stand out: According to their last financial statement that I’ve seen, from the end of October, they have close to C$120 million in net cash with a market cap of about C$150 million, and a bit of royalty money coming in. Their biggest royalty right now, by far, is from Voisey’s Bay, which is the big nickel mine in Labrador (we’ve seen this one before — it’s also the biggest contributor to the results for International Royalty Corp).

Voisey’s Bay results have suffered over the past year or so as nickel and copper prices have collapsed, but thanks to increased volumes the royalty still went up, and it still produced a nice cash flow for Altius in their last fiscal year. Thanks to that, and to their big cash pile, they say they are in position to be “fully financed internally for the next several decades.” Voisey’s Bay results will probably fall further this quarter, but apparently this large mine, operated by Brazil’s Vale, is so low-cost that it seems unlikely that it would have to close down even with low nickel prices.

Haven’t looked into them in any further detail, but they appear to be a good match for the tease — they did sell off their holdings in Aurora Energy, the uranium miner that they created in partnership with Fronteer Development, in October of 2007, and they do still have a royalty stream on that uranium project … and the shares did go up about 200% in 2007, from $10 to $30. They’re under $6 as teased, at about C$5.20 today, and they have generally been bouncing around between C$4.50 and C$5.50 so far in 2009. And their properties are focused in Eastern Canada, mostly in Labrador and Newfoundland. I don’t know that they have precisely 26 properties, so I suppose that’s the weakest part of this match — they do have 13 current active joint ventures and additional properties beyond that, so it’s quite possible that the total number is 26 if you dig through and do the math (and, of course, one must always acknowledge the possibility that the Gumshoe is wrong … I can often be 100% certain, but not today).

I’m a little tempted by Altius, and I’ve seen them written up as a “value” investment before, but I don’t know them well yet. I’ll have to dig in and do a bit more research — I do like the array of current mining projects and the incoming royalties, even if Voisey’s Bay would be a much bigger winner if nickel was still at the China-driven highs of 2007 or early 2008. As Ferris noted, this is not just a gold explorer, and it’s probably more accurate to say that gold is a small part of their business. They do have a gold project that seems promising, the Viking project in collaboration with Northern Abitibi Mining, but in addition to Voisey’s Bay (nickel, mostly) they’re also into potash, iron ore, shale oil and several other resources.

And the current royalty holdings are just for Voisey’s Bay and that uranium resource, which is Aurora Energy’s Central Mineral Belt project. Aurora Energy, just FYI, looks like it’s in play at the moment, Altius’ old joint venture partner in the creation of Aurora is now trying to buy out the whole company (shouldn’t matter to Altius — they sold their equity already, so they hold just the 2% royalty on this project now).

From a quick glance, the balance sheet and their history of dealmaking appear very promising — most of that net cash probably comes from the sale of Aurora, and most of their ongoing cash flow comes from Voiseys’ Bay at this point, so they currently have a diversity of potential assets and a paucity of cash-producing assets. But still, I’m tempted — my rules say I can’t buy shares within three days of writing about it, but I may do some further research into this one during that time, see if it’s worth a little interest from the Gumshoe portfolio.

Do be careful if you share my initial optimism — this ad is hitting a lot of people, and the fact that I’m writing about it here means it will find more eyes still, so it’s entirely possible that the shares could move significantly just on the interest of these new investors. Moves like that are often temporary, of course, for these little low-volume small cap companies, but you never know.

There are probably some skeletons in there somewhere, too, so please feel free let us all know with a comment below if you’re familiar with Altius and can share an opinion. The filings can be found on Sedar, and they also provide most of the basic info, including some interesting analyst notes and media articles, on their website.

And I haven’t come up with a solution to the second one yet and I’ve run out of time, but I’ll share the clues quickly here — if I dig this one up soon I’ll share it as well, or if you have ideas for this one feel free to let us know.

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“This company — run by one of the wealthiest and influential men in the Canadian natural resource industry — gets you a huge portfolio of gold, silver and copper projects in the U.S., Canada, and South America.

“Long-term holders have made a ridiculous amount of money…

“When this firm first got started about 10 years ago, in the first year alone investors saw a 540% return…

“And just recently, it completed a deal to sell off one of its resource projects in the U.S. to one of the biggest steel multinationals in the world — netting 336% on the deal…

“You can get into this stock for under $5 per share today…”

As I said, I don’t know yet what this one is just yet — and the clues are sparse, so I don’t know if I’ll get to it before it’s “official” or not. Ferris will be releasing it in his newsletter Tuesday evening, apparently, and discussing it with subscribers on a conference call at the end of the week with a “special guest” (teased as “RR”, which a betting man would say means the guest is going to be Rick Rule — so if you’re doing some digging, maybe this will end up being a company that Global Resource Investments, Rule’s firm, has raised money for).

So — in the bigger picture, should you be trying to “get rich with prospect generators?” They do sometimes look interesting, and certainly some are better than others, but it is perhaps important to keep in mind that the share prices of many of these firms can really move up and down in fits and starts as investors look for home runs — anytime you’re trying to hit it out of the park, of course, you’ll also end up with lots of strikeouts. Despite the fact that Ferris calls them safe, that adjective doesn’t necessarily fit for all firms of this ilk — it’s not at all unusual to see one of these little guys fall by 50-80% if one or two projects fail to pan out, or deals don’t work out as planned, or the vagaries of time lay waste to investor patience.

We saw that on the Altius chart, for example — it wasn’t magic that led those shares down from $30 in 2007 to today’s price of about five bucks, and there are plenty more examples if you research other prospect generators. I think I remember reading about Miranda Gold, for example, as one that was a pick of a different Stansberry analyst a couple years back, and those shares have been on a pretty steady tumble from two dollars to about forty cents, where you can buy it today. Matt Badiali, who writes about energy and commodities for Stansberry, has also spent the past couple of years extolling the virtues of prospect generators, so it’s certainly something that we’ve seen come up time and again, for good or ill. To be fair, the ad is clear in telling you that these are volatile investments, even if the price of the underlying minerals isn’t crazy volatile (as it has been over the past few years), so take your antacids first.

I say that not to dissuade you, or to tell you that these kinds of investments are pointless — just to share that despite appealing characteristics, they’ve certainly got plenty of opportunity to fail even if they do find a few good mineral strikes — as I said, Altius looks tempting to me, too, I do like those big net cash positions, but that doesn’t mean there isn’t bad news somewhere in there.

And there are indeed some huge gains to be had if you choose wisely, and perhaps get lucky, just like there are with many junior companies in the resource space, “prospect generators” or no — Aurelian Resources, often held out as an example of an amazing prospect generator, got bought out last year by Kinross Gold and certainly put a few dollars in many pockets, and there are other stories of windfall profits that get circulated over and over in this space. On the other hand, many of the stocks that you’d call “prospect generators” are far, far smaller than Altius, often trading for just a twenty or thirty cents a share with market caps of just ten or twenty million dollars — and quite a few of them raised money over the past few years, as all commodities were climbing inexorably higher and optimism was in the air, so we may also see more and more folks exploring for dearer resources with smaller payouts in the near future.

Fun stuff to dig around in, though — let us know if you find any lucky strikes!

Extreme Value hasn’t yet been reviewed by anyone on the reviews site as I type this, so please click here to jump in and share your opinion if you’ve subscribed to this one — or if you’re interested in other Stansberry publications you can see reviews of many of them here.



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kirk whitehouse
February 17, 2009 9:31 am

hi please can you advise what is the best ay to invest in gold and canyou get a monthly return on it or can you by puts

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Gravity Switch
Gravity Switch
February 17, 2009 9:35 am

Kirk, I can’t provide advice.

Gold doesn’t provide interest income, so the main ways that people try to get income from gold without selling it in my experience, are by holding a gold stock or ETF and selling calls against it, or by buying dividend-paying gold mining companies. GLD, the popular physical gold ETF, is optionable so both puts and calls are available.

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F. Guignard
F. Guignard
February 17, 2009 9:51 am

Hi sir,
About the #2 can it be Sprott resources (SCP-T) who sellPBS coal to Severstal, a russian steel holding ?

F. Guignard

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February 17, 2009 10:48 am