This is the part of Mark Skousen’s recent gold-related pitch that caught my eye:
“Today, I’m going to show you how to retire on a single stock…
“My ‘Alpha-Gold’ investment.
“By this time next year, you could be enjoying 10X… 20X… even 30X your money.
“But only if you get into it now, before the gold rush really takes off.”
10X or 30X your money in one year? Um, yep, please sign me up!
Oh, wait, I’m supposed to be the thoughtful and cautious guy. Maybe I should figure out what it is first?
Here’s some more from the initial email:
“… my #1 gold stock is set to dominate the $190 billion gold industry.
(It’s already quietly making boatloads of money – and it soundly beat the Street’s earnings expectations a little more than a month ago)….
“You have the opportunity to be one of the early investors and reap the biggest rewards.”
OK… so it’s a gold stock, it’s already making money, and you can be an “early investor?” That’s a lot of catnip for gold investors even if you don’t throw in that “30X returns” greedbait. What’s the stock?
For that, we’ll have to dig into the actual ad and see what clues we can surface as we seek to “Live Out the Retirement of Your Dreams With This Single Stock!”
The spiel, which comes in from Skousen’s publisher Roger Michalski, is, of course, largely about gold and the likely rising gold price…
“The Gold Rush Is On!
“With each day that passes, more Americans are rushing to the protection of gold as a safe haven for their retirement accounts.
“It wasn’t long ago we saw the price of an ounce of gold move from just under $1,500 to more than $1,800 in a few months’ time — That’s a 20% gain — and then a 15% uptick in the price in more recent months….
“So where does Dr. Skousen think gold falls on this timeline?
“It wouldn’t surprise him at all to see gold soar to $3,000… maybe even $5,000 an ounce before all’s said and done.
“The reasons for this are pretty clear…
“From the never-ending fighting in Congress…
“To the constant political tensions between the U.S., China, Russia and Iran…Are you getting our free Daily Update
"reveal" emails? If not,
just click here...
“To the shocking ‘Black-Swan’ event Coronavirus that shut down the entire world…
“All these factors add up to a new gold bull market charging all the way through 2021 and beyond….
“As the media catches on to the new gold rush, this could turn into a gold mania like we haven’t seen since 2011.”
I can at least vouch for the fact that my email inbox was chock-a-block with junior gold teasers from 2011-2013 or so, as gold soared following the financial crisis, something we haven’t really seen reignite yet — with the exception of the first six months of 2016, when gold had a quick 20% run and took all the junior miners with it. Will it happen again? I have no idea… gold did have its “post-crisis” surge, which in retrospect is somewhat typical of the price of the shiny stuff immediately following times of crisis, gold ran up 30% or so in the few months following the pandemic shutdowns in the US… but most of the chatter about another surge for gold over the coming years is really about the US Dollar — about gold’s “store of value” status when the world begins to worry more about inflation and the falling value of the dollar thanks to the massive stimulus and spending programs engineered by the government and the Federal Reserve last year (if you create more dollars, each one must be worth less, right?). And maybe this year, too, if the spending surges continue and inflation accelerates.
That’s pretty firmly in Skousen’s wheelhouse as an “Austrian rules” economist, libertarian and critic of central banking, and, of course, as a longtime fan of gold (we’ve looked at plenty of his gold teases in the past).
And apparently it’s a low-priced stock as well, which speculators always love…
“Even if you capture just a fraction of this new bull market in gold, this could be your chance to retire on just one gold stock.
“Right now, you can still get shares of this “Alpha-Gold” stock for pocket change – under $6.
“The stock is still cheap and unknown. But that won’t last long.”
And he begins to hint at what makes this “Alpha Gold” stock special:
“What would make up the perfect “Alpha-Gold” stock?
“It would be a leader in its industry.
“It would have explosive growth.
“It would consistently bring in the highest profit margins in the industry.
“And it would have a rising dividend policy.”
And along the same lines, goes through some of the more general “Alpha” criteria that he considers important for stock picking, which is mostly a screen of reasonable financial metrics…
- “Earnings-per-Share Growth of 15% over the last year…
- Return on Assets over 1%…
- A Piotroski score of at least 6 (out of 9)…
- Altman Z-score of at least 2…
- Price/Earnings Ratio below 20…
- Dividend Policy…”
And the ad says “he also checks to see if a stock has a return on equity of at least 15%…”
So those are some of the financial clues… how about the story behind the stock? We get a bit on that as well…
“The CEO of this company could very well be ‘the world’s most interesting man’….
“He grew up in South Africa, where he became a professional rugby player.
“His instincts on the field served him well in a career that’s taken him from the harsh Yukon bush as a contractor in the early 1980s…
“To forming back-to-back multi-billion-dollar gold companies.”
And there’s one very specific clue, which will be helpful for the Thinkolator…
“In 2007, his company was acquired by Kinross Gold Corp (TSX:K) for $3.5 billion.
“It was a huge payoff, and also lucrative for his close-knit team, who had been together for 25 years.
“That’s when they decided to form a new company with plans to do it again….
“Since its IPO in 2007, it has gone from being a junior miner with no production to an owner of four gold producing mines – with a fifth on its way.
“More importantly, this “Alpha-Gold” company just crossed $1 billion.
“It has quickly become the lowest-cost, senior gold producer in the world. But it’s just getting started.”
OK, so the Thinkolator made short work of that one… good thing, since I forgot to refill those propane tanks after our last winter cocktail party. That’s a reference to B2Gold (BTG) and its CEO Clive Johnson, who did previously build Bema Gold, along with his team, and sell it to Kinross.
And yes, that sale to Kinross Gold went through for C$3.5 billion in 2007, mostly on the strength of Bema’s Russian mines. B2Gold was formed out of the ashes by Johnson and his partners, and went on to find a few attractive assets, again searching in politically dicey areas (particularly in Mali in the early 2010s). And just as a reminder of how mercurial the gold markets can be, and how much money gets set on fire by gold miners as they try to build production, that takeover, though at a nice premium that was a greed to in late 2006, was an all-stock deal… and if Bema shareholders had held on to those Kinross (KGC) shares they received in exchange they’d have lost about half of their money over the past 14 years since the deal closed (KGC was in the low teens and got as high as $24 post-deal, and stayed relatively strong through the 2011-2012 gold bull, but collapsed pretty quickly after that and trades around $7 recently. B2Gold, in contrast has just about doubled since listing in Canada back in 2007.
B2Gold has distinguished itself by building several good-sized mines, including their flagship Fekola mine in Mali, and by keeping costs under control — they’ve built a big cash hoard now, of $500 million, and have another $600 million line of credit available if they want to fund faster expansion, but don’t currently carry a meaningful amount of debt, which is pretty impressive for an operator who has built several mines. They say their all-in sustaining cost per ounce remains low at $788, and cash cost substantially lower at $423/oz, so they are very profitable when they can sell their gold for well over twice their cost (gold has moved around a lot, for sure — it’s down a bit from it’s peak above $2,000 last year, and every move tends to cause a sharp reaction from mining stocks, but the gold price hasn’t been below B2Gold’s stated $788 “break even” cost since 2008).
The challenge, in the world of exciting junior mining discoveries, is that they’re not very glamorous — their most valuable properties are in places with some political risk, and they aren’t growing production in any huge and dramatic way… in fact, they had expected production to dip a little bit over the next couple years before beginning to grow again in 2023 as some mine extensions and a new project, Gramalote in Colombia, get into production, though the presentation they gave at their Annual Meeting indicated that’s not the case any more — Gramalote has been pushed back a year, to 2025, but the existing production is growing at their other mines, largely because of the new Cardinal zone at Fekola in Mali, and should grow slightly for the next couple years… and they do have several other potential development projects that are not included in their five-year projections yet, so we’ll see how it goes.
In exchange for that lack of explosive drill results and huge growth, though, you get a lot of profit — BTG is expected to see relatively flat earnings over the next few years, and trades at about 10X earnings and pays a (recently lifted) 3.3% dividend yield, but given the steady production of nearly a million ounces a year, and their pretty stable operating costs, that presumably means that analysts are not assuming any real rise in the gold price… so if gold goes up sharply, naturally, earnings could well rise faster given the substantial leverage a gold mine can produce.
So you do get the exposure to a possibly rising gold price, and the likelihood that they will continue to expand their reserves base over the years and build a few more mines and extend the life of their existing mines — you have to discount that by any political risk you see from their projects in Colombia, the Philippines, Namibia, Burkina Faso and Mali (where years of instability helped lead to a coup last month, though B2Gold says they are so far not impacted), but it is true that this management team has embraced the swashbuckling role of building and operating mines in challenging places and given us at least some confidence in that regard. You don’t get “cheap” and “easy” in the same package, but B2Gold is, for a steady and profitable operating miner with some expansion potential in the future, at least cheap. And that commitment to an unusually high dividend reinforces their shareholder friendliness, their commitment to not waste money, and the relative resistance to dilution — most smaller miners issue shares willy-nilly to acquire properties or fund construction, and B2Gold has done some of that, but they look downright chaste compared to a lot of empire-building mining companies I’ve seen… over the past five years, they’ve tripled their revenue while growing their share count by just 12%.
I am not often really tempted to invest in a gold miner, I have such a strong preference for royalty companies and have seen so many miners collapse over the past 20 years that it rarely feels like it’s worth the risk, but if I were to get excited about a mining company it would probably be one like this — strong management, sane growth and proven experience at building mines, and solid profitability. And, to be clear, my preference for royalties is risk-based, not returns-based in the short term — if there’s a gold boom, the best gold miners will likely have meaningfully more leverage to rising gold prices than the best royalty companies, if only because royalty companies tend to trade at pretty high valuations. But if there’s a gold bust, the royalty companies won’t go bankrupt… and some of the miners will. B2Gold may well be a survivor, they’re low cost and clearly conservative with cash, but they do still carry that special risk that always comes with working on a valuable project deep underground in an unpredictable country.
Is it possible to get to Skousen’s 10X returns in a year? I guess so, but it wouldn’t be from any surge in production — it would have to be from a big surge in the gold price, and something approaching a gold mania for investors… awfully hard to predict, but it has happened before. They’re likely to produce a million ounces a year, give or take 5% or so, for the next couple years, so if gold is at $2,000 that would be revenue of about $2 billion a year. If we assume that their cost of goods (the cost of actually mining and producing the gold) and their overhead remain the same as last year, as is reasonable but probably not perfectly accurate, then their operating costs should be about $900 million. That leaves $1.1 billion in pretax income.
If gold is at $3,000 at this time next year, however, the costs shouldn’t change much as a result… so that would effectively double their pretax income ($3 million in revenue, still $900 million in operating costs, so $2.1 billion in pretax income).
If you’re valuing the company the same as it’s being valued today, as a cash-flowing dividend payer, it’s not going to see 10X returns… but if that surge of gold to $3,000 an ounce or higher actually happens, the story could change and daydreams could ignite a bit. If B2Gold goes from being a steady 45-cents-a-share-in-profit idea to an exciting “earnings tripled” idea and is closing in on making $1.50-2 a share in profit because of that windfall gold price, maybe investors will get excited and lever that up with a higher earnings multiple — maybe you’re only willing to pay 10X earnings for a steady gold miner today, but perhaps someone wants to pay 25X earnings for an exciting high-growth gold miner next year, and they see that $2 a share in possible earnings from $3,000+ gold and want to pay you $50 for the shares.
And, of course, things get a little more exponential as you go up in price — if gold hits Skousen’s $5,000 target in the “next few years” and all else remains the same, that could lead to something close to $4 a share in pretax income and, well, you can daydream about that multiple yourself.
I wouldn’t count on those kinds of windfall returns, personally, but that’s the kind of thing that can certainly happen in a gold mania — BTG’s revenue rose by only about 20% during the quick gold price spike we saw in the first half of 2016, and that helped the share price to triple in about six months, so wild moves are certainly possible when gold sentiment changes. And if you’re wrong and there is no mania, or B2Gold doesn’t turn out to be the stock those future investors are excited about, well, they’re still making a profit as long as gold stays well above $1,000 an ounce, and they’re paying a solid dividend and have a nice cash pile to help them bull through any smaller challenges. You could do worse, I imagine, and I know I could. I’m not buying this one, but I won’t try to talk you out of it.
And in case you’re curious, Skousen does also drop some hints about a smaller stock that he likes for speculation…
“My ‘Swing for the Fences’ Gold Play
“This firm is highly speculative. That means you take a little more risk, but the upside potential it offers is completely off the charts.
“The gold is so high-grade, it would be the fourth highest-grade, open-pit deposit in the U.S.
“Plus, its largest shareholder is Barrick Gold, the biggest miner in the world, which I believe makes this a prime takeover target.
“For folks looking for a little more risk and a huge potential reward, this could be a once-in-a-lifetime opportunity.”
So we’ll just hazard a guess on that one for you — because Mark Skousen has teased it before, including in the ad I covered about a year ago, and it continues to match those clues, I expect he’s again pitching Midas Gold there… though that company has now changed its name, uplisted to the Nasdaq, and now goes by Perpetua Resources (PPTA). They’re still the same company otherwise, still with Barrick Gold and John Paulson as major shareholders (among others), still trying to build the Stibnite Gold Project on the site of an abandoned (and environmentally messy) mine site in Idaho. The investor presentation still indicates that it would be one of the highest-grade gold mines in the US, and the biggest producing mine that’s not owned by a major miner… and that they’re trading well below their assessment of the project’s net present value (at $1,850 gold, they think the discounted NPV at a 5% discount rate is $1.8 billion — so the hope is that once permitting is complete, investors will drive them closer to that… right now, with a market cap below $500 million, they’re valued at about a 75% discount to that number).
There have been plenty of delays along the way, though, both financial and regulatory, and there seem to still be a couple big permitting decisions to come — they expect the final record of decision in the environmental impact statement next quarter, and the final record of decision by the end fo the year, followed by a some more permits, construction financing, and a beginning to construction, they hope, by 2023, which would allow production to begin in probably 2026 — but I would assume it’s those permitting decisions anticipated over the next six months that would be the next catalyst (and the decisions, of course, could be either positive or negative — I don’t know if there’s meaningful local objection to the project, but something has sure been slowing it down). That schedule is a far cry from the teased certainty from pitches past that Midas/Perpetua would be mining by 2020 or 2021 (this one has been pitched, off and on, by a number of newsletters over the past five yeras), but, well, that’s mining. Perpetual and almost irrational optimism is often the price of entry.
That’s it for me this time around, dear friends — have any thoughts on favorite gold miners? Have a fondness for (or fury toward) B2Gold or Perpetua? Let us know with a comment below… thanks for reading!
P.S. If you’re curious about those screening terms that they use, both the Piotroski score (explained here — there are nine financial health criteria, you get one point for each) and the Altman Z score (explained here — this is used as a predictor of bankruptcy risk, if you’re above 2 the odds of bankruptcy are supposed to be low) are just measures of financial health — measuring leverage, operating efficiency, and the like, with higher numbers meaning “safer” in their terms… BTG had a maximum “9” Piotroski F score in 2019, though it dropped to 8 last year, and their Altman Z score has risen, too, it got above 2 in 2018 and has risen to 7 now. Most charting and financial research websites will automatically calculate both for you — they’re not at all predictive, it’s more like running a quick credit check before you do your more in-depth research.