Global Resource Hunter’s “Buy List”

Agriculture, ENergy and rare earths picks teased by Kevin Kerr and Sean Brodrick

By gumshoe, September 15, 2011

I hope you can forgive your friendly neighborhood Gumshoe for being a bit addle-brained, but I can’t seem to keep track in my head of the vast numbers of natural resources and commodities-focused newsletters that have sprung up (or been renamed) over the last year or two. I think this one is new, it’s called Global Resource Hunter and it’s being put together by two people who you might have heard of from their other heavily-teased newsletters: Sean Brodrick and Kevin Kerr.

It’s put out by Weiss Research, where Brodrick has long been a mining fixture, but Kevin Kerr is perhaps best known for his few years at Outstanding Investments, probably the highest profile of the “relatively inexpensive” natural resources-focused newsletters (and, thanks to good picks and to the long bull market in commodities, often the top performing newsletter over some multi-year periods, according to Hulbert — that newsletter is now helmed by Byron King, and previous editors include Justice Litle). No one beats Agora in hypetastic marketing, but Weiss isn’t that far behind — today we’ll see how they tease out some of their “buy list” picks in their recent ads, and try to identify the picks for you gratis.

I probably don’t really have to pass along their “buy hard assets” argument to you, it’s all stuff we’ve heard before — but in case you got to class late they tell us that the money is to be made in gold, silver, agriculture, oil, rare earths and several other mining and energy endeavors … so they’re looking into anything related to natural resources, with the standard and well-worn reasons being:

1. The dollar is losing its “safe haven” status and going down, thanks to new money creation and a weak economy — they call it the “seesaw of pain” when a falling dollar causes rising commodity prices (since almost all commodities are almost always priced in dollars for trade purposes).

2. China and emerging markets are rising, new people are joining the middle class, and they want more stuff … more metal products, more energy, more protein, etc.

3. We’re running out of cheap resources, and when oil or copper (or whatever) is harder to find or extract to keep up supply, it naturally becomes more expensive.

That’s our backdrop, then — so what are the picks?

They tease several, we’ll check ’em out in turn:

“Global Resource Hunter Buy #1: A Chinese Miner That Could GIVE AWAY Its Silver and Still Make Gobs of Money!

“… silver is especially attractive because it’s like gold on steroids. Heck, a 5% move in gold can turn into a 10% move in silver!

“That’s why Kevin and I are particularly fond of a company that is based in China and produces enough base metals that its cost-per-ounce of silver is negative….

“Better yet, it is expanding its resources and has plenty of cash reserves, and it recently thought its stock was so cheap, it started buying it back!”

Sound exciting? Well, if the mighty Thinkolator is right (and it almost always is, we boast of 99%+ accuracy in identifying teaser picks), this pick has actually been in the crosshairs of the blogging short-sellers in recent weeks: SilverCorp Metals (SVM)

SilverCorp has been teased many times over the last couple years, by many different newsletters — I think the first one to call it to my attention was Matt Badiali over at Stansberry, who recommended it a little over two years ago, and in the couple ensuing years it was almost all up after that, going from about $5 or $6 to $16 as silver rose and more and more newsletters picked the stock … until earlier this year, when many of the silver producers started to trail off on fears of reduced demand and, more recently, when SilverCorp became the latest Chinese company to receive fraud allegations from short-sellers.

I don’t know whether the accusations of fraud are going to hold up or not, you can see them from Alfred Little here, for one, and you can see the string of developments pretty clearly in SeekingAlpha’s tracking of SVM coverage. The company is responding aggressively to the fraud allegations, and a lot of folks seem to think the drop in the share price is a real opportunity — judging just from the fact that the fraud story only dropped the stock by 20-30% (much of the fall, it’s now down about 70% from the high, came earlier in the year, when many silver miners and Chinese companies were suffering).

The company continues to expand resources and acquire new assets, and they have gotten much of their attention over the years because of that high by-product credit — they produce such heavy amounts of base metals in their mines that the silver production comes at a negative cost (they earn $6 per ounce of silver above and beyond what they sell the silver for, so if silver’s at $40 their net revenue per ounce of silver is $46). That means they are very reliant on demand for base metals as well as silver, though that’s true of many silver producers — there are relatively few primary silver producers in the world, most silver mines are really copper, nickel, lead or zinc mines that also produce a lot of silver … and since most of their assets are in China, they can sell straight to the world’s biggest consumer.

SilverCorp has plenty of cash, pays a dividend, and reports great assets and excellent results — if you believe their filings it’s quite clearly a buy, if you believe the fraud allegations it’s quite clearly a big risk. Given my quick scan of SilverCorp’s response I’d be inclined to give them the benefit of the doubt, but I haven’t researched the allegations very thoroughly. I don’t own shares and can’t buy them even if I want to right away (I don’t have an urgent need to buy, but I refrain from trading any stock that I write about for at least three days after publication).

I know a lot of my readers have owned SVM in the past, so if you’re interested in this one or have been following the story I’m sure we’d all like to hear what you think — just use the comment box at the bottom.

Next idea?

“Global Resource Hunter Buy #2: An Undervalued European Agribusiness Ready to Reap a Bushel of Gains!

“It’s no secret that more and more people need more and more food, with the global population expected to hit 7 billion people this year.

“As a result, demand has surged for things like meats, better quality grains, soft commodities including coffee, cocoa, and sugar. This huge increase in demand is rapidly outstripping supplies of many key resources, and putting a strain on an already overloaded agriculture system.

“That’s why Kevin and I like a large, European agribusiness company that markets seeds and pesticides around the world.

“It’s a leader in crop protection, and ranks third in total sales in the commercial agricultural seeds market. And while it’s a foreign company, you can buy it right here on a U.S. stock exchange.”

Toss all that into the Thinkolator, and we learn that this one is … Syngenta (SYT), the big Swiss agriculture concern.

Syngenta is essentially the Euro version of Monsanto, though it hasn’t generally been as reviled as Monsanto as far as I can tell — they specialize in proprietary seeds and pesticides, like Monsanto, and they are indeed the third biggest player in seeds — after Monsanto (MON) and DuPont (DD). DuPont, for what it’s worth, has consistently been the cheapest “seed” stock, since it’s not really a pure play thanks to their chemicals business, but it also hasn’t seen the same incredible share price performance as MON and SYT over the past decade (SYT has climed about 700%, MON about 500%). SYT’s advantage comes mostly over the last year or so, when Monsanto has faced more of what you’d call “headline risk,” protests against their policies and products and against “frankenfood” and genetically modified seeds in general.

And yes, SYT is still a bit cheaper than Monsanto in terms of valuation, though their businesses aren’t exactly the same — SYT has a trailing PE of about 17, MON is around 24. Syngenta is also a bit smaller, though both are huge companies and SYT’s market cap is just under $30 billion. Neither carries enough debt to make a difference, and both are growing. I don’t know what Kevin and Sean’s “specific buying instructions” are, but I’m quite sure they’re teasing Syngenta — whether you want to buy it is, of course, entirely up to you, I’d probably buy SYT before MON but I haven’t had a hankering to look at either one lately.

Another one?

“Global Resource Hunter Buy #3: The Rare Earths Company with a Game-Changing Use for Cerium!

“You likely use rare earth metals every day and don’t even realize it. That’s because rare earths are vital components for modern consumer goods — like rechargeable batteries, DVDs and fluorescent lighting — and also in many environmentally friendly technologies. But prior to the digital revolution and the green movement, most investors had never heard of them.

“In rare earths, as is often the case in the mining industry, cash is king and so is a unique angle. And one company that Kevin and I favor has both.

“It is by far the Western leader in rare earth production, with a mine in California and other properties, including one in Estonia.

“Plus, this company has an ace in the hole: They have developed a water purification filter that uses the most abundant rare earth, cerium, which can purify water of virtually any condition.”

This is, sez the Thinkolator, Molycorp — the only US rare earths producer, and probably the most well-timed IPO I’ve ever seen (they came public just as rare earth investor frenzy was starting to rev up a little over a year ago, and helped to fuel that frenzy). They did also acquire Silmet and its Estonian operations earlier this year, though Rare Earths guru Jack Lifton was a bit cautious about the move. Molycorp is certainly the highest profile rare earths company that’s trying to restart significant production outside of China — in their case, at Mountain Pass in California, and it’s one of the few that’s producing or near production. It’s also the biggest rare earths stock I’m aware of, at $4 billion their market cap dwarfs the Australian company Lynas (LYSCF), which I think would come in second place by that measure (they’re also actively mining, though they’ve had challenges regarding concentrating and refining their ore).

But anyway, if there is one rare earths company most investors have heard of, it’s Molycorp … and you can find plenty of opinions about them anywhere so I’ll leave it at that. After all, we have a fourth pick to unearth!

“Global Resource Hunter Buy #4: A Pipeline Operator with Rock-Solid Financials and a Fat Dividend Yield!

“As much as Americans bitch and moan about the pain at the gas pump, we aren’t in the driver’s seat when it comes to fuel demand anymore.

“U.S. oil demand is actually expected to go DOWN — but we’ll be paying higher and higher prices due to the soaring demand in the rest of the world.

“China should account for 41% of demand growth over the next five years. Emerging markets make up most of the rest.

“And perhaps the best way to play this shift in oil consumption is by investing in the one company that pumps more crude oil through its vast network of pipelines than nearly any other U.S. firm.

“Heck, it already has more than 5,400 miles of pipe and it’s continually buying up competitors to fuel further growth!

“Its financials are rock solid, with sales and earnings both growing. Plus, it pays a fat dividend yield to boot! Over the next 18 months, Kevin and I think your investment in this company could easily double!”

I can’t say that I’ll jump right on board with the logic that increasing demand for oil and gas from overseas means that buying a US pipeline operator is the “best way to play” the shift in demand away from the US — after all, essentially no US oil and gas is exported. Even though the capacity to export Liquefied Natural Gas (LNG) is likely to come on line soon as a result of our shale gas glut, almost all of the pipeline operators run networks designed to move product from gathering systems in the fields to US population centers, any future export will probably have a small impact on companies who do distribution but don’t own the ocean terminals that might become LNG export hubs.

And, sez the Thinkolator, this is just such a company: Buckeye Partners (BPL), a master limited partnership (MLP) that owns a large distribution network of pipelines — though, to be fair, they also own many terminals and storage facilities, including one large strategic site in the Bahamas that’s situated to serve international trade in oil. They get their name from the Buckeye state (that’d be Ohio, for those who don’t follow college football), where they originated as an arm of Standard Oil well over 100 years ago.

If you look at the numbers BPL is pretty similar to most of the other large (they have a $6 billion market cap) pipeline MLPs — they’ve been good at raising their distribution, and the current yield is just over 6%, which is almost exactly average (if you calculate the average by looking at the Alerian MLP ETF, ticker AMLP). It has done slightly worse than the index average over the last half year or so, but absent big corporate transactions almost all of the large pipeline MLPs move in concert most of the time.

We’ve covered MLPs many times in this space, and I know lots of folks have favorites (and love to debate the merits of an ETF or closed end fund that simplifies taxes and recordkeeping, versus an individual MLP that gives tax advantages and saves you the cost of a fund). If you’d like to jump in with an opinion about Buckeye, which I haven’t looked at closely other than to confirm it as the best match for the clues, well, feel free to jump right in with a comment below.