“The Next Franco-Nevada” and Nickel Prices

By Travis Johnson, Stock Gumshoe, September 4, 2008

From what little I know about visitors to this website, it appears that the recent ramp-up in the emails from Chris Mayer’s Special Situations regarding mining royalties is having an impact … and folks are once again excited by what Chris called the “Chaffee Royalty” payments that all investors should want to receive.

If that’s what brought you to these fair shores, then you’ve probably already seen my writeup of this Chaffee Royalties teaser, a writeup I posted when I first started seeing these ads back in the Spring, or you may have seen the rerun of that article that I ran during Gumshoe vacation week. So if you just wanted the name or the writeup on those royalty companies, or an explanation of royalties (or you just forgot all about it and want to refresh your memory), it’s probably best to start there.

I just wanted to share a note with you because it’s slightly unusual to see a teaser ad revived with such strength at a time when the stock it teases has been decimated. International Royalty Corp., which is that “next Franco Nevada” that they tease in the letter, has taken a cold, hard beating over the last several months.

Now, to be fair, this is not necessarily Chris Mayer’s fault — and the company hasn’t done anything particularly wrong, as far as I know. It has fallen by about half since the recent highs of the early Summer, and has fallen quite significantly even since Chris Mayer’s recommendation started circulating as the stock was coming out of a dip in May (the shares were at about $5.50 when I wrote about them, they’re now down to about $3). That’s a fall of several dollars, but the real fall here has been a nickel. A commodity called nickel, I should say — the big Voisey’s Bay mine is one of the large drivers of ROY’s stock, and it’s largely a nickel mine. With nickel prices getting clobbered, the stock is doing the same.

At the same time, there’s a real lack of clarity in the sector about these royalties — the big mining companies appear to be taking one of two tracks right now: some are taking advantage of good cash positions to buy back their royalties form companies like Royal Gold, Franco Nevada, and International Royalty, to reduce escalating mining costs; and others are selling royalty streams even more aggressively than before, to get up front cash payments for a stream of income that they might fear is in danger due to falling commodity prices. If the mining companies don’t really know what’s going to happen to the price of nickel (or gold, or what have you), I’ve certainly got no chance of guessing correctly, either.

So … the royalty business hasn’t changed all that much, but the potential income stream certainly has — a nice reminder that when it comes to these kinds of companies, it’s important to remember that the fact that they are “safer” because they aren’t exposed to the risks of actually paying for the mining themselves, does NOT mean that they are cushioned in any way from a fall in the price of nickel (or whatever the product is they’ve got a royalty on, gold, silver, oil, etc.).

Other folks have encouraged us to look into these “royalty” companies too, partly because their business model is one that’s pretty fun to sell in a newsletter ad — it sounds like “money for nothing”, especially if you’ve never heard of any companies like this before, and it sounds like a “safe” way to play the commodities boom that we’ve all heard about (though that boom, or “bubble” if you prefer, or “commodities super cycle,” certainly seems less certain now).

One of the other newsletter publishers that’s been using this concept to sell its wares, Stansberry & Associates, also touted International Royalty at one point as part of the “Nevada’s Filthy Rich Royalties” ad for Matt Badiali’s S&A Oil Report — and they’ve noticed how far it has fallen, too. Brian Hunt, who works on another publication for Stansberry, noted in a recent Daily Wealth that “The huge decline in nickel and ROY means investors are pricing in economic Armageddon. But if things just get “weaker” instead of biblically bad, the world will consume more of the stuff listed above… and this washout is a buying opportunity.” (Hunt’s full note is here, you’ll have to scroll to the bottom to see it if you’re interested.)

Maybe he’s right, I don’t know — but it’s sure cheaper than it was a few months ago. Timid souls need not apply, but there is nickel in the ground … whaddya think it’s worth?

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September 6, 2008 10:39 am

Running out the door, but I must know a dozen investors who’ve been “done in” by ROY’s failures & also LMC, which is down almost 60% now! Nickel isn’t the only industrial metal that’s suffering, we have a world-wide recession dulling demand, yet the very adroit Chris Mayer seems to have overlooked same.

If you must invest in these royalty stocks, “nibble but don’t gobble” as some analyst once said. (Was that you Travis?)

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Carol Shansky
Carol Shansky
September 7, 2008 9:22 pm

Canadian Oil Sands Trust Units (COSWF) and Freehold Royalty Trust Units(FRHLF) don’t look too shabby at this point.

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farley 5
farley 5
September 8, 2008 9:50 am

Watch for a spread double bottom break at $44 canadian for Canadian Oil Sands. That would be the second sell signal and send this one to $37 Canadian. Broke the trendline at $46 – never a good sign.

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Blake Russell
Blake Russell
September 9, 2008 11:09 am

On a broader scale, I am of the opinion that Agora and Stansberry, along with most premium investment newsletters, are not worth the paper they are printed on. I owned subscriptions to newsletters in each, allocated a portion of my portfolio to them and went “all in” on their stock picks. Not a single winner and now down over 20% in that portion of my portfolio! It amazes me how they throw out all their “winners” in the sales letters and make it appear that you can come out way ahead following their advice, yet when you come aboard, everything seems to head south.
Thank God for you Travis! I have really gotten an education on just how rediculous all these things are.

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