Just to be clear, when I include that “3-to-1 Gains Guaranteed” in the headline, that’s a quote from the ad — your friendly neighborhood Stock Gumshoe doesn’t guarantee anything, except that I’ll continue to do my best to dig into these fabulous teaser ads … you keep reading, I’ll keep writing, that’s the deal.
Today’s peek behind the curtain is at an ad for Outstanding Investments, the natural resources-focused letter from Agora that was a huge hit during the commodity boom (it really was the top-ranked letter for a five year period a couple years ago, and it was a big favorite of my readers for a while, too, though that ardor cooled as the commodity markets did). It’s edited by Byron King these days, though he wasn’t the guy in charge for most of the best years of the letter, apparently, if memory serves he came on board well after the commodity bulls were in control of the market (I think the prior editor was Kevin Kerr).
This ad is one that teases us about five gold investments, including several that they’ve used in their teasers for this newsletter for years, but the headline and the first few paragraphs tell us that we should instead be buying silver, which has much further to climb. So I’ll go into the gold teasers they include in a moment, but let me start with their silver bit …
“In a Good Year for Gold, This ‘Other’ Metal Will Do Even Better
In case you haven’t guessed, I’m talking — of course — about the “other” precious metal, silver. In a good year for gold, especially with the cycle we’ve just locked into right now, silver can give you even greater gains… driven by the same precise megatrends.
I’m going to show you my current favorite silver play in just a second.”
The silver argument is one many of you have probably heard before — the gold/silver ratio is way out of whack, historically (that’s the price of gold divided by the price of silver — for most of the past 25 years or so that number hovered around 40-50, but it jumped above 60 in 2005 and hit 90 last year, and remains fairly high. Not as crazy high, though, silver has come back a bit in recent months and the ratio is now int he mid-60s. I have no idea whether or not this ratio should really have any predictive power or if there is a meaningful “mean” for it to revert to, since there have been huge swings throughout recent history, but I do hear many folks citing it as an important reason for silver to climb (or, of course, for gold to fall — but most silver lovers also think gold will be going up, and Byron King is no exception.
They also go on to say that supply and demand is improving for silver, since there aren’t many pure silver mines and there are continuing to be new industrial demand drivers for silver’s conductive, andibacterial, reflective and catalytic properties — along, of course, with investor demand for silver coins as a “gold jr.” way to preserve spending power during inflation or currency crises.
The supply part of the story is particularly interesting:
“… there are only 22 pure silver mines around the world. For 15 years straight, they’ve fallen short of meeting total silver demand. In the last two years alone, they were off by nearly 76 million ounces.”Are you getting our free Daily Update
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I’m not sure what the drivers of supply are behind that, but the letter claims that it has been mostly central banks selling off their silver stockpiles, and now many of them hold little or no silver … and I imagine there’s also been plenty of melting down the old silverware during years when silver’s price has spiked a bit. And of course, there are far more mines that produce silver than just those 22 “pure” silver mines — many copper, gold, nickel and other mining operations also find silver, though it doesn’t drive their mining economics, and they do produce and sell that silver as a way to offset the costs of their copper (or whatever) mining. That’s the business model behind Silver Wheaton, one of the more successful silver stocks in recent years — they buy the “silver rights” to mines where silver is a secondary metal, almost like a royalty investor.
To be clear, there are also plenty of people who think that silver is about as high as it’s likely to get, and it has had a nice run recently — there was a good Financial Times article on this today that essentially argued that silver has rallied because it’s enjoying both investor demand and industrial demand in a kind of sweet spot, but that one of those demand drivers or the other is likely to tail off because they’re rarely in concert. Not sure what I think, but it’s worth reading if you want to hear the other side.
So what is the one silver mine that Outstanding Investments wants us to buy? Here are the clues, in their words:
“The silver company you’ll find in the report is a powder keg play… with a solid track record going back to 1891. This firm recently took 100% control of Alaska’s largest silver mine… doubling its annual silver output and growing its silver reserves by 150%.
“That might sound impressive enough. But here’s the real opportunity: The mine is so rich in other minerals — gold, lead and zinc — that production of those metals alone covers the mine’s operating costs. Whatever silver comes out of the ground is gravy.
“That means the company is pulling silver out of the ground at effectively no cost, right?
“Actually, if you run the numbers, it’s better than that. For every ounce of silver that comes out of this mine, the company actually puts $7.42 of cold hard cash on its balance sheet.
“Multiply that by nine million ounces per year and you start to see the enormous potential.
“It’s like a triple play on silver. You could profit from the rising price of the metal… plus the appreciation in the share price… plus the chance for growing dividend income.
“Do this now and I see you tripling or quadrupling your money overnight.”
So who could it be? I’m not sure how to justify the $7.42 of cash per ounce of silver at the moment, not if they’re implying that they have negative operating costs, but based on all the other clues this pretty well has to be Hecla Mining (HL).
Hecla was founded back in 1891, and they did recently gain control of the largest silver mine in Alaska, and one of the biggest in the US (that’s the Greens Creek mine, on Admiralty Island — they had owned about 30%, and bought out the balance from a couple of subsidiaries of bigger miners in 2008). They also do produce about nine million ounces of silver a year (that’s close to the 2008 number, at least), though that’s at two mines, Greens Creek and their smaller producing mine, Lucky Friday in Northern Idaho. They’re also actively exploring to increase reserves at both those sites, and in two exploratory concessions in mining districts (and sometimes atop old mines) in Colorado and Mexico.
Hecla is fairly large for a junior miner — it has a market cap of about $700 million and currently, after restructuring their balance sheet, has about $40 million in debt, and it trades for pretty close to the reported book value of $3.38 … though of course that book value (and certainly the share price) could fluctuate significantly with any changes to their reserves, the price of silver, or problems with production or with funding their ongoing development and expansion.
They are not currently profitable, but they are growing their sales thanks to increased production, and analysts are projecting that they’ll be close to break-even (losing three cents a share) for 2010 — I don’t know what kind of silver prices are built into those estimates, and Hecla does not hedge their production so they’ll probably rise and fall with the spot price of silver.
Hecla has performed a lot worse than the price of silver in recent years, and with far more volatility (not unexpected for a small miner — or even a large one). They were one of the miners that really saw their shares tumble last fall when everyone believed that funding for mining projects would dry up, and it hasn’t helped that they have also been deferring their dividends on the preferred shares, telling us, in essence, that they need the money.
If you’re interested in taking a look at Hecla, the last conference call transcript is here, and the press release for those earnings is here … a lot of folks are hoping that Hecla rebounds as nicely as Couer d’Alene did, and they were able to renegotiate some of their debt (those debt covenants are what prevents them from paying dividends on the preferred stock right now — here’s their announcement that updates their debt picture).
So … that’s about all I’ve got on these guys — looks to me like Outstanding Investments thinks you oughta rush out and buy Hecla Mining for the upcoming silver boom, if any of you out there are HL aficionados, let us know what you think.
Oh, and if you like getting into the details and doing scenario planning, you could also always look at those preferred shares — they won’t pay dividends until HL has enough cash, but the dividends should be made up once they can pay them (if the share price gets high enough, though, they can be paid in shares instead of cash). From what I can tell both the series B and series C preferreds (tickers HL-PB and HL-PC) are trading at a bit of a premium to their conversion value, but they might be worth a look if you’re otherwise interested in the company. You can get the basics on those (and most other income-focused investments, FYI) at QuantumOnline (it’s free, but you have to register).
Now then … I also mentioned that there were some gold stocks featured in this ad. Most of those will not be a big surprise to any of you, and some of them are old chestnuts that have been in ads for Outstanding Investments for years, but let’s have a look:
“HOW TO SNAP UP RAW GOLD… AT JUST 1 PENNY PER OUNCE!
“What if just before the biggest gold price surge in recent history, you could get your hands on a large stash of the yellow metal… for less than one penny per ounce?
“There’s no alchemy involved. No secret technology. And no smoke and mirrors. But a small upstart new mining company is doing exactly that. Its technique is simple. But it’s just about the only company across the entire mining industry that’s able to do this right now.
“In 2005, it mined about 100,000 ounces this way. For 2006, it quadrupled that haul, using this same technique. In 2007, it became a million-ounce producer. Now it’s on track to double that production… with at least 19 million ounces of gold still in the ground….
“So here’s how this works. For most miners, getting gold out of the ground is done in pretty much the same way across the industry. But not for this wily little company I’ve been telling you about.
“What it’s done is invent a way to mine the gold — and rich veins of raw copper — at the same time.
“The copper mining is so lucrative the profits more than cover the cost of pulling the gold out of the same hole. And that means close to 100% upside potential on the gold, no matter the current spot price on the market.”
This one has been discussed here at StockGumshoe many times, both in my teaser writeups and in the forums, so it’s probably not a surprise to longtime readers, but it’s Yamana Gold (AUY). And they do now have about 19 million ounces of proven and probably reserves, most of which are located in their major mines in Brazil — this is a Canadian company, but all of their operations are in South and Central America. I have not re-checked the numbers, but they are still among the lowest cost producers in the world, and they do have fat reserves booked — and if you divide their $7 billion enterprise value (most of that is equity, they have a sliver of debt) by the 19 million ounces of gold you get about $370 per ounce, but they do also have 173 million ounces of silver and over 11 million pounds of copper on those reserves, so you can probably dance around those numbers and get something really low for the gold valuation.
Yamana hit nosebleed prices back when gold first got over $1,000 an ounce, but this time around it’s not quite as rambunctious — the shares are just under $9 at the moment, and they’ve bounced up and down a couple dollars around that price for much of this year (like almost all other miners, their shares did collapse in November, down to around $2).
Like or loathe Yamana? Let us know, but we’ve got a couple others to share … next!
“‘MORE GOLD THAN FORT KNOX…’ AND THE WORLD’S EASIEST 94% GAIN
“This next move is easily one of the best ways anybody can double their money in 2009. You rarely see something this close to a pure play.
“At the center is a town so tiny it may as well be at the end of the world. And what, just seven years ago, used to be one of the tiniest junior mining companies in the industry.
“Today, both are suddenly sitting on what could be $27 billion worth of unprocessed gold — “That’s like finding more gold than the government stores in Fort Knox all in one location,” says one of my smartest investment research colleagues….
“Not only were they wrong, but suddenly this junior miner doesn’t look so “junior” anymore. Because it now owns one of the largest single gold deposits in the world, with as much as 33 million ounces underground.
“Thanks to a partnership with one of the world’s largest senior mining companies, this once-undiscovered firm can get that gold out of the ground for about $233 per ounce….
“This same firm has another 13 billion pounds of copper tucked underground, just south of the border of the Yukon, deep in the north of British Columbia.
“Until recently, it cost too much in water and electricity to get that copper out of the ground. And that knocked the wind out of this firm’s share price when investors figured costs would spiral out of control.
“One of the massive gold miners — I can’t say which one, because it would give away too much — offered $16 per share just to buy this company and its options on these two mineral-rich properties outright.
“If it just made that offer again, without any other changes in the company’s outlook, you’d be talking an instant 94% gain in the shares just since the start of this year.”
That sounds like another stock that we’ve seen in this space before, NovaGold resources — and if I’m right on that, they need to update their copy, because if Barrick tried the takeover route again (as they did three years ago) and offered $16 a share, I’m sure everyone holding NG would go bananas, given that the share price is now down around $3.50. Ouch, way more than a 94% gain right now.
Why does this match? Aside from the $16 offer from Barrick back in 2006, they do have half ownership of a potentially huge gold mine in what I assume is the tiny town of Donlin Creek in Alaska (they are just initiating permitting now, and the environmental study of the site has been ongoing for more than ten years, so it might be a while yet). And they do also have a large copper deposit that they’re working to develop, Galore Creek in Northwest British Columbia, and it does have about 13 billion tons of copper if you include the measured, indicated and inferred reserves.
NovaGold is very dependent on continued solid commodity prices, and on financing, since they’re quite a ways from production at either of those two big sites, but I often hear about it as a favorite undervalued junior gold miner from a number of newsletter editors … if gold skyrockets, it would probably be the not-yet-producing juniors that get the wild ride from their leverage to higher future prices, but of course the flip side of that is illustrated nicely in NovaGold’s fall from $20 around two years ago to today’s price of $3.50.
But there’s more! I bit off a bit too much with this one, I’ll try to be quick:
“THE ‘BLUE CHIP’ GOLD MINING SHARE NOBODY’S TALKING ABOUT
“When gold takes off, major ‘blue chip’ gold producers like Newmont, Barrick and AngloGold grab lots of headlines. But there’s another of the top 10 producers that’s not getting nearly as much attention — yet.
“Now is your chance to grab it before soaring gold prices push it higher.
“This company owns one of the five largest inventories of gold deposits. Plus, it owns nine operating mines in five different countries, including the U.S., Canada, Brazil, Chile and even Russia.
“But here’s where it has its biggest “undiscovered” edge.
“This major miner has three very promising projects in development that could easily up its output to levels 60% above where they are right now. That’s a lot of new gold. And coming online over the next two years.
“What’s more, this company does it all with an extremely tight rein on costs, with profit margins running an impressive 18%.”
I’m not entirely sure about this one, but I think the best match is Kinross Gold — they actually have eight producing mines, not nine, and they don’t have any in Canada (though that’s where their headquarters are), but they do have operations in Brazil, Chile, Russia and the US — the fifth country that’s got their focus right now is Ecuador. They are generally considered a top ten miner, you can call that “blue chip” if you like, and they are growing margins and cutting costs, so that’s always lovely to see. According to their presentation at UBS last week [pdf file], they’re guiding for a 30% production increase this year over 2008.
The fourth recommendation from this gold letter is for an ETF, which is so obviously GLD that I won’t even bother going through it — that’s a quick freebie for you.
And finally, there was one last miner that they teased that they call …
“THE SINGLE BEST GOLD STOCK TO OWN IF YOU’RE ONLY BUYING ONE …
“Your best bet is the gold company I’ll tell you about right now. It’s not small. In fact, it’s one of the mega-producers I’m sure you already know by name.
“What you might not know is this one gold producer will land leagues beyond competitors in 2009 and beyond…
“See, just a couple years ago, this company was on its back. Mines were dying. Gold production had collapsed.
“Then this company did something.
“With just a little under $600,000 invested in a whole new wave of gold exploration technology… it took the entire mining industry into the innovation age.
“Applying new discoveries in applied math, advanced physics and computer graphics… to the age-old business of digging holes in the earth and calling them mines… it got its payoff.
“Within months, this company discovered 110 new pockets of undiscovered gold on property its own geologists had once given up for dead.
“A shocking 80% of those new deposits turned out to be jammed with gold. Enough to crank out over $3 billion in new discoveries over the years that followed.
“Once again, you can do the math. Any way you slice it, turning half a million dollars in R&D costs into over $3 billion is stunning….
“Meanwhile, this company is also producing gold faster than its competitors, too. More than 10 times faster than Newmont… triple the production rate of Newcrest… and better than five times the rate of AngloGold or Gold Fields.
“In short, this one company crushes the nearest competitor.
“Which makes it a perfect share for you to own as gold soars over the 12-24 months ahead. Political risk for this company is minimal. And all its gold is what you call ‘unhedged’ — which basically means it’ll start reaping even greater rewards as gold values go up.
“And did I mention this stock also pays a dividend. Annually, 18 cents per share. And the company promises to hike up that rate even higher as the gold price goes up. It’s like getting paid to own one of the best and safest gold stocks in the entire industry.”
So yes, you probably have heard of this one — and thanks to their successes of the last few years, I think it’s probably the most expensive miner based on the PE ratio (not that most people look at that ratio very closely for gold miners). This is …
Agnico-Eagle Mines (AEM)
And yes, the political risk is probably pretty small here — their mines and exploration properties are in North America and in Finland. And I don’t know if their successes have been as brilliant as is implied by this sales letter, but they did manage to make great new discoveries and effect a serious turnaround in the share price over the last five years, and we can all kick ourselves for not buying shares when it collapsed to $20 back in November (it’s around $57 now, and it hit $80 last year). This one I’ve written about a number of times along the way, too, and it is a huge major gold company these days so there’s no shortage of info out there for you to find … and I know a lot of my readers own this one, so feel free to pipe up and share your opinion.
Phew! That’s just about enough for one day — sorry to dither on for so long digging up the new names and dusting off the old ones in this revamped ad, but I get so many questions about it that I hope it’s worth your time.
If you’ve ever subscribed to Outstanding Investments, click here to let us know what you thought — I’m curious about whether investors are happy with them again now that commodities have recovered, or if the angst of last year remains.
Happy Investing, everyone!