What’s Palm Beach’s “Canadian Mint” investment that can “Multiply Your Money 10X?”

by Travis Johnson, Stock Gumshoe | September 17, 2015 1:59 pm

Tom Dyson says the 'Canadian Mint' is perhaps the best way to play gold today -- what is it?

This teaser wasn’t the core offering of Palm Beach Letter[1]‘s latest pitch for their premium package of services — that was mostly Tom Dyson[2]’s increasingly strident “Income for Life[3]” push — they usually call that the “770 Account[4],” and they’ve been pushing it for several years now as the only safe way to protect your wealth in the coming market disaster… Dyson goes so far as to say “Move at Least 20% of Your Net Worth Into This Asset Now — Before the Next Market Drop,” and to remind us that he personally has pulled $400,000 of his own money “out of the U.S. financial system” using these 770 accounts.

(You can see some of our past discussions of this here[5] and here[6], it’s basically the “Bank on Yourself”/”Infinite Banking” system of buying participating whole life insurance[7] from mutual insurance companies, minimizing the life insurance aspect and maximizing your cash value and dividend-earning capacity using riders, and borrowing from your account when you need capital in the future for cars, college, whatever).

But as an added inducement to buy this “Income for Life Master Class” package, which apparently also includes access to private deals like investing alongside Jason Ford’s real estate[8] business (Mark Ford[9]’s son, I assume — the elder Ford developed much of the marketing that drives all Agora[10]-related newsletters, and is Dyson’s partner in publishing Palm Beach Letter), they included some other special reports — including one that they called “The ‘Canadian Mint’: A Rare Investment That Can Multiply Your Money 10 Times Over” …

… and that caught my eye, so let’s see if we can figure out what the “Canadian Mint” investment is, shall we?

Here’s what got my attention:

“It’s about a unique gold[11] play developing in Canada[12]. One caught at the intersection of safety and the potential to skyrocket in value.

“How high?

“A 1,000% return over time.

“Now, normally, I cringe when I hear promises of ‘huge’ gains. But… this play is built on a rock-solid foundation.”

OK, so what’s the investment? Is it a stock? Some other strange thing?

We do get a few details…

“First, this company is safe. It has $365 million in spare cash. It has no debt. And the people running the company own about 70% of the stock.

“…. It’s trading right now for pennies on the dollar… around $2 per share. With a nice dividend yield of 5.7%.”

And it’s got something to do with gold, but it isn’t a miner or a royalty or streaming company. So what is it?

Last clues:

“I discovered this company in the office of one of Canada’s 100 richest citizens—a man worth more than a billion dollars….

“… an important trend most investors are ignoring could ignite this $2 stock.

“… if we begin to see the effects of flashpoint No. 3 (rampant inflation), gold-related investments are the perfect safety hedge…

“And the ‘Canadian Mint’ is perhaps the best way to play gold today.”

OK, so we can at least cross a few things off the list — it’s not a gold producer or gold mining[13]/royalty stock, and it’s not the actual Royal Canadian Mint that mints collectible and commemorative and bullion coins[14]. But it has something to do with gold… and there’s some kind of substantial leverage[15] in their business model if they have that much cash, pay a strong dividend, and can also be said, with a straight face, to be capable of generating 1,000% returns.

Assuming that they’re saying it with a straight face, that is. Which they probably are — Dyson usually has some actual numbers backing up his teasers, even if they might not be likely “what you’re going to earn” numbers.

So who is it?

There are a few candidates, but the most likely ones are sort of derivative plays on resources — and the best bet there, given those general kinds of clues, is likely asset managers.

No one can lever up returns as well as someone who invests other peoples’ money (and therefore doesn’t need as much capital or equity to grow) — asset managers generally have pretty fixed costs, it doesn’t cost much more to manage a billion dollars than it does a million dollars, and as the numbers go up that becomes even more true… managing a billion dollars and managing two billion dollars are essentially the same business, with maybe a little extra admin cost for servicing customers, so if you grow from $1 billion in assets under management (AUM) to $2 billion, either because you invest well and you double your clients’ money or because you bring on new assets to manager (the latter of which can cost some money in terms of sales expenditures, commissions or similar), your costs stay relatively flat but your revenue doubles. That’s a great business…. though of course, the reverse is true as well, if you have some terrible years and lose a lot of your assets under management, both because client accounts shrink in value because of your poor management and because clients leave and aren’t replaced, then your revenue drops a lot but you still have that basic level of staffing and overhead expense to service the accounts and manage your portfolios.

Since Tom Dyson and his colleagues at Agora, Stansberry and the other affiliated publishers all hold Rick Rule[16] in extremely high regard, I’m guessing that there’s a good chance they’re talking up one of the Sprott investments… and really, given those clues, there’s only one that I’ve found that’s pretty close: the papa bear, Sprott Inc. (Sprott bought Rick Rule’s US-based commodities-focused investment company a few years ago, now Rule effectively heads up Sprott USA, and has always seemed quite tight with the Agora publishers including Stansberry, Casey[17], Palm Beach Letter, etc., talking at their conferences and often being featured in their newsletters.)

So is Dyson really teasing Sprott here? Sprott Inc. (SII in Toronto, SPOXF OTC in the US) is an asset manager founded by Eric Sprott, and they are best known for Sprott’s acumen in mining investment and attachment to silver[18] and gold, and for their many investment vehicles that are exposed to natural resources, including several large bullion funds — but they are also a “regular” asset manager and fund manager, with lots of mutual funds[19] offered, primarily to Canadian investors, including many that are not specifically focused on natural resources or mining.

Let’s see how we match up…

They clues are not exactly a match. Sprott does not have $365 million in “spare cash,” though that’s close to the number they have in current assets (C$367 million — that includes receivables, which should really be ), and they do not have 70% insider ownership — but they do have extremely high insider ownership at 40%, so it’s possible that’s a red herring from the ad (or that the Thinkolator is wrong).

And the price and yield are a match, Sprott has had a yield of 5.7% within the last few weeks — today it happens to be 5.4%, because the stock has jumped slightly (it’s now C$2.28, it’s been bouncing around within about 5% of that number for the last month).

So that’s our best match on the clues, unless one of you can come up with something better. What’s the story with Sprott?

Well, it was a darling stock four or five years ago, when the market cap hit $1.5 billion and everyone was salivating over Eric Sprott’s magic touch with gold and silver investments, and many of the hedge funds[20], ETFs and mutual funds they managed were big hits, and Canada’s commodity-driven businesses were booming and bringing the Canadian Dollar up with them. And Eric Sprott is one of the richest people in Canada, still a billionaire and still on the “top 100” list of Canadian wealth[21] compiled by Canadian Business (he was in the top 50 back in 2011, he’s number 87 now… not missing any meals, to be sure, but his personal wealth has probably dropped by 30-40% since the peak, maybe more once they compile the numbers for next year).

Asset managers like Sprott make money primarily by the fees they earn from managing money — usually a percentage of the portfolios they manage, and in some cases, like with hedge funds or special investment funds, a performance fee, sort of a “profit share” on top when they make a lot of money. So the keys are keeping assets under management high, and beating your benchmarks to earn that performance fee. Sprott’s assets under management were over $10 billion in 2011, and now that number is C$7.8 billion as of the end of the last quarter. About half of that is in bullion funds that are tied directly to the price of gold and silver, the rest is mutual funds and ETFs, a variety of alternative investment strategies, and some managed companies that more or less act like hedge funds (like Sprott Resource Corp, which I owned for a while several years ago). They say, in their quarterly presentation, that they’re effectively holding their own — the majority of their funds outperform their benchmarks, even if, for many of those funds, that means they’re just not doing quite as badly as the average natural resources investment.

Their revenue has been roughly 2/3 management fees, with the rest coming from performance fees (none of those last quarter, since there wasn’t any performance), capital gains on their own invested capital, and interest on the loans they make as a banker to (often resource) companies.

If Sprott is going to have a dramatic comeback as teased, it will be driven by renewed investment interest in natural resources, and a boom in the stock prices of resource stocks (and, presumably, higher prices for gold, silver and other high profile commodities) — and that is possible, particularly because, as an asset manager with some of their assets under a performance fee agreement, their earnings should be quite dramatically levered to the performance of natural resources stocks in general. And since Sprott is quite strong and conservative (they have no debt), and committed to their specialty, it might be that they outlast many of their competitors and are one of the few companies standing that’s still managing institutional investments in mining and resources the next time a bull market heats up. So if you think investors will be clamoring for gold and silver and iron and wheat and whatever else in a year or two and driving up the shares of mining and resource stocks, then it’s logical that Sprott should perform very well in that scenario.

If that doesn’t happen, they still have plenty of cash on their books and pay a perfectly decent dividend, so there is likely some limit to the downside — they are trading at almost the lowest price/book they’ve seen in many years (it’s about 1.3 now, it has gotten down to 1.15 or so — SII has never traded below book value), and they’re also trading at a very low (compared to their history) EV/EBIT ratio of about 10. Not necessarily objectively cheap for an operating business, but cheap for them, and in the same neighborhood as other asset management type companies (though they all have very different businesses) like Brookfield (BAM) or Affiliated Managers Group (AMG). The lack of debt is encouraging, though it doesn’t mean that the stock can’t be cut in half again if it keeps losing money, or if their investments of their own capital do terribly.

So that’s what I’m guessing here — not a certainty that Dyson is pitching Sprott as his “Canadian Mint” investment that will have levered exposure to a recovery in commodity prices (particularly gold and silver), but it’s the best match I can identify and, for folks who like the sector, an appealing way to have pretty outsized returns in a great market and somewhat limited downside (thanks to the cash balance and the dividend) if the market stays as weak as it has been for the last year or two (or gets even worse).

Sound like your cuppa tea? Let us know with a comment below.

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