“The Next Royal Gold” Revealed

By Travis Johnson, Stock Gumshoe, March 24, 2010

I was going to hold off on writing about this teaser until Friday and cover it just for the Irregulars in the Friday File because it’s a tiny stock and I’ll very likely be influencing the price by writing about it for this larger group today — but I’ve gotten so many questions in just the last couple hours that it seems disingenuous to hold off when I’ve got the answer all ready for you. There’s such a push behind the shares thanks to this Phase 1 Investor ad that I want to remind you to be careful, if the stock pops today there’s no reason why it can’t come right back down again. It’s already up a few percentage points this morning when most other gold stocks are down by an equal amount, and that’s before the vast horde of Gumshoe readers gets wind of it.

The tease is in an advertisement for Phase 1 from Stansberry, which is their most expensive newsletter (normally $5,000, “on sale” for $3,000), and the letter they use when they want to recommend a micro-cap stock — in the past Phase 1 has typically been a tech and biotech newsletter, but they’ve also often used it for these kinds of “top secret” mining stocks and other less liquid ideas. And it’s under a couple new editors now, they’ve brought in their new small-cap guy, Frank Curzio, and their biotech guy Dr. George Huang to helm the newsletter (not sure what happened to Rob Fannon, the former editor). I just checked over at Stock Gumshoe Reviews, and we’ve seen several comments on Phase 1 but, to be fair, It looks like most of the comments are more broadly about Stansberry & Associates and a few of those folks probably haven’t subscribed to that actual letter.

So this teaser is all about a little gold company, a stock that Porter Stansberry and his folks apparently think can be the “next Royal Gold” — which, if true, would make it a “no brainer” investment. Royal Gold (RGLD) looks pretty good even now, with their large portfolio of gold mine royalties that keep the money rolling in with very little risk (I’ve been thinking about re-investing in Royal Gold myself, though I don’t currently own shares and, per my rules, won’t be buying it within three days of writing you this note) — but if you could have bought the shares years ago, before everyone knew they would become a big, stable royalty company, you’d obviously be better off.

Here’s how they put it in the ad:

“On April 5, 2010:

The NEXT Royal Gold?

“The last time this happened, early investors had an opportunity to make a fortune – more than 179,000%. Now, one small team of researchers seems to think it’s happening again. They just flew to Toronto to investigate firsthand.”

The April 5 bit is for a conference call that they’ll be holding for Phase 1 subscribers to discuss this investment with a few of their sources and editors — and I’m sure they’ll be able to tell you a lot more about the company than your friendly neighborhood Stock Gumshoe … but at least I can use my uncanny super powers to read the rest of the clues and tell you which company it is.

The ad then goes into some history on the royalty companies, and why the idea of another Royal Gold is so tantalizing — they mention the three main existing royalty firms, the granddaddy Franco-Nevada, Royal Gold, and Silver Wheaton, all of which have had massive runs in their share price since inception — thanks to the investing model in part, I suppose, but thanks in even larger part to the huge price increases that many commodities have seen in recent years. Just FYI, Royal Gold is almost entirely gold-focused, Silver Wheaton is entirely silver focused, and Franco-Nevada has a wide range of commodity royalties, including metals and energy.

The idea for this particular stock pick apparently came in to them from one of their researchers/contacts, who they give the code name “Patton.”

“The way PATTON tells it…

“He was pouring through 43-101’s, when he came across a rather unusual paper trail. It started with a document published by one of the largest and most successful gold producers in the world…

“And it ended at the accounting department of a tiny Canadian company he’d never heard of before…

“Now, there are more than 386 mining and exploration companies in Canada alone. PATTON knows many of these personally. The ones he hasn’t met with… you’d better believe he’s studied their geological and financial data.

“For PATTON to encounter an unfamiliar mining company is strange indeed.

“Why Have I Never Heard of this Before…?”

“If this tiny company is such a potential blockbuster, then why has it received virtually zero publicity and press to date? Two reasons…

“Part of this is because the U.S. Government doesn’t like Canadian resource companies. Why? Because they play by a different playbook than the one the Feds would have them comply with. For better or worse, history proves it’s in no one’s best interest to flout the wishes of the Federal Government.

“The second reason? This company is ridiculously small.

“What does this have to do with anything?

“Simple: Mutual funds and other large financial institutions can only invest in companies when they reach a certain size. In a sense, they’re legally prohibited from investing in tiny companies – their charters prohibit it.

“Since mainstream financial media such as the Wall Street Journal only cover companies their readers own – namely the larger blue chips and ETFs most big funds own and run – you’ll likely never hear about tiny Canadian companies like the “Next Royal Gold.”

“Even more odd, the document revealed that this large gold producer was contractually obligated to pay a portion of the profits on one of its largest producing Canadian gold mines to this tiny, unknown mining company…

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“A mining royalty?

“Paid to an obscure penny stock by one of the world’s largest blue chip gold companies?