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?

“Now PATTON was deeply intrigued.

“He called us up… and told us about the paper trail he’d uncovered… and that he ‘may have found the next Royal Gold.'”

And they go on to build up the excitement by telling us in several different ways that this is a company that you’ve never heard of, it’s not covered in the media, and you couldn’t find it even if you wanted to … which, of course, is half the reason I’m writing about the stock right now: I can’t resist a challenge.

“I’m nearly certain you won’t find this company anywhere in the Wall Street Journal, Barrons, Investor’s Business Daily, New York Times, or any other mainstream source for financial information.

“We know, because we’ve checked a database containing 4,943 published sources –newspapers, periodicals, and academic journals.

“Not a single mention.

“This was a great start.

“Why?

“Because when the whole world knows about an opportunity, it’s usually not a good one. Not everyone can get rich. It just doesn’t work that way. “

Hmm, OK, well then let me apologize in advance for sharing this opportunity with the whole world. Or at least, the part of the world that’s intelligent, witty, and beautiful enough to be reading this article. But they lay it on a bit thicker than that …

“When Royal Gold was just starting out, you couldn’t tell it was a gold royalty firm. It was disguised as an exploration company. Even after its first royalty deal, you couldn’t tell it apart from the hundreds of regular explorers out there…

“There was no big press release from the company announcing the shift. There was no big story in the Wall Street Journal.

“Heck, by the time it was big enough for folks in the mainstream press to start caring about… the stock had already risen thousands of percentage points.

“Today, it’s the same case with this tiny company – the ‘next Royal Gold.’

“You see, there’s no way to screen for royalty companies. And even if you’re specifically searching for them, the proof you might need is likely buried deep in their books.”

And then we get into the only specific clues in the ad. They tell us that part of the secret to Royal Gold’s success was that they were initially focused on Nevada, and still get a lot of their revenue from Nevada mines — and Nevada was a great place to explore for gold … and this stock is apparently focused on the ‘New Nevada’:

“As gold-rich as Nevada might be… there’s a new region the Fraser Institute’s mining survey ranks even higher…

“It’s an area of Canada that’s got more gold… and is even friendlier to gold companies than Nevada.

“Where is the ‘New Nevada?’

“For decades, geologists have known there was a ton of gold resting in this region. For starters, 90% of the subsoil is made up of Precambrian rocks. This is a strong geological indicator of gold.

“Even more so… there’s a massive, 200-mile sedimentary belt running east-to-west across this region. This is fertile ground for huge gold deposits.

“And gold companies have been drilling holes here for a long time – over 473 at last count. But they kept coming up with nothing. 200 miles is, after all, a large area.

“As it turned out, they were drilling in the wrong spots…

“The tiny company we found – the ‘Next Royal Gold’ – and its exploration partners have found the sweet spot in ‘New Nevada.’ They’ve struck it rich with a 3.15 mn ounce discovery… and are actively looking for more. With twenty potential deals established in this region, the ‘Next Royal Gold’ could make a fortune in royalties if anyone of them generates gold…

“It’s where the ‘Next Royal Gold’ – the tiny company we’ve been talking about – has been quietly signing new projects.

“These guys hit pay-dirt with their first royalty agreement:

“A 3.15 million ounce Gold discovery – nearly twice the size of Royal Gold’s first major royalty contract.

“It’s the reason this tiny company is swimming in cash right now. They get a 3% cut of any gold produced from this monster deposit.

“In fact, this find was so huge – such a sure thing – they’ve been receiving what are known as “advance royalty payments.”

“In short, the large player who bought them out (one of the largest gold companies in the world), wanted this deposit so bad they agreed to start paying royalties even before the mine went on line.

“$100,000 a month since April ’09.”

And later on, the ad teases us that this company is sitting on $30 million in cash.

They do put in a quick paragraph or two about the risks as well …

“Chances are good the ‘Next Royal Gold’ will become just that – the next biggest gold royalty company… and make you a once in a generation fortune in the process.

“One more thing to bear in mind…

“It probably goes without saying, but we probably ought to say it anyway:

“As confident as we are about this recommendation, it is still, at its core, a calculated speculation. You can always lose money on an investment. If this were a sure thing – if there were no risk involved – the potential reward would not be so absurdly high.”

OK, that last paragraph should be something that pops up in your head for any recommendation you read about here or elsewhere — so they get credit for actually spelling it out.

And that’s pretty much all we hear by way of clues — did you catch the little details in there? $100,000 per month since April of last year, $30 million in cash, and a gold mine with 3.15 million ounces? That will have to do for the Thinkolator today — this stock is …

Virginia Mines (VGQ in Toronto, VGMNF on the pink sheets — click here for a free trend analysis on Virginia Mines from MarketClub, one of my advertising partners)

And yes, just as a quick reminder, THIS STOCK IS TINY — there are about 30 million shares outstanding, and the current price is about C$6, so that’s a market cap of under $200 million and it trades in low volume, often less than $100,000 worth of these shares will trade in a given day. If even one percent of Stock Gumshoe readers rush out and place market orders right now, the stock could go crazy even on a day like this, when the sector is down and gold prices are dropping.

So that said, why do I think this is Virginia Mines, and what do we know about them?

Virginia Mines agreed to a deal with Goldcorp back in 2005 to develop the Eleonore Mine in Quebec (and yes, Quebec is that “next Nevada,”often referred to as the most mining-friendly jurisdiction around, and home to a number of impressive discoveries). The mine currently has a “measured and indicated” gold resource of 3.15 million ounces. And the royalty deal gives Virginia Mines advanced royalty payments of $100,000 per month (and has since April 2009), and the royalty is a rather lucrative looking one — they get bonuses to the royalty percentage as the price of gold goes up and as the production climbs, so if this turns out to be a large and long-lived mine Virginia will make out very well, indeed. The current details of the royalty are listed in this press release from last month, and while the royalty is not currently at 3% the company does say that “the royalty is highly enhanced with the current gold price and the new resource calculation suggests that Virginia’s royalty could reach a value of over 3% NSR.” So that’s close enough.

Virginia Mines is one of a dozen or so “prospect generator” companies that have gotten a fair amount of attention in recent years, including from S&A researchers. The general model is that they acquire underexplored mining concessions or land, or stake their own discoveries, and then put in enough money to explore and define the potential that another company gets interested. Then they partner with that other company, usually selling off a controlling interest in the resource in exchange for their partner putting in the big exploration dollars and some participation on the potential upside, often through a production royalty (ie, a percentage of the mine’s output if it ever gets developed) or through a continued partial ownership of the joint venture.

The bad thing about a prospect generator is that they give up a lot of the upside of potential huge discoveries — they aren’t likely to discover a gold resource and develop it themselves and get 10,000% returns in a matter of a few years, which is the dream of many junior mining stock investors. But they also are much less likely to dilute their owners into oblivion as they desperately raise money to explore or develop a risky mine — or go bankrupt and disappear when their discoveries don’t pan out, or when their discovery turns out to be impossible to mine.

Prospect generators rely on the occasional big win, too — Virginia Mines did hit it big with this Eleonore mine and would be doing far worse without it — but they tend not to “bet the company” on each potential mine, and they usually have reassuring balance sheets with plenty of cash and, if they’re big enough, a diversified portfolio of joint ventures that have the potential to pan out and drive them to nice long-term profitability — and they also often focus on a relatively small geographic area where they’ve built up some big land holdings or a particular local expertise. They’re “steady eddies” compared to most of the junior explorers.

Virginia Mines is focused, as I noted, on Quebec — with most of their land holdings and projects up fairly near James Bay in the northern part of the province, and they are spending their own money to continue exploring and identifying potential resources in the same general area. The Eleonore royalty is certainly the “big deal” for Virginia, but they have several other joint venture partners exploring properties on which Virginia holds a royalty interest, (not all are gold exploration projects). You can see a map of their projects here on the Virginia Mines site.

I haven’t yet dug into Virginia’s filings in great detail, but they do have a good chunk of cash (they claim a current $43 million in “working capital” and no debt) and that Goldcorp royalty that promises future inflows (though the Eleonore mine isn’t guaranteed to be built or to become a blockbuster mine — Goldcorp is apparently planning to release a pre-feasibility study of the proposed mine soon, and has been spending money on the project … promising, but not guaranteed), and they do have those other royalties on not-yet-developed mines that may be worth something eventually.

If you’d like to read up on prospect generators, including Virginia Mines, Brent Cook published a nice little article that summarizes a handful of them last year [pdf file] and commented on some similar companies in The Gold Report back in August. Stansberry’s own Matt Badiali also mentioned Virginia Mines a couple times in recent years when he got on a “prospect generator” kick, including this note about the big boost from Eleonore back in 2007 and a broader interview last year about some other gold stocks, and Adrian Day wrote just last week about Virginia Mines being a “high conviction” idea.

I personally own Altius Minerals, another prospect generator which I’ve written about several times for the Irregulars (they seem a bit more mature and hold more cash), and I’m certainly intrigued by Virginia Mines — among a few of the other firms in this group that I plan to look at in more detail in the future — but I haven’t scoured through their books to see what the prime opportunities or worries might be beyond the Goldcorp royalty. If you’ve got an opinion on Virginia Mines or their competitors, feel free to let us know with a comment below.

And if you’ve had the good (or bad) fortune of being a Phase 1 Investor subscriber, let us know which it was by sharing your thoughts over at Stock Gumshoe Reviews. Thanks!

Full disclosure: As noted above, I own shares of Altius Minerals. I also have limit buy orders in for additional Altius shares that could possibly be triggered in the next few days. I am not invested in any of the other stocks mentioned above, and other than those existing orders for Altius shares I will not trade in the shares of any company mentioned (or alter my existing orders) for at least three days per my rules.