“Colorado Oil Jackpot: 2 cents to $2” Badiali

This one is from Matt Badiali at the S&A Oil Report, which we’ve seen a few times already. It teases a couple little companies, but first starts us out with a long-winded teaser about the idea of investing in penny oil stocks.

That’s really all the “Colorado Oil Jackpot” is — the concept that in order to make massive returns in resource stocks, you need to buy penny stocks. The Colorado part comes from the fact that there were so many tiny resource companies selling royalty rights and shares for pennies in Denver way back when the West Was Won.

That idea is teased with a few snippets from the mainstream press to give it the ring of truth — first is one about a Fortune Magazine article that told the story of how former Colorado Governor Richard Lamm took advantage of this “oil jackpot” to make $44,900.

That story, by the way, is from 1987. And it’s a cautionary tale — Lamm made that money on the penny stock of a Nevada casino company, a company that he also tried to benefit by using his influence to get them a license in Nevada. Meanwhile, he stood up as a strong opponent of gambling in Colorado.

Don’t see what it has to do with penny oil stocks, but he did make a fair piece of change on oil stocks, I’ll give them that.

And the second quote is from the Chicago Tribune — didn’t actually look at that article, but I assume it’s also just about the dangers and excitement of penny stock investing.

So, granted, there is more potential for ridiculous returns from penny stocks than there is from most blue chippers or most of what you and I would consider “normal” stocks.

Of course, it depends to some extent on what you call a penny stock. Personally, I’d say they have to have a market cap of a couple hundred million or less, and the shares should trade under $5 … often, under $1.

Many folks have different definitions — and that comes into play in just a moment …

You see, Badiali goes on to tease two stocks …

Number one, which you will receive information about in your free report, “Colorado Jackpot Company No. 1: Tap Canada’s Next Great Oil Province,” is teased thusly:

“Penny Stock #1 – 60 billion barrels of oil for ‘pennies’: On a recent trip to Canada, I found a penny oil company that currently holds over 707,000 acres of oil rich land. They acquired this land during a first-ever offering of this prime real estate. After preliminary testing, they have estimated that they now have access to over 60 billion barrels of oil. Amazingly, they still trade for pennies.”

I suppose pretty much any amount of money can be described as “pennies” as long as you’re willing to move the decimal point over … this one, you’ll be unsurprised to hear, is Oilsands Quest (BQI), which he has teased several different times before, in slightly different ways … and I’ve somehow fallen into writing about them several times. The market cap is almost a billion dollars, which takes it out of penny stock land for me … but the folks at Stansberry are pretty consistent about calling any thing with a share price near $5 or below a “penny stock.”

And I do still own call options on BQI for later this year. Should have sold them a little while ago when the shares were around $5, but perhaps they’ll go up again, this is just a small speculation on my part that their potential reserves might make them a buyout candidate — or that rumors will swirl to that effect more aggressively this summer and send the shares up. Certainly, that might not happen — indeed, probably won’t happen, if you’re going by the odds, but it can be fun to speculate.

BQI is a ways away from producing any oil from its Saskatchewan oil sands holdings, but they’re working on it. Slowly. And while there is potential for 60 billion barrels of oil in the land they have access to, according to some estimates, there’s absolutely no way on earth that they’re going to extract even a fraction of that amount. So far, they’ve provided estimates of “discovered resources” — which is much less stringently defined than “reserves” — of between 1 and 1.5 billion barrels. They’re expected to update that sometime fairly soon, using data from their winter drilling program.

I have no problem with BQI as a large-territory, potentially high reserves, speculative play on oil sands — and I’m surprised that the shares have been dipping as oil continues to climb — but it’s far from a 60 billion barrel hidden investment, I’d say, and there are huge costs and risks to be incurred before they make a buck.

And there was a second penny stock teased, too — this one related to gold.

“Penny Stock #2 – Collecting royalties from gold: When I was in Nevada recently, I found a unique penny stock that doesn’t explore, mine, or produce gold. Instead, it collects royalties on the more than 60 properties it owns. Since 2004, they’ve collected more than $71 million in mining royalties – but this company is growing fast (and so is the price of gold) – and I expect them to double revenues (and share price) in the coming months.”

This one appears to me to be International Royalty Corp (ROY), which I’ve also written about before (though not from a Badiali teaser — this was the answer to the “Chaffee Royalty Program” teaser a couple weeks ago). They actually have more than 80 properties now, though it was “over 60” not that long ago, and this ad probably needs a bit of updating. And like BQI this is no teensy tiny fella, though it is reasonably smal, just under $500 million in market cap. I think they went public first in Canada about three years ago, but they existed before that so the 2004 year makes sense.

ROY does have plenty of gold royalties on tap, but their most important property is the one that was breathlessly described in the Chaffee teaser — the labrador nickel mine at Voisey’s Bay.

So … ROY is actually making money now, unlike BQI, even though ROY is certainly not cheap … but with ongoing royalties, and many royalties in place for mines that are not yet producing, we can be fairly certain that ROY will make more money in the near future without having to spend too much money … that being the beauty of being a royalty holder instead of a miner. Whether it’s enough money to justify their current share price … well, that’s up to you to decide. It is, after all, your money, and you’re not going to get it back from them anytime soon (the dividend is currently under 1%).

So … two companies we’ve looked at before, both interesting, both “penny stocks” if you want to call them that (though they’re not at all comparable to the real penny stocks, the lottery ticket companies with market caps of $20 million and share prices of 3 cents). If you’ve had any revelations since I last wrote about these … maybe about oil sands, or investing in royalty holders, or investing in miners generally, well, let us know …

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full disclosure: I continue to have an interest in Oilsands Quest, in the form of call options. I do not own shares in any other company or investment mentioned.