Picture this; the year is 1968, the place is the USS Little Rock, the flagship of the mighty U.S. sixth fleet. We were sailing in the Mediterranean Sea off the west coast of Italy somewhere between Rome and Naples. I was waiting to go on watch in the CIC (the Combat Information Center) or as we fondly call it: the center of intense confusion. I was reading a magazine article; I think it was Saga magazine that had my undivided attention. The article was written by someone who had just made a killing speculating in penny mining stocks. I have always been fascinated with the concept of making big bucks on a chump change investment and this was right up my alley. The most important part of this article was that the writer informed the reader that if you were going to speculate in penny mining stocks, you had to subscribe to the Northern Miner, and what is even more important, he gave the address. I sent off a letter requesting a subscription. I remain a subscriber to this day.
Now I know what you are thinking. You are thinking; why penny mining stocks? Why not penny stocks in general? What is so great about penny mining stocks?
I thought you would never ask. First, it needs to be understood that I only invest in mining stocks that are listed on the Toronto stock exchange or its related junior stock exchange the TSE Venture exchange. Contrary to popular belief, our northern friends do an excellent job of policing and regulating their mining industry so long as perfection isn't expected. And they provide an excellent filter by mandating minimum requirements that the companies must adhere to. How many penny stocks do you know of that are listed on an exchange and have to meet minimum requirements that aren't mining related? The correct answer is almost none. Another advantage is that only a tiny percentage of these stocks are producers. The vast majority of these stocks have no operating income at all. I regard this as a plus because then they can be analyzed strictly as an asset play; and they are asset plays with a vengeance. There is no other investment on earth that routinely has such colossal asset values in relation to their stock prices. Then there is their astounding ability which no other type of stock possesses to go into hibernation for years, if necessary for decades, and maintain their listing. All other stocks perish if they can't maintain operations. Lastly I am of the belief that we are entering a golden age of natural resources that should last for at least another decade. I have already given you the example of Getty Copper.
Let's take a look at Moneta Porcupine mines. It was incorporated in 1910, and I believe it has been listed on the TSE since 1926. It was a gold producer from 1938-1943, but since then it has produced nothing. It owns ten gold properties on which there are a total of 26 past producing mines. It has 1679 mining claims. Each mining claim is 40 acres, for a total 67,160 acres. The stock currently sells for about 16 cents a share. At that price the entire market capitalization is about $11,860,000. That is for the whole company, lock, stock, and barrel; not to mention the 67,160 acres! At that price the market is placing a value of $176.59 for every acre that Moneta owns. Of course Moneta hasn't earned a penny in operating income since 1943, but somehow it doesn't seem to matter. In the last five years the price has fluctuated between 6 cents a share and 22 cents a share. Where else are you going to find asset values like this?
Let me tell you about another penny stock that will illustrate some points that I want to make. This was back in the early days. There was this jewel called Arctic Gold and Silver mines. When I bought it I remember thinking that the name was worth the 46 cents a share I was paying. I was wrong. The company was delisted and I wrote off the investment. But it wasn't a total loss. I had this rather attractive stock certificate that they had mailed me. In those days they still mailed you the stock certificate. I was going to frame it on the wall. It would make a wonderful conversation piece, but it wasn't to be. I never got around to framing it because about a year later Arctic Gold and Silver mines rose from the dead. In Canada, mining companies can reconstitute themselves. If they pay their back taxes and fees, they can reclaim their charter, mining claims, and listing. Provided no one has acquired their claims in the interim. This happens more often than you would think. Arctic Gold and Silver mines was back in action, but I was no longer a believer. When the stock had struggled back to about 25% of what I had paid for it, I took the money and ran. The stock was delisted again, this time forever. I now regret sending back the stock certificate, it would look wonderful on the wall. The amount I received for the stock was trivial. In those days my standard investment was 500 shares.
At this point you are probably wondering how it is possible for penny mining stocks to survive for years and indeed decades without any operating income. It is tied up with the ability of penny mining stocks and penny mining stocks alone of all other investment categories to hibernate or go into suspended animation. It isn't unusual for a penny mining stock to have only three employees, the president, the secretary, and the geologist who usually doubles as the vice president. Until recent years it was possible for a determined president to operate a bare bones operation like this for as little as $250,000 a year or less. Today it can be done for $500,000 a year or less. Only the fact that penny mining stocks are the purest asset plays on earth allows this type of set up to be feasible.
Since they typically earn no income, the normal means of funding by a broker-promoted secondary offering doesn't work for mining stocks once they have been around for a few years and their stock is still selling for pennies. The standard method by which penny mining stocks raise capital is by way of what is called a private placement. In this model the president solicits money directly from private investors every year. Under ideal circumstances it can work like this. The president invites say four to six serious investors out to investigate the mining site. If he is smart, he will provide each investor with one of those cute geologist's hammers and a jeweler's loupe with a chain so that they can wear their new status symbol around their necks. A jeweler's loupe is a small ten-power magnifying glass that is the status symbol of three professions; jewelers, coin collectors, and geologists. Each profession loves these status symbols and never misses an opportunity to employ them with great ostentation. At the mine site the investors will be invited to chip off rock samples with their cute little hammers and examine them under their jeweler's loupe. For lunch they go down to the lake and have a picnic. If they are lucky, they can watch soaring eagles capturing fish while they lunch. How do I know that there is a lake? There are hundreds of thousands of lakes in Canada; I kid you not. Every mine I have ever owned has been within sight of a lake and two of them were located on islands in the middle of a lake. In the afternoon, time will be set aside for some fishing, and late in the afternoon or evening there will be fried fish over an enormous fire. If the weather is good, getting the investors to write a check is like shooting fish in a barrel. A determined president can keep his company solvent for years using this technique.
Let's now take a look at the type of profits that penny mining stocks can generate by looking at three of my recent successes.
Exall Resources was a stock that was an old favorite of mine. I had sold it twice before at a profit. This time I purchased it at 18 cents a share. Exall was now under new management and the new management had decided that it would re-deploy its assets into the oil and gas sector and place all its gold assets into a new gold company that would be called Gold Eagle mines and then spin Gold Eagle mines off to Exall's owners. This was fine with me. I am a big energy fan. Now Gold Eagle's mine was located in the fabulous Red Lake mining camp. This is Canada's most prolific gold mining area. At this time a new drilling program was underway at Gold Eagle. The stock was rising nicely, but nothing out of the ordinary. When suddenly the stock jumped overnight from about 30 cents a share to $1.20 a share. For an old salt like myself it wasn't too difficult to figure out what had happened. The arrival of the Northern Miner provided the answer. The drill program was a success and reported high-grade gold intercepts, much higher than anybody had expected. The president hastily informed the owners that the program to spin off Gold Eagle had been canceled, a wise decision. At this point my normal procedure would be to take the money and run. Normally after a report like this the stock blows off and then declines. A decline back to the 60 cents to 80 cents a share range would be normal. But this was the Red Lake mining camp and the core samples were very rich. Against my better judgment I held on. To my considerable surprise the stock didn't decline as I expected; it continued to rise. There were now three drills on site instead of one. This was highly unusual action for a penny mining stock, which must hoard their limited resources. And they were reporting bonanza grades. It looked like Gold Eagle was a mine in the making. I was holding on. As this is being written, Exall Resources is selling for $2.00 a share. Not bad for an 18-cents-a-share investment and this move may not be over. Exall Resources 2005 annual report was a joy to read it began like this.
Our company has not seen a year like 2005 in its entire 71-year history. With a major discovery at the Gold Eagle property, the very property that formed the foundation of Exall's incorporation as a company on February 13, 1934, we have come full circle co-incident with a very exciting time in the gold business.
But the part I liked best in the annual report was the part that said that Exall's stock had climbed 1,100% during the second half of 2005 based on positive drill results.
Another favorite that I am very keen on is Canadian Zinc. The saga of Canadian Zinc, and it truly is a saga, begins with the famous Hunt brothers and their attempt to corner the silver market in 1980. In the process the price of silver was driven to $50 an ounce. As this was going on the Hunt brothers were building what is today's Prairie Creek mine in Canada's Northwest Territories. The Hunt brothers sank $50,000,000 into building the mining infrastructure, which was 90% complete when the Hunt brothers declared bankruptcy and lost the mine. Over the years a total $100,000,000 has been spent to build the infrastructure that is now complete. The ore body is extraordinary, 11.8 million tonnes of lead, zinc, and silver. If silver were a base metal the deposit would probably rank as the richest base metal deposit in the North American Continent that wasn't in production. The deposit contains 70 million ounces of silver, three billion pounds of zinc and 2.2 billion pounds of lead.
I know what you are thinking: "Fred, how much did you have to pay to buy into this treasure trove?" I made my initial buy in 2002 for nine cents a share, but my average cost is now 20 cents a share. As this is being written, silver is selling for about $10 a ounce, zinc is selling for $1.02 a pound, and lead is selling for 53 cents a pound. Now if my figures are right you come up with a total ore body value of about $4.86 billion rounded. Currently Canadian Zinc has about 93.4 million shares issued. Therefore each share represents about $52 in ore value. As this is being written, Canadian Zinc is selling for about 80 cents a share. The best is yet to come. Now the astute reader is going to point out that what is really important isn't the value of the ore body, but whether it can be extracted at a profit. And this is of course true, but when you own 40-50 penny mining stocks and each position is considerably less than 1% of your investment capital, you need a quick and useful indicator of value, and this is one of the best. For years I struggled with this problem. There are many mining claims for which no reliable ore estimates exist. How do you estimate value? For a real estate appraiser this was a serious matter that I couldn't resolve.
One day, plus or minus two years from the time of my Koger Equity crisis, I was reading the Northern Miner. I was trying to make sense out of the core drilling samples that had just been reported to the press by a company that I was following, but of course I wasn't having any luck. The only thing I know about geology I learned in a college course. As I agonized over the data, the second great revelation of my stock market career occurred. In a flash I realized that penny mining companies weren't mining companies at all unless they were producers; and this is very rare. They are in reality real-estate companies in drag. They are "location plays." And I had always been too stupid to figure it out.
In real estate the classic location play is raw acreage. You find out in what direction the city is growing and you drive out in that direction until you reach the point where the land is sold by the acre rather than by the lot, then you just buy and wait for the city's growth to reach you. Penny mining stocks only asset is their mining claim, which is real estate. And the value of that mining claim is overwhelmingly determined by its location in a mining camp or proven mineral trend. When a mining camp reports a rich strike, all the mining stocks go up in value and the cheapest stocks go up the most. Armed with this knowledge I was able to take bigger positions and bet with more confidence than had ever been possible before.
There is one last penny market play that I have to tell you about. The reason why is that it is the greatest profit maker I have ever had on a percentage basis. It started out in an unusual manner.
In the year 2001 I bought a little jewel called Pioneer Metals for 12 cents a share. I liked the stock because it had a nice package of properties and it was being run by the highly regarded mining promoter Stephen Sorensen. A year later in 2002 the owners of Pioneer Metals received a most intriguing letter. We were informed that the company had decided to spin off its uranium properties into a new corporation to be called UEX. I was only vaguely aware that it even had uranium properties. I had purchased the stock because it had an interesting stable of gold properties. But what blew me away was their brilliant analysis of the coming boom in uranium. Until that time uranium didn't even appear on my radarscope. By the time I finished reading the report, I was a raging bull on uranium. At that time uranium was selling for about $18 a pound, today it is selling for $45.50 a pound. The shortage is so acute that $60 a pound is in the bag in the next two years; at its birth in 2002 UEX was blessed with about 247,000 very strategic acres in Canada's Athabasca basin in northern Saskatchewan. The Athabasca basin is the richest, but not the largest, uranium camp in the world and produces about 30% of the world's uranium. I was so impressed with UEX's potential that after the spin off, I increased my position by an additional 25%. Because the value of Pioneer Mines was worth more after the spin off than when I purchased it, I decided that for accounting purposes I would regard the cost of the spin off shares as zero. Currently Pioneer Metals is selling for about 57 cents a share. When I consolidated the free spin off shares with my purchased shares of UEX the average cost of my position was seven cents a share.
I wasn't the only one who was impressed with the potential of this new creation. From the moment it went public, its rise was relentless. UEX currently sells for $4.25 a share. My investment has increased in value about 60 times and the sky is still the limit. As I have stated before, it is possible for an investment to be too good to be true if people are unaware of its existence. The penny mining stock universe is the secret citadel of stocks that the investing public would regard as being too good to be true if they knew it existed. Where else can you routinely make microbets or chump change investments and get returns like this? I rest my case.
Fred Carach is the author of Forty Years A Speculator, and his blog is fortyyearsaspeculator.blogspot.com.
No comments:
Post a Comment