Mar 01, 2009
Golden Parachutes
By Andrew Mickey, Q1 Publishing
Update: (November 2, 2009) Many of the gold company shares mentioned in this report have performed exceptionally well since this report was issued while the market was bottoming out in early March. Leading the way has been Ventana Gold (TSX:VEN) whose stock soared from the $1.05 we recommended it at to a recent high of more than $10 per share. That's up more than 800% since this report was initially issued in March!
Don’t let the performance get in your way though. There is still plenty of value in the gold stocks researched here. In fact,we just added another gold stock which is conservatively valued between 75% and 90% cheaper than many of its peers. Whether you’re an experienced gold investor or just jumping into the gold bull market, if past results are any indication of future results, you’ll certainly be pleased you’re reviewing this report today.
Every few decades a chance to get rich off gold comes along.
This is likely one of those times.
At Q1 Publishing, we consider ourselves and our readers to be opportunists. We take what the market gives us. The way things are shaping up, the market is giving us an opportunity in gold.
Don’t let the recent volatility in gold prices fool you. Gold is likely going much, much higher. And the current crisis/liquidity crunch is probably the last opportunity to get in on gold while it’s still reasonably priced.
Right now the opportunities in gold are tremendous. Just take a look at what we’ll be detailing in this report:
- How gold will win whether we’re facing inflationary or deflationary pressures
- The #1 thing you must understand before buying ANY mining stock
- A small gold company which could return more than 1,440% without setting a new high
- The country in the midst of a gold rush and the short-term, big upside way to play it
- The meaning of “unhedged,” how it impacts all gold miners, and the one company using it to “double up” on rising gold prices
- One gold miner who just partnered up with a 98-year old mining firm and it’s the perfect time to buy in
It’s an exciting time to be moving into gold. What we’re facing is a once in a life time kind of thing in gold which only comes along every few decades. And, as you’ll learn in this report, there is a lot to know about investing in gold and gold mining stocks, but once you understand it all, the opportunities to make an absolute fortune is well worth it.
Normally, gold is a poor investment. Just look at the gold bear market between 1981 and 2001. Not much money was made in gold. And from a fundamental perspective, gold is a metal with virtually no industrial uses. Gold’s not like a piece of manufacturing equipment. It’s not productive capital which you can invest in and use to increase production of something. It’s gold.
Every few decades though, the right conditions come along to make an absolute fortune in gold and gold stocks. Right now the conditions are right.
Ready…Set…
The next three to five years offer exceptional opportunities for those of us moving into gold now. Everything is falling in place to launch gold prices to the next level.
Governments around the world are borrowing at unprecedented levels. They’re facing record budget deficits. To make a bad situation worse, most of them have already borrowed so much money their creditors are getting worried about their solvency and unwilling to lend anymore to them.
That’s why the world’s central banks, the “lenders of last resort,” are “printing” money to extend to their governments.
Case in point is in the United States. The Federal Reserve (Fed) has a monopoly on printing money. But right now, no one has any. The banks are facing record losses. Consumers are overburdened with debt and are starting to pay down their debts – all at the same time. Insurance companies and pension funds are reeling from stock market losses and collapsing bond prices.
Earlier this year, as I spoke about with demographer and author Harry S. Dent , we considered the different ways this can all end. He has looked at the history of bubbles busting in his latest book, The Great Depression Ahead, and is determined there is only one way for this to end: deflation.
A massive credit contraction will and always has led to deflation. Of course, deflation makes stuff cheaper. Oil, gasoline, houses, labor, coffee makers, etc. all get cheaper. Deflation resets the price of everything.
Stuff getting cheaper is a good thing for those of us who are savers. The bad part about deflation is debts become more expensive. So when the government, which controls the money supply and has the ability to print money and inflate away debt, is so deeply in debt itself, it’s only recourse is to print more money.
The federal governments want inflation. They need inflation. They will guarantee inflation.
Right now, we’re in the middle of the road amid an epic battle
between natural post-credit bubble deflationary forces and the inflationary
government printing of dollars. It’s not a conspiracy. It is what it is. But the
big question remains; who will the winner be? Frankly, only time will tell. But
I can tell you one metal is in perfect position to win either way.
Inflation vs. Deflation: Gold Wins Either Way
Over the past few months deflation vs. inflation has been a popular subject of debate. While $60 trillion of wealth has been wiped away in this downturn, central banks are going all out to print new money. They’re going to do everything they can to prevent the inevitable deflationary effects of the contraction. And, as we’ve noted before, all speculative bubble-booms end in deflation.
So we have two opposing forces here. The governments of the world are willing to debase their currencies in order to prevent a deflationary spiral. The credit contraction has caused trillions in paper wealth to disappear. It’s going to be a struggle and it’ll be years before we know for sure whether we have to deal with rampant inflation or the economy-destroying effects of deflation.
But here’s the thing about gold, it wins either way. That’s right. Gold wins – either way.
If the global economy comes back to life, credit gets flowing once again, and there are all these extra dollars floating around, inflation is the result. We’re looking at the very real possibility of 5%, 10%, or higher inflation rates in the years ahead. When inflation is high gold prices will go up.
If there’s no economic recovery, the governments of the world will continue to “stimulate” the economy by handing freshly printed money out to everyone (maybe not everyone, more like their friends – banks, contractors, etc.). They’ll pull out all the stops on this one. Even if they have to completely debase their currencies. Nothing will stop them.
Of course, debased paper money is worth what it’s printed on and not much more. Investors will inevitably turn to gold as the currency of last resort. As a store of value. As a result, deflationary forces push up the value of gold.
Gold is in a win/win position. But don’t think gold absolutely has to go up from here. Financial markets are funny things. We’ve got all the conditions for a huge run in gold, but there’s one last part. It’s what I call the “missing link.”
The missing link is absolutely necessary for a genuine bull market in gold to emerge. It’s the only thing which can spark the kind of demand that's strong enough to send gold prices soaring past $1,500 on their way to $1,800 then to $2,000 and beyond.
It hasn’t been there for decades. But, in early 2009, the missing link may have been found.
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Not Just for “Gold Bugs” Anymore
You see, gold’s a funny thing. It elicits such an emotional response. Gold has had a pretty volatile year. The yellow metal started attracting a lot of attention when it passed its early 80’s highs in 2007 and has been up and down since. Lately, it has had more ups than downs. Despite all the recent attention, we’re still right back where we were when gold passed $900 over a year ago.
Whether you’re an all out “gold bug” who has been waiting a long time for this run, you question the value of gold because it has very little industrial use (ala Warren Buffett), or somewhere in between, you’ve got to take a look at what has happened to gold in the past few weeks.
Here’s the thing, this time around there’s interest from some very big money investors. The big money is now considering gold a viable investment again. It’s not just the hyperactive, hot money hedge funds batting around gold anymore. Now pension funds, mutual funds, and other institutional investors are betting on gold – in a big way.
That is the big difference this time around. The big money interest hasn’t been there for decades. It looks like that’s starting to change – quickly.
Unprecedented sums of money have been pouring into gold in the past few months. While a lot of funds are licking their wounds from the recent downturn and facing ongoing redemptions, some still have money. Those that do are putting it in gold. At least part of it.
Betting Big on Gold
Just take a look at the recent money which has been put into gold companies across the board. They’re all getting new cash. Major miners looking for extra cash to fund takeovers, exploration, and mine development are getting it. Small gold companies looking for one more financing to put themselves into production are getting it too. There’s money out there for gold.
Leading the charge in financing major and mid-tier gold miners has been syndicates led by Citigroup, J.P. Morgan, and BMO. They’re the big money. And they (except for BMO) wouldn’t have given gold the time of day when private equity players were chasing after real estate, Chinese companies, and other “hot” sectors over the past few years.
Of course, it’s not just one or two big deals though. There have been six different $100 million plus financing arrangements completed in the past few months and many more to follow.
Industrial companies may be going under because they can’t get financing. But when it comes to gold companies though, there appears to be plenty of money available. In a way, the whole gold situation may have changed completely with the big money moving in. And they’re moving in big.
Recently, Pequot Capital Management, a hedge fund with more than $4 billion in assets, ramped up its gold exposure by 997%. Pequot plowed more than $250 million into gold in less than three months. And there’s Highfields Capital too. Highfields managed as much as $10 billion last year. They’ve got a lot of money and they’re starting to show the early stages of gold fever. In the past few months Highfields has upped its gold exposure by 302% when it threw more than $150 million into gold.
The big money is coming – quickly. And, given all the turmoil and uneasiness in the markets, there has never been a better time to bet on gold stocks.
Hit for the Cycle in Gold Stocks
We’ll get to the stocks in a moment. First there is one thing that’s absolutely imperative to understand about mining stocks. If you don’t, you’re doomed to fail when it comes to investing in gold. It will seem like the cards are stacked against you even in the strongest bull market in gold.
All mining stocks are highly cyclical. Gold stocks are no different. As a
result, the key to winning big, safely, and consistently comes from understanding the cycle and turning it into an advantage.
In a recent article about mining stocks, Frank Holmes, CEO of resource-focused mutual fund management Global Investors (NASDAQ:GROW) and a man with decades of experience in the mining stock world, put together the perfect illustration of the life cycle of a mining stock (see chart to the below).
If you look through all of the historical data, you’ll see most stocks go through this cycle. There’s a lot of initial excitement. Then there’s a long period of development and most of the initial excitement fades. All of a sudden, it seems, investors realize how long it takes to build a mine. Then the company really gets going in the final stage.
Paying attention to these cycles will help keep your money safe when it comes to gold and mining stocks. Here are the signs to watch out for to tell you which phase you’re in.
Phase 1: This is the most exciting time. It’s when a tiny junior mining company strikes a large amount of high grade gold or copper. It’s when that 20 cent stock goes to $1, $2 or higher. It’s when speculators push up shares thinking this is the next stock which goes from 20 cents to $80 a share.
The big successes are rare here, but they’re there. But if you pay close attention and create a solid plan before going in, it’s the only time you’re going to make 50%, 100%, or more in a matter of days or weeks.
Phase 2: This is a long, boring, and usually unprofitable time. The herd that piled in at the end of Phase 1 expecting to make a huge score slowly realizes the odds of shares of the company going from $2 to $80 are about 1 in 5,000 and sell out.
This is the period when mining companies are actually busiest. There are environmental approvals to get, financing arrangements to be made, all kinds of studies to complete, mining plans, and building of the infrastructure required.
It’s when the hot money rolls out and the big money starts to buy in. You’ll see the occasional takeover in this time or a competent management team push a mining project into production. It’s also the time when the company runs into at least one unexpected delay. Depending on the size of the project, this phase can last anywhere from six months to five or ten years.
If you’re looking to buy in at this phase, you better be prepared to wait a long time.
Phase 3: This is when the mine actually goes into production. The company starts pulling resources out of the ground and selling them into the market. It’s when you can start to value a company based on cash flow, earnings, future growth in production, and other fundamental criteria.
That’s the key. The big money is focused on the fundamentals and, as a result, this is when the shares of the company get a second life. As the company delivers quarter after quarter and meets its growth goals, shares will steadily rise. This is also the phase when shares will move up when the price of the commodity it produces goes up.
This is the lowest risk phase, but that doesn’t mean it can’t be profitable. The second time to buy into a mining company is near the end of Phase 2 right before Phase 3.
5 Best Ways to Make a Fortune
As you can see, there are two profitable phases for investors. It really doesn’t matter how the underlying commodity is performing if we’re buying in at the wrong part of the cycle.
We can talk for days and days on end about how great gold is going to do over the next couple of years. We can touch on things like how the gold bull market will push shares of gold miners to the moon, but if you’re not buying in the right part of the cycle, you could be taking on big risks for making less of a return.
Buy these:
1. Tiny Gold Miner Shares Could Climb 1,483% Without Setting a New High – An old friend of mine once told me, “I’ve been in the mining industry for a long time. I’ve been through all the cycles. Sometimes you’ve got to wait a while – a long while - but if you’re waiting in the right spot, it’s more than worth it.”
Right now, gold is shaping up to be one of the right spots to be in and Timberline Resources (NYSE:TLR) is shaping up to be one of those opportunities.
Timberline is the perfect example of what can happen during the mining stock life cycle. Shares of this emerging gold producer climbed from around 30 cents in July of 2005 to a high of over $5 per share in July of 2007.
It was a great ride in Phase 1. Since then though, excitement has completely disappeared and shares of Timberline have fallen all the way back down to less than 30 cents per share. It was in the wrong part of the mining stock life cycle when the credit crisis hit and it was absolutely crushed.
That’s why now is looking like the time to get back in. Timberline is making its way out of Phase 2 and will be entering Phase 3 within the next year. Timberline should be producing about 40,000 ounces of gold each year from its Idaho operations. That’s not much compared to the big boys of the gold mining world, but when you consider Timberline has a market cap of less than $9 million, it’s insanely cheap.
This one is going to take at least a year or two to play out completely. But the opportunity to make 500% to 1,000% doesn’t come along often. And, quite frankly, it doesn’t happen overnight.
2. The Colombian Gold Rush of 2009 – The California Gold Rush of the late 1840’s was a wondrous thing. A single gold strike, some strong promotion, and the overwhelming power of greed managed to change a country.
Now, the modern equivalent of a gold rush looks like it’s happening all over again. This time around though, it’s not in Calfornia, it’s in Colombia. Now, I know what you’re thinking. Colombia is better known for its role in the international drug trade than for gold mining. But Colombia is actually a very friendly place for resource companies to operate.
Oil exploration and production company Gran Tierra Energy (AMEX:GTE) has been extremely successful in the country. Greystar Resources (TSX:GSL) is a gold exploration company sporting a $150 million market cap (that’s huge for a small mining company). And AngloGold Ashanti (NYSE:AU) has an 11 million ounce gold deposit (yes, that’s worth $11 billion at $1,000 an ounce gold).
All three companies have had a lot of success in Colombia, right. Here’s the thing though, Greystar and Yamana are practically right beside each other in Colombia. Both have been extremely successful, but one tiny company has gotten all the land in between those two companies’Colombia operations.
And this tiny company has struck gold – lots of gold!
Ventana Gold (TSX:VEN) has acquired a big patch of land in between Greystar and Yamana in Colombia. They’ve recently begun exploring it too. So far, the results have been spectacular.
Ventana is in the early part of Phase 1 of the mining stock life cycle. There’s a lot more news to come out in the next few months, it recently got a cash infusion of more than $3 million to fund its search for more gold, and this one offers some pretty strong upside in the very near term.
3. Safety in Numbers: One Miner Doubling Up on Gold – There are two ways for gold companies to increase earnings. They can either expand the amount of gold they produce or sell gold at higher prices. Randgold Resources (NASDAQ:GOLD) is doing both.
Randgold is expected to double its gold production from about 400,000 ounces per year in 2008 to just under 800,000 ounces by 2011. That’s a big move for a mid-tier gold producer like Rangold and, if successful, will put the company right up there with the top-tier gold producers of the world.
Randgold is also an unhedged gold producer. That means it will enjoy any rise in gold prices more than a lot of other gold miners. This is a key difference between Randgold and many other major mining companies like Barrick Gold (NYSE:ABX).
You see, gold mining is a risky and expensive business. It takes years to develop a mine and (usually) hundreds of millions of dollars. Mining companies need a lot of cash up front to build the mine and then cash out over 10, 20, or 30 years – depending on the expected mine life.
To get the upfront cash they need, they borrow from banks. Banks aren’t speculators willing to bet on a rise in gold prices. That’s why they normally make the borrower “hedge out” or “forward sell” their future gold production. They enter into contracts to deliver the gold at a future time at a predetermined price. That way the risk of the gold prices falling isn’t an issue for the company or the bank it owes money to.
In most cases, most of the first three to five years of a company’s gold production is already sold at a predetermined price. As a result, a “hedge” gold producer won’t get the giant pop in its earnings from rising gold prices and an unhedged gold producer is a far better way to ride a bull market in gold.
Randgold Resources is still in the early stages of Phase 3.
4. Golden Needle in the Haystack: Backed By 98-Year Old Mining Firm - One of the easiest ways to lose money is to buy into companies listed on the OTC Bulletin Board. This is one of the most loosely regulated markets in the world. It attracts some of the slickest scam artists, criminals, and outright thieves.
It’s getting better and cleaning itself up. There are plenty of real companies which trade on the exchange, but they get overshadowed by the bad ones.
So I avoid stocks on here if I have any doubts whatsoever. When it comes to my investment dollars, I’d rather be safe than sorry.
Every once in a while, however, there is an opportunity that’s just too enticing to pass up. Gold Resource Corp (OTCBB:GORO) is shaping up to be one of those opportunities.
GORO is in perfect position to get in on the ongoing gold bull market. It’s in Phase 2 and is about to enter Phase 3. GORO is on track to produce its first ounce of gold in mid-2009.
It’s shaping up to be one of the lowest cost gold producers in the world. GORO can mine gold for less than $100 an ounce. That means for dollar an ounce of gold rises in price, GORO will be booking an extra dollar of profit. You don’t get in much better position than that.
To give the company the added bit of credibility, it recently inked a partnership with Hochschild Mining, one of the oldest mining firms in the world. Hochschild was founded in 1911 and has mined gold and other commodities around the world for almost 100 years.
5. Cheap, Cheaper, and Cheapest Gold: In every sector there are overvalued and undervalued stocks. Gold is no different. But if you’re looking for the relative safety and upside potential, there aren’t many cheaper gold stocks out there than Otis Gold (TSXV:OOO).
As I write, Otis has a market cap of just under $12 million and it has one million ounces of gold in the measured, indicated, and inferred resources (half in M&I and half in inferred categories). That gives it a $12 per ounce of gold in the ground valuation. Most smaller gold companies are fetching as much as $100 to $200 per ounce of gold in the ground with an average across most gold juniors of $40 to $50 per ounce of gold in the ground.
There’s also plenty of exploration upside with Otis Gold. The company is actively drilling away on its properties in Idaho. Any additional gold the company discovers will only push down the “price per ounce in the ground” and make Otis shares increasingly undervalued relative to its peers.
Otis is not for the faint of heart investors. With a market cap of under $12 million, a share price under $1, and relatively light average daily trading volumes, there’s a lot of risk. But there’s also a lot of upside too. So for more advanced traders and active investors, Otis does offer an exceptionally compelling value.
BONUS: Instant Gold Gratification: Talk to any gold investor right now and they will tell you physical gold is as scarce as it has ever been. When I say physical gold, I mean gold coins, bullion bars, or any other type of gold which you can physically hold in your hand and store away in a safe place.
There have been reports of line-ups two blocks long in the United Kingdom, the Middle East has been on a buying frenzy for gold, China has been spending part of its dollar hoard on gold, and Indians (the real Indians which live in India) have been big physical gold buyers for decades.
As a result, physical gold supplies are drying up. Local coin dealers are running low. National coin and bullion dealers are charging premiums as high as 10% to 15% over the spot market price. And customers who pay the premium often have to wait 6 to 10 weeks before their physical gold is even delivered.
Despite it all, there is a way to get physical gold and silver delivered quickly and inexpensively. It’s through www.seekbullion.com.
SeekBullion has set up an open market between buyers and sellers of gold and silver. It’s one of the most efficient ways to buy gold and silver. The premiums are smaller, you’ll have your physical gold and silver delivered within a matter of days (no waiting around for months!), and it’s run by some of the most trusted dealers in the gold and silver bullion industry.
Physical gold and silver is an insurance policy against total economic disaster and we at Q1 Publishing recommend everyone have at least a small portion of savings in physical precious metals. As with all insurance policies, you hope it is never needed. But you’ll be very glad you had it if it is needed. SeekBullion offers one of the easiest and low-cost ways to get insured now.
You Get What You Pay For
We’ve been over the stocks, the risks, and the timing. We’ve been over a few ways to get in on the gold boom, which at this point we have to say is highly likely (remember there are NO sure things when it comes to the markets). There is one more thing. It’s a question I get asked all the time.
Why would you be giving away all of this research for free?
Well, the answer is simple and it’s something you must understand before taking advice from anyone.
I’m in the research business. I’m 100% independent. I don’t take any payment for providing advice to others – there’s no hidden agenda. I own Q1 Publishing 100% outright. Every decision made here, every experience you have with us, falls on me.
Q1 Publishing’s goal is to find our readers the best opportunities possible and show them how to take advantage of them. We want to make our readers better investors.
Our business is a simple one. If you try us out and like the research and the safe and original (and often emulated) ideas we come up with, and we help you achieve your financial dreams, then you’ll want to stay on with us. If not…well, I won’t have any business at all. It’s just that simple.
So yes, this advice is free – take it for what it is and do what you like. You can buy into these stocks or just keep an eye on them and see what they do. The decision is yours.
The thing I ask you to pay close attention to is the rationale. That is the key to investing successfully in anything. You might go into an investment and it might work out occasionally. But if you don’t have the right rationale and a plan, you are doomed to fail.
Regrettably, the recent downturn has uncovered the flaws in a lot of people’s investing rationale. But, I implore you, now is not the time to throw in the towel because…
Crisis Breeds Opportunity
It’s no secret times are tough. But at Q1 Publishing, our investment research focuses on opportunity. I call it guarded optimism. As you’ll see in the next edition of the Prosperity Dispatch, there are plenty of silver linings in all this mess.
That’s because crisis breeds opportunity - you’ve just got to look a little bit harder.
For instance, we’ve already been over the positive outlook for gold. But we’re in the middle of a bull market for gold so more and more people are catching on. The thing most people haven’t realized is most of the truly iconic American corporations were founded during hard times.
Just take a quick look back through history. The Panic of 1873 kicked off the original Great Depression (which it was known as until the world rose out of the 1930’s Depression). The failure of the leading North American investment banking firm, Jay Cooke & Company, sparked one of the worst economic downswings in history (eerily similar – I know). The downturn lasted 23 years. Five years after Panic, with the country mired in depression, the Edison Electric Light Company was founded. Edison’s company grew into General Electric (NYSE:GE).
The Tabulating Machine Company, the company which would become IBM (NYSE:IBM), was founded during the late 1890’s recession shortly after the (then) mighty Reading Railroad failed. Microsoft (Nasdaq:MSFT) was founded in 1975. In 1940, the first McDonald’s (NYSE:MCD) opened up in California.
That’s just the start of it. There are hundreds more.
You see, these business visionaries jumped at the opportunity when everyone else was running for cover. They trounced their competition by innovating and not holding back when it came to ensuring their customers didn’t forget about them.
Speaking of the Prosperity Dispatch, I think you’ll find it’s unlike anything you’ve ever read. It’s made to be easy to read and useful for all types of investors. Whether you’re a novice just learning the ropes or a pro with decades of experience under your belt, I’m sure you’ll find plenty of value in the Prosperity Dispatch.
Most importantly, it was founded on the basic principle: there are opportunities to be had in any market. It might mean learning a new investing strategy or learning about a new sector, but there is always an opportunity coming around the corner.
The goal of the Prosperity Dispatch is to help our readers find those opportunities and become better investors all in less than 15 minutes a week.
With that, I’d like to say welcome aboard.
Here’s to the start of a long and prosperous relationship,
Andrew Mickey
Chief Investment Strategist, Q1
Publishing
Publication Date: March 1, 2009
Disclosure: As of the time of this writing, Ventana was recommended in Q1 Publishing’s President’s List premium advisory service.
