As a metals analyst, I sometimes find a stock that seems to have everything going for it—but then some darn politician steps in and ruins the investment…
On April 5, 2011, I recommended Pan American Silver (PAAS) to BIG GOLD subscribers. It was virtually a no-brainer pick—and yet we ended up selling for a loss. It was why we sold that really grated me.
At the time, the company generated a million dollars per day in operating cash flow, had a pristine balance sheet, and was headed by "broken slot machine" Ross Beaty, who earned the nickname from his uncanny ability to return a profit every time you invested in one of his companies.
But the real prize was the giant Navidad silver deposit in Argentina, which, if permitted, would have paved the way for Pan American's production to jump by 65%, to a whopping 40 million ounces per year. This would catapult PAAS to the rank of largest silver producer in the world—an exciting prospect.
But the politicos threw us a curveball.
The local governor announced he wanted "greater state ownership" of the mine and to increase the royalty from 3% to 8%. The leftovers were too little for Pan American to turn a profit; management was forced to admit that the world's largest pure silver deposit was "uneconomic at any reasonable estimate of long-term silver prices."
Navidad still sits idle today.
Greed Is Good—Until You're the Victim
Unfortunately, there are many stories like this—and the trend is getting worse. Veteran gold mining investors have witnessed the growing move of governments increasing their take in mining projects through higher taxes and royalties, higher regulatory or environmental bars, and sometimes outright nationalization.
The kicker is that a management team can do everything right and have a great project—much like Pan American—but a voracious government can render it uneconomic to develop or too burdensome or unprofitable to operate.
Unreasonable political interference doesn't just hurt mining companies or local communities. It hurts investors, too. Stock prices take a hit, and portfolios absorb losses. The pain spreads as money flees other companies operating in that jurisdiction. Trust is hard to re-earn.
The temptation is to hurl four-letter pejoratives at politicians. But it's more constructive to simply focus our money where it's safer.
Beat the Politicians: Vote with Your Investment Dollars
Three parties are involved in a mining project: the mining company that operates the project; the host country where the asset is located; and investors who back the project and buy the stock.
Two of these parties have very limited options:
- The mining company can't move the deposit to a more friendly business environment. If local politicians demand more earnings, management teams have no choice but to negotiate. It can get more diabolical: the host government may permit a project and let the mining company spend millions (or billions) developing the project, only to add onerous taxes or royalties after it begins operation—if it doesn't just steal the whole thing.
- A government can do great harm in its own territory, but its options are extremely limited regarding assets outside its borders. Politicians in South Africa, for example, can't tax or regulate a mine in British Columbia.
Only one party has complete freedom to choose which projects to back and what jurisdictions to take a chance on: the investor.
There will always be some risk when investing in mining—but what if you could find an opportunity where the host government is so low risk, it actually promotes mining?
Mining Investment Nirvana
If you've no appetite for investments that tank because of crazy dictators and the like, the good news is that it is possible to say goodbye to unnecessary political risk—and we've found a place where you can do it.
Our new stock pick in the October issue of BIG GOLD has a political-risk rating so low that it's essentially negligible and enormous upside potential—what Louis James called an "impossible" stock.
How do we know the risk is so low?
We spent months developing what we call our "Casey Country Score" for each of 74 countries with significant amounts of mining around the world—a proprietary indicator that taps a variety of sources to assess a country's investment climate. Combined with site visits when possible, the end result is a comprehensive analysis of the political risk for buying a gold or silver stock in that country. You won't find it anywhere else.
Our "Impossible" stock has a political-risk rating lower than any other stock in our portfolio—which says a lot, because the BIG GOLD portfolio is already rated 30% lower than the global average.
The political system in the jurisdiction where this company operates is very stable. The local government promotes mining and offers exceptionally generous tax incentive programs for mineral exploration. It even collects geological data for the mining community and has one of the largest such databases in the world.
A refreshing thing to hear in the present environment, eh?
Of course, low political risk alone can never be our sole reason to buy a stock… so what about the upside?
This company is a little different from what I normally recommend in BIG GOLD. That's because it's not a producer, but an explorer with massive potential—and cash flow.
Lucky for us, the political Shangri-La this company operates in is also known for its exceptional mineral potential, and the company controls almost two dozen properties there—which means the odds of making a game-changing discovery are much higher than average.
The company cleverly lowers its exploration risk by establishing partnerships with other mining companies. The upside is also shared, but not every exploration project works out, and this reduces the company's financial commitment.
A key part of this investment is that the company is led by an enormously successful, award-winning exploration geologist. He's under the radar of most retail investors, yet he's already found half a dozen economic mineral deposits, which is about half a dozen more than most geologists find in their lifetimes. I've dubbed him "the best explorer you don't know."
But the best part is that management made one of the richest gold discoveries anywhere in the world over the last decade, and now has a substantial royalty on the mine being built there—with advance royalty payments already rolling in. This is important because most exploration companies are what Doug Casey calls "burning matches," i.e., they burn out when the money runs out.
To have cash flow to fund exploration for the next giant gold deposit instead of diluting shareholders to the point of no returns is so exceptionally rare, it really is almost an impossible accomplishment.
This is an opportunity I just recommended to our BIG GOLD subscribers last week, so I can't give away the name of our Impossible pick. However, you can take advantage of it by giving BIG GOLD a try today (and I haven't even revealed another angle to this stock that is just as exciting as the exploration potential).
It's completely risk-free: You have 3 full months to test BIG GOLD, and if you're not 100% satisfied—for whatever reason—just cancel within those 3 months for a full refund of every penny you paid. Even if you cancel later, you'll still get a prorated refund.