You have to kick rocks
My name is Louis James, and I’m an investment analyst, a mining expert, and the senior editor of Casey’s International Speculator — a monthly publication devoted to identifying companies in the “junior” metal mining sector that have substantial upside potential. While not confined exclusively to precious metals, much of my focus is currently on silver and gold.
Why do I spend a third of a typical year in far-flung places and in the company of blowflies, botflies, and machete-wielding campesinos?
The simple answer is that a visit to a potential mine site allows me to bring subscribers the very best speculative opportunities — at the earliest possible stage.
It allows me to take a first-hand look at the political and social environments in the region, because nothing will kill a project faster than a local guerilla war, a nest of highly endangered dipstick-birds, an uncooperative government, or a permitting process that will take 20 years to complete. And it’s very difficult to get a handle on all of that without going there.
The other reason to visit the site, of course, is to fully understand its geology and the mineralization. Because it’s one thing to read about the geology and the samples from a prospective project — but it’s a whole other thing to examine the samples yourself, look the company’s geologist in the eye, and ask him to describe his theory about the deposit.
|This is what high-grade ore looks like in many silver mines. It contains a large amount of sulfides, galena, sphalerite, and pyrite in quartz.
Standing on the prospective site, maps and cross-sections in hand, I can “get my head into the rocks” so that I fully understand what the company may have — or may never have.
And that allows me to recommend companies knowing that their claims are true — that the right stuff is in the ground, and the right people are there to dig it up.
Which brings me back to the mountainside in Colombia. Based on what I saw there, I came back with a mixed bag of opinions about the project’s potential.
As to the amount of gold that may be there, it’s still too early to make a judgment. Surface sampling is under way to determine if it’s even worth drilling. However, even with its significant topographic challenges, I’m keeping an eye on this project, watching for positive drill results.
But I came away with information about the future of this project no less important than drilling results. I learned that the guerillas who had controlled the area just five years earlier (there were still bullet holes in the walls of the thatched farmhouse I slept in) are no longer a threat.
Once chaotic and violent, the area is now stable and peaceful. I found that the Colombian government is more encouraging than ever to mining operations, and that there’s a ready and willing local population that would like nothing better than work the site.
In other words, if there’s enough gold there, all the other conditions in the region are favorable for a successful mining operation. That first-hand information alone
had made the trip worthwhile.
There is only a handful of analysts in the entire world who go to these lengths to research stock picks. None have the advantage I do of working with Doug Casey, drawing on his 30-plus years of experience doing the same thing: looking for the best possible reward with the least possible risk.
|That's me on top of Freegold Mountain in the Yukon. I saw signs of a high-grade gold story coming together there that resulted in subscribers doubling their money in less than two months.
Of course, there’s a lot more to picking stocks than kicking rocks and talking to people at the site. In fact, long before we go to the site, we’ve put the company through the exhaustive “8Ps” vetting process — and I’ll get to that in a minute.
But kicking rocks is essential in finding the best precious metals stocks for Casey Research subscribers, and it’s one of the many things that separates us from any of our competitors.
When all of the pieces are in place — geology, the financing, the management, the political environment, and much more — I can recommend the company in Casey’s International Speculator.
And these companies can be immensely profitable investments.
Spectacular profit from “junior miners”
You can divide mining companies into three categories.
Major producers are the large-cap companies with multiple, large projects — often worldwide. Because of their company’s size, the price of large-cap stocks tends to move slowly.
At the other end of the spectrum are the exploration companies: these have few or no discoveries on hand, but are searching. The vast majority of these companies will run out of money before they ever find anything — BUT — there are some that are well managed, well financed, and potentially on to a significant discovery. We watch those companies very closely.
In between are what the industry calls developers. These are companies that have found strong evidence of economic (meaning economically viable) deposits. They may be in the process of proving their find by drilling, or they may have already proven the deposits and be in the process of building a mine. Or they could have already begun production.
Both explorers and developers are often called juniors. Casey’s International Speculator focuses on quality juniors, because when they prove the existence of economic deposits, these are the companies that can bring investors explosive profits — virtually overnight.
In the most exciting cases, the company is clearly on to a significant resource in the ground — but its stock price doesn’t yet reflect the value of the resource.
THAT is the sweet spot I deliver to readers.
Below are recent examples of the dramatic movement of some my recommendations.
These four positions are still in our portfolio and still going up. (As they are active recommendations, company names are for subscribers only.)
|Gains since first buy recommendation, including “Take Profits” (TP)
recommendations, as of 12/24/09.
The four below have been sold and their profits reinvested elsewhere.
|Altius Minerals (T.ALS)
|Northland Resources (T.NAU)
|Lundin Mining (T.LUN)
|Northern Peru Copper (T.NOC)
|Gains from date of buy recommendation to date of sell recommendation, including TP.
Now, any investor knows that spectacular gains like these don’t happen with every stock pick — although some investment newsletters would like you to believe they do.
While I’m proud of those big wins, I’m just as proud of the average of my recommendations, because that reflects the returns that International Speculator subscribers could realistically expect to achieve.
Active portfolio: up 65.4%.
This is the total gain for investors who bought each new International Speculator pick on the day of recommendation, took profits (TP) when recommended, and held until 12/24/09.
Compounded gains 2004-2009: up 188.5%
Compound growth by reinvesting gains, as of 12/24/09.
2009 gains: 67.9%.
Growth of the portfolio as a whole during 2009, including TP.
These returns are conservative performance numbers, meaning that we don’t count the extra benefit that might have been gained from warrants that came with a private placement, since many subscribers don’t participate in those. Nor do we count the times we average down, since not all subscribers do that. Nor is there any indexing, weighting, etc.
What’s more, these numbers include taking profits when recommended, which results in less profit (but a better night’s sleep!) than would leaving all profits on the table.
Gains like these are not the result of good luck. They come from many years of experience, hard work, and diligent research. And kicking a lot of rocks.
Spotting the trend
While we’re talking about successful trades, it’s important to understand that we are not “traders” at Casey Research. We don’t recommend a lot of buying and selling, and neither do we make any real effort to “time” the market.
Instead, our philosophy is to invest in sectors in which we see a trend — or the likelihood of a trend — that will work to our very great advantage. Spot the trend, and you don’t need to precisely time the market.
This strategy allows you to buy long before the market recognizes the inevitability of the trend you have identified — and sell as the market acquires a voracious appetite for what you already own.
Doug Casey — famously contrarian investor, best-selling author, and founder of Casey Research and International Speculator — has been spotting trends for over 30 years. He anticipated the meteoric rise in the price of uranium, which went from $18 a pound to $138 in 3 years (producing a 5,975% gain on one of his picks). And over the years, he’s anticipated huge movements in the dollar, real estate, base metals, T-bills, and much more.
Doug has made fortunes for thousands of investors, and he continues to do so today within the pages of International Speculator and other Casey Research publications.
And for many years, Doug Casey and Casey Research have recommended substantial investment in gold.
|Chewed-up rock with quartz veining. The "chewed-up" textures are indications of strong mineralizing fluids passing through the rock — the sort that can leave lots of metals behind.
One of the great trends of our lifetime is the current bull market for precious metals, and gold in particular. In the face of worldwide loss of faith in paper currencies, colossal U.S. debt, and the rampant inflation that is certain to come as a result, nations, institutions, and individuals are flocking to gold and will continue to do so.
Physical gold — coins and bullion — remains the single best hedge against inflation and insurance for the preservation of wealth.
While there has been a large run-up in the price of gold (approaching 400% since 2001), we believe that the real action in gold — the “Mania phase” — hasn’t even begun.
Why junior miners, rather than the metal?
In a word, leverage — and the chart below says it all.
The returns you see here took place over just 18 months. In that period, gold went up 26%, while the average of the three junior mining companies went up 416%.
Why do junior miners provide so much leverage over the price of physical gold?
Simply because gold is very difficult — and expensive — to find.
First, the easy gold has mostly been found. Gold is one of the most stable elements on earth. Because it doesn’t react easily to form other compounds, it can be found in pure form, literally filling a crack in the face of a cliff or lying on the bottom of a stream. This is one of the things that makes gold so magical.
Unfortunately, most of these easy surface pickin’s have already been found. After all, people have been searching for gold for thousands of years.
So most of the gold that can be found today is encased in minerals, or rock that needs to be crushed and the gold extracted by one of a variety of methods. Suffice it to say that processing gold today is neither easy nor cheap.
Finding the gold and discovering how much is there very capital intensive. Often it’s found in remote places, further driving up the cost. And sometimes, even though gold has been found in the rock, there’s not enough of it to make its extraction economically viable.
So when a mining company finds gold in economically viable concentration, that company has turned unproductive land into, quite literally, a gold mine. And this can begin overnight — within hours of assay results from a “discovery hole” coming in.
And that’s where the investment magic happens: recommend that company before it confirms viable concentrations in the ground — before the big guns in the market know about it and drive the price up.
In order to be able to recommend a BUY at or before the time those results come in, I need to know everything about that company, with all of my research complete. And as I’ve said, that involves a lot more than a visit to the site.
Thanks, Casey gang!
“I started buying gold six years ago, and with discipline and the help of you folks, my speculations will allow me to retire from my own law firm by the end of this year. I have achieved intellectual and financial freedom. I might have achieved this eventually without the help of the Casey gang, but certainly not this quickly. Thanks."
Specifically, it involves…
The 8 Ps
This is Doug Casey’s tried and true due diligence process we use to separate the wheat from the chaff among speculative investment opportunities. We apply it always when considering companies to recommend to our subscribers. Because there is a whole lot more chaff than wheat out there, most fail the vetting process long before they get to the last P.
Very briefly, here’s what we look for:
Who are the key players in the company? What is the track record of companies they’ve managed? Have they looked after the interests of their shareholders in the past?
Typically, we focus on companies with resources in hand — and we’ll often get a second or third opinion from a consulting geologist before we book a flight to visit the site.
When looking at financing, we’re trying to match up the company’s next-phase objectives with the ability to finance the cost of reaching those objectives. Of course, all kinds of considerations about the source of the money and the consequence to company value are evaluated.
Goes hand in hand with financing, since capital is almost always raised from the issuance of new shares. As a result, analyzing the structure of the company is as important as the geology of its holdings. Too much cheap paper in the company’s past can hold a share price down for a long time – even with the best results coming in from the projects in the field.
We’re in this to see the value of shares grow, and that isn’t going to happen if no one knows about the stock. We need to know how and when the company is going to get itself noticed.
Is the government stable, and does it welcome mining and foreign investors? Are ecopolitics or a many-year permitting process going to bleed the project dry before it can get started? Good politics are vital.
What’s going to move this stock? Usually it’s drill results we’re after, but it can also be an increase in the price of the underlying commodity, a merger or acquisition, resolution of a legal issue — any number of developments that add value or remove a negative.
A deposit may be worthless if the market price of the embedded materials is “X.” But it may become economic at 2X. At 3X, the project may be worth hundreds of millions. It’s essential to look at potential price moves of the underlying commodity to envision both positive and negative impact on the value of the company.
It’s all in the details
Let’s face it: investing in relatively small companies looking for precious metals comes with a high level of risk. But by completely examining every aspect of the company, the 8Ps vetting process — plus a lot of experience kicking rocks — goes a long way to reduce risk.
I recently made a trip to look at a property another analyst had visited the week before. He wrote a gushing report about the country’s next major gold discovery. But the company still didn’t actually have a discovery. They had encouraging signs, but didn’t understand what controls the gold mineralization. When we got down to the nitty-gritty, management agreed with me that it would probably take a couple years before they could estimate how much gold they might really have.
Looking at the drill core, I recognized the mineral arsenopyrite — often associated with gold — which the guy before me did not. I'm not a mineralogist, but I do recognize most of the key minerals important to mining, and I can tell if the rock is saying the same thing management is saying. And this drill core was telling me that the mineralization contained arsenic — which was going to add considerable expense to the processing of the ore.
Unlike the guy who visited before me, my conclusion was that this company had many hurdles to jump over before I could recommend it. They might be on to something big, but they might not. Nobody was likely to get rich anytime soon.
Why International Tower Hill was a BUY —
and shot up 461%
- The president and CEO was a veteran explorer with 30 years of experience and a long record of making good on whatever he promised.
- The deposit in question was on state-owned land in mine-friendly Alaska. Permitting would not be a problem.
- While the ore was good — but not great — it would likely be a heap leach operation: inexpensive, with high yields.
- It was also located on a gentle hill, which means they wouldn’t have to literally move mountains out of the way in order to mine the ore.
- There were very strong geological indications that the existing gold resource was about to get much larger (and it did, several times over).
- The site already had the interest of a major producer as a potential buyer.
- The company had plenty of money on hand to see it through two years of production.
When it all comes together...
What I live for is finding companies in which all the pieces DO come together. A good example is International Tower Hill, recommended to International Speculator subscribers just as the sky was falling in November 2008.
The sidebar to the right summarizes what I laid out in detail in International Speculator that November.
This one was definitely a BUY recommendation, and at that time the price was US$1.21. One year later, it was trading at $6.79 — a 461% profit in just 12 months.
Profits like these are not at all unusual. In fact, 9 out of 24 picks made since December ’08 have already more than doubled in value (as of 12/24/09).
Profit with me on
my next adventure
When you subscribe to Casey’s International Speculator, you’re plugged into the best research team in the business — a team with…
- Contacts. Whom you know can be just as important as what you know. Doug Casey and I stay in steady contact with the movers and shakers in metals mining. If there is breaking news or a rapidly unfolding opportunity, our subscribers are among the first to know.
- Experience. We're immune to feel-good stories and “hot tips.” We know how to look at the rocks and how to get behind the puffery to find the real story.
- Unbiased research. Casey Research has a well-deserved reputation for integrity. Our opinions are not for sale – mining companies cannot pay us to write positive things about them – and everyone in the industry knows it. We are committed to no one other than our subscribers. If you don't do well, we don't do well. It is as simple as that.
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I look forward to having you along!
Senior Editor & Analyst,
Casey’s International Speculator