By David Forest, editor, Strategic Investor
In yesterday’s Dispatch, I presented the “Nine Ps.”
It’s a system the founder of our business, Doug Casey, developed to help identify winning stocks.
And it’s a method I (Dave Forest) use today.
Before recommending a mining stock, I put it through the “Nine Ps.”
It’s a simple, effective system…
And I revealed four of the “Nine Ps” yesterday.
Today, I’ll hit the final five…
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At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing our best investing ideas, and how you can take advantage of them.
Today, we’ll take you through the second part of our essay on the “Nine Ps.” It’s the system I use to pick some of the biggest winners in my research services.
The “Nine Ps” of Mining Investing
Here’s a summary of the first four of the “Nine Ps”:
People: Who are the executives involved? Are they “superstars” or “snake oil salesmen?”
Property: Where is the project? Is it in a great area for resource development?
Paper: How many shares has the company issued? Could they issue more, which would dilute your ownership in the company?
Promotion: Is the company capable of communicating the potential of its projects to a wide range of investors?
Now, we’ll run through the final five elements of the “Nine Ps.” First up, Phinancing (Financing)…
Phinancing – Where’s the Money?
Okay. Our founder took liberties with this one. But “Nine Ps” sounds so much better than “Eight Ps and an F”…
So stick with me on this one. Phinancing (from here on, referred to as “Financing”) is related to one of the “Nine Ps” we discussed yesterday, Paper.
Here, I’m trying to match the company’s next-phase objectives with its ability to finance the cost of achieving those objectives.
For instance, when buying a junior explorer based on early drill results, I want to think about the company’s ability to finance a more extensive drill program.
This is an important part of the project development. Early results don’t always turn into a blockbuster project. It requires further work to better define the size of the target mineralization.
So, you have to ask, “Where will the money for the drill program come from?” Do they have it in the bank? Will they do another financing? If so, how much will it dilute shares if we buy today?
Or will they get financing from a deep-pocketed, larger mining company? If so, how much of the company or the rights to future development on the property will they have to give up?
Finding financing at a reasonable price depends on several factors… like the skills of management, the quality of the property, the stage the company is in, the current share structure, and so on.
That makes Financing (or Phinancing) one of the most important elements of the “Nine Ps.”
Politics – There’s No Avoiding Banana Republic Politics
Politics touches almost every aspect of life in mining.
It can make or break a promising junior stock. Remember that many of the gold deposits found today are in third-world countries.
That’s why it’s important to research the political climate. Is the government stable? Are there rebel groups or kidnap gangs operating around your mine site? (Sounds crazy, but it happens.)
Could the country nationalize foreign interests at the first sign of financial trouble? These (and others) are all good questions to ask company executives.
Perhaps the biggest threat to mine development these days, however, is ecopolitics. Try to build a mine in the most remote corner of the most remote desert in the U.S. and be prepared to have your application blocked by the Committee of Friends of the Box Turtle!
It’s for that reason you’ll often see mining projects in countries such as Mongolia or Eritrea. Places that are so desperate for money that they tend to be more tolerant of the mine aesthetics.
One of the reasons I’ve visited mine sites in over 35 countries is that it gives me an up-close opportunity to assess the mood of the locals and the greed level of politicians.
In short, politics count.
Push – Ask Yourself, “What’s the Push?”
Often, impending or foreseeable drill results are the Push that will bring us the returns we’re after.
None of the years of preparation, surface work, geophysics, etc. count for anything unless drilling defines an economic tonnage of ore.
But Push can be anything: a successful transition to production, a major increase in the price of the underlying commodity, positive metallurgy or engineering reports, or positive feasibility studies…
It could be a green light given to construction, a merger or acquisition, realization of a royalty, or the resolution of legal, political, or regulatory difficulties. It could even be a big promotional push.
Push is any important development that either adds value to the company or removes a negative.
And if we can clearly see the Push coming, that’s a basis for speculation.
So “What’s the Push?” is a question I ask about every company we evaluate. If we can’t see the Push, we look elsewhere. It’s as simple as that.
Pitfalls – Things CAN Go Wrong
While the biggest threat to mining these days usually stems from ecopolitics, there are many other things that can go wrong in mine development.
That’s where “Pitfalls” comes in.
You can look at “Pitfalls” as the anti-Push. Where “Push” lists things that can go right, “Pitfalls” sums up what can go wrong.
It’s important to remember that “Pitfalls” aren’t dealbreakers. “Pitfalls” can just be an added element of risk.
After all, speculating in mining stocks isn’t risk-free.
But knowing the “Pitfalls” helps you manage your risk. It helps you calculate how much to invest… or what kind of return you should expect.
Just remember that “Pitfalls” are different for every company. It’s my job to identify them and then explain them to you.
Now, let’s look at the last of our “Nine Ps”…
Price – From Worthless to Worth Billions
Think about this scenario – a deposit may be worthless if the market price of the embedded minerals is “X.” But it may become economically viable if the embedded mineralization price goes to “2X.”
And at “3X,” the project may be worth hundreds of millions… perhaps billions of dollars.
It’s one of the more laborious aspects of analyzing resource companies. As the price of the underlying commodity rises, you have to review your assessments on companies and properties almost across the board.
For instance, a few years ago, we followed a copper company that took advantage of low copper prices to buy a huge package of proven properties for dirt cheap.
At the time, when copper was selling for 75 cents a pound, no one wanted anything to do with the company.
But as copper went over $1.00 a pound, the value of the company’s resources in the ground became worth hundreds of millions of dollars. Everybody wanted to own the company.
Not surprisingly, our shares quickly doubled.
In short, price is important. Not just the stock price, but the commodity price and the price (cost) of mining the resource.
This Proven Strategy Yields High Returns
And that’s the “Nine Ps.” It’s a proven strategy that we’ve been using at Casey Research – courtesy of our founder, Doug Casey – for many years.
Before I even think about recommending a mining stock, I make sure to put it through the “Nine Ps” test.
It keeps us on the straight and narrow – a set of steps we take to ensure the highest due diligence… to make sure no corners are ever cut on our research… so you can get the best resource speculations out there.
Because of this method, we have open picks up 208%, 250%, 367%, 722%, and 892%. There are many more with similar gains.
Mining stocks have been the market’s hidden success story over the past year. And based on my research, I’m convinced there are more gains on the way.
Editor, Strategic Investor
P.S. There’s another hidden success story in the making right now… It has to do with a scarce resource that could grind tech – including bitcoin… blockchains… and more – to a halt.
I call it the “Bitcoin Bug.” And one U.S. company holds a critical patent that could fix this problem… and make well-positioned investors a lot of money.