Freaks of the Resource Sector
The Daily Reckoning PRESENTS:Doug Casey attends a lot of resource shows, from Vancouver to Val d’Or. That’s because if you want to find great values in the resource sector – overlooked gems that can multiply your investment several times over – you simply have to pound the pavement. Read on…
FREAKS OF THE RESOURCE SECTOR
Of course, the more companies you evaluate, the more chaff you have to sift through. On any given day I come across all types, from well-meaning but generally inept geologists to out-and-out hucksters who spin pirate-esque yarns of unimaginable treasures and then laugh all the way to their Mexican beach homes, bought and paid for with millions lifted off of feckless investors.
Surprisingly, however, scam artists are not an investor’s biggest worry. Far more dangerous – and numerous – are the “competent” professionals who swell the middle of the industry’s bell curve.
That’s because while “competent” may sound like a desirable quality, it can often be less than a good thing. Competent people are those who execute their tasks with an adequate degree of skill, satisfactorily meeting minimum requirements. But many competent people are neither inspired nor cutting-edge. Even government officials can, on occasion, be competent (even if only to the degree that they competently interfere with the progress of humankind). My mother was a competent cook.
But make no mistake that a competent explorationist can pose a very specific danger to unaware investors. I’m talking about the variety of explorationist that has a reasonably encouraging background with one company or another, often times even a blue ribbon major. While the individual in question, whether a geologist or an executive, has no significant discoveries to their credit, they can still proudly point to their long career as proof of their competence.
Which impresses many investors, who then go out and buy the stock thinking, “Well, Mr. Geologist worked for Barrick or Exxon for five years… he must know what he’s doing.”
But you see, Mr. Geologist lacks something: the creativity and the fire in the belly that’s absolutely critical for making big finds. He’ll have a half-decent property, which a dozen or so other half-decent geologists have looked at in the past and drilled with limited success before passing on. And Mr. Geologist, urged on by the company promoters standing just behind him, will take your money and drill more holes a few hundred feet from where the last person drilled. He might even hit a couple of interesting intersections you’ll read about in the daily email touts that besiege us all… but ultimately, the property will turn out to be a sub-economic money-pit, eventually returning to resource oblivion, waiting to be resurrected by the next competent geo in the next bull market.
Can you make money on such operations? Absolutely… even the dimmest of prospects often enjoy a moderate run in share price before the gravity of marginal drill results brings the stock crashing back to pennies. Can you make big money on them? You have a better chance of getting sunburned in a mineshaft.
Simply put, the resource sector is not for the merely competent. We all know that the odds are very long against an exploration prospect making it into production… by some estimates the chances are one in a thousand, but some astute observers put it at more like one in three thousand. The success rate is higher for oil and gas, but hitting significant pools is getting harder by the day. Given that the chances for the average company are so slim, why should we risk investing in an average management team?
Here’s the key: Most mines and oil pools of any significance are discovered by just a few individuals. I’ve spent my career following these professionals – traveling and eating dinners beside them, even playing poker with them (in fact, I have a whole publication, The Explorers’ League, dedicated to tracking their business ventures) – and I can tell you that to call them “competent” would be an insult.
These people are mercilessly driven – often sleeping scant hours per night between work on numerous projects – and perfectionist students of their science. But most of all, they are inspired, out-of-the-box thinkers. The kind who would rather die in a cave-in than endure the boredom of plugging a few more futile holes in a sub-par property in the hopes of lifting some easy cash off of the investment unwashed. They come up with ideas most geologists would never dream of… and would never have the courage to implement even if they did. The type of unique business models that make serious money for shareholders.
These professionals are freaks, in the absolute best sense of the word. Outliers at the far reaches of the bell curve. And make no mistake, they produce the real wealth that gets generated in our sector.
Let me give you a few examples.
One of my favorites is Silver Wheaton (T.SLW), a company I recommended to readers of the International Speculator in February 2005, and which we rode to peak profits of 321%. Let me give you a stat on SLW that I think sums up the company’s genius: the market cap is nearly $2.5 billion, and yet it has only seven full-time employees. Just seven. That’s $350 million of value for each worker.
How did Silver Wheaton achieve such towering gains – greater than many mining companies with thousands on the payroll – with this skeleton crew? Here’s how: the company pivots on a brilliant and absolutely unique strategy brainstormed by Ian Telfer, one of mining’s brightest minds.
Ian recognized early on that we’re in a rising market for gold and silver. He also noted that while there are many ways to invest in gold, there are few pure silver plays. Why? Because silver is mainly produced as a by-product from mining other metals, few operations have primary production.
So, Ian decided to create what nature couldn’t: a pure silver company. He did so by purchasing by-product silver production from several mines around the world, creating the premier vehicle for investing in silver. When the white metal spiked to $15 this past May, SLW became the go-to stock for investors, doubling the company’s share price in short order.
The real genius is that Silver Wheaton doesn’t actually do any mining… they let others do the heavy lifting, and simply collect checks from the sale of the silver. Thus the lean staff and slim overhead.
Looking at this business plan, I knew the company would be a run-away success even when it was just some scribbled notes on a pad of paper. Which gave me the confidence to buy the stock on the cheap, and to recommend it to subscribers early on, allowing for the phenomenal gains noted above.
I look for the same sort of dynamic thinking in the oil and gas sector. One of the best examples is a micro-cap Alberta company I recently came across and recommended to readers of the Casey Energy Confidential. This group currently has very little production and thus is selling for almost nothing. What they do have, however, is a heads-up business plan that I believe will grow their production at a rate that’s going to knock the market for a loop.
Here’s how. Although Alberta has a lot of oil and gas – and a lot of companies exploring for it – the province is experiencing a shortage of drill rigs. In some cases, explorers are waiting for six months to get a drill on their property.
The problem is that not all companies can wait. Some are sitting on leases that will expire unless a well is drilled, the land reverting back to the provincial government. Management teams in such a position tend to get edgy… and willing to cut deals.
Enter the dynamic Alberta company we’re now following for subscribers. The group is run by a seasoned land man, the type who knows everyone worth knowing in the oil patch. This professional has forged a relationship with the head of a drilling outfit – who is now a VP of the company – such that he gets first dibs on several rigs. The team then approaches companies with leases about to expire and offers them drills… in exchange for a sizeable interest in the property.
Using this model, the company has been able to assemble hundreds of drill targets… an absolutely massive inventory for a company this size. And they’re moving quickly to capitalize. Each time we speak to the company, another ten holes have been sunk. They’ve been quiet about the results so far, but I suspect they’ll soon put out a release saying that their production has taken a quantum leap. The stock looks ripe to double – or more – in short order. I can’t give you the name here – that would be unfair to paying subscribers, and the market cap is small enough that widespread buying would send it through the roof – but it’s one we’ll be following closely over the coming months. [To find out the name of this Alberta company and follow its progress, see the link below to sign up for a no-risk trial subscription to the Casey Energy Speculator.]
Having made a lot of money on high-octane business models like these, I see no point in wasting time and cash with “competent” companies. I’m simply not interested in giving my money to a well-meaning plodder. The only sensible strategy is to bet on the sector’s upper-percentile professionals, the ones pushing the limits and coming up with strategies near guaranteed to make us big gains.
September 5, 2006
for The Daily Reckoning
Editor’s Note: Picking the right companies is not as easy as it sounds. Ideally, you would spend considerable time jetting around the world, looking at drill sites, talking to reps of resource companies, and browsing the news on junior explorers.
That’s why the subscribers of the Casey Energy Speculator find the expertise of Doug Casey and his team so valuable. It combines detailed information on companies…in-depth descriptions of promising sites…and an instinct for “golden” opportunities that are likely to generate double- and triple-digit returns in 12 to 24 months.
Learn more about those golden opportunities and how to profit from them:
Casey Energy Speculator
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Are You Ready for Denver Flu?
Important Information on the Deadly Infection That’s Killing the Housing Market
Make no mistake: The game is up in housing. “Denver Flu” is spreading…and even mortgage lenders say prices could tumble up to 20%. But one group has already had a chance to see 124% betting against the bubble – and it’s preparing to rake in much, much more. Here’s everything you need to know about “Denver Flu” – and how it could be your ticket to 300% gains over the next few years.
Try winning at Ultimate Combat wearing a strait jacket.
That’s what Ford and GM have to do. This is what the Minneapolis papers tell us:
“Each more than 100 years old, Ford and GM are victims of being successful for too long. GM has 476,000 retirees. Ford provides health insurance for 590,000 people at an annual cost of $3.5 billion. Both Ford and GM have health insurance costs of about $1,100 per vehicle. Neither Asian nor European producers are burdened by such costs.”
How can you compete with that kind of handicap?
Poor GM and Ford. The two automakers are suffering. They only seem to make money on their big SUVs and pickup trucks. And now, with oil near $70 a barrel, people don’t see any reason to lug tons of extra steel around with them all day. Auto buyers are downsizing, say the press reports, which leaves a lot of heavy metal on the dealers’ lots.
Ford and GM are valiantly trying to “move the metal” with discounts and incentives. These offers are intended to help preserve market share, but what good is a market in which you lose money on every sale? Even William Ford, Henry’s great grandson and now CEO of Ford, thinks the company is in trouble. The shares dropped after he said so last week.
But we are feeling sorry for everyone today.
Take the poor customer. The guy wants big, manly wheels to ride around on, but he can’t afford them. A U.S. Labor Department study shows that down at the middle and lower ends of the wage scale – where people often drive pick-ups – real earnings have gone nowhere since 1979. Median wage earners realized a total gain over the entire quarter century of just 2.3%. Low wage earners lost 3.7%. While the picture is dark at the center and below decks, the upper berths on this vessel have enjoyed sunshine and smooth sailing – with real earnings up 20.3% since 1979.
How can you afford a big gas-guzzler when the guzzling costs so much more money than it used to…and you have got so much less? No more credit cards, ARMs, or home-ATMs to keep the guzzling going.
But now, pity the poor homeowners.
The Record Net reports from California:
“Home prices in the Central Valley have started sagging year-to-year, just as they have in most San Joaquin County cities. Sales were down nearly 43 percent year-to-year as well.
“Vince Malta, a San Francisco real estate broker who is president of (CAR), said the market is slowing as sellers often hold to unrealistic pricing expectations while buyers have more properties to choose from. ‘With inventory levels double that of a year ago… some regions of the state prices are down from a year ago,’ he said.
“Meanwhile, local homeowners say it’s a bleak housing market these days, even with some price slashing going by some motivated sellers. Jim Coan put his north Stockton home on the market in May. He has cut the price twice, from an initial $459,000 to $424,500. There have been only nine viewings and not a single offer, he said. ‘We have an oversupply of houses and few buyers out there, for whatever reasons.’
“‘The experienced agents are telling me this is one of the worst markets they’ve seen,’ remarked Sue Kappel, who has operated since 1972.
“And what of the thousands of people who only recently got into real estate or related industries to capitalize on the boom? ‘We’ve probably had 300-400 people quit in the last few months. We’ve had a lot of Realtors and loan officers quit,’ said Jim Porter, Solano Mortgage’s owner and senior loan officer.
“‘It used to be get listings, get listings, get listings,’ Kappel said. ‘Now it’s find buyers, find buyers, find buyers. The paradigm has shifted.'”
Uh oh…when the paradigms shift, someone is bound to get hurt.
From the East Coast, we get word that the housing market around Washington, D.C., once one of the hottest, is cooling off fast. Agents and developers used to call the police to manage the crowds at housing sales…now they call the police and ask for the Missing Persons department. The buyers have disappeared.
One seller reported that his buyer insisted on a $100,000 discount on a $1.6 million house, to make up for falling prices in the area. If he didn’t get it, he said he’d walk away. The seller caved in; he figured this buyer might be the last he’d see for a while.
The anecdotal evidence is not too thin to conclude that the housing market is not just liable to a mild 5% decline, which would wipe $1 trillion from household wealth. Rather, it is likely to see a full-scale retreat, in which the bids disappear altogether. Some experts are predicting as much as a 20% to 40% collapse in prices, which would be as much as $8 trillion in “wealth” knocked off homeowners’ balance sheets.
And why not? The housing boom has been of historic proportions. Nothing like it has ever happened before. Why shouldn’t the housing bust be extraordinary too? Generally, the bigger the booms, the harder they fall.
But unlike the market for stocks, bonds, and pork bellies, the market for housing does not clear quickly. In a housing bear market, the seller sweats for months and months, hoping a buyer will appear. Poor things.
On to those poor people who are no longer homeowners! The foreclosure rate is climbing; now, one out of every 1,245 households is in foreclosure. But we note that that still leaves plenty of room for growth.
Mike Shedlock, reporting for Whiskey and Gunpowder…
“Is this plan the way forward, or are these acts of desperation? After all the jobs and parts are moved to Mexico and China, will Ford still be running ads to ‘Buy American’?”
For the rest of this story, see The Way Forward
And more pity for the poor victims of paradigm shifts:
*** Michael Larson, on MarketWatch, writes this:
“The housing stocks have been clobbered. Taken out back and shot, really. Stocks such as Toll Brothers (TOL26.48, +0.06, +0.2% ), Lennar (LEN : Lennar Corporation CTX51.13, +0.18, +0.4% ) have fallen drastically in the past year…”
But Larson cautions against bargain hunting. He thinks a further drop is likely and suggests looking instead at what he calls the “second round impact” of the bust:
“Who ELSE is vulnerable to slowing home sales, rising inventories, and a slumping construction industry? In my view, they’re the NEXT round of stocks poised to tank.
“The hit list:
“Professional construction suppliers: I’m talking about companies that make the ‘guts’ of today’s new homes. Think Masco, which supplies cabinets, faucets, and a whole bunch of other products, or Mohawk Industries, which makes carpet and tile. Home retailers: Home Depot and Lowe’s are the obvious names. Home Depot shares recently slumped to a 52-week low. Lowe’s could be headed to the low $20s. Also vulnerable are companies who sell to consumers through these major retailers, such as Black & Decker.”
“Other ‘outside the box’ names: There are lots of smaller players in the business as well. Toro makes lawn and garden equipment, for instance, while Scotts-Miracle-Gro sells fertilizer and spreaders. Is it reasonable to think that overwhelmed, overstretched homeowners might cut back on things like lawn maintenance to save money? You bet.
“If you’re an aggressive investor who’s comfortable with selling stocks short, or using put options, this is where I’d focus my attention. Some of them are starting to fall already. But they haven’t fallen nearly as far as the home building stocks. That smacks of opportunity to me!”
*** And pity also the poor people who install granite countertops. The housing boom had them working around the clock – leveling whole mountains in New Hampshire in order to provide kitchen countertops for Americans coast to coast.
But not only is there a bust coming in the granite countertop industry, granite countertops themselves are becoming passé, out of style, like, sooooo 2005. This from the blogosphere:
“What comes next after Granite Countertops are the Acocado Green Refrigerators (Think Brady Bunch) of the early 21st century? I was at a design center in LA this week and found the answer – frosted glass Italian countertops with lighting from below – kind of glows in dark…really neat. In 10 years, people will tear out the dated granite for frosted Italian Glass!”
*** And why confine out pity to our shores? Poor Alfredo Stroessner! What is wrong with this world of ours that it can’t shed a tear for a dictator? Last month, the former chief executive dictator of Paraguay died to dry eyes. Wasn’t he a friend to the United States for three decades? Didn’t he maintain law and order in that benighted South American paradise? Didn’t he control his military forces (Paraguayan troops remained in their barracks while he was in command…happy to get from him a share of the spoils from smuggling)? Didn’t he stage periodic elections…and win, according to some accounts, more than 100% of the vote?
But the world has now become unsafe for dictators. Saddam is in the dock, Alfredo is in the grave, and we are all democrats. Except we here at The Daily Reckoning, who don’t care what politicians call themselves, just so long as they leave us alone. We are as happy with a dictator as with a democrat.
However, our preference is for a monarch. Dictators, like democrats, have to win public office, the former by force…the later by fraud. Both have to sell their souls to the special interests, to the army, to the rich, to the church, to the merchants or to the voters. But monarchs are born to the job…owing nothing to no one – except the duty to rule to the best of their abilities. Besides, we like the gaudy uniforms.