A Template for a Strong Resource Buy
I’ve uncovered a mineral play that has a treasure-trove of upside packed into each low-priced share. Indeed, if I had to design an investment with “space shuttle” upside potential, this one would offer a template. Here’s the outline…
The share price has been beaten down below reasonable measures. Yes, the market could always mug the shares of this company lower — markets sometimes do that — but on the worst day of the week, there’s much more upside than downside.
The ore grade is excellent. It’s not the “highest” ore grade in the world — not quite, and my readers already own the company with that particular mineralogical distinction. But this company’s ore is a very strong grade. It’s better than almost everyone else’s, and by a good measure.
So the ore grade is excellent, and the overall resource is… ASTRONOMICAL! I mean immense. Huge. Ungodly big. We’re talking about a crack in the Earth’s crust that goes down into the mantle. We’re talking about mineable ore zones at the surface that are miles long and 1,000 feet deep (likely more). We’re talking about a mine life of 100 years, and maybe more.
The location is far away from North America, in an emerging jurisdiction that’s starved for investment. There’s a certain element of political risk in this country — after all, we’re not in development-friendly California, right? Then again, you’d hardly characterize this place as among the world’s trouble spots. It just means that the company has to play the local political games, and stay on good terms with the political class.
The far-away locale also means that the play is that much closer to emerging markets of the future that will use much of the product — India, China, Korea and more. Besides, the location is right next to a big blue ocean, which makes it easy to ship product.
As for the management team, I’ve met the staff, and they’re can-do guys. The geology is first-class. It’s by the book, and in this case, the results are superb. Indeed, on a recent visit, I actually witnessed a bench-scale operation that crushed and screened raw ore that’s basically ready to ship, without any fancy upgrading.
Overall, this project is absolutely doable. It’s so doable that there’s no doubt in my mind that we’re looking at a short time frame to an up and running operation, with significant cash flow.
It all gets back to that A-B-C-D approach to analysis. The asset is staggeringly good. The business plan is very doable. The company has cash in the bank, with no need for near-term fundraising and no dilution. And the management can do it.
What Does the Future Hold For Resources?
Many readers have written to ask where things are going in the stock market, especially the junior resource space.
You surely know that we had a miserable stock market stretch this spring. I report on many fabulous resource ideas — energy, minerals, technology angles, etc. Yet despite the merits of each company, the market pummeled share prices.
There’s no pretty way to paint the picture. There were weeks in which share prices declined, declined and declined some more. It was more than perplexing or frustrating. It was actually scary to watch positions and portfolios unwind.
So the next question is this: Will resource plays remain out of favor?
I don’t believe so, at least not such that people should just throw up their hands and walk off. We’re in that part of the market cycle where things are low — the “buy low” part of that old piece of market advice about when to buy and when to sell. Not long ago, a longtime resource investor bragged to me that, “it’s times like these when I make my greatest gains.”
Contrary to a recent editorial drumbeat in the Financial Times, I don’t believe that we’ve somehow come to the end of the commodity cycle, or super-cycle or whatever else you want to call it. Out of 7 billion people in the world, under a billion live anywhere near a “high” standard of living. Resources still matter, and the fact is that there are NOT enough resources to go around. No way.
Maybe we’re coming to the end of a certain monetary and political model that supports the overfinancialization of the world. In that arena, the old model may have outlived itself. Change is due. But we’re not coming to the end of large, growing demand for resources.
Looking ahead, more and more people seek a better standard of living. When you look at the world’s problems in another light — literally, riots in the streets of Europe, the Middle East and elsewhere — it’s a sign that people collectively are sick and tired of traditional politicians and political models that take the road to national insolvency. The old guard hasn’t delivered on economic improvement, and in a wired world, people know it.
I can’t say what changes we’ll eventually see. No doubt, we’ll live with transformations to political and economic structures in Europe, the Middle East, Asia and even here in North America. The details will unfold in due course. But if the politicians don’t deliver, then they’re toast.
What will it take to grow economies and improve peoples’ standards of living? Start with more resources. More oil, copper, aluminum, concrete and much, much more. More resources to make more stuff.
Despite the gloom and doom, I’m optimistic — OK, relatively optimistic. The world has problems, but then people react and the problems call forth solutions. Things will rectify, although the process will perhaps occur in fits and starts. But as bad is things are, there comes a time when they start to get better. The resource-investing world definitely is NOT coming to an end.
Across the globe, nations and political systems — and currency systems — will have to evolve into something else. But at least things will evolve. We’ll see more positive change than not.
So yes, I know that the stock markets are down and “Canadian junior” players have been beaten down. Yet looking ahead, I envision things getting much better over the next few years.
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