Avoiding zombies in the search for precious metal stocks
The economy may be among the living dead, says a U.S. advisory that follows Canadian juniors, but some precious metal stocks are alive.
The economy may be among the living dead, says a U.S. advisory that follows Canadian juniors, but some precious metal stocks are alive.
We aren’t making this up. The article we discuss today is entitled "Beware of Zombies Wearing Lipstick."
Ever since we saw Invasion of the Body Snatchers, we have been careful to avoid all such macabre manifestations, with or without makeup. But we are always open to more advice on the subject.
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Turns out that the zombie in this case is the moribund economy — and the "lipstick" refers to the attempts of various governments to dress it up and take it somewhere.
All such attempts are bound to fail, in the opinion of Doug Casey’s International Speculator. But that doesn’t means that all investors must join the ranks of the undead, says Mr. Louis James, senior editor and analyst for this advisory.
From its headquarters in Phoenix, Arizona, this advisory follows mining explorations stocks, which means, essentially, Canadian stocks.
And it makes the case that there are opportunities even in this haunted economy for "sharp speculators." Two such opportunities will pop up in a moment.
Let us pursue this journey into the eerie mists of the ongoing crisis.
The same bad medicine
Mr. James begins his supernatural analogy by asserting that the U.S. economy "has decayed from dead-man-walking status to that of a zombie in the grave." Will this zombie get up and stumble on for a year or two?
"The reality is, beneath all the bravado, that no one is ever sure of what will happen." But if the zombie rises, this editor adds, it won’t be real life we see.
"In other words, there is no credible scenario in which the efforts of U.S. and other world governments to cure the global economic crisis will not succeed, not before mistakes from the past are liquidated. With increasing doses of the same bad medicine that caused the illness in the first place, how could it?"
But before this medicine kills the zombie, "it may show signs of rosy life — but it will just be lipstick, not the healthy flow of living blood."
At this point, the author abandons his "gruesome metaphor," and turns to what he sees as the crux of the matter.
Maxed-out Master Card
We are approaching a fork in the road, says Mr. James. And neither path leads to a happy destination. The short path "drops sharply downward from here, with the decline triggered perhaps by another round of depressing economic news."
This will be the deflating of the Obama rally.
The longer path leads to reflation — in fact, "a reflationary boom for the record books." The economic stimuli will work so well that they will create "an even more gargantuan level of ill-advised consumption, unnecessary construction and massive misallocation of capital — all charged to an already maxed-out Master Card."
If the short road is taken, the outcome is clear, says the editor. Base metals will tank and precious metals will soar. That, at least, should make the holders of precious metal shares "very, very happy."
The consequences of the longer road are not as clear. But Mr. James believes they will be just as positive for those who invest in junior mines. Precious metals would remain strong — "fear won’t go away quickly, and rising mining costs are creating a price floor" — and base metals would keep on recovering, creating a new mining boom.
This will encourage the majors to take out the juniors that have large deposits, says the editor. And that is just the sort of company this advisory has loaded up on in its portfolio.
Rapidly advancing production
Whatever long-term fate is in store for the zombie, the months ahead will not be easy, says Mr. James. Both the short and long paths are liable to lead downward in the near term.
Thus this editor foresees short-term weakness in the junior mining sector, followed by "continued recovery and growth among the quality companies we are invested in."
Two stocks, both precious metals, give some indication as to where the "sharp speculator" may look. One has been up and one has been down.
The price chart for Osisko Mining (TSX-OSK) is in bull-market territory. The company is rapidly advancing production at its Canadian Malartic open-pit gold deposit. Most important in this tight economy, it already has most of the cash needed to build the mine in hand.
If the company is successful, it will instantly become a mid-tier producer. "So there’s very good reason for the high valuation, and plenty of reason to expect the valuation to go higher still."
But the relatively high share price is vulnerable to correction, such as a short sharp one that hit in early April before a big recovery. So the advisory suggests buying on dips below $5. It opened today at $5.60.
Silvercorp (TSX-SVM) is the first Canadian junior to get a mining license in China. The company had a huge accounting writedown last quarter and its shares suffered.
But with that scare behind it, "the company’s super-high-grade Ying mine should deliver excellent profits for the quarter just completed and those ahead."
We will find out about the quarter just completed on Friday, when Silvercorp announces its results. Meanwhile, the share price has pushed ahead even in the short time since the advisory published this report, moving from below $3.00 to open at $3.36 today.
If the share price falls back, the suggestion is that investors buy in around $2.40.
Perhaps this advisory is right and the economy is just a zombie waiting for its lipstick to fade. In that case, we’d better be on the lookout for undervalued stocks that can be snatched from the clutches of the undead.
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