Where to go prospecting for fast-moving mining stocks
Small resource stocks that seed mining projects may bring big profits, says a Canadian analyst — and maybe even a 1,000-per cent return.
It’s almost baseball season.
You don’t have to know much about baseball to know that a four-bagger is a home run, covering all four bases with one blow.
How much better, then, is a ten-bagger? There are no ten-baggers in baseball, but there are in investing. It means quite simply a stock that flies up the charts to ten times the price you paid — a 1,000 per cent bonanza.
The term is most closely associated with Mr. Peter Lynch, the longtime Fidelity Magellan fund manager and best-selling author.
And it is exactly what you are looking for when you buy small resource stocks, says Mr. Michael Smedley in Investor's Digest of Canada.
The stocks he’s writing about are a special group he calls “generators” or “enablers” — prospectors, financiers and project originators.
In short, companies put together to feed money into promising mining projects around the globe.
These companies are not aspiring to be the next Teck Resources or Barrick Gold. But they are more than happy to work with the big guys and ultimately, to be snapped up by them.
Mr. Smedley builds his case around a stock he bought for 25 cents a share fourteen months ago.
Not doing the dirty work
This is “a sector with no name,” admits Mr. Smedley, manager of a closed-end fund. These are companies “that help seed the development of resources and revenues by other mining companies.”
Or you might simply describe them as firms that want to be “making money while others do the difficult and dirty work of mining.”
Investors who want to make money should buy more than one of these stocks. “I find that being early and owning lots of names can be good for my financial health,” says this analyst.
Here he acknowledges the approach of Mr. Lynch, who held many names in his fund and enjoyed as many as 100 “ten-baggers.”
We happen to have the best place to find these ten-baggers, says Mr. Smedley, in “the top resource market in the world — the TSX.”
Sharing the wealth
Back in January 2010, Mr. Smedley noted “some awakening activity” in Millrock Resources (TSX/V-MRO). He also noted that no analysts were covering it. He bought in at 25 cents.
Millrock calls itself “a project generator in a joint-venture model.” Indeed, it claims to be “reducing risk in the riskiest business in the world.” By sharing the wealth, you spread the risk around.
In effect, it acquires mining projects and sells shares in them. Among its partners and shareholders are such headline-making names as Vale-Inco, Teck Resources, Kinross Gold and Inmet Mining.
Right now, Millrock and Inmet are partners in a copper project in southeastern Arizona. Teck is expanding its interest in the Estelle gold project in Alaska, after buying new Millrock shares at a premium.
In Alaska, Millrock is also working with junior partners. One of them, Ryan Gold (TSX/V-RYG), paid $6 million to get its hands on 75 per cent of one project. And Ryan is headed by one of the most successful prospectors in the region. In all, six of Millrock’s eight Alaska projects are active.
Mr. Smedley also praises Millrock’s management, headed by Inco’s former exploration manager in Alaska. Management holds 10 per cent of the company’s shares, while Kinross holds eight per cent and Teck six.
Two months ago, an investment bank “discovered” Millrock at 90 cents a share, and introduced its management to fund managers. The stock had ridden as high as $1.05 in December, and is now back at $0.74.
Close connections
The exploration world is full of close connections, and 10 per cent of Millrock’s shares belong to another “project generator,” Altius Minerals (TSX-ALS). This firm hones in on the big iron ore projects in Labrador.
It also made a killing on the Aurora project in Labrador when uranium prices were booming. Altius trades at a higher level than Millrock and reached $14.09 in mid-December. Today it sits at $12.98.
Mr. Smedley notes that Millrock’s presentation kit to investors listed eight comparable companies that are “project generators.” Two have already been taken over by larger firms.
But among the other names, he informs the readers of Investor's Digest of Canada, he found five with intriguing prospects.
Management makes the difference
Eurasian Minerals (TSX-EMX) has strong front office credentials, he observes, people with backgrounds at Newmont Mining and senior copper firm Phelps Dodge. In this business, management makes the difference.
Eurasian has gold and copper projects in six countries and joint ventures with such giants as Newmont (no surprise) and Freeport-McRohan (the copper behemoth that absorbed Phelps Dodge).
The shares, which were below $1.70 in the summer, rose to $3.88 in January and now trade at $3.16.
Two more stocks in the same vein are Virginia Mines Inc. (TSX-VGQ), which works with Goldcorp, among others, and Almaden Minerals (TSX-AMM), which has six gold and copper projects on the go.
Virginia trades at $9.50, close to its 52-week high, and Almaden, which reached $5.25 in December, is now at $3.85.
There is even a company that has executed a spin-off. Sandstorm Gold (TSX/V-SSL) is run by the former CFO of Silver Wheaton, a noted seller of silver “streams” from mines around the world. So Sandstorm is negotiating gold streams. The stock is not far off its 52-week high at $0.92.
It has spun out Sandstorm Metals & Energy Ltd. (TSX/V-SND), which has begun life with six coal streams. It has several small partners and backing from National Bank of Canada. Up above a dollar in January, this stock is now at $0.62.
You won’t find any dividends with these stocks and you probably won’t get much sleep if you’re counting on just one of them to make you rich.
But this analyst insists that the route to a ten-bagger leads through a basket of the up-and-coming firms that are putting their money where the mines are.
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