The Freaks of the Resource SectorDoug Casey, Casey Energy Speculator
September 2nd, 2006
DOUG CASEY is a contrarian investor, sought-after public speaker and author of several books. His work “Crisis Investing” held the position of # 1 bestseller on the New York Times list for 26 consecutive weeks. Doug’s unusual views on the economy—and just about everything else—have gained a huge following in the investment community, and it certainly helps that his stock recommendations of undervalued junior exploration companies have made his subscribers millions. Now in its 27th year, Doug’s monthly newsletter, the International Speculator, is one of the most established and esteemed publications on gold, silver and other natural resource investments. Together with the Casey Energy Speculator, it covers a broad range of carefully selected stocks with the very real potential of double- and triple-digit returns within 12 to 24 months.
Make 321% with the Freaks of the Resource Sector
I attend 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.
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 5 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.
The Secret of Success
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, click here 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.
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.
Doug Casey, Casey Energy Speculator
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