We recognize that we can’t predict the price of gold. Rather, we view gold mining companies th...
3 'Uplifting' Metals Stocks
10/11/2012 12:45 am EST
Uplifting is a term that means stocks that are lifted up from the obscurity of a local market and launched onto an American exchange, and grabbing the right shares before that happens can mean big profits, writes Jason Burack of Wall Street for Main Street.
Gregg Early: I’m here with Jason Burack, co-founder of Wall Street for Main Street. Jason, gold seems to be rallying again, and there’s been a disparity between gold and the mining stocks. Where do you see that diversion heading? Do you see it continuing or do you see it changing and narrowing?
Jason Burack: Well, I see the diversions ending. I see the mining stocks finally starting to outperform bullion.
For a recap here: over the last 12 months, mining stocks have massively underperformed bullion on a percentage basis. A lot of the miners, including the producers, some of them were down 60% to 70%. They had cost problems because the bullion prices had a correction, and then the intra costs—like energy intra cost, labor, costs to build a mine—all rose.
So what I would say here is on the charts, you can take a look at the GDX, or you can take the gold price and divide that by the GDX. If you look at those types of charts right now over a five-year maximum chart, you can see that there’s a nice, really solid double bottom, like a W, and then also there’s another continuation pattern and there’s a cup with a handle chart forming. So it’s very, very bullish in that respect on the technicals.
The fundamentals are improving also, because gold and silver are finally starting to move higher. So I think you’re going to see that leverage where the gold price maybe goes up to like a little above $2,000, but you’re going to see some of the miners maybe go up over 100% in the next 12 to 18 months.
For some readers, if they’ve seen our work in past interviews, Sandstorm Gold (SAND) has massively gone up. That was a company we talked about in past interviews on here. That’s Sand, they just uplifted and they have $43 million a month in free cash flow at this gold price.
If the gold price goes higher, to like $1,800 or $1,900, they get $5 million a month in free cash flow. That’s if they don’t add another gold stream. So that’s their existing portfolio. That would be one stock. I would continue to accumulate on dips.
But that’s not a real miner. They’re a gold streaming company, but they’re extremely well run. For regular gold and silver miners, I would take a look at Alexco (AXU) for silver.
Alexco has the highest average grade for any pure silver producer, and they have a really good production growth portfolio. They keep adding reserves. It’s very, very solid. There is no risk of bankruptcy. The balance sheet is clean.
For gold stocks, there’s Colossus Minerals (Toronto: CSI). Colossus is going to be in production by mid-2013. They’re down in Brazil. Colossus is bringing on one of the highest grade gold, platinum, and palladium (they have a little bit of silver too) projects in the world. So they will be producing a lot of gold, platinum and palladium.
Also, that stuff is outside of South Africa, where there are strikes and other issues with platinum and palladium. So I think Colossus minerals could have a very big run as they bring that mine into production in the next 12 months.
Gregg Early: Is Colossus a US-based company?
Jason Burack: Colossus is on a Canadian exchange, but I think they’re going through the uplifting process right now. So they should be on an American exchange probably within 12 months.
There tend to be some really good arbitrage opportunities for your listeners for stocks if investors can do research and find them on the Canadian exchange before they uplift, because a lot of really large pools of capital will not buy even a regular TSX-listed stock until they're on an American exchange. So there tends to be a very big run if the company has a lot of earnings growth over a short amount of time. And this stock has potential for a very big run.
We had an experience like this with First Majestic Silver (AG) when they uplifted. They were $4 a share on the TSX and they uplifted to an American exchange and the stock went to $12 pretty quickly; and then it went up to $30 a share even faster when silver touched $48 an ounce briefly in April 2011.
These are arbitrage situations. The company itself is very undervalued. It’s good growth in the near term, but the market is not valuing it because the large pools of capital will not touch the stock until it’s on a major exchange because of liquidity issues. So this is something that the retail investor or hedge fund can take advantage of—the fact because they’re smaller and more nimble.
Gregg Early: So what it sounds like is, you’re also saying that silver is going to move along with gold. I guess there’s a certain relationship there between the two, although one is a more industrial metal. You mentioned platinum and palladium...so you’re looking at pretty much the whole group of strategic metals to move up?
Jason Burack: Yeah, they’re all going to move up, but there’s going to be obviously more volatility in silver or platinum and palladium because of their industrial components.
Silver is like half monetary metal and half industrial metal. So silver is going to outperform—I’m in the camp in the long term that silver is going to outperform gold—but the problem is for most people is they can’t deal with the volatility of silver. As volatile as gold is, silver is gold’s volatility on steroids.
I would just be very careful about chasing the silver price higher. If people are going to chase the price there, you have to have some stops. People have to have the discipline to do that; it’s easier said than done.
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