A multibillion-dollar mystery
Editor's note: With Goldsmith still traveling this week, we asked our resource specialist Matt Badiali to take another turn at the Digest.
As you read this, I'm probably sitting in a helicopter, flying over the latest gold discovery in the Yukon...
I'm following up on a mystery that took more than 100 years to crack... a multibillion-dollar secret that geologists just unlocked. The discovery gives us the opportunity to invest in the next great gold rush when gains of thousands of percent are still possible.
You read that right... thousands of percent. If the Yukon turns out to be what some geologists think it is, we could make enormous gains... It's happened before, in just the last three years.
Let me explain...
In 1896, prospectors, working in the Klondike region of the Yukon in Canada, found gold in Rabbit Creek. Their discovery triggered one of history's great gold rushes.
The Klondike gold rush produced about 12.5 million ounces of gold. The astonishing thing is, this gold didn't require explorers to construct deep mines. Rather, they sifted it from the rivers and streams. The creeks in the Yukon were full of gold.
No one ever discovered the source of all that gold. No amount of searching yielded the original source rocks. Many geologists and miners speculated none existed. They figured the original rocks eroded away over millions of years.
However, in the past three years, geologists using high-tech exploration tools developed a new theory... one that yielded three big gold discoveries in the Yukon.
ATAC Resources – which we've told you about many times in the Digest – was among the first explorers to make finds in the Yukon. You can see what news of its discoveries did to the share price...
ATAC drilled this project for two years. Its share price rose from about $0.08 to more than $7.
That's an 8,650% gain.
Readers of Phase 1 got into ATAC at $0.88 per share and closed out the position a few weeks ago with a 542% gain. But I think even bigger winners are developing in the region.
Now, I'm flying up to the Yukon to research other promising projects. And I recently recommended another big Yukon gold discovery to Phase 1 readers. To learn more about Phase 1 and access the recent gold recommendations, click here.
Right now, investors are ignoring another huge resource story...
Thanks to innovations in drilling and engineering, we can now exploit enormous natural gas reserves in shale "oil kitchens." These are relatively thin rock layers that sourced the oil that filled America's iconic oil fields.
The biggest new shale is the Marcellus in Pennsylvania and New York. This giant shale could hold 4.4 quadrillion cubic feet of natural gas, according to Pennsylvania State University professor Dr. Terry Engleder. That's enough natural gas to meet U.S. demand for 196 years.
However, there's one big problem with the Marcellus gas...
The Marcellus Shale's proximity to huge markets, including Boston, New York, Philadelphia, and D.C., was supposed to make its gas economic at any conceivable natural gas price.
Unfortunately, we've spent most of 2010 at inconceivable gas prices. Natural gas has traded for about $4 per thousand cubic feet (MCF) for most of the year. (Natural gas spot prices were roughly four times higher in 2005 before new drilling technologies created huge new supplies.)
Gas producers drilled 84 wells in the Marcellus between July 2009 and July 2010. Each well produced 572 million cubic feet of natural gas. At $4 per MCF, each well produced $2.3 million in revenue. Unfortunately, each well cost between $5 million and $6 million to complete. At the current rate, it will take more than two years to pay for itself.
That's simply too long. Oil and gas companies can't afford to tie up that much capital for that long. They borrow that capital on credit revolvers – short-term bank loans. The companies must pay interest on the loans, so they need to pay that money back quickly. Two years is far too long.
Worse yet, the banks adjust the amount of credit available to the companies by the price of natural gas. Companies can go out of business if the credit line gets trimmed back too far. If the companies can't borrow the money, they can't drill wells... and that's all she wrote.
That's why we're seeing oil and gas companies cut back on drilling in the big natural gas shales across the country, including in Marcellus. Less drilling means less natural gas production for those companies, which hurts earnings.
But here's what investors are ignoring... Natural gas prices can't stay this cheap forever. As guru resource investor Jim Rogers says, "The best cure for low prices is low prices." Eventually, cutbacks in drilling will cause supplies to lag behind demand. When that happens, the whole cycle reverses... Prices rise, explorers deploy more rigs, and money starts flowing into the sector.
Investors who take a two- or three-year view will make a fortune.
I've recommended S&A Resource Report subscribers buy several stocks that should race higher once natural gas prices turn upward. These companies have stakes in some of the most important gas fields in the country, including Marcellus. And these are safe, profitable stocks even when natural gas is cheap... To learn the best ways to play natural gas, click here.
But this is only the beginning. I'm looking forward to a big dive in shale gas companies. Most investors don't look further than this year's earnings reports. They are already selling. When things get a little worse for the sector, I'm going long the best natural gas companies.
New highs: Atlantic Power (AT), Market Vectors Gold ETF (GDX), iShares Silver Trust (SLV), Altria Group (MO), Philip Morris International (PM).
The usual suspects, Dan and Porter, return to The Digest Thursday and Friday... make sure they have plenty of bile and acrimony to respond to here: feedback@stansberryresearch.com.
Good investing,
Matt Badiali
September 22, 2010