Lots of gold in Argentina

Why would one of the world's largest and most sophisticated gold miners pay so much money for a small mining firm? Because Andean is currently operating in resource-rich southern Argentina. Andean's Cerro Negro project in the area has "indicated resources" of 2.54 million ounces of gold and 23.6 million ounces of silver. I asked Badiali for his opinion on the takeover. He responded:

This is important because Andean has no "reserves." It doesn't even have the highest-quality "measured" resources. This buyout will puzzle some people, but it's about quality assets. The big mining companies are looking for large deposits with good grades. That's the attribute being rewarded in the market today. We're seeing it among the juniors, too.

As we've already explained this week, you can make huge money in junior miners. ATAC Resources (ATC.V), which Matt recommended to Phase 1 subscribers in the November 2009 issue, is now up nearly 600%. Two other companies Matt recommended in that report, Rainy River (RR.V) and AuEx Ventures (XAU.TO), have returned triple-digits for subscribers. The average gain is 269% in less than a year. Put another way: If you put a total of $10,000 in the three juniors we recommended then, you would have about $37,000 today.

I think H&R Block has much more of a future than Mr. Market assumes. It's seen all kinds of new competition over the last several years, and it's still 15 times bigger by revenue than its nearest competitor. I don't think Turbo Tax will kill H&R Block, because the tax code will continue to change and become more complicated. Plenty of taxpayers will need to sit down with a live human being and get help. In a bad economy like we had in 2009, Block might suffer, but I think many of those customers will come back this year.

Last week, Standard & Poor's lowered its outlook for H&R Block's credit rating from positive to stable. S&P gives Block a triple-B credit rating. Egan-Jones, the credit ratings agency we use, rates Block three notches higher, at A. Egan-Jones' latest report on Block shows some of its credit ratios with an implied rating of double A-plus, one notch below the highest possible rating. – Dan Ferris, August 30, Digest

Prior to Dan's update, shares of H&R Block had tumbled 18% in a month. Today, shares jumped 10%, after the company told investors its costs wouldn't soar due to its defunct mortgage business. CEO Alan Bennett said worry of losses connected to mortgage buybacks "is not based on fact." Bennett also said the company's reserves to handle claims "are adequate."

Shares are slightly higher than when Dan released his update, but it proves his thesis correct. We wouldn't be surprised to see H&R Block recover to around $16 – where it was trading before the mortgage fears hit.

If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $60 or $65 in the coming year as opposed to the current consensus view of almost $90. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 12x was actually buying the market with a 17x multiple.

Ferris comment: If you read Extreme Value, you never fell into this trap because I've been saying (and saying and saying) the overall U.S. stock market was overvalued all along and still is, trading today at more than 18 times earnings and yielding less than 2%. When you measure the whole market, not just the S&P 500, the two often look very, very different. The S&P 500 may be where most of the market cap is found, but you can find plenty of return elsewhere. You'd think more people would be interested in those valuations, too.

It turns out, he does. After we talked about his latest investment, I told him to take all the time he needs. His latest recommendation is going to be a huge winner. The note below is the e-mail Dan sent me in response...

I'm actually delaying the September issue of Extreme Value a few days so I can flesh out the best investment story I've discovered in months. It's a small finance company that made roughly $2 billion in loans over a 15-year period and incurred just $1.6 million in losses – about 8/100s of 1%. During that time, it made minimum returns on equity of 15% – with zero leverage. You can't find a U.S. bank that comes anywhere near that. It has now partnered with a group that one industry mogul calls "the single finest group of microcap investors on the planet."

It now has access to the No. 1 and No. 2 sources of deal flow for lending and equity deals less than $30 million. One of its biggest competitors above the $30 million threshold lost its former loan guy, too, so who knows what sort of larger deals these guys will be able to do in the next several years? I know a few years ago they made one for $33.3 million and it turned out very well.

The company's market cap is about $200 million. It's reinstating its dividend, and I suspect it'll be an excellent source of gold, silver, copper, and other natural resources-related income for at least the next decade. It's currently trading at a 15% discount to its net asset value.

It's really hard to find stuff like this. This is a fat pitch.