Metal Mining Madness

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/08/2013

Aspen, Colorado

* * * "…the picture Forbes published was of the bedroom in my office. I take a nap every day," explained Mohnish Pabrai, the keynote speaker at our Alliance conference yesterday. Pabrai is principal of Pabrai Funds… and one of the few investors anywhere in the world to average more than 25% a year in gains. One of his keys to success: Don’t do too much.

Sleeping during the day isn’t what made Pabrai’s investors 28.8% a year since 1999 – after all of his fees! Pabrai takes 25% of all of the gains greater than 6% each year. Ergo, pre-fee gains must have been in excess of 35% a year. Nobody else buying common stocks, without leverage, comes close to Pabrai’s returns since 1999. He did it buying totally safe stocks: His average annual turnover is around 13%.

So how did he do it? asked a member of the audience. "I read Extreme Value…" Pabrai replied. Flattery works. We’ve already invited him back for next year.

Pabrai is a very unusual fund manager: He only makes one kind of investment. Pabrai buys stocks that have little or no downside and a very uncertain future. He knows Wall Street can’t stand uncertainty. Nor can individual investors. For example, one of his largest holdings is Harvest Natural Resources (NYSE: HNR). Talk about uncertainty: Most of Harvest’s assets are located in Venezuela, so everyone else is afraid to touch it. But it’s gone from $8 to $12 this year.

* * * How rich is Aspen? A teardown house here starts at $1.5 million. The hotel bar sells Ornellaia, one of the most expensive wines in the world, by the glass. If you ever want to feel really poor, spend some time here. It’s humbling.

* * * Steve Sjuggerud warmed up the conference crowd with a story of how he came to be in the newsletter business. "I was running a mutual fund, and I was the fund’s only employee. I did the research. I did the trading. I did the SEC compliance. I did the accounting. I did the customer service. It was a lot of work. They paid me $23,500 a year, but said I’d get a big raise once I’d proved myself. The next year, they offered me $27,000 – and bragged to me that it was the largest percentage raise they were offering in the whole company…" He went home and told his girlfriend he’d quit his job. "Then I took out all of these newsletters – Doug Casey’s, Mark Skousen’s, Adrian Day’s, etc. – and I spread them out. This is what I’m going to do, I told her. I’m going to write a newsletter." Read this month’s True Wealth to find out what his girlfriend said in reply.

* * * I’ve known Sjug for more than 20 years. He’s such a contrarian that if I tell him he should read a book, he can’t do it… it would be following someone’s lead. And wait until you see what Sjug is recommending in his next issue of True Wealth (to be published today). He went over the rationale at yesterday’s meeting: "… nobody is going to take my advice on this… it’s way too contrarian. Sentiment in these assets has never been worse. But those are the ones that always work out the best."

* * * Sean Goldsmith says the best thing about the St. Regis Hotel, where we’re holding the conference, is the wake-up call. It sounds like a beautiful woman with a British accent. "Good morning, Mr. Goldsmith. This is your 8:00 a.m. wake-up call." Goldsmith replies: "How you doin’…"

* * * The best idea of the conference? When asked what stock he would buy, if he could only buy one stock for the next three years, Jeff Clark didn’t hesitate. He immediately gave the name of a small electric power infrastructure company. Look for a lot more on this theme from us over the next few weeks. There’s a government boondoggle of epic proportions brewing… something that guarantees this stock will soar in the next few years. Jeff says all the details will be in the next issue of The Big Trend Report.

* * * Another riddle – courtesy of the worldly Tom Dyson. Take a wine bottle. Push the whole cork down into the bottle. Question: How do you get the cork out of the bottle (without breaking the bottle)? Answer on Monday.

* * * * * * * * * * * * * * * * *

I think resource hoarding is one of the best business ideas of the last 20 years.

The idea was first explained to me by Rick Rule, whose investment bank, Global Resource Investments, created almost all of these companies. Mining is incredibly expensive, very risky, and takes a tremendously long time. Meanwhile, resources, such as gold and silver, have increased in value, thanks to the perfidy of our government.

Rick’s question: If the gold and silver you’ve got in the ground is going to be worth more in the future… and if mining is a very capital-intensive and risky endeavor… why bother digging at all? The gold isn’t going anywhere. Why not just keep it in the ground?

Companies like Seabridge (AMEX: SA) and Silver Standard (Nasdaq: SSRI) raised money from investors, bought high-quality mineral assets… and then just sat on them. As the price of minerals (gold and silver) has soared, the total "proven" reserves of these companies have increased substantially. (Proven reserves are those that can be mined using current technology at current prices. As the price of silver or gold increases, more and more mineral assets become economic to produce.) The stock prices of these companies tend to trade in correlation with their level of proven reserves. And that’s why Seabridge Gold, for example, has been one of Steve Sjuggerud’s best performing recommendations in Sjuggerud Confidential.

But there’s a wrinkle in every brilliant plan…

As Rick told me, the only problem with these companies is they’re inevitably run by geologists – folks with rocks in their blood. These men simply can’t seem to sit still. They have an insatiable need to buy expensive equipment, to dig, and to move rocks around… which throws a big wrench into the low-cost hoarding strategy.

And now I’m seeing this for myself. The silver-hoarding company I recommended in my newsletter (PSIA, May 2006) recently announced that it will spend more than $100 million bringing one of its mines into production. That’s not what we bought it for: We bought it as the ultimate way to hedge the declining value of the U.S. dollar. Now I’ll probably have to recommend that my subscribers sell. The last thing I want to own is a working mine.

Ironically, even the hoarding companies that don’t give in to their rock-hound desires don’t seem to be able to just sit still and keep costs down.

The CEO of a company Sjuggerud calls "the next Seabridge" addressed our conference yesterday and surprised us with a new plan, which should boost the price of his stock almost immediately.

At first glance… this seems like a very good idea:

"We’re going to combine some of our best Nevada assets with a private company’s Nevada properties, raise $25 million to fund the transaction, and then spin off the land package as a separate company. By listing these assets separately, we expect to increase the total market cap of our company by 30%-40% in the next few weeks…"

Given the strong market in commodities, the company’s plan will probably work. (To learn more about this opportunity, see Matt Badiali’s special report, Gold Hoarder: How the Pros Buy Gold, June 2006. It’s available to all S&A Gold Report subscribers.)

But… in the long term… the plan doesn’t make much sense to me. The CEO is going to create an entirely new company… with its own board, its own management team, its own engineers, its own lawyers and listing expenses, etc. Meanwhile, the resource – the gold in the ground – isn’t going anywhere. It’s just sitting there.

Why double the management burden on the resource? How many CEOs and boards of directors do you need to sit on a pile of gold?

It’s a strange world, isn’t it? You can actually make more money by not producing the commodity you own. And yet… people just can’t seem to sit still.

Well, everyone except Pabrai.

Good investing,

Porter Stansberry

P.S. New feature for our Digest – the Stansberry Top 10. It’s a list of our 10 best current "open" positions. As I’ve been telling you, our Extreme Value product is by far our best performer. I’ll comment on the list from time to time, when we add a new position.

Stansberry & Associates Top 10 Open Recommendations