The Best Piece of Advice Porter Gave Me
The best piece of advice Porter gave me... Traveling the world in search of the next great gold stock... What I learned in Mexico... And Alaska... Why 'boots on the ground' research is critical to our success...
When Porter asked me to head up our company's first precious metals newsletter, he offered a piece of invaluable advice...
"Hit the road and meet as many people as possible."
Since early 2016, I (Bill Shaw) have traveled the world, attending conferences, touring mines, and visiting exploration projects. I've been east to Khabarovsk, Russia... north to Fairbanks, Alaska... and south to Santiago, Chile – with dozens of stops in between.
As analysts, we spend a lot of time poring over 10-K filings, Bloomberg data, and company presentations. While this is important, I've found that when it comes to commodities in particular, there is no substitute for "boots on the ground" research.
In this industry, companies are at the mercy of the cyclical nature of commodity prices. The difference between success and failure often comes down to competent management. Meeting these executives face-to-face is often critical for collecting the necessary due diligence to make a decision on whether to recommend a stock.
Though meetings and lunches can be effective, I've found that traveling with them is a better way to gauge the company's culture and leadership.
But travel isn't always fun, and it's not an excuse to kick my feet up and relax at the Four Seasons...
In June, I spent a week traveling around Mexico with Keith Neumeyer, president and CEO of mid-tier silver producer First Majestic Silver (AG). The company has six operating mines across Mexico.
On my trip with management, I found myself in Hermosillo, Mexico, sitting on the runway in the back of a 1969 de Havilland Canada DHC-6 Series 300 Twin Otter airplane. The temperature reached 107 degrees. And with no circulation inside the airplane, it felt even hotter than that.
As the pilots completed their routine preflight checks, I started to feel woozy. Sweat soaked through my shirt. I tried to use the "barf bag" as a fan, but it didn't help.
Soon, we were cleared for takeoff. And once we were up in the air, the vents provided some much-needed relief.
Over the next five days, we flew eight times in the 19-seat plane. After my rocky start in Hermosillo, the trips became much easier. I almost got used to landing on short dirt runways near the mines' remote locations.
The real reason I was jet-setting all across Mexico was to see the San Dimas gold and silver mine...
A month earlier, First Majestic had acquired Primero Silver (and its flagship San Dimas mine). Silver was first discovered at the site more than 250 years ago, and the deposit has been commercially mined since the early 1900s. It's expected to double the company's annual production, but it wasn't an easy deal to get done.
I met with Neumeyer in his Vancouver office shortly after the company announced the deal back in January. He told me it took a year to iron out all the details of the complex agreement between First Majestic, Primero, and Wheaton Precious Metals (WPM), which has owned a stream on the mine's production since 2004. The $320 million takeover was friendly, but Primero didn't have much choice as it headed for bankruptcy. After dealing with three different banks and three different legal teams, the deal racked up $10 million just in transaction costs.
To make the deal work, Wheaton restructured its streaming agreement on the San Dimas mine. Under the new terms, Wheaton will receive 25% of the site's gold and silver production, converted to gold-equivalent ounces at a fixed ratio of 70-to-1. In exchange, it will pay First Majestic $600 per ounce.
This agreement freed up cash flow, which allowed First Majestic to make improvements to the mine. But it didn't come cheaply... Because Wheaton will produce less revenue with this deal than it had previously, it also received nearly 21 million shares of AG, valued around $115 million at today's prices. That makes Wheaton the largest shareholder in First Majestic with nearly 11% of the company's shares.
Given Primero's financial woes, I was curious to see what condition the site was in...
I was surprised to see well-kept brick sidewalks wind through beautifully landscaped gardens on the property.
Everyone I traveled with had his own air-conditioned bedroom with a private bathroom. That might not sound like much... But it's a major step above the accommodations I'm used to experiencing at remote mining camps in other countries... like sleeping in tents on folding cots next to complete strangers.
There's also a pool, tennis courts, a gym, soccer fields, schools for the workers' kids, and a technical school for teaching basic mining skills. The site even includes a hospital, which Primero built back in 2015. It's small, but includes a blood lab, an X-ray machine, a delivery room, and a pharmacy.
The trip to Mexico wasn't only my first visit to the mine... It was also a first for many of the First Majestic executives I was traveling with. Former Primero employees were finally meeting their new bosses in person. We met and dined with several employees who stayed on after the deal, and they seemed optimistic about the future.
Sometimes, insight comes from unexpected places...
Work travels took me to Anchorage, Alaska, recently to meet with executives from NovaGold Resources (NG). Longtime Stansberry subscribers may recognize the name. NovaGold is a "land bank" – an exploration company with large metal resources in the ground.
I was there to visit the company's massive Donlin Gold deposit – a 50/50 joint venture with Barrick Gold (ABX) that contains nearly 40 million ounces of gold in the ground.
Since construction is still years away, there wasn't much to look at onsite. But at a dinner later that night, some important guests joined us. Specifically, we dined with Alaska Governor Bill Walker and Natural Resources Commissioner Andy Mack.
Walker and Mack noted that Alaska has just five producing mines right now, the oldest of which isn't even 30 years old. But they're both bullish on the future of mining in the state.
As they explained, five additional precious metals mines are in the advanced exploration stage – including NovaGold's Donlin Gold project. That means the deposits are defined enough to conduct economic assessments and feasibility studies, but they aren't producing gold just yet.
The best part is, both political parties support the mining industry. Walker, who was previously a Republican, ran for governor in 2014 as an independent with Democratic nominee Byron Mallott as his running mate. And Democrat Mark Begich – expected to be the next gubernatorial nominee this fall – has supported the Donlin project for years.
We're encouraged, and we anticipate more exploration and development in Alaska in the years ahead.
But not all of the mines I visit are developed...
Junior explorers are typically years away from construction. In these cases, I try to get a feel for the local sentiment toward the mine's construction. Mining is often controversial and polarizing. Non-government organizations frequently attempt to sow discord among local stakeholders by spreading misinformation to slow down the permitting process.
The best way for miners to get in front of these problems is to proactively reach out to local communities, keep them well-informed, and listen to their concerns. Two companies that excel at this are Almaden Minerals (AAU) with its Ixtaca deposit in Mexico and Midas Gold MAX.TO) with its Stibnite project in Idaho.
Both companies have earned widespread support because they're actively involved within their communities. They've developed trust by opening local offices and hiring locals when possible. I've met with local politicians and citizens near these projects and heard firsthand how excited they were to advance the projects.
Of course, you can't please everyone...
On a trip to the tiny town of McCall, Idaho, I stopped into the local gift shop.
The woman working there was friendly when I first walked in... We chatted about the town and the beautiful weather as I browsed the trinkets and postcards. Then she asked what brought me to the area. "I'm researching a gold miner," I told her.
That's when her attitude soured. Her voice grew loud, and she scowled. I understand where she was coming from... Previous mining activities caused extensive damage to local bodies of water, prompting environmental groups to sue miners looking to develop new projects.
I did my best to explain who I was, but this only made her angrier... so I wished her a good day and exited the store.
As I hope you can tell, boots-on-the-ground research has been an essential factor in our investment success...
This year alone, I've flown 29 times and traveled more than 26,000 miles in search of the next great opportunity in precious metals. The relationships I've formed along the way are priceless, and have led to some fantastic opportunities for my subscribers.
I'm proud of our track record. But I'm not the only one. In the 2017 annual Report Card, Porter gave Stansberry Gold & Silver Investor an "A" rating. As he wrote...
Over the past 20 months, our portfolio delivered a 63% win rate with an average portfolio gain of 24%, for an annualized gain of 14%. That's roughly double its benchmark.
If you don't have any exposure to gold stocks but want some, this is the best way to play it. We've built a low-volatility portfolio that outperforms even while gold and gold stocks remain relatively flat. And we're convinced it will outperform by a wider margin when gold takes off like we expect.
This year, silver prices are down 17%. Gold is down nearly 9%. And gold stocks – as measured by the VanEck Vectors Gold Miners Fund (GDX) – are down nearly 25%.
But our Stansberry Gold & Silver Investor portfolio, which takes a weighted approach among explorers and developers, producers, royalty firms, physical gold, and gold coins, has fared much better... and experienced far less volatility.
Nothing is more hated than precious metals right now...
Each week, the U.S. Commodity Futures Trading Commission releases the Commitments of Traders ("COT") report, which tracks the positions of different types of traders in futures markets, including precious metals.
We're most interested in what the speculators – the so-called "dumb money" – are doing.
You see, these folks generally take extremely bullish positions at market tops and extremely bearish positions at market bottoms. When speculators all take one side of that bet, it signals that the trade is "crowded," and a reversal is likely.
Late last month, the COT report indicated that net-short bets on gold had reached the highest level on record since 2006, when the commission began tracking the data.
And according to a recent Bloomberg article, investors had been pulling money out of gold exchange-traded funds for 13 consecutive weeks, the longest streak in five years. All told, investors have yanked $1.4 billion from gold-backed funds this year.
Precious metals are currently stuck in a downtrend. But they won't be for forever. When the uptrend returns, the companies we've hand-picked for our model portfolio should vastly outperform GDX shares. If you're interested in learning more about a subscription, click here.
New 52-week highs (as of 9/6/18): Automatic Data Processing (ADP), Blackstone Mortgage Trust (BXMT), and iShares U.S. Aerospace and Defense Fund (ITA).
In today's mailbag, a reader writes in to share his personal experiences with yesterday's Digest on "esports." What's on your mind? Let us know at feedback@stansberryresearch.com.
"Very interesting article on the popularity of the 'new' generation of video games. Here's something that you may not be aware of... my step-son is currently attending Maryville University, which is located in St. Louis. He is attending this school because he was offered a 4 year scholarship. The free ride came about as a result of his skills at playing the video game, League of [Legends].
"He began playing the game in the 8th grade. Consequently, he rose in the rankings and is currently ranked in the top 50th of LoL players in North America. The school that he is attending actually has a LoL team that made it to the semi-finals last year, playing against other colleges and universities that host LoL teams.
"My wife and I were both amazed at the set-up and operations that Maryville has in place for their LoL team. It's incredible to us that a kid has a chance to attend a school of higher learning simply because they are highly skilled at playing a video game. Interesting enough, most of the successful LoL players are kids that possess a very high IQ level.
"Nevertheless, there are numerous colleges and universities that offer scholarships for gamers. In addition to Maryville, our son was also offered a full ride to Columbia (Missouri) and a partial scholarship to THE Ohio State University as well. The times have definitely changed." – Paid-up subscriber David R.
Regards,
Bill Shaw
Baltimore, Maryland
September 7, 2018