 Casey Files:
Views from Vancouver
David Galland
Doug Casey's International
Speculator
May 21, 2008
With the downturn
in the precious metals markets making even the most stalwart
investors question their instincts; it's good to have some advice
from the field about what is really going on out there.
Here today
David Galland, of Casey Research (publishers of Casey's International
Speculator)
offers some insights into the current state of the precious metal...
and what to look for in the companies that mine it.
I have just returned from my
bi-monthly pilgrimage to Vancouver, known by many as the Mecca
of Mining - or at least to the junior mining exploration sector
- to check in on our research team there and to reacquaint myself
with the buzz in this hotbed of hot stocks.
If I were pushed to name one
impression over all others gained during my trip, it would be
the general state of gloom hanging over the place. Were I a writer
of the genre of Cormac McCarthy, I might try to describe the
mood thus...
"He arrived to a dark
sky and laid down on the cold cement and felt the wet of it soak
through the back of his suit. He wanted to call a cab but wanted
more to sleep here and now."
This, of course, is a far cry
from the Vancouver vibe in frothy times, when the deal flow is
humming and the investors are biting at every new stock like
trout at live bait. In those happier days, the community of junior
mining "professionals," a term I use loosely, are a
positively effervescent lot. With their fine Italian leather
shoes, shiny suits and attentively coiffed hairdos, they positively
bubble over with the money they are making by selling large handfuls
of the freshly printed paper that is mostly the stock of their
trade.
But with a damp fog enveloping
the sector since last August, the streets of the town are quiet,
the conversations subdued. One sure sign of how dire the outlook
is, is that I was asked four or five times, "So, what do
you think about technology plays?"
(For those of you new to the
Vancouver market, it may be helpful to think about it like one
of those multi-colored, multi-cartridge pens most often found
in close proximity to members of the local high school chess
club. When red is the color of the day, then red it is. But when
that falls from favor, a quick click and you are writing in green
or perhaps turquoise. In the Vancouver market, when mining is
out of favor, the promoters go "click" and just like
that, their unwanted mining shells become technology plays.)
While I don't sense that things
have gotten quite that bad, there is no question that they are
bad. But bad is a relative term, because it is in a market like
this that the smartest speculators plant the seeds of fortune.
On that topic, a couple of
further observations
It's a buyers' market. My many conversations over the past
two days have been punctuated by tales of well-known promoter
types being unable to close financings, even small ones. Translation:
if you are going to invest at this point, be selective, try wherever
possible to get into private placements where you can get a share
and a warrant... and be firm on the terms you will require in
exchange for your money. The mining promoters need you a lot
more than you need them.
On a practical level, when
a mining promoter tells you that you better hurry up and get
your money in because a deal is going to close, be skeptical.
If you like the management, and you like the project, tell him
that you are only investing in deals with a two-year warrant
on good terms.
Stick with quality. Make sure your portfolio is made up
only of quality companies that are well cashed up and able to
deliver on their aspirations. A number of "wannabe"
companies are running out of cash and will either have trouble
finding that cash or be forced to offer terms that will be significantly
dilutive to existing shareholders.
Watch the cost side of the
equation. On companies
that are in the feasibility phase, look hard at the potential
for bad news on the capital expenditure front. Few things will
send a stock down harder than the revelation that the mine they
had expected to bring in for $400 million will now cost upwards
of $1 billion.
As for the opportunity, the
Wall of Worry about the sector now looms so high, it is almost
as if we have been pushed back to the "Stealth" phase,
the phase where no one wants to hear about the Canadian junior
exploration stocks. That spells opportunity, because when there
are only sellers and few buyers, the only direction a stock can
go is up... once the dust settles. But only for the quality companies;
the paper tigers are doomed.
The bottom line: Keeping your eyes firmly fixed on
the prize and today's soft markets means you can get positioned
into great companies at deep discounts from where they should
be trading. And certainly will be trading, when the broader market
understands that the commodities bull market is very much intact
and that if you want to buy into the sector, you invariably will
have to do it on a Canadian exchange.
David Galland is managing director
of Casey Research, publishers of Doug Casey's International Speculator,
now in it's 28th year. New subscribers are invited to try a subscription
for three full months with the security of a 100% money-back
satisfaction guarantee. Learn
more and sign up now.
David Galland
Managing Director
Casey
Research, LLC.
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