My Favorite Mining Investments Are Cheap Now!

October 30th, 2008

If you’ve been following my thoughts lately, you know that I have a lot of opinions that seemingly conflict each other. I believe that many great companies are being thrown out with the bad. I believe we are in a recession. It won’t be easy or real short but it will eventually end. That said, I believe the commodity boom is far from over. I think we are headed into a weird time of socialist government policies and a wildly loose monetary policy. I also foresee extreme inflation, or hyperinflation and rising interest rates (once the inflation hits). Some call this stagflation. The world population is continuing to expand and previously impoverished nations are industrializing and beginning to compete with us for capital, jobs and resources. Our economy is unable to compete with others and we are seeing increased outsourcing due to differing labour and environmental laws/regulations, currency manipulation(and arbitrage) and taxes.

Many of the above thoughts may conflict with each other. But in some odd way, they make sense to me. Maybe I’m nuts? But I think you MUST have some exposure to hard assets as a hedge to fiat currencies and the coming hyperinflation. One way to hedge is to buy physical gold or silver (or other precious metals). That is a really good idea, but holding physical gold and silver, safe as it is, doesn’t actually make economic sense (to me). I’d rather invest in a mining company that holds these assets in mass, but also makes money by exploring and extracting these minerals from the ground. Regardless of how you get exposure to this industry, I think this is a good time to buy.

Gold

My favourite gold company at the moment is called Northern Dynasty Minerals [TSX: NDM $2.75; AMEX: NAK $2.17]. It’s a relatively risky, but potentially lucrative investment that I recently wrote an article about here. Suffice to say, this Company now looks extremely undervalued and the mine will be built over the next few years, barring any environmental setbacks. Not only is it extremely undervalued, but it’s a potential take-over target. If it isn’t bought out, it will have impressive cash flows after the mine is constructed in 2015. Yes, this is a relatively long-term investment of mine (if it isn’t taken over).

Silver

You would never expect to see an extremely innovative business structure involved in the silver industry, but weirder things have happened. Silver Wheaton [TSX: SLW $3.77; NYSE: SLW $2.87] is the largest pure silver company in the world despite the fact that it owns and operates NO mines. Think of Silver Wheaton as a neat financier for mining companies. Silver Wheaton buys rights to the future stream of silver from mining companies at fixed rates (like $3.90 per oz.) for a lump sum payment. The lump sum enables mining companies to construct their mines, of which silver is often just a by-product anyways. Silver Wheaton is currently PROFITABLE, cash flow positive, and expanding it’s silver rights rapidly. If inflation does occur as I predict, then Silver Wheaton will do very well.

Iron

Why iron? As the rest of the world industrializes, steel is going to be in high demand and iron is an important element. Okay, that’s a bit of a stretch, but it makes sense. The truth is, I fell in love (this could hurt) with the Company before it decided to focus solely on iron. This is my riskiest investment out of the three listed in this article. That said, I do believe the prospects for iron are positive.

The Company is called Adriana Resources [TSX-V: ADI $0.29]. I first fell in love because of it’s extremely small market capitalization with an all-star management team responsible for creating several multi-billion dollar mining companies in the past. I like the strategy of focusing on generating some cash flow so it can continue to afford the exploration costs involved to find world-class deposits. Now the Company has decided to alter directions (instead of just being a mining company looking for any minerals/metals) and focus itself by becoming a world class fully integrated iron ore producer due to management’s perceived opportunity to profit from the industrialization of the rest of the world.

As the Company was searching for world-class iron properties, it uncovered an interesting opportunity near Rio de Janeiro, Brazil, where limited shipping capacity on ports was hindering iron producers access to foreign markets. The Company bought a parcel of land on the Brazilian coast and decided to build a world class shipping port. I’m a big fan of Brazil (I like the future of their economy!).

But plans have been slightly altered, again. Now the world’s leading steel company, ArcelorMittal, has agreed to buy 80% of the shipping port for a total consideration of $40.5 M USD. Adriana will then have over $65 million in working capital upon completion of this agreement. Please note that the Company’s market capitalization is currently $25 million with the recent stock price drops! (Share price is $0.29 and there are 88,677,040 shares fully diluted, though the number of shares will increase). ArcerolMittal intends to investigate future strategic and mutually beneficial world-wide opportunities with Adriana.

ArcelorMittal is also going to buy up to 19.9% of the shares of Adriana (in two private placements) and help Adriana find financing to fund it’s portion of the $250 M USD port. Yes, it’s a big port that will ship 10 million tonnes per annum with options to expand to a deep sea port capable of 50 million tonnes per annum. I seen some older projections that mentioned revenue of $12/tonne and operating costs of $4/tonne. If those are accurate, and I have no clue if they are, then Adriana could have cash flow of $8 per tonne on 2 million tonnes a year and eventually up to 10 million tonnes per year! I believe Adriana plans on using this capacity to ship their own ore out of a mining property they hope to find and acquire in the region.

What really impresses me is the ability of Adriana’s management team to find opportunities, change plans, form strong partnerships and raise money in a difficult environment. Clearly connections matter. They have been conducting private placements for shares at prices well over the current market price. I also forgot to mention that the Company is selling it’s exploration rights in Northern Canada for $6 M worth of stock in Goldbard. Adriana is keeping the Lac Otelnuk, December Lake and Bedford’s iron properties in in Quebec, and Newfoundland & Labrador, Canada.

Obviously Adriana intends to acquire mineral rights in Brazil that will have access to their new port. At the same time the management team impresses me, it makes me dizzy. I never know what to expect next, but I’m confident they know what they are doing. I think the markets have thrown this one out with the rest. The share price was, historically, around the $1.10 mark, which is about the price I paid for it and about the price the company continues to get private placements for. This Company is a LONG way from owning any operating mines and is very risky.

Summary

I have massive losses on each of these investments. I don’t mind. The Companies haven’t changed (too much) and all look to be going forward and making progress. I will continue to acquire shares in each of these as long as I see value and opportunity. Maybe I’m nuts?

I want your help! I’m looking for opportunities all the time.What are some of YOUR favourite mining companies and why?

Full Disclosure: The author does own shares in NDM, SLW and ADI at the time of writing this article. (Also Note: I wrote this article a few days ago when the share prices were a bit lower.)

Entry Filed under: Stock Watch, Mining, Investing