Looking to leverage the upside of inevitable rising precious metals prices without the risk of buying mining company stocks?
In this interview with The Gold Report, Dudley Baker, founder of Common Stock Warrants, shares his approach to evaluating companies for longevity and the opportunities warrants in those companies might play in the right circumstances.
The Gold Report: A lot has changed in the resource space since we interviewed you last. From your perspective in Mexico, how did we get to where we are today?
Dudley Baker: I stay abreast of the views of our friends—Rick Rule, Frank Holmes and many of the others in the business. Despite the toll low gold and silver prices have taken on companies and portfolios, I remain confident that those of us still invested in this sector will be greatly rewarded for our patience. It's just a matter of time.
We are four years into this pullback right now, which means we have to be getting close to the end of this bottoming process. Two recent events stressed to me that we are near a bottom. One was the folding of our friends Casey Research into Stansberry & Associates Investment Research. Over the last decade Doug Casey has built an empire of services and expert newsletter writers. That he would join forces makes me think we must be near a bottom.
A second one that hits even closer to home for me is that I recently received an email from my brokerage firm at market close on Friday that it was going out of business. This was a total shock. We have used Penn Trade for the last 10 years. The parent, Pennaluna & Company, is based in Coeur d'Alene, Idaho, and has been in business since 1926. Most of the firm's client base included resource investors. That is a dramatic contrarian sign that maybe, just maybe, we are close to a bottom.
TGR: If that's the capitulation that Rick Rule has talked about, what would the signs be that regular investors are starting to come back?
DB: Let's face it. The average investor does not want to step in right now. For me, if I can find opportunities, I'm still going into this market. Is it premature? Perhaps. But I don't want to miss all the upside coming. I'm afraid average investors are going to wait until we have one hell of a rally before they get their confidence back. It's going to take something well north of $1,250 an ounce ($1,250/oz) gold before the generalist takes notice, and at that point there's a high probability that it will be too late.
TGR: What if, as many have predicted, we end up with sub-$1,000/oz gold?
DB: It is always a possibility that we could go down from here. I do not want to see lower prices, but it could break down. If we break the previous low, $1,070/oz, there's no support until we get to $1,000/oz gold. That could happen really quickly and the faster the better. Let's get it over with. If we have to have a final cleansing, bring it on. Let's not drag this thing out for months. Then we can get a fresh start on a new uptrend.
The more likely scenario is that we have already bottomed. Of course, no one knows for sure. That is why we have to make our own decisions and be prepared for whatever happens. It is scary to step into these markets right now, but this is the game you have to be playing today. You have to be a contrarian, even if that means being a little early.
TGR: During this bottoming process, where is it that you're finding the best opportunities? What types of companies are best positioned to come back strongly?
DB: I have a whole basket of resource and non-resource companies in my portfolio. The challenge right now is timing. Who has good properties and the cash to survive this downturn? The ones that fit that description include New Gold Inc., Sandstorm Gold Ltd., Quaterra Resources Inc., Starcore International Mines Ltd. and Pilot Gold Inc. These are companies that are going to weather this downturn and be great performers when the markets turn.
TGR: Quaterra recently announced that Freeport-McMoRan Copper & Gold Inc. is investing $7.1 million ($7.1M) over the next year that will be used to explore the Bear copper project in Yerington, Nevada. Is that an example of how some of these juniors are surviving by joint venturing with majors?
DB: I have followed Quaterra for over a decade and been in and out and made some really nice money. In 2006, the stock rose to over $4/share. The company has restructured to become more of a copper play and it is sitting with around $4M in cash, weathering the storm. It is headed up by Tom Patton, one of the legends in the business. For a small company, Quaterra has incredible upside potential. I'm always looking for a minimum 500–1,000% potential when I go into something. This could be one of those companies when the market starts heating up.
TGR: Are you looking for the same thing with Starcore International?
DB: Starcore is a small gold producer in Mexico. It is producing some 19,000 oz (19 Koz) gold equivalent per year and sitting on $5M in cash. This could be a sleeper now that it has purchased the Creston Moly assets in Mexico out of bankruptcy for $2M. Those assets were purchased for $195M just four years ago. Starcore management was savvy to pick that resource up for less than a penny on the dollar. When the market turns, Starcore is going to be an interesting little play.
TGR: Pilot Gold has been the exception to the rule and actually realized a share price increase when it released results on the Kinsley Mountain project in Nevada. We hardly ever see stocks go up on good news anymore. How did management accomplish that?
DB: The share price had been beaten down so badly to the low-CA$0.30s that it was due for a pop to the upside. This is also just another really interesting company. It has the Nevada property and a joint venture in Turkey with Teck Resources Ltd. Plus it's sitting with around $12M of working capital. It is so important to me that we don't wake up one morning and one of our companies disappears. Cash takes the worry out of the game.