Deep Value or Priced Efficiently? 3 Resource Stocks Trading Below Cash on Hand

Aug 16

Deep Value or Priced Efficiently? 3 Resource Stocks Trading Below Cash on Hand

According to the “efficient markets theory”, the prices of stocks, bonds, and other securities fully reflect all available information at any point in time.

In other words, no one should waste valuable time researching thousands of companies to find a deal, because someone else has already done it. This “someone else” is likely much smarter, and has more resources to deploy. Someone else will always isolate the mispricing first and capture the arbitrage before you, so why bother?

—hire someone else to manage your investments.

Arguably, too much information has already been written on the topic of efficient markets. I won’t waste your time arguing for or against the theory, but I will present two opposing viewpoints and ask you ahead of time… can both be true?

1) “I’d compare stock pickers to astrologers, but I don’t want to bad-mouth astrologers.” –Eugene Fama

2) “I’d be a bum on the street with a tin cup if the markets were always efficient.”
–Warren Buffett

In my humble opinion (which just happens to align with Warren’s), there is a well-established trend supporting the idea that markets aren’t always efficient (and won’t be anytime soon), especially when dealing in securities valued less than $2 billion.

Below are the A’s, B’s, and C’s supporting my belief:
A) The Wall Street machine has been firing equity analysts by the thousands year after year. No fees = no analyst coverage.

B) ETFs and mutual funds… millions, perhaps billions, are spent advertising them. The message is, why buy an individual stock when you can buy a broad basket? Trust someone else, you’re not a professional.

C) Group think is rampant! Very few portfolio managers have the courage to invest outside the herd, trend following rules the day. In a world desiring instant gratification, there’s not enough time to be a contrarian.

Getting to the point, below you will find 3 resource stocks that are currently valued below cash on hand. My goal is to provide just enough information to peek your interest, if you require more in depth analysis I trust you know where to find it.

Alternatively, call (407) 772-1135 or email [pennystockexperts@aol.com] to speak with me directly. I have invested hundreds of hours researching these companies, and would be happy to share further information with you.

As you review, keep in mind, famous resource investors like T. Boone Pickens made fortunes by mining the stock market.


Presently, the cost to build would exceed the cost to acquire. In all likelihood, the following valuations would not exist outside of a vicious bear market in natural resources.

Here they are!

1) Strategic Metals Ltd (CVE: SMD) (OTCMKTS: SMDZF)
According to The Fraser Institute, the Yukon ranked #1 in the world for mineral potential. Strategic Metals Ltd. is the largest claim holder in the Yukon, it controls more than 800,000 acres of prospective terrain. Applying a “prospect generator” business model, Strategic Metals Ltd. spreads its risk across hundreds of projects. Exploration is risky, but fabulously rewarding when successful. The prospect generator model increases Strategic Metals Ltd.’s odds of owning a piece of something great, as opposed to 100% of nothing.

Market Value on August 14th, 2015 = $23.2 million

Cash and Investments on hand = $37 million (approx.), no debt

 

2) Pan Orient Energy (CVE: POE)
With cash on hand, prospective drill targets with a carried interest, and no long-term debt, Pan Orient Energy is positioned opportunistically to survive the downturn. Earlier in the year Pan Orient Energy sold a 50% interest in its Thailand subsidiary, after closing costs it netted $52 million (its market value is $55M). Looking forward to 2016, its much larger partner, Talisman Energy (now Repsol), is funding the first $10M of drilling expenses, located onshore and offshore Indonesia. Additionally, Pan Orient Energy holds a 71.8% equity stake in Andora Energy. Its assets include a small bitumen operation in Sawn Lake, Alberta, and a patent related to steam assisted gravity drainage (“SAGD”).

Market Value on August 14th, 2015 = $74.2 million

Working Capital on hand = $87 million (approx.), with no long-term debt, $70M cash

 

3) Orca Gold (CVE: ORG) (OTCMKTS: CANWF)
Orca Gold controls a vast swath of land in what geologists call the Arabian-Nubian Shield, it’s thought to be the original source of King Solomon’s gold. Despite its tremendous mineral wealth, and storied history, little to no modern exploration has been done there to date. Orca Gold aims to uncover much of the gold ancient Egyptians left behind. Artisanal miners are literally picking up nuggets from the surface using metal detectors, little to no modern exploration has been done, so it wouldn’t be surprising to see Orca Gold grow its existing resource base of 2 million ounces to over 5 million ounces gold in the coming years. Led by Chairman Richard P. Clark, Orca Gold consists of much of the same team who built, then sold Red Back for $9.2 billion to Kinross Gold in late 2010. Equity partners worthy of mention (> 10%) include the Lundin Trust and Sinotec, a Chinese multinational.

Market Value on August 14th, 2015 = $18.3 million

Cash on hand = $24.7M as of December 2014; expenses for 2015 approx. $5M

 

Closing Thoughts: the stocks mentioned above, like any other business, have a unique set of risk characteristics. Arguably, on a risk/reward basis, each presents an interesting, dare I say deep value opportunity, given the underlying assets are assigned little to no value at recent market prices. Then again, according to theory, someone else, surely more intellectual and resourceful than you and I would already know everything there is to know about Strategic Metals Ltd., Pan Orient Energy, and Orca Gold.

If we rely on theory alone, you’re time reading this will have been wasted. But if… just maybe… that all knowing someone occasionally gets lazy, leaving a mispricing or two for us, all the effort will pay off handsomely in the end.

Each name was highlighted because it checks three boxes I prefer to have checked on any potential investment/speculation:

  • The people factor, each has a strong team in place, coupled with a track-record of success.
  • Share buybacks in place, the corporation and insiders are, and have been repurchasing stock… much of it at higher prices.
  • Little to no analyst coverage, I interpret this to mean very few influential investors are telling the story and there is plenty of buying potential on the sidelines.

 

 

*Disclosure: author has a long position in Strategic Metals Ltd

 

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