Strategic Metals Ltd. = A little bit different (in a good way). Watch Webcast.

Oct 11

Strategic Metals Ltd. = A little bit different (in a good way). Watch Webcast.

Outside of the natural resources / commodities arena I’ve had a tough time finding “great deals”. What criterion makes for a great deal? Ask 10 professional analysts and you’ll probably get 10 different answers.

Personally, i tend to be attracted to deep value opportunities.

What’s the criterion for “deep value” you ask?

Or maybe you didn’t ask? Either way.

Respectfully, this is merely a free blog where i’m free to ramble about my personal ideas. I’d have to steer you back to those 10 figurative analysts for clarity on what is and isn’t deep value (for my purposes its a buzzword). Most likely someone (or two tree people) has already written an entire book on the topic. In all honesty, i haven’t read those books, but i probably should someday.

For now, the majority of my reading and listening time is focused on identifying what my common sense tells me are deep values. To that end, i’m pretty damn sure 7 out of 10 doctors (or professional analysts) would agree, Strategic Metals Ltd. (CVE: SMD) (OTCMKTS: SMDZF) is valued deeply below its true worth.

Strategic Metals Ltd. was a little bit different of a story (in a good way) than every other presenter at this years Precious Metals Summit in Beaver Creek, Colorado. A beautiful and luxurious venue, so i’m told, “Where the smart money goes prospecting.” Thankfully, the good people at Precious Metals Summit webcast all the presentations! so some smart money (like us?) doesn’t have to make the trip, while still gaining knowledge and awareness directly from the source — at a time and place convenient for us.

Over the last month I listened to most of the presentations. A number of my favorite names where there, all legitimate values in their own right — think Richmont Mines, St. Andrew Goldfields, Orca Gold, and McEwen Mining. As much as i like those companies, Strategic Metals is a little bit different (in a good way).

Instead of me trying to explain why its a little bit different (in a good way), is that point starting to sink in yet? I figured… why not allow Mr. Douglas Eaton CEO to sell us on the idea. As you will hear below, Mr. Douglas Eaton lays the story out succinctly and pragmatically. Despite his level-headed demeanor, my emotions ran over, I left the presentation with even more confidence in Strategic Metals Ltd than i had going in. Quite frankly, I’m excited and thankful for the opportunity to acquire Strategic Metals Ltd. below 5o cents!

Is buying a company for $24M that has roughly $40M worth of cash and investments a deep value?

Listen Here>>> Listen Hear>>> Just 10 moments of your time to better understand.

Below are a few more points from the webcast that struck a vein with me:

Why Yukon?
A recent survey of mining CEOs agreed– the Yukon is the best placed in the world geologically to make discoveries, and Strategic Metals Ltd. is the largest claim holder there by far. Yukon is a safe jurisdiction in which to invest long-term, it offers political stability and friendliness toward explorers and miners. How friendly are they? Well, as one example, Strategic has built up enough “assessment credits” with the Yukon government (a hidden value you won’t find on the balance sheet) from prior exploration that it incurs no costs for holding 130 properties. In other words, it can hold all claims while waiting out this down cycle for next to nothing.

The Archer Cathro connection
Strategic Metals Ltd. has been working in the Yukon for 20 years. Archer Cathro has beeen working in the Yukon for 50 years (arguably its preeminent explorer). Strategic Metals Ltd. has used Archer Cathro’s experience and database to make a lot of its acquisitions over that time. Archer Cathro’s name isn’t on every major discovery in Yukon, but it’s on a lot of them. By the way, more gold has been found in the past 5 years than since the Klondike gold rush.

Strategic - archer cathro

This you scratch my back I’ll scratch your back consulting relationship is invaluable to Strategic Metals Ltd.

One questioner asked Doug Eaton to talk about his secession plan. I’m glad he asked publicly because Doug’s answer was spot on: “i only want to work with people who are smarter than me. You can teach brilliant people, but you can’t teach intelligence.” Also, ideally he wants loyalty, Archer Cathro is in its 4th generation of geologists, and many of them start while in college and stay through retirement. From the outside looking in (and asking around a bit) it seems something special is going on here, synergies and knowledge-sharing exist between the two… my gut tells me hidden value is buried within the culture.

Gaming the cycles
As Doug said: “through three cycles now, we’ve demonstrated ability to capitalize on downturns and really exploit upticks.” While i believe practice makes improvement, not perfection — Strategic Metals Ltd. is building a nice track record of buying into weakness and selling into strength. Notice the yellow (cash) and blue (securities) lines below, they have grown consistently over a decade.

Strategic - new chart w cash

Doug would rather be patient and wait 2-3 years to do the right deal than do bad deals in a down market (who could disagree with that). As referenced, its land holding costs are virtually nil, Strategic has plenty of financial strength (most don’t have the luxury of being patient) so its positioned perfectly to take advantage of weaker players whom can’t hold prospective property for one reason or another.

Repurchase plan
Strategic Metals Ltd. has been buying back stock at a more frequent pace lately. The plan isn’t to bid up the stock price, but i think it could provide somewhat of a floor. If someone wants to give shares away it appears Strategic and Doug’s financial team will be there to take it off their hands.

In summary: its rare to find a stock trading for below its cash value, but even rarer to buy a company for such a low price that doesn’t have something wrong with it (debt burdened, broken business model, lack of talent, etc.). Truly, i’ve been trying to isolate the fatal flaw, problems, downside… what the hell am i missing here?

Me thinks this valuation is just a symptom / signal / byproduct of a deeply depressed resource sector. And in my experience great bargains don’t last forever, be it washing machines, houses, food, or stock.

Playing devil’s advocate, the downturn could turn down further and Strategic’ management team could make bad decisions regarding asset allocation going forward, but i don’t get the impression this group would waste shareholder money (if they’re wrong, at least they have great intentions). Besides, Management has skin in the game (+10% equity ownership) and it also has at least two solid institutional investors as watchman (wouldn’t be surprised if others are accumulating) in Tocqueville Gold Fund and Condire Resource Partners.

Strategic Metals Ltd. is the largest claim holder in the Yukon, industry executives voted it the best place in the world to make discoveries. Strategic is led by a super-smart group of geologists. It also has good lawyers and financial professionals, i don’t think they’re as exceptional as the geologists, but should be able to get the job done. Strategic Metals Ltd. sells on the open market for around $24 million, with approximately $40 million worth of cash and marketable securities (a portfolio poised to grow) with no debt.

–Therefore, Mr. Market, in all his infinite wisdom is assigning less than no value to all of Strategic’s other assets, Huh? Say what!

What more can a value-oriented common sense investor ask for?


Daniel T. Cook

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*Author has a long position in Strategic Metals Ltd.


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