Rules of the Road in Discovery Investing: Finding the Ones to Watch
Source: Michael A. Berry, Ph.D (3/25/08)
In this exclusive interview with The Gold Report, the first of a three-part series, Dr. Michael Berry, a pioneer in the field of discovery investing, shares his expertise for identifying winners early in the game—often long before the market recognizes their value. Learn about his favorite gold and silver mining companies and why he thinks they have what it takes.
TGR: Can you give us some background about Discovery Investing?
MB: Here's how I recommend people look at discovery investing. I divide the universe into three types of stocks: The first is the incubator stock, a company at the very front end of the discovery cycle. These are normally penny stocks. They're very risky and usually fairly illiquid. A company such as Terraco Gold, Inc. (TSX.V:TEN) falls into this category.
TGR: And the other two categories?
MB: The other two categories are mature discovery stocks, such as Midway Gold Corp. (AMEX/TSX.V:MDW;MDWGF.PK) and legacy stocks, such as Apple, Inc. (NasdaqGS: AAPL) or Boeing Co. (NYSE:BA). People should understand that discoveries happen across the spectrum. Boeing used discovery technology to produce the 787. Apple discovered the iPod and the iPhone and created tremendous wealth. They are what I call legacy stocks because they aren't as risky, and you can hold them for a long time.
TGR: But you put Terraco Gold into the incubator category?
MB: That's right. Terraco owns the Moon Valley property in Nevada, near Lovelock. The company announced the drill results from its first 15-hole program, which included mineralization on 8 of the 15 holes. This property is in a prolific silver district, just over the ridge from Midway Gold's Spring Valley property, which has 700,000 ounces of gold. I like Terraco because it's a 30-cent stock, and it has two of the best geologists in the business—Charles Sulfrian and Ken Snyder, both of whom have a lot of experience working with the big mining companies. Todd Hilditch is one of the best young CEOs. Management likes this property. When the [recent] drill results came out, people said, "Well, these are disappointing." I said, "Wait a minute. This is the first time this property has ever been drilled." In the discovery process, if you're not patient, if you don't do your due diligence, and you don't have the courage to stay in the game, you won't make the great discoveries. The discovery doesn't always happen right away. Ken and Charlie are very happy with the results. They're planning to start their drill program in May of this year on the same property. So, I think it's got great potential.
TGR: And at 30 cents, it's very affordable.
MB: That's right. That's what's so great about the incubator phase, the stock is still cheap, so you can buy a lot of it. You have to own enough of the stock to make a difference. Terraco Gold is a fabulous opportunity right now because I think the company has a chance to make a major discovery in the next year or two. The results certainly indicate silver mineralization. Silver is selling for $16.99 now. Two or three years ago silver sold for $6/ounce. We have an amazing price increase going on now in the precious metals game even with the recent pullback in commodities. Terraco is a great play on both gold and silver.
TGR: Let's go back to Midway Gold. Why do you like it?
MB: I've owned Midway Gold for six years. The company has two great properties in Nevada—actually, they have three great properties, but they started with two great properties in Spring Valley and Midway near Tonopah. Spring Valley might contain about a million ounces of gold. People don't realize that you've got to drill a lot of holes to determine just what an ore body looks like before you even think about production.
Midway’s Spring valley has a lot of nugget-type gold, which has slowed things down a bit because that type is always more problematical. But they're making progress. If they keep making progress, you'll have to buy this stock on the dips. Within two years the company will begin mining its second property, Tonopah, in south-central Nevada. This property has the characteristics of the Pipeline mine. It could produce a couple of million ounces of gold. Midway is perfectly positioned for growth with those two properties. At $3, it's a very cheap play on higher prices in gold. It's performing very well. It's management has executed well, and has proven reserves.
TGR: What about Aura Silver?
MB: Aura Silver (AUU - TSX.V) has three great properties. One of them is in Oaxaca, Mexico, and it is in a very prolific mining region near several high-grade silver veins. Aura also has properties in Silver Valley, Idaho and they have a silver property in Canada. This is a pure silver play with a good management team, and right now, I'm waiting on results. Aurora is a very cheap stock at this stage.
TGR: And Quaterra? What do you like about this one?
MB: Quaterra Resources, Inc. (TSXV: QTA) is a mining company I've been invested in for about eight years. It recently drilled 72 holes on its MacArthur Copper property near Yerington, Nevada. I think this is going to be a major wealth-creating resource. The property could be a company-maker. The MacArthur mine could produce 200-300 million tons of .4 or .3% copper oxide and chalcocite that will be leachable, and it’s already an open pit. So it will be inexpensive to produce.
TGR: What about Quaterra's management team?
MB: Good management is key for a discovery company, and I like this one. It's the same team that made the Western Silver Corporation (WTZ) discoveries. Dr. Tom Patton, the former president & COO of Western Silver, is Quaterra’s CEO. He's put together a great team of people who have a completely different discovery approach. A former chief exploration geologist for Kennecott RTZ, Patton's strategy is to put together the best properties he can find, whether gold, uranium, or copper. He's assembled a stable of properties, including the MacArthur copper property. So the combination of potential discovery and a solid management team has convinced me that Quaterra represents a great opportunity.
TGR: What can you tell us about War Eagle Mining Co. Inc. (TSX.V:WAR) and Polymet Mining (AMEX: PLM; TSX: POM)?
MB: I visited War Eagle Mining Co. germanium and zinc mine in Chihuahua. It turns out that germanium is a very rare metal used in fiber optics and night location devices and so on. Their Tres Marias Mine—high-grade zinc, high grade germanium—is very attractive. This is really an interesting play, and I think it's going to worth an awful lot of money. The stock is about 40 cents today—very cheap—and it's a stock that should be considered. In addition to the Tres Marias Mine in Chihuahua, there are a number of other targets that look like they're germanium as well, so it's a very interesting play and a good team.
Polymet Mining pulled a real coup. They acquired Cleveland Cliff’s asset base in northern Minnesota. These include the iron ore processing facilities for a song. They have a very prolific ore body up there. It has PGMs, cobalt, gold and copper in it. They're waiting for environmental permission from Minnesota and I think they're going to get it. The stock is very cheap in the $3 range. The catalyst for Polymet will be environmental approvals by the state of Minnesota.
TGR: Can you talk about a couple of other gold names? You've mentioned Piedmont Mining Company, Inc. (OTC BB: PIED) and Freegold Ventures (TSX: ITF)
MB: Piedmont Mining is an incubator company. I started buying it at 6 cents; it went up to 30 cents. It has since fallen back to 18 cents. They have a great management team led by Dr. Robert Shields and a good board of directors.
Their strategy is to have property exposure on the famous gold trends in Nevada. All their properties (they have eight) are situated on the various gold trends there. They are focused on gold although they may have some silver. I think they've got a great chance to make a discovery given the number of their properties, and the kind of people with whom they're doing joint ventures. This is an incubator company with the potential I like to find at the beginning of the discovery cycle. They have a great opportunity to create significant wealth. The share price is 18 cents and, if you are new to the game, you can buy 10,000 shares and it doesn't break you. Your risk to reward ratio is also favorable
TGR: What about Freegold?
MB: Freegold Ventures is a classic discovery play.CEO Steve Manz took it over, and he's done a great job with it; he's going to be a great CEO. This was a 40-cent stock but they kept making discoveries, and eventually the market recognized that this was more than a micro cap stock, and they bid the stock up. The stock got as high as $2.70. It was hurt in this last down turn but it's very cheap. One property is in Alaska and lots of gold has been discovered there, so I like Freegold's chances. I call them a mature discovery play rather than an incubator because they have made some significant discoveries. Once they start to pile up the resource, the market is going to wake up and say, "Hey, wait a minute! This is more than just an ordinary stock, this is for real." When that happens, it's very exciting, and I think that could happen to Freegold.
I think Freegold has great potential. So does Polymet and certainly Midway. If somebody doesn't want to buy at the incubator stage because the stocks are just too risky for them, then look at Midway Gold, Freegold or Polymet. These companies are positioned to move higher with more discoveries, and they're maturing. So you cut your risks with them.
TGR: What about U.S. Silver, MacMillan, GoldCorp, Goldcorp and Kenrich?
MB: Let's start with Kenrich-Eskay Mining Corp. (KRE.v). I started working with Kenrich a couple of years ago. We flew up to see the famous Eskay Creek mine. On the 109th hole they found a mass of sulfide, and it was very rich. That mine just kept producing and producing many millions of ounces of gold and hundreds of millions of ounces of silver. And Kenrich-Eskay has all the properties maybe 10 kilometers south of the Eskay Creek Mine. There is a very famous guy—I think he's the best massive sulfide geologist in the world—named Paul J. McGuigan. His team has been on that now for five or six years, and they're teasing the sulfides out. They've had some massive sulfide discoveries; they still haven't hit the big one yet. The stock is very cheap. I am convinced that one day they're going to go out and drill into another Eskay Creek ore body. They've had a great track record. When you do discovery investing, you want to bet on the property itself and then the track record of the team that's managing it.
TGR: Why don't we wrap up with MacMillan and U.S. Silver, and then Goldcorp.
MB: MacMillan GoldCorp. (TSX-V: MMG) had properties in Mexico. They've got something big in Peru now and I'm kind of excited about it. I haven't been down there. As you know, one of the things I try to do is to go out and see everything. That means I fly a lot. But they are on to what I think could be a major discovery— a gold, copper, porphyry. It's an old Spanish mine from back in the 1600s, and so the aphorism is you find a mine where there's been a mine. And we are just waiting now to see drill results. George Brown runs MacMillan, and he has a good team. The stock is cheap. Again, it's one of those situations where if the drill hits and they get a good result, you could have a $3 or $4 stock pretty quickly. It will be gold; it will be cooper; but I haven't been to see it yet. So, I can't actually say, "You know, yeah, I was there, and I spent 3-4 days, and I walked around, and I am convinced" on that one.
U. S. Silver (TSXV: USA) is mining in Idaho right now. They've got a major silver play there, and their big problem is hiring the people to actually come in and do the mining. U.S. Silver is going to be very good because they're in production. That's one I would certainly say is at the mature stage. U.S. Silver is about a 75-80 cent stock—very cheap when you consider they have proven reserves; they're in the U.S., and they're mining.
TGR: What about Goldcorp?
MB: I have gotten to know Goldcorp Inc. (TSX: G) (NYSE: GG) well because I got a lot of it when I was taken out of Western Silver Corporation (WTZ) stock. It is a great company. There's no doubt in my mind, having been there so many times, that its key asset is Peñasquito. This is the discovery that Western Silver made in the state of Zacatecas near a little town call Mazapil. When I first went to Mazapil in 2003 or 2004, it was like going back into the 16th century. That's changed now but Goldcorp, at that single site at Peñasquito, will have at least 20 million ounces of recoverable gold and at least a billion ounces of silver, and many, many million pounds of lead and zinc. So, it's a wonderful asset.
They have recently agreed to sell their equity position in Silver Wheaton (NYSE: SLW).
MB: For $1.8 billion dollars, and I think that was to fund the development of the Penasquito Mine. I am not exactly sure why they did that, but my guess is to ease the balance sheet a bit.
TGR: Right. I see that Silver Wheaton has halted trading.
MB: Oh, really? That's interesting. Well, there's a stock, Canplats Resources Corp. (V.CPQ, PK.CPQRF, F.CPQ, DE.CPQ, BE.CPQ), which is within about seven miles of the last land we staked down there at Peñasquito. Of course, they're the ones that had 184 meters of 1.6 grams of gold. I bet my life on it that within a year Goldcorp will ultimately take a lunge at Canplats and take them out. They had six great holes the other day at Canplats, and the stock fell.
TGR: I know. It's also run up what three or five fold since November.
MB: Oh yeah, absolutely. I vowed I wouldn't chase it. I am not chasing this stock. It will come back, because most of them do. Another rule of the road in discovery investing is don't chase it; if you miss it, there will be another one that comes down the pipe. When you chase these things and you buy them at $6, they end up going back down to $3.
TGR: Before they go to $8.
MB: Yes, hopefully.
TGR: You have given us quite a lot to consider here.
MB: It is a smorgasbord. What I try and tell people is to know your own risk tolerance because you're going to be able to pick from the riskiest, and perhaps the highest reward discovery stocks, to the least risky. Just before I leave I must also mention Galway Resources (GWY:TSX.V) and Grande Portage (GPG: TSX.V). Grande Portage has the merry Widow and Old Sport Horizon on Vancouver Island near Port Hardy. This has been a prolific iron ore mine for the past century. Iron ore is now going through the roof.
Galway has a very nice proven deposit of tungsten and molybdenum in New Mexico near Deming. This will most definitely become a mine. Moly is so important tin car manufacturing, nuclear reactors and many other applications for its ability to make stainless steel very hard.
At 50 cents Galway is a steal today. It’s a mature discovery play that CEO Rob Hinchcliffe and COO Marshall Himes are running today. A portfolio of these discovery names should do quite well in the future.