It's Time To Seperate The Men From The Boys

By Mike Hoy  February 8, 2007

IT’S TIME TO SEPARATE THE MEN FROM THE BOYS!

Having been bitten by the proverbial “Gold Bug” over 25 years ago I believe it is safe to say that I have been taught many lessons.  For the first 15 years most of these lessons came at a very high cost.  This is the “bad news.”  The “good news” is the fact that since this bull market began in August of 1999 I am happy to say that I have been able to recognize most of the traps and pitfalls that snared me in my early years, coupled with a twenty year bear market in the precious metals.  By being able to recognize these signs I have been able to “steer clear” or exit early (usually at a profit) companies that serve no useful purpose other than a year end tax write off; assuming one can find a “greater fool” to unload their shares on.

In the end I believe the twenty year bear market in gold gave me the knowledge and experience to limit my mistakes and prosper in what will most likely become the “Greatest of ALL Bull Markets!” 

THE DANGEROUS FEELING OF INFALLIBILITY!

In a bull market making money is quite easy.  All one has to do is deposit their money in the right sector and profits are all but assured.  In fact, many funds and investors confuse “good timing” with actually knowing “what’s going on!”  This can be very dangerous; in fact it can be financially devastating in times of pullbacks, corrections and ultimate trend reversals because the inexperienced investor may fall victim to their emotions rather than rational, sane judgment in making decisions to buy and sell stock. A classic example of this was the decade of the nineties and the bull market in the tech sector. 

The tech sector gobbled up inexperienced investors and addicted them to a style of investing that could not have been further from the truth.  In fact, before the insanity ended the experts created two categories of tech sector stocks.  The irony to all this is the fact that those companies who were most overpriced were classified as “New Economy” and those tech stocks that did make sense as an investment, albeit at much lower prices, were given the insult of being classified as “Old Economy!”  I still chuckle when I think of this and the discussions I had with many investors who owned nothing but the “New Economy” era of investments.  None of these investors could tell me anything about the sales, earnings or outstanding shares in any of these “New Economy Stocks.”  All these brain-washed investors had one thing in common; each of them could tell me exactly where the price of their stocks had come from and where they thought they were going.  Many of these victims are still writing off their bad experiences on their current tax forms.

The sad part to this is the fact that they will one day be repeating the same mistakes again except this time it will be at the tail end of precious metals bull market.  The ironic point to this is the fact that these “bagholders” will be giving sophisticated and astute precious metals investors’ ample liquidity to exit their positions at huge profits without damaging the markets of the individual stocks they own when the appropriate time does come to take profits and exit positions with their final rewards.

SEPARATING THE MEN FROM THE BOYS!

I personally believe that the timing could not be more perfect than we have right now for investments in the precious metals sector. As investors, I believe the opportunities standing in front of us right now could become a “once in a lifetime opportunity!”  Before the bull market in precious metals is over the returns of the tech bull market, prior to its collapse, could look like “child’s play” in relation to the total returns of the precious metals sector.

If my thinking is correct those  funds and investors that have the ability to recognize companies that are “real” with projects that are worthy of attaching the word “production” have the opportunity see returns beyond their wildest dreams.  Unfortunately this probably will not happen for the vast majority of investors.  Why?  Because the vast majority of investors and funds are “BOYS!” 

“THE BOYS”

The “Boys” are investors who think in terms of percentages.  These investors have very little respect or understanding for the value being developed in the assets they own. Many are traders who allow a formula to dictate their entry and exit points giving no credence whatsoever to the accomplishments of management.  Many are private placement buyers who understand the necessity of Venture Exchange Companies to raise capital.  They know that after their holding periods are up they can sell their shares at a percentage profit and keep their warrants with absolutely no risk and no capital tied up.  In the end, many of the “Boys” that play this game have never had a trade in the open market except for a sell.  The sale of these shares gives them percentage profits, which normally turn out to be pretty good percentage returns, but in no way reflects the true value of the investments they may own.  I call these people “Boys” because they do not differentiate companies that are very well managed with a future from those that are nothing more than trading vehicles.  A classic example of this is trading a silver dollar for pennies.  No one in their right mind would make an exchange like this if they knew the difference.

“THE MEN”

The “Men” on the other hand, are in search of the “Silver Dollars.”  The “Men” recognize the potential of companies that are very well managed with corporate teams that have been successful in developing resources that are worthy of being put into production. The men recognize that share price weakness in these companies is an opportunity to build positions and redistribute shares from the hands of the “Boys” into strong hands that want “Silver Dollars” instead of pennies.  The Venture Exchange has no shortage of companies that fall into this category.  The “Men” recognize that as a company develops their projects, shareholder value multiplies making their original investments pocket change in relation to what should be reflected in the current market share price of their investments.

Many times the current market share price has nothing in common with the value that has been built as a result of successful programs.  It is at times like this where you have a true separation between the “Men and the “Boys.”

At times when the share price does not perform in a manner that one would naturally assume it should as a result of positive behind the scene developments the “Boys” will constantly gripe and complain about the poor price of their shares.  The “Men” on the other hand will sit back and quietly take advantage of the mistakes made by the “Boys” as they dump their shares and move on in search of “what they think” are more plentiful hunting grounds.

It is at this stage that the “Men” recognize that owning shares is no longer the main focal point of their investment as they turn their attentions to owning percentages of the company rather than just shares.

Let me give you an example of this; I will not mention the name of the company because I am interested in making a point on how undervalued certain companies are in relation to the value they possess.  There are many companies that fall into this category and I just want to highlight one example.  For the sake of ease I shall refer to this company as XYZ.  I am also not going into detail as I want to keep it simple.

EXAMPLE:

For the past 1.5 years XYZ has been drilling and developing a gold property in China.  An 800 ft. concrete shaft should be complete sometime in the second quarter of 2007.  Production of 500 t/day from this shaft should commence sometime in the summer of 2007.  Currently final negotiations are underway to purchase majority interest in an existing mill capable of processing up to 2,500t/day along with additional properties that are currently producing 300-800 t/d.  XYZ estimates that one year from commencing initial production in the summer of 2007 annualized gold production should net the company in excess of 50,000 oz./year with a cost of $225/oz. from this one project.

Other potential projects are being reviewed as future acquisitions to further enhance gold production in China.  The company is currently working closely to acquire other projects of this nature.

If XYZ is successful in their attempts to acquire other producing projects in China they hope to have production of roughly 250,000 oz. gold/year coming from China within the next three years.

As you can see; XYZ has a very attractive future based on the 50,000 oz/year gold production, coming from their first project, which should give them net positive cash flow of roughly $21,250,000 annualized one year after initial production begins in the summer of 2007.

A sophisticated investor would expect XYZ to trade at a minimum market cap of 5-10 X the $21,250,000.  The funny thing is the market cap on XYZ is roughly $20,000,000 C.

Who knows at this time how successful XYZ will be in their hunt to acquire other opportunities as attractive as the one they have that is about to come into production.  If successful it is possible for XYZ to become the largest foreign gold producing company in China.  This is a lofty goal and only time and excellent management will prove whether XYZ will reach this goal. Progress will be closely monitored as the company moves forward.  At this point in time this would be considered “the icing on the cake.”

The “Boys” would think of XYZ as a good percentage trade; The “Men” would think in terms of owning 10% of XYZ.  At current market prices 10% equates into roughly $2,000,000 C.

In the future if XYZ is successful and does become the largest foreign gold producing company in China; what do you think that 10% will be worth?

If you happen to be an institution or a fund what do you think 10% ownership of companies like XYZ would be worth to your portfolios?  Do you think a couple of XYZ’s in your portfolios would give you returns better than your competition?

Up to this point in time XYZ has not attracted any fund or institutional support.  This in my opinion makes XYZ a particularly attractive and timely investment.

It is important to note that XYZ is not unique as The Venture Exchange is full of companies just like XYZ.

With this type of opportunity commonplace on The Venture Exchange do you think the risk is that stocks will fall in value from where they are currently trading or do you believe like me that “IT IS TIME TO SEPARATE THE MEN FROM THE BOYS?”

As always folks these are just my own opinions and the fact remains that I could be wrong.  Therefore it is always important for each of you to do your own homework as in the end your opinions may differ from mine.

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Mike