Forty years a speculator

— The following is the first of a two-part, edited excerpt from Forty Years a Speculator, an investing memoir by Fred Carach, a Florida resident and 40-year subscriber to The Northern Miner. The 142-page book is available at www.lulu.comand www.amazon.com.

I am not a Wall Street professional. In real life, I am a State Certified General Appraiser in the realty business. This is the story of my transformation over more than four decades from a conservative blue-chip investor into a steely eyed, riverboat gambler with nerves of steel. As the years progressed, I realized that blue-chip investing wasn’t the answer. It couldn’t be. Those Godzillas don’t move, and I wanted a stock that would go to the moon.

Gradually, I discovered what I was looking for in the unreported and unknown world of small-cap and micro-cap investing.

Picture this; the year was 1968, the place was the U. S. S. Little Rock, the flagship of the mighty U. S. Sixth Fleet. We were sailing in the Mediterranean Sea off the west coast of Italy somewhere between Rome and Naples.

I was waiting to go on watch in the CIC (Combat Information Center) or as we fondly call it: the center of intense confusion. I was reading a magazine article; I think it was Saga magazine that had my undivided attention. The article was written by someone who had just made a killing speculating in penny mining stocks.

I have always been fascinated with the concept of making big bucks on a chump change investment and this was right up my alley. The most important part of this article was that the writer informed the reader that if you were going to speculate in penny mining stocks, you had to subscribe to The Northern Miner, and what is even more important, he gave the address. I sent off a letter requesting a subscription. I remain a subscriber to this day.

Now I know what you are thinking: why penny mining stocks?Why not penny stocks in general? What is so great about penny mining stocks?

First, it needs to be understood that I only invest in mining stocks that are listed on the Toronto Stock Exchange or its related junior stock exchange, the TSX Venture Exchange.

Contrary to popular belief, our northern friends do an excellent job of policing and regulating their mining industry, so long as perfection isn’t expected. And they provide an excellent filter by mandating minimum requirements that the companies must adhere to.

How many penny stocks do you know of that are listed on an exchange and have to meet minimum requirements that aren’t mining-related? The correct answer is almost none.

Another advantage is that only a tiny percentage of these stocks are producers. The vast majority of these stocks have no operating income at all. I regard this as a plus because then they can be analyzed strictly as an asset play, and they are asset plays with a vengeance. There is no other investment on earth that routinely has such colossal asset values in relation to their stock prices.

Then there is their astounding ability, which no other type of stock possesses, to go into hibernation for years, if necessary for decades, and maintain their listing. All other stocks perish if they can’t maintain operations.

Lastly, I am of the belief that we are entering a golden age of natural resources that should last for at least another decade.

Let me tell you about a penny stock that will illustrate some of the points I want to make. Back in the early days, there was this jewel called Arctic Gold and Silver Mines. When I bought it, I remember thinking that the name was worth the 46 a share I was paying. I was wrong: The company was delisted and I wrote off the investment.

But it wasn’t a total loss. I had this rather attractive stock certificate that they had mailed me. In those days, they still mailed you the stock certificate. I was going to frame it on the wall. It would make a wonderful conversation piece, but it wasn’t to be.

I never got around to framing it because about a year later, Arctic Gold and Silver Mines rose from the dead.

In Canada, mining companies can reconstitute themselves. If they pay their back taxes and fees, they can reclaim their charter, mining claims and listing, provided no one has acquired their claims in the interim. This happens more often than you would think.

Arctic Gold and Silver Mines was back in action, but I was no longer a believer. When the stock had struggled back to about 25% of what I had paid for it, I took the money and ran. The stock was delisted again, this time forever.

I now regret sending back the stock certificate, it would look wonderful on the wall. The amount I received for the stock was trivial. In those days, my standard investment was 500 shares.

At this point you are probably wondering how it is possible for penny mining stocks to survive for years and indeed decades without any operating income. It is tied up with the ability of penny mining stocks — alone of all other investment categories — to hibernate or go into suspended animation.

It isn’t unusual for a penny mining stock to have only three employees: the president, the secretary and the geologist, who usually doubles as the vice-president.

Until recent years, it was possible for a determined president to operate a bare bones operation like this for as little as $250,000 a year or less. Today, it can be done for $500,000 a year or less. Only the fact that penny mining stocks are the purest asset plays on earth allows this type of set-up to be feasible.

Since they typically earn no income, the normal means of funding by a broker-promoted secondary offering doesn’t work for mining stocks once they have been around for a few years and their stock is still selling for pennies.

The standard method by which penny mining stocks raise capital is by way of what is called a private placement. In this model, the president solicits money directly from private investors every year.

Under ideal circumstances it can work like this. The president invites, say, four to six serious investors out to investigate the mining site. If he is smart, he will provide each investor with one of those cute geologist’s hammers and a jeweller’s loupe with a chain so that they can wear their new status symbol around their necks.

A jeweller’s loupe is a small ten-power magnifying glass that is the status symbol of three professions: jewellers, coin collectors and geologists. Each group loves these status symbols and never misses an opportunity to employ them with great ostentation.

At the mine site, the investors will be invited to chip off rock samples with their cute little hammers and examine them under their jeweller’s loupes.

For lunch, they go down to the lake and have a picnic. If they are lucky, they can watch soaring eagles capturing fish while they lunch.

How do I know there is a lake? There are hundreds of thousands of lakes in Canada — I kid you not. Every mine I have ever owned has been within sight of a lake, and two of them were located on islands in the middle of a lake.

In the afternoon, time will be set aside for some fishing, and late in the afternoon or evening there will be fried fish over an enormous fire.

If the weather is good, getting the investors to write a cheque is like shooting fish in a barrel. A determined president can keep his company solvent for years using this technique.

Let’s now take a look at the type of profits that penny mining stocks can generate by looking at some of my recent successes.

Exall Resources was a stock that was an old favourite of mine. I had sold it twice before at a profit. This time I purchased it at 18 a share.

Exall was now under new management that had decided it would re-deploy its assets into the oil and gas sector and place all its gold assets into a new gold company that would be ca
lled Gold Eagle Mines and then spin Gold Eagle off to Exall’s owners.

This was fine with me. I am a big energy fan. Now, Gold Eagle’s gold asset was located in the fabulous Red Lake mining camp. This is Canada’s most prolific gold mining area.

At this time, a new drilling program was under way at Gold Eagle. The stock was rising nicely, but nothing out of the ordinary. Then suddenly, the stock jumped overnight from about 30 a share to $1.20.

For an old salt like myself it wasn’t too difficult to figure out what had happened. The arrival of The Northern Miner provided the answer. The drill program was a success and reported high-grade gold intercepts — much higher than anybody had expected.

The president hastily informed the owners that the program to spin off Gold Eagle had been cancelled –a wise decision.

At this point, my normal procedure would be to take the money and run. Normally after a report like this, the stock blows off and then declines. A decline back to 60-80 per share would be normal.

But this was the Red Lake mining camp and the core samples were very rich. Against my better judgment I held on. To my considerable surprise, the stock didn’t decline as I expected; it continued to rise.

There were now three drills on-site instead of one. This was highly unusual action for a penny mining stock, which must hoard its limited resources. And they were reporting bonanza grades. It looked like Gold Eagle was a mine in the making, and I was holding on.

As this is being written in 2006, Exall Resources is selling for $2 a share. Not bad for an 18-a-share investment and this move may not be over.

Exall Resources’ 2005 annual report was a joy to read. It began like this: “Our company has not seen a year like 2005 in its entire 71- year history. With a major discovery at the Gold Eagle property, the very property that formed the foundation of Exall’s incorporation as a company on Feb. 13, 1934, we have come full circle co-incident with a very exciting time in the gold business.”

But the part I liked best in the annual report was the part that said Exall’s stock had climbed 1,100% during the second half of 2005, based on positive drill results.

[Editor’s note: At presstime, Exall had since spun off its oil and gas assets and merged with Southern Star Resources to form Gold Eagle Mines, with former Exall shareholders owning 53% of Gold Eagle Mines. Goldcorp has just tabled a friendly $13.60-per-share offer for Gold Eagle Mines, valuing the junior at $1.5 billion.]

Next week: part II