"New Kid on the Block in Brazil"Mickey Fulp is in this - pre-IPO!
A Special Alert Musing from Mickey the Mercenary Geologist
June 15, 2011
As regular readers are aware, I use a standard formula to evaluate junior resource companies for
speculation. My formula is simple and consists of four parts: Share structure, people, projects, and
undervalue.
I own a newly-listed company that perhaps deserves your attention. Brazil Resources Inc (BRI.V) went
public about a month ago and the issue has been well-received by the marketplace.
Please note that I have been involved with the company and its principals for several months and
participated in two financings prior to the IPO. Therefore, my cost basis is less than its current trading
range. Although I have the proverbial multi-bagger in free-trading paper, I’m not selling at this juncture
and these are the reasons why:
• The founders of the company are the same team that took Uranium Energy Corp (UEC.NYSE)
from a startup explorer to a new USA uranium producer in less than five years. I am a committed
investor in UEC and have spoken about the company frequently in recent media interviews and
conference presentations. I have had a working relationship with Amir Adnani, CEO of UEC and
Chairman of Brazil Resources, for nearly a year.
• Brazil Resources has very strong management and technical teams and is currently adding to that
mix with Brazilian professionals having strong financial and technical acumen. The company has
a strategic alliance with Brazilinvest, a private merchant bank in the country. Its founder and
Chairman Mario Garnero is a director of BRI.
• The company is tightly held with 35.0 million shares outstanding; 10.3 million of those are
escrowed and due for release in tranches over the next 11 months. There are no warrants, few
options, a large insider position of 34%, and strong institutional support at 23%. The company
has $8.0 million in working capital.
• Some of the usual suspects in our business, including financiers, analysts, and newsletter writers
(including yours truly), are early shareholders in the company.
• It has a flagship project, Montes Aureos, in northeastern Brazil with a small historic gold resource
that is currently being evaluated by shallow auger drilling in saprolite. That will be followed by a
5000 meter diamond drill program in August. The chances for upgrade of the historic resource
into a larger 43-101 compliant resource in the near term are strong.
• The company’s goal is to become a significant player in the Brazil gold arena in the near-term
and eventually build a mid-tier gold miner in the country.
With an oversubscribed initial public offering at 65 cents, Brazil Resources Inc began trading on May 16.
The issue was well-received by investors and it traded from $1.00 to $1.10 over the first two days. After a
quick run-up to $1.45, BRI has settled into a trading pattern around $1.20 on light volume over the past
two weeks:
Since the fall of 2010, I have mentioned several times at panel discussions and workshops my fondness
for Brazil as an underexplored gold destination. As subscribers are aware, I previously covered another
Brazilian explorer, Amarillo Gold Corp (Mercenary Musing, February 14, 2011) with good success. It
went from 65 cents to a high of $1.90 during its one year tenure as a sponsor of my website and currently
trades at about $1.30.
Brazil is endowed with the requisite geology and a phenomenal gold budget for major discoveries.
However, it has lagged behind other countries, particularly in Latin America and West Africa, during the
exploration and discovery boom of the 2000s. There are a few reasons that come to mind:
• Difficulty in exploring in the Amazon Basin with little outcrop and significant infrastructure
challenges.
• Lack of a strong junior presence with about 15 public companies listed on the Toronto, London,
and Australian junior exchanges that have significant exploration, development, or production
projects in Brazil.
• Lack of a giant discovery by a junior or mid-tier company that attracts a major miner take-out.
• A cumbersome Brazilian bureaucracy and long-lead time to establish a corporate entity in the
country.
In my opinion, the relative lack of competition in the public company arena in Brazil represents an
opportunity that BRI is positioned to exploit.
The company meets my three key criteria for investment. The only question remaining is its valuation
with respect to its peers. And that, my friends, is an unanswerable question at this early juncture. Until the
company completes its current auger and diamond drill programs, posts assays, and returns a 43-101
resource estimate, we do not have a compelling way to compare it to the few peers among Brazilian gold
explorers.
With its strong access to capital markets and a financing in the planning stages, BRI’s share structure and
working capital will change considerably in the short term. By the time I get around to a field visit to
Montes Aureos in the early fall, it is likely to be a very different company than its present juvenile
identity. Simply put, I expect this new kid on the block to grow up fast.
Brazil Resources Inc has on-going drilling at its flagship project, personnel additions to the Board of
Directors and in-country technical teams, a planned financing in the next quarter, and an aggressive
business plan to build a mid-tier gold miner. These catalysts lead me to opine that Brazil Resources has a
strong chance to double in the next 12 months or less.
But as you are aware, I have skin in the game at a lower price and the company is a sponsor of my
website. That makes my views biased and you must do your own research to determine if the company
meets your specific speculative criteria.
I encourage you to check out Brazil Resources Inc and see what you think.
Ciao for now,
Mickey Fulp
Mercenary Geologist
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