Edited By Thom Calandra
www.tickertrax.com™
“Welcome,Danny Deadlock! We hope to see your fresh Ticker Trax perspective on investing each week around this time. (Subscribers, please see my note at the close of Danny’s presentation. I’ll still be contributing research and writing. Subscribers always want research like the work we did on Nevada’s Comstock Mining (LODE), which has tripled in two months … and those uranium stocks ... and molybdenum, etc.) I have known Danny Deadlock and followed his work for some time now. He has a keen sense of discovering undervalued investments, both natural resources and technology companies.” – Thom Calandra
INTRODUCTION
As this is my first research report for Ticker Trax, an introduction is in order. I am the founder and lead analyst for MicroCap.com and have published free research on Stockhouse for more than a decade. Canadian penny stocks have been my passion for at least 25 years; this has been a full time occupation for me since 1998. Prior to that, I was a financial analyst for a large Canadian mining company.
It was an honour for me to be asked to contribute research and market insight for Ticker Trax as I take great pride in the work I do. Thom Calandra and the team at Stockhouse share similar values and objectives in that our primary goal is to educate and help speculators make sense of penny stock investing. And above all, to make money. Naturally, we cover companies that have gone beyond pennies, and even dollars, per share. We just like to catch them when they are closer to pennies.
I live in a community outside of Calgary in Canada and also keep a residence in Calgary. Typically I spend 12 hours per day researching Canadian stocks and the markets in general. I have spent my entire life in rural mining and oil communities, so corporate protocol means little to me. My first priority is to my paid subscribers, so we will never become married to any one company. If they underperform or do something I deem outside the best interest of shareholders, we will drop coverage and you will be the first to know why. This is a ruthless game of speculation and for the first 15 years I continually lost money until the Internet came along and levelled the playing field. Public markets are often driven by greed so it becomes a major challenge knowing whom to trust.
I do not pretend to be an expert in any area and because there is so much information out there, I specialize in Canada-listed companies, initially trading under $3. I’m Canadian. I think I know what to look for (both good and bad), and I depend upon other people for their area of expertise. I follow metals and minerals exploration, oil & gas, biotech and technology. Following the tech bust in 2001, we focused on 40 cash-rich techs that all gained anywhere from 100% to 700% in 18 months … and then followed a similar approach with mining stocks (with similar results) when markets collapsed in late 2008. To do this I follow a large number of brokerage analysts, newsletter writers and media.
‘Contrary … Risk’
Even after doing this for so long, I make mistakes. Every year I hope I have it figured out, and every year something catches me off guard. That is the nature of penny stock investing and because of this, my first priority is to try and manage risk. If the downside risk looks reasonable, then I try to assess whether the stock can double or better in six months. I like to bottom fish companies before they become well known, and often we’ll take a contrarian approach to the rest of the herd (although I definitely like to follow trends and momentum).
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The Ticker Trax plan is to introduce a new company every two weeks and on the alternate week, to provide an update on past picks, the market, etc. These reports will appear for free on Stockhouse 30 days after initially published. (Thom occasionally does this with his Stockhouse articles as well.) This I hope will expand the audience for stocks you may own and (hopefully) provide one major advantage to being a paid subscriber.
In keeping with the theme of managing risk/reward, I am introducing a company that trades below its cash and investment value yet provides significant leverage to various popular commodities.
Cardero Resource Corp. (T.CDU High of $1.60 since profiled to Ticker Trax subscribers / Amex CDY $1.60)
www.cardero.com
Snapshot: A cash-rich resource company with iron ore, titanium and copper projects. And large investments in companies associated with gold, silver, base metals, rare earths and uranium.
Financials as at July 31st
Net Value of Cash & Investments less debt = $1.39/share
Cash $63 million ($1.08/share)
Investments $46 million ($0.78/share)
Accounts payable $800k (-$0.01/share)
Income Tax $27 million (-$0.46/share)
Shares outstanding: 58.6 million
Since financials were last filed for the end of July, Cardero has invested another $9.5 million. Those additional investments are reflected in the total below. Of particular interest, pay attention to the investment in Coalhunter Mining. It appears this could be IPO’d early 2011 and my research indicates that there is tremendous growth potential there (based upon value of publicly-traded peer companies). I have detailed that investment near the end of today’s report (written Wednesday of this week and published Thursday).
Current market value of the investments is as follows:
-- International Tower Hill (TSX: T.ITH) - 4.6 million shares - $36 million
-- Trevali Resources (TSX: T.TV) - 7 million shares - $10 million
-- Wealth Minerals (TSX: V.WML) – 5.0 million - $3 million
-- Dorato Resources (TSX: V.DRI) - 2.2 million - $3 million
-- Coalhunter Mining (Private) – 12 million - $3.6 million
-- Kria Resources (TSX: V.KIA ) – 15 million - $3 million
-- Misc. Investments - $2 million
Cardero(TSX: T.CDU, Stock Forum) and (AMEX: CDY, Stock Forum) invested $9.5 million of its cash but current value of the investments is $60 million or $14 million higher than last quarter. This is a net gain of another $5 million that moves theircash and investment liquidation value (after accounting for income tax payable) to approx. $1.50/share.
The large tax liability occurred in January when it sold its Peruvian iron deposit for $100 million (to a group from China). The company had an estimated $10 million invested in this project.
GROWTH POTENTIAL
The downside risk on this stock is controlled by the pure value of cash and investments. The growth will not only come from those underlying investments, but (hopefully) from two key projects that carry zero value right now (because the stock trades below its liquidation value).
1) Pampa el Toro Iron Sands - Peru
Cardero has significant experience in working with China. In 2009 they negotiated the sale of their iron sands project in Peru for $100 million. Prior to the financial collapse, it was estimated this could be worth almost twice that. Pampa el Toro is their remaining iron sands project and in the last set of financials, they stated the following:
During the quarter April 30, 2010, and to June 10, 2010, the Company was primarily focussed on promoting the Pampa el Toro Iron Sands program as a viable project for the production of iron ore concentrate and/or pig iron to serve the needs of the PRC (People's Republic of China).
At the present time, the Company is actively engaged in securing a partner who can help move the project to a commercial stage and, although the Company is presently in discussions with interested entities (including conducting property visits), there can be no assurance that it will be able to do so.
The most important statement we could see is that they are actively marketing it in China and are also looking for a development partner (or outright sale).
The company is controlling costs and has only committed to spending $3 million on the project in 2010. This will continue advancing it to the stage of production or sale. They have done extensive work already and spent millions. The property consists of two dune fields - Pampa el Toro and Carbonera. [The one year chart below is for iron ore delivery in China].
Cardero has 12,100 hectares in four areas that are owned 100% and 3,600 hectares in two areas that are held under option from an arm's length private Peruvian company. The Iron Sands project is located near the city of Nazca in the desert coastal region of southern Peru approximately 45 kilometres northeast of the port of San Juan and close to the large Marcona iron mine
In addition, Cardero intends to complete the metallurgical test program presently under way for the recovery of vanadium and titanium from the smelter slag produced in the melting test, and believes that the results of this testing will add significant value in terms of potential high-quality pig-iron and titanium-vanadium co-products. This testing will be completed in Q3/10.
Because the company trades at a discount to net cash/investments, this large iron sands project is deemed worthless by the market. This makes no sense - but creates huge opportunity. Obviously there can never be a guarantee they find a buyer or development partner from China, but if they do, the upside potential from these levels is very significant.
2) Ferro-titanium TiTac and Longnose Projects - Northern Minnesota
This is another very promising project that oddly carries zero value by the market. August 31st they released drill results and one hole in particular reported a very significant 532 metres of iron, titanium, and copper. The copper credit (grade) appears low but it appears the iron and titanium (14.8% combined grade) is quite good. In addition to the big hole, almost all their other assays reported very encouraging numbers.
Both projects were previously subject to historical exploration and according to BHP, were the largest known ilmenite (FeTiO3) resource in North America. Cardero has completed a total of 36 diamond drill holes at the projects for a total of 11,506 metres, with significant iron-titanium and copper mineralization being intersected in the majority of the holes at both projects. Their winter drilling program will start up again before year end.
This means that their large iron sands project in South America is valued at zero, and now this property in Minnesota is also worth zero (or in theory, a negative value). If this was a standalone project in any other public company, these results could generate substantial activity.
It’s an extremely strange situation sitting ride under our nose that 99% of investors choose to ignore – or know nothing about.
The Coalhunter Investment
Cardero as I showed near the beginning has invested in several public companies. Their primary investment is International Towerhill (ITH.T), a very large gold project in Alaska that will eventually go into production or be bought out. While the other investments also hold strong growth potential, the CoalHunter project is worth following closely.
In June Cardero secured a 49.5% interest in Coalhunter Mining for $3.6 million (12 million shares at $0.30). The company’s Chairman is Alan Johnson, a mining executive with extensive experience in the Canadian and international coal business. He was a former Member of Canada’s Parliament and Chair of its Energy, Mines and Resources Committee and also managed the Coal Division for Gulf Canada. Also involved is Michael Hunter. A co-founder of First Coal Corporation, he was instrumental in assembling the largest land position of any coal company in BC.
Coalhunter’s primary asset is Carbon Creek. The project is located in the Peace River coal fields of NE British Colombia. Ownership has been disputed since 1929 (the last round was 2004 to 2010), but it was eventually awarded to Coalhunter in 2010.
The property has been extensively drill tested and of particular importance, it is a (high demand) soft coking coal with excellent recovery and low ash. There is plenty of room for expansion but drilling has confirmed 67 million tonnes recoverable.
Carbon Creek is located in a known metallurgical coal field with excellent power and transportation access. Development and sales contracts are planned for 2011 with production in 2012. Planned IPO in early 2011. Estimated costs to production, $100 million.
Compared to several publicly-traded Canadian companies in the same business (and region), Coalhunter’s valuation on a per tonne basis leaves dramatic room for growth. www.coalhunter.com
China Will Continue to Fuel Growth
Commodities as everyone knows, are doing extremely well and the trend is expected to continue. Worth noting are recent comments from Evy Hambro of Blackrock, the world's largest money manager with $3 trillion in assets. Hambro is overweight copper and also favours iron ore and met coal. He cites strong underlying Chinese commodity consumption un-dented by steps to curb growth (including recent interest rate increase).
Mr. Hambro spoke in Australia two weeks ago and stated that they are very comfortable with the Chinese economy and its rate of growth (consumption of raw materials). He believes we will continue to see strong demand for iron ore and for coal used to make steel (coking coal).
Conclusion
When we consider the strength in resource stocks since early September, we see that it is not often one can find a company still trading at spring 2010 levels, let alone the same price it was in mid-2009. Cardero is a very attractive risk/reward scenario with very good liquidity in the $1.20’s per share.
That is it from me, Danny Deadlock. By the way, I own 15,000 Cardero shares, purchased this past summer. Thom Calandra does not own any shares of Cardero.
Thom Calandra: “Thank you, Danny, for brining something into the Ticker Trax mix that offers our subscribers a fresh perspective.”
Subscribers: We’ll be hearing more from Mr. Deadlock next Thursday. I’ll be acting as editor for our Canadian friend. In addition, I’ll have another Ticker Trax issue early next week. By the way, I believe we will see attention to geothermal companies accelerate in the wake of uranium’s rise to $54 or so per pound. In addition, prospects for molybdenum, a stainless steel additive that is important for high-temperature pipelines and tubes in nuclear reactors, also might brighten. Finally, I see some attention from institutional analysts and perhaps newsletter writers coming to Colombia gold prospectors. We want to congratulate founder John Winfield of Comstock Mining for delivering on the promise of his Nevada equity. “I think you’ll see our land package is so large and our historical data so deep, that it is not proving the silver and gold is there, it is what the quantities are,” Mr. Winfield told me today. (I do not own shares of LODE but do know many subscribers who did purchase two months ago.) – Thom Calandra
San Francisco Hard Assets in November: This autumn I will be attending one show: San Francisco in November. If you’d like to join our Stockhouse and Ticker Trax audience at the November show, please see: San Francisco Hard Assets.
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Ticker Trax™ is published by Stockhouse Publishing Ltd. Ticker Trax is an information service for subscribers and neither Stockhouse nor Thom Calandra nor Danny Deadlock is a broker or an investment advisor. None of the information contained therein constitutes a recommendation by Mr. Calandra or Mr. Deadlock or Stockhouse that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Ticker Trax does not purport to tell or suggest the investment securities subscribers or readers should buy or sell for themselves. Subscribers and readers of Ticker Trax should conduct their own research and due diligence and obtain professional advice before making any investment decisions. Ticker Trax will not be liable for any loss or damage caused by a reader’s reliance on information obtained in the reports. Subscribers and readers are solely responsible for their own investment decisions. Opinions expressed in Ticker Trax are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in Ticker Trax should be independently verified. The editor and publisher are not responsible for errors or omissions or responsible for keeping information up to date or for correcting any past information. Ticker Trax and Thom Calandra and Danny Deadlock do not receive from any companies that may be mentioned in Ticker Trax. Some of those companies are advertisers or clients of Stockhouse, the publisher. Xtra-Gold Resources was at one time a preferred client of Stockhouse for investment relations, marketing and other commercial but not editorial services, which are never guaranteed. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed in Ticker Trax. PLEASE DO NOT EMAIL SEEKING PERSONALIZED INVESTMENT ADVICE. Copyright 2010 all rights reserved.