The necessity to own gold (GLD) and silver (SLV) as a form of protection is increasing by the day. The global wave of monetary stimulus seems unstoppable. The monetary base has reached historical highs in all Western regions and politicians don't show any sign of changing their monetary policies. The historically low interest rates (zero-interest rate policies) result in negative real rates. The trust in the financial system is fading by the day. These are only the most important elements which make much higher gold and silver prices almost a sure thing.
One characteristic of precious metals is their very high stock to flow ratio. This truly differentiates precious metals from all other commodities. As the future demand for gold is expected to increase substantially, it's very likely that supply will not be able to meet demand. In terms of supply, the gold rich deposits have become more and more scarce. Senior miners (GDX) (HUI) are struggling to find new deposits. So gold in the ground has never been as important as today.
Those facts bring us to the conclusion that exploration companies that develop economically viable projects will be big winners in the years ahead. It goes without saying it will be reflected in their stock price. However, the number of exploration and development companies (GDXJ) that will survive is estimated to be between 10 and 20 percent, according to expert Rick Rule. Because of this, stock picking becomes critical.
Casey Research created a framework for investors, The Eight "P's" of Resource Stock Evaluation, which describes how to increase the success in picking the right companies to invest in. This framework is based on the analysis of eight criteria which aid in evaluating natural resource companies and measuring their quality as an investment.
We decided at GoldSilverWorlds to apply this "eight P investment model" to Brazil Resources Inc. (BRIZF.OB). Brazil Resources is a publicly listed gold exploration company which is focused on the acquisition and development of projects in emerging gold districts located in Brazil and other South American countries.
(1) People: The management team's track record of success
Brazil Resources' management team has held senior management positions with world class mining companies such as BHP Billiton, De Beers, Kinross, Rio Tinto and Teck. Combined, they have an abundance of experience, particularly in South America having discovered and developed over 10 Moz in Brazil.
Amir Adnani is Chairman and co-founder of Brazil Resources Inc ("BRI"). He is also co-founder and CEO of Uranium Energy Corp (UEC), one of the newest uranium producers in North America. With Mr. Adnani's leadership, UEC transitioned from an exploration company to a uranium producer in just five years. He provides BRI with a strong presence in the capital markets and expertise in identifying and executing strategic acquisitions.
President and CEO, Stephen Swatton, has over 30 years of experience in the resource sector. He was the former head of BHP Billiton's Business Development and Technical Team Division (Exploration Department). Prior to this he worked as an analyst and a field geologist for companies such as Yorkton Securities and Rio Tinto. Stephen's diverse background makes him the perfect fit to run the company's day-to-day operations and execute its unique business strategy.
Director Mario Garnero is the Chairman, founder and principal shareholder of the Brasilinvest Group, one of the largest private merchant banks in Brazil. Mr. Garnero's intimate knowledge of the Brazilian market provides BRI with a strategic advantage based on superior access to capital, projects, and people.
Director Enzio Garayp is former Exploration Manager for Kinross in Brazil. He directly oversaw the 8 Moz expansion of the 15 Moz Paracatu Mine. His extensive experience in the numerous gold fields of Brazil is a valuable asset for Brazil Resources.
It's worth noting that BRI's management team holds 30% of the outstanding shares, which is an obvious sign of their commitment and dedication to their company.
(2) Property: Results of drilling programs and ownership of deposits
The strategy of Brazil Resources is to grow by acquiring advanced-stage gold projects, with proven resources, at the right price. The experienced management team, their ability to access capital and the in-house technical expertise have allowed the company to, thus far, successfully execute this strategy. We believe those elements are important conditions to make the M&A strategy work.
Four of the company's projects are located within the Gurupi Gold Belt, where significant gold deposits have been discovered over the last few decades. The projects are in the early exploration to development phase and total 26,296 hectares of land, located near properties of Kinross Gold, Luna Gold, and Jaguar Mining. The properties have good infrastructure with road access and sufficient power.
The Cachoeira Project is the company's flagship property. Falling in line with its mandate of acquiring advanced staged gold projects, BRI acquired the Cachoeira project from Luna Gold Corp. on September 25, 2012. The Cachoeira project has an NI 43-101 indicated mineral resource of 12.5 million tonnes at 1.11 g/t Au or 446,000 ounces of gold, and an inferred resource of 5.4 million tonnes at 1.27 g/t Au, or 221,300 ounces of gold.
Brazil Resources' team was able to acquire the Cachoeira project for roughly $18/ounce in the ground, where historical valuations for gold in Brazil range between $50-$60/ounce. The gold at Cachoeira is near surface and past and present work confirms open pit potential.
Furthermore, the company has significant exploration upside with its Artulandia project, located in the central part of Brazil in Goais state. With a land package comprising of 104,800 hectares and a low acquisition cost, the first results from the technical team seem promising. In September, BRI announced that their samples have confirmed a copper-gold anomalous zone of approximately 1,000m by 250m, which is open in all directions. The project is in its early stages of exploration, so more research and drilling will follow to understand its full potential.
(3) Phinancing: The financing to achieve the next phase of objectives
BRI has a strategic alliance with the Brasilinvest Group, which currently manages over $6 billion within Brazil and has a track record of attracting foreign investments, having already attracted investments in excess of $16 billion. Since its founding over 35 years ago, Brazilinvest has handled transactions for global companies such as ITT-Standard Electric SA, NEC, Bombril, Fiat and Volkswagen. The alliance between BRI and Brasilinvest Group should prove to be valuable for future financing opportunities and sets the company apart from other junior miners.
In May 2011, 3.8 million shares were offered during the initial public offering. The IPO was completed at $0.65 per share, as the company raised $2.5 million. A second round of financing was completed at a share price of $1.10. Both financings did meet the intended target.
In these tough market conditions, where it is common practice for junior mining companies to issue warrants during financings, the fact that BRI has no warrants speaks to the caliber of management and the confidence investors have in the company.
The company currently holds a cash position of $7.2 million, as of August 31 202, and no debt.
(4) Paper: The owners of the shares
30% of shares are held internally by management and 35% are held by institutional investors:
- The KCR Fund, which is a private investment fund managed by well-known natural resource investors Rick Rule, Doug Casey and Marin Katusa, are the largest shareholders of BRI, owning 16% of the company.
- The Brasilinvest Group, one of the largest private merchant banks in Brazil, owns roughly 12%. To the best of our knowledge, BRI is the only junior exploration company that has a bank as a major shareholder and a strategic relationship.
In addition, the company maintains a tight capital structure with only 39.8 million shares outstanding and no warrants.
(5) Promotion: The ability to reach out to investors
The ability to garner attention from resource investors is a function of having a well-respected track record and a following. Under Amir Adnani's leadership, UEC transformed from grassroots exploration into the world's newest uranium producer in five years. This reputation has led to support from thousands of shareholders including institutions like Blackrock and Oppenheimer. Additionally, Amir has been recognized by Casey Research as their "NexTen," which showcases a group of rising executives with a history of success in the mining industry and the expectation that they will realize even greater success. Amir's track record and following has, and will continue to, attract the attention of resource investors to Brazil Resources.
All of this has led to strong attention for BRI from respected financial newsletter writers and analysts such as Mine2Capital in Canada, Mickey Fulp, James West, and Jay Taylor in the US, as well as other newsletter writers in Switzerland and Germany who have initiated coverage of BRI and include the Company in their model portfolios.
Finally, as Chairman of the Brasilinvest Group, Mr. Mario Garnero is strongly tied to both the political and private sectors in Brazil. He provides BRI with an opportunity to also build strong ties within the country.
(6) Politics: Risk of the political environment of mining operations
The projects are located in Brazil which is a politically stable and mining friendly jurisdiction. The country has much more political stability than most of the other countries in South America. The country offers an established legal system, reasonable infrastructure and skilled personnel. Brazil is a mining friendly country, with little threat to nationalization.
Foreign investments in Brazil have increased tremendously in recent years, going up fivefold since the beginning of the past decade, reaching 67 billion in 2011, based on figures of the World Bank.
The country is preparing for the 2014 World Cup soccer and the 2016 Olympics, which is attracting international attention and significant foreign investment.
(7) Push: Triggers that will move the stock higher
We discussed the ongoing plans of BRI with their investment department. It appears that the company plans to fast pace its growth by continuing its strategy of acquiring projects with proven resources. BRI is dedicated to acquire additional properties which have relatively low capital requirements which they can take into production in the near-term to generate cash flow.
The company is moving swiftly on its flagship property, Cachoeira, by hiring an engineering firm to begin environmental permitting and better understand economics. BRI is dedicated to becoming a mid-tier producer in less than five years.
News about the upcoming drill results from the other exploration projects in the company's portfolio (Montes Aureos, Trinta and Maua in the Gurupi Gold Belt district) could push the stock higher.
(8) Price: The price at which gold or silver ounces are being valued
The overall strategy of the company is to acquire projects with proven resources (as discussed in point 2), because this market is not rewarding exploration risk. This strategy not only aids in keeping the cost per ounce of gold down, but also allows the company to develop projects with a low CAPEX. An example of this is the way Cachoeira was acquired. The company was able to acquire the project at about $18 an ounce. That's extremely low as historically gold ounces in the ground in Brazil are valued at approximately $50-$60.
Stock price performance since IPO vs. junior mining peers
Additional information for investors
To view Brazil Resources' latest corporate presentation and fact sheet please click here:
More info about the projects at BrazilResources.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.