Dr. Michael Berry on Discovery Investing

Includes: GG, MDW, PLM, WPM
by: The Gold Report

In this exclusive interview with The Gold Report, the first of a three-part series, Dr. Michael Berry shares his expertise for identifying winners early in the game—often long before the market recognizes their value. Learn about his favorite gold and silver mining companies and why he thinks they have what it takes. Key excerpts follow:

TGR: Can you give us some background about Discovery Investing?

MB: Here's how I recommend people look at discovery investing. I divide the universe into three types of stocks: The first is the incubator stock, a company at the very front end of the discovery cycle. These are normally penny stocks. They're very risky and usually fairly illiquid. A company such as Terraco Gold, Inc. [TSX.V:TEN] falls into this category.

TGR: And the other two categories?

MB: The other two categories are mature discovery stocks, such as Midway Gold Corp. (AMEX: MDW) and legacy stocks, such as Apple, Inc. (NasdaqGS: AAPL) or Boeing Co. (NYSE:BA). People should understand that discoveries happen across the spectrum. Boeing used discovery technology to produce the 787. Apple discovered the iPod and the iPhone and created tremendous wealth. They are what I call legacy stocks because they aren't as risky, and you can hold them for a long time.

TGR: Let's go back to Midway Gold. Why do you like it?

MB: I've owned Midway Gold for six years. The company has two great properties in Nevada—actually, they have three great properties, but they started with two great properties in Spring Valley and Midway near Tonopah. Spring Valley might contain about a million ounces of gold. People don't realize that you've got to drill a lot of holes to determine just what an ore body looks like before you even think about production.

Midway’s Spring valley has a lot of nugget-type gold, which has slowed things down a bit because that type is always more problematical. But they're making progress. If they keep making progress, you'll have to buy this stock on the dips. Within two years the company will begin mining its second property, Tonopah, in south-central Nevada. This property has the characteristics of the Pipeline mine. It could produce a couple of million ounces of gold. Midway is perfectly positioned for growth with those two properties. At $3, it's a very cheap play on higher prices in gold. It's performing very well. It's management has executed well, and has proven reserves.

TGR: What can you tell us about Polymet Mining (AMEX: PLM)?

MB: Polymet Mining pulled a real coup. They acquired Cleveland Cliff’s asset base in northern Minnesota. These include the iron ore processing facilities for a song. They have a very prolific ore body up there. It has PGMs, cobalt, gold and copper in it. They're waiting for environmental permission from Minnesota and I think they're going to get it. The stock is very cheap in the $3 range. The catalyst for Polymet will be environmental approvals by the state of Minnesota.

TGR: What about Goldcorp?

MB: I have gotten to know Goldcorp Inc. (NYSE: GG) well because I got a lot of it when I was taken out of Western Silver Corporation stock. It is a great company. There's no doubt in my mind, having been there so many times, that its key asset is Peñasquito. This is the discovery that Western Silver made in the state of Zacatecas near a little town call Mazapil. When I first went to Mazapil in 2003 or 2004, it was like going back into the 16th century. That's changed now but Goldcorp, at that single site at Peñasquito, will have at least 20 million ounces of recoverable gold and at least a billion ounces of silver, and many, many million pounds of lead and zinc. So, it's a wonderful asset.

They have recently agreed to sell their equity position in Silver Wheaton (NYSE: SLW).

TGR: Right.

MB: For $1.8 billion dollars, and I think that was to fund the development of the Penasquito Mine. I am not exactly sure why they did that, but my guess is to ease the balance sheet a bit.

TGR: Right. I see that Silver Wheaton has halted trading.

MB: Oh, really? That's interesting. Well, there's a stock, Canplats Resources Corp. [V.CPQ, PK.CPQRF, F.CPQ, DE.CPQ, BE.CPQ], which is within about seven miles of the last land we staked down there at Peñasquito. Of course, they're the ones that had 184 meters of 1.6 grams of gold. I bet my life on it that within a year Goldcorp will ultimately take a lunge at Canplats and take them out. They had six great holes the other day at Canplats, and the stock fell.

TGR: I know. It's also run up what three or five fold since November.

MB: Oh yeah, absolutely. I vowed I wouldn't chase it. I am not chasing this stock. It will come back, because most of them do. Another rule of the road in discovery investing is don't chase it; if you miss it, there will be another one that comes down the pipe. When you chase these things and you buy them at $6, they end up going back down to $3.

TGR: Before they go to $8.

MB: Yes, hopefully.

TGR: You have given us quite a lot to consider here.

MB: It is a smorgasbord. What I try and tell people is to know your own risk tolerance because you're going to be able to pick from the riskiest, and perhaps the highest reward discovery stocks, to the least risky. A portfolio of these discovery names should do quite well in the future.