Chen Lin: Seeking Value in Junior Miners
Source: George Mack of
Independent investor Chen Lin takes advantage of high metals
prices by investing in companies with the financial strength to
stay the course until the resource is in production or can be
expanded, making the company an attractive takeover target. For
metal miners, the sustainability factor is critical because it
can take years to get a mine to cash flow-positive status. Chen
shares several of the companies he owns that he believes will
return significant capital appreciation in this exclusive
The Gold Report.
The Gold Report:
How important is technical analysis for you? Is it more useful as
an entrance or exit point for a stock? Or, do you use technical
indicators as a longer-term approach?
That's a very good question. I know technical analysis pretty
well, and I watch a lot of indicators. Technical analysis
probably helps most when entering or exiting a stock. You can
also see some pretty good entrance points. Technical analysis
also helps when the technical indicators improve and a lot of new
technical buyers come into the picture; you can predict the stock
will do well. But fundamental analysis is always most important
for me, and value is the most important factor.
What indicators do you use-moving averages?
I don't follow those too closely; I look at the chart and I can
see the trend. I set up an alert at my Fidelity account to email
me whenever gold is crossing certain moving averages, such as the
200-day moving average. I use these as reference points to see
the general trend for the stock. I also use Relative Strength
Index (RSI) as a good indicator to see how a stock is overbought
In general, you want to start selling when a stock is
overbought and buy when it's greatly oversold. But the company's
fundamentals are the most important. If it's undervalued, it may
still rise-like one stock I own that recently had a 90 RSI-which
is extremely overbought-but is going higher still because the
stock is undervalued from any perspective. It just rose so
sharply, I had to sell some; but I'm keeping a lot of shares.
After a stock is fully valued, do you attempt to ride it as a
momentum play to squeeze out more juice? Or are you just happy to
take your money off the table and use it to enter another value
Usually when a value stock reaches its valuation, it rides higher
than its valuation and tends to get overvalued. Day and momentum
traders rush in; so, stocks actually appreciate a lot in a very
short period. Then I just start selling and taking profits
gradually. Sometimes it will get a very big pop in one day when
I'm selling, and I use those indicators to sell more. But in
general it's very hard to catch a peak. So, taking profits is a
process instead of a one-day event.
You play anywhere from penny stocks in the single-digit millions
up to the $3-$4 billion market-cap level. That's a real advantage
for an independent or non-institutional investor. Even most hedge
funds don't have that luxury. Obviously, liquidity issues don't
scare you. How do you manage those situations when a stock may
not be marketable?
I generally follow different rules, but first you have to know
where the market is going. If the market has just started to
rise, you can get into illiquid or risky stocks because, as the
market rises, liquidity will come and illiquid stocks will become
more and more liquid. But if the market is getting more mature
and dangerous, you might want to sell them; for example, back in
summer 2008, I sold all my junior stocks. For every stock, I set
a rule for when I would sell. When they got to a certain level, I
got out. By the end of 2008, I started to buy junior
You buy when you see activity in very small stocks?
Activity is a good indicator, but it's not the only indicator.
I'm a value investor, so I look mostly at the valuation. But in
general you want to invest in companies with rising volume and
increased trading activity. That means more people are interested
in the stock. So, if you believe that liquidity will be on the
rise, then you can take a heavy position in a small-cap
How do you start when you're looking for a metals stock versus,
let's say, an energy stock?
Metals stocks are very different in valuation from energy stocks.
I generally like a metals stock with a world-class asset or
potentially world-class asset. For an exploration company with 5
million ounces (Moz.) gold or gold equivalent in a desirable
location that a major might be interested in taking over, you can
put a value on the company. That's because we know what price
majors are paying for the gold.
The most recent takeover was for almost $1,000/oz. in the
ground. Of course, there's a potential to expand the resource
too. For production companies, you look at the production
profile. You look at the average cost, the cash flow and the
balance sheet. A production company can immediately leverage to
higher gold and silver prices. Use those numbers to calculate
cash flow, and you have an objective valuation of the
Chen, do you currently favor silver over gold? Is there more
upside, percentage-wise, to silver than there is to gold?
Yes, I think so. I probably have a little more silver than gold
because silver started relatively late and is just coming up.
Gold starts first, and silver always outperforms gold in the
second half of a bull market. That happened in the '70s, and I
think it could happen in this round.
On February 18, the margin of silver reserve requirements for
silver contracts was increased by the exchange. Silver exploded
because funds were betting heavily against silver, and they had
to cover their shorts. It could easily go to $40/oz. and to
$50/oz. There's still a big short position in silver, and it
could outperform gold.
Where would you be investing today if commodities weren't in an
If the underlying commodities were not in an upswing, I would be
more focused on stocks with high liquidity-those with strong
balance sheets and strong cash flow. When they generate cash
flow, they don't need to come to market to raise money. So, then
they're relatively insensitive to commodity prices. Another very
important factor to consider is the cost of producing the
commodity. That's also in the cash flow model. If the commodity
price stopped rising, or started to go down, I would invest in
Do you have a metal stock you want to mention?
Pretium Resources Inc. (
. That was my pick in early January. I met CEO Bob Quartermain at
a conference, and we had a discussion. Quartermain was the
Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI)
; he retired, and then came back to run this company, which is a
gold asset spinoff of Silver Standard.
When we met the stock was in the low $6 range, and I believed
it was very much undervalued. So I put it in my newsletter, and
it's appreciated a lot. You can see it's up about 50% in the past
two months. But it's still a very undervalued stock.
So why do I like it? One factor is that it has a very large
gold deposit next to a large
Seabridge Gold Inc. (TSX:SEA;NYSE.A:SA)
deposit. Seabridge has 50 Moz., Pretium has 40 Moz. gold, is
drilling and has more results coming. Its 40 Moz. low-grade
deposit has already given the company some valuation. If you
compare Pretium to
NovaGold Resources Inc. (TSX:NG; NYSE.A:NG)
, it's very much undervalued just on the low-grade part. But on
the high-grade part it's all blue sky. There is some basic
valuation, and a lot more upside yet to be seen. They recently
did an IPO, and the company is well funded for the next two
Is there another metal stock you want to mention?
, I mentioned a couple of silver stocks. One was
Alexco Resource Corp. (TSX:AXR; NYSE.A:AXU)
, a very high-grade silver deposit in the Yukon. They own the
whole district, they have started mining operations and they have
a mill running. They're beginning to produce 3 Moz. silver per
year, but they can gradually increase to 5 Moz. and eventually to
7 Moz. What's so special is that it's a very high-grade
silver/lead/zinc deposit, and if you apply lead and zinc credit,
the silver cost is below zero. So, you're talking 3 Moz. at zero
cost. It's free silver. If they go to 7 Moz. at zero cost,
$30/oz. silver means a huge cash flow. So, it's becoming an
amazing cash flow generator.
Another silver play?
Golden Minerals Company (TSX:AUM; NYSE.A:AUMN)
. Golden Minerals and Alexco have similar characteristics, namely
that their silver is extremely high grade. El Quevar is Golden's
flagship property in northern Argentina. It's in the high Andes,
and there's nobody living there. There's plenty of water. The
company has only explored a small area, but has already found
very high silver content, and it's expanding its resource.
Early on, the company was talking about 6 Moz., but it can
build a much larger silver mine and increase capacity. Because of
the grade, today's silver price gives the company a huge margin.
Plus, Golden Minerals owns huge properties throughout South
America and Latin America, including Mexico. It's a spinoff from
Apex Silver, which went into bankruptcy, and all the exploration
properties came to Golden Minerals. Apex put in their claim very
early, and they own a lot of very good and important properties
throughout South America.
I have owned a gold stock called
OceanaGold Corp. (TSX:OGC; ASX:OGC)
for a fairly long time. In early 2009, I got in at around $0.40,
and I still own a very large position in it. The stock has not
been doing very well over the past few months because the company
raised money to build a Philippine mine, and the market didn't
take it well. That brought down the stock quite significantly in
just a few months.
I have been adding a little more stock to my already large
position, partly because they have a very stable 270,000 oz.
(Koz.) per year operation in New Zealand. Potentially, the cash
costs can come down next year, but at current gold prices they
are generating a huge cash flow. Plus, it has this new mine in
the Philippines coming on, and the company can dramatically
increase its gold production and reduce costs because the cash
cost is below zero if it's getting credit for the copper.
You invest in very small stocks. Can you mention one?
Majescor Resources Inc. (TSX.V:MJX)
is a tiny company, and so liquidity is quite limited. I met the
CEO late last year. The main property is in Haiti. The
fascinating thing is, the company already has a huge historical
resource drilled by the United Nations and verified by German
engineers. It has over 1 billion lbs. of copper and very
high-grade gold-about 250 Koz. gold at about 14 g/t.
The Haiti property is right next to a property of
Newmont Mining Corp. (
. Newmont's CEO did an interview recently, and he mentioned that
the Haiti operation is the most promising up-and-coming project
for Newmont. The market cap right now is just $9 million, and
that's why I see potential. If successful, this can be a home
run. Of course, if it's a failure, you lose all your money.
Majescor is obviously a takeover candidate with a $9M market cap.
Somebody can probably have it for $20M.
Exactly, and hopefully a lot more. If Newmont wants to build a
mine, it's going to pour maybe a billion dollars into a
world-class flagship mine. Majescor already has the mining
permits, while Newmont is still applying for them. I think people
will eventually find this company; we're trying to get in there
Something else you wanted to mention?
It's a rare earth company-
American Manganese Inc. (TSX.V:AMY, OTCPK:AMYZF)
. Manganese is a very important metal used to make steel and
batteries and China controls about 97% of the electrolytic
manganese metal (
) market. This could be the next rare earth trade. If you compare
American Manganese side to side with
Molycorp Inc. (
, there are very good similarities, but its market cap is still
just 1% of Molycorp's. I think there's a lot of upside here.
If this stock doubles, it gets large enough for small-cap mutual
funds to buy it.
Exactly. That's the beauty of this stock. Right now, the mutual
funds couldn't buy it. So, once it rises, mutual funds get in and
push the stock to much higher levels. I got in at half of today's
price. The company recently did a private placement, and I heard
some funds were fighting to get in on that. Even though it's
already doubled from our initial purchase price, those kinds of
stocks may not initially have a lot of liquidity. Once they get
to a $100 million market cap, the mutual funds get in and more
investors realize that this could be the next Molycorp. Liquidity
will increase, and you ride the liquidity and rising volume; the
stock can go much higher from here.
Chen, do you have another gold stock that you want to
Colossus Minerals Inc.'s (TSX:CSI)
stock didn't do anything in the past year. That's typical,
because traders only care about a mining stock until about a year
before it's in production. The company's mine is going into
production next year, so the stock can break out from here.
Colossus has very high-grade gold. It also has platinum and
palladium credit, and so the cost of gold will be below zero.
They have 200-300 Koz. gold coming out. Production costs are
always rising, but this is a world-class, low-cost producer. That
should attract a lot of majors who fight for low production
costs. A major could take it over. It's only an $800 million
Thank you, Chen. This has been very informative.
to Analyst Chen Lin on Jay Taylor Radio (2/22/11)
Chen Lin writes the popular stock newsletter
What Is Chen Buying? What Is Chen Selling?,
published and distributed by Taylor Hard Money Advisors,
Inc., publisher of
Gold, Energy & Technology Stocks
newsletter and Roger Wiegand's
Using his wife's Roth IRA account, Lin invested $5,411 in
December 2002, and by December 31, 2010 it was worth
$1,188,993-with no cash added. You can see his portfolio chart
A doctoral candidate in aeronautical engineering at
Princeton, Chen found his investment strategies were so
profitable that he put his Ph.D. on the back burner. Chen worked
in the Internet and computer area where he founded a few start-up
companies. After the tech bubble burst of 2000, Chen was able to
move his technology portfolio into the resource sector with
considerable success. Chen employs a value-oriented approach and
often demonstrates excellent market timing due to his exceptional
technical analysis. To subscribe to Lin's
What Is Chen Buying? What Is Chen Selling?
, or call Claudio Bassi at (718) 457-1426.
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1) George Mack of
The Gold Report
conducted this interview. He personally and/or his family own the
following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are
The Gold Report:
NovaGold, Golden Minerals, American Manganese and Colossus.
3) Chen Lin: I personally and/or my family own shares of the
following companies mentioned in this interview: Every stock. I
personally and/or my family am paid by the following companies
mentioned in this interview: None.
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