As the years go by I learn that investing isn't just about buying the right companies, but also buying at the right time.
I remember March 2009 like it was yesterday.
That was the absolute bottom for the biggest market crash in 75 years. Hope was in short supply, and the net worth of all equity investors had taken an unprecedented beating. Even successful, proven investors were afraid and unwilling to buy.
Do you know what else it was? The best time in a generation to invest.
There has been a similar collapse in Canadian resource stocks over the past couple of years. This has happened quietly and without much U.S. television exposure since it occurred north of the border.
The chart below represents the TSX Venture Exchange. This entire index of stocks has dropped 60% over the last 30 months. That is considerably worse than the S&P 500 crash of 2008/2009.
To look at it another way, this entire index needs to increase 250% just to get back to where it was in early 2011.
For the past few years, American investment capital fled the Canadian market and stocks suffered as a result. But that trend is now reversing with the weakening Canadian dollar adding some fuel to the fire.
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It is at the bottom of a crash like this that investors should be hunting for value. This is where good, debt-free companies are available for bargain bin prices.
Consider that the S&P has gained 160% since it bottomed out in March 2009. I think the TSX Venture Exchange is poised to do something similar.
And a major disconnect has formed in one sector in particular that could lead to massive gains for investors. In short, the TSX Venture Exchange -- which is loaded with commodity producers -- has crashed, but commodity prices haven't.
Take gold for instance. At $1,330 per ounce, gold is still worth three times more than it was ten years ago. That should be a boon for gold producers, many of which had projects built with much lower gold prices in mind.
But while gold is still relatively high, share prices of gold producers have taken a beating. Not just some gold producers, virtually all of them. The S&P/TSX Global Gold Index (index of gold producers) has been cut in half over the past three years (as you can see in the chart below).
Something doesn't add up here. If the price of commodities had collapsed, the big decline in the TSX Venture Exchange would make sense. But that isn't the case. Most commodity prices are still quite high by historical standards.
This disconnect means that a lot of commodities producers are drastically undervalued in respect to the value of their resources. Not surprisingly I've found myself an inexpensive gold producer that looks set to soar as the overall TSX Venture Exchange gets back on its feet.
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Here are four reasons why I think Brazil Resources Inc. (BRIZF) is a 'buy' now.
#1 - A Flagship Asset To Hang Your Hat On – Brazil Resources isn't just another resource company with some money and some prospects that it is optimistic about. This is a company with a very significant core asset in the Sao Jorge project located in Northern Brazil.
A 3rd Party Preliminary Economic Assessment on the project using a $1,500 per ounce gold price calculated that the project has a net present value of $331 million. Cash costs on the project are estimated to be only $635 per ounce, which makes it very profitable at current (and lower) gold prices.
On an after tax basis the net present value of this project alone is estimated to be $1.70 per Brazil Resource share. That is 40% higher than the current share price.
#2 - Rapid Growth – Since Brazil Resources IPO'd back in 2011, it has rapidly grown its resource base. The two main company projects (Sao Jorge and Cahoeira) have each had significant resource expansion. Sao Jorge has gone from an indicated resource of 343,000 ounces to 666,000 ounces, while Cachoeira has advanced from 446,000 ounces to 786,000 ounces.
That is impressive growth and the stock market hasn't seemed to notice this near doubling of resources.
# 3 -Top Notch Management and Key Shareholder – Quality management is important for all companies. For resource producers it is essential. Amir Adnani is Chairman and Director of Brazil Resource and he is a proven commodity, having established another company (Uranium Energy Corp) as one of North America's newest uranium producers.
Additionally, Brazil Resources boasts the support of Brasilinvest Group as a 10% shareholder. If you haven't heard of it, Brasilinvest Group is THE major player in the Brazilian resource game. This provides Brazil Resource with a couple of huge competitive advantages -- access to Brazilian capital and smooth government relations.
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#4 - A Hidden Asset and Catalyst – I believe that the value of the Brazilian gold projects that Brazil Resource owns are worth substantially more than the current share price.
But it's not just gold that really puts this opportunity over the top for me.
Brazil Resources also owns 75% of the Rea Uranium Project located in Canada's Athabasca Basin. This is the uranium hotspot of the world. The Rea Uranium Project is a big package of land totaling 219,000 acres. Not only is this asset valuable, it is also potentially a major catalyst for the share price. There is a distinct possibility that the Rea Uranium project will be spun out into a separate company which should unlock considerable value for shareholders.
Risks to Consider: Brazil Resources is a pre-production commodity producer. The assets have very real value, but taking those assets to the stage where they generate cash flow requires careful execution. And once producing this company is going to be exposed directly to the price of gold.
Action to Take --> It is not hard to see that Brazil Resource Inc. is cheap relative to its assets. The third party resource value estimates prove this. With a catalyst pending and a strong commodity stock market as well, now is the time to get on board.