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June 4, 2018 | Land Bank Plays

Lobo Tiggre, aka Louis James, is the founder and CEO of Louis James LLC, and the principal analyst and editor of the Independent Speculator. He researched and recommended speculative opportunities in Casey Research publications from 2004 to 2018, writing under the name “Louis James.” While with Casey Research, he learned the ins and outs of resource speculation from the legendary speculator Doug Casey. Although frequently mistaken for one, Mr. Tiggre is not a professional geologist. However, his long tutelage under world-class geologists, writers, and investors resulted in an exceptional track record. The average of the yearly gains published for the flagship Casey publication, the International Speculator, was 18.5% per year during Tiggre’s time with the publication. A fully transparent, documented, and verifiable track record is a central feature of IndependentSpeculator.com services going forward. Another key feature is that Mr. Tiggre will put his own money into the speculations he writes about, so his readers will always know he has “skin in the game” with them

A land bank is a company that buys large mineral deposits when prices are way down, making them uneconomic. This puts them on sale for pennies on the dollar. A project can even be picked up for free, if the previous holders drop it. The land bank company can then stake claims over the deposit. The company buys as many such properties as it can while prices are down, then holds the projects until prices go up.

Ideally, the company does nothing more than the legal minimum required to hold the properties. Because the company does almost nothing, it can last as long as it takes to wait for mineral prices to rise—even if that’s many years.

When the prices of the minerals in the deposit do go up, the project(s) can be sold to other companies that may try to turn them into mines. That takeover can provide a big win for shareholders in the land bank company. Better still—though not entirely rational—shares price of the land bank company will tend to rise and fall with the prices of the underlying commodity. That means that by the time the takeover comes, shareholders will likely already have a big win—which will suddenly get even bigger.

This is a lot easier, at least in concept, than exploration. You don’t have to pour all that money into the ground looking for a deposit. You just buy them when no one wants them and sell them when everyone wants them. It’s contrarian speculation in physical form.

What’s not to love?

Well, I’ve seen companies succeed at this. But I’ve seen more fail at it.

While simpler than exploration in concept, there’s still a lot that can go wrong.

Long Wait for Payday

The first and simplest drawback is that the land bank strategy can take years—even a decade or more—to pay off. While waiting for payday, the stock often drops and drops, year after year. Very, very few speculators are that patient.

I’m not sure I’ve met more than two or three.

The Siren Call of Exploration

Land bank management teams almost never resist the temptation to try to add value to their holdings by exploring them. As we all know, exploration is very hard, very expensive, and never guaranteed to succeed. The moment a land bank company starts talking about “adding value” to its properties, it ceases to be a land bank play. It becomes an exploration play—with assets that are already known to be uneconomic.

This almost never ends well.

Cheap Can Mean Bad

By far the biggest stumbling block for me is that the deposits land banks acquire are not economic.

That fault can last long after prices are no longer low. We have to ask; if this project should be economic when prices rise, why wasn’t a mine built when prices were higher?

Suppose a mining company discovered a major copper deposit. They drill it off to a high level of confidence. They do a full engineering study showing that the project to build a mine is feasible. They even make a positive construction decision. Then copper prices nosedive. The company puts the project on hold, for a time, but runs into financial difficulties and sells the project for pennies on the dollar.

This sort of land bank play would interest me. I might try to organize a company to buy the asset myself. In fact, I did try exactly that, some years ago. Someone else beat me to the punch, both times. But this sort of opportunity is rare.

What’s much more common is for some junior company to discover a deposit, putting as few holes into it as possible while making it look as big as possible. The thing never gets shown to be economic. Investors get wiped out. The project goes dormant until some other junior, perhaps one trying to make a go of land bank “optionality,” picks it up for pennies on the dollar.

I don’t think I need to spell out for you, my wise reader, why this second scenario is so different from the first—and so much more likely to end in misery.

If a project was not economic before, there better be very good reason to think it will be now.

A higher commodity price is not reason enough.

Don’t forget inflation and the much higher regulatory burdens on mining today. If a project didn’t work at $1 copper decades ago, that doesn’t mean it will be a cash cow at $3 copper today. It might take $6 copper. Or it might be so remote, or in such a dangerous country, or so close to a national monument, or any of a number of other fatal things, that it will never be a mine.

I don’t like speculating on something I think is worthless.

That doesn’t mean a land bank with worthless properties will never see its share price rise. It’s actually common to see such stocks rise if the price of the underlying commodity rises. But not always. And they are prone to sudden and devastating reversals if the commodity drops.

The bottom line for me is that the land bank strategy is very difficult to implement well, and it usually takes longer than I’m willing to wait at this time.

Let me be clear: I’m not saying that all land banks are bad speculations.

I am saying that it’s tough to find a good one. And even when you do, you might have to wait longer for payday than I’m looking for right now. That’s why I have no land banks on my shopping list.

To each his or her own, of course.

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June 4th, 2018

Posted In: Louis James

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