Tuesday, November 25, 2008

Callinan Mines: A Penny Stock

In my search for natural resource investments, I recently came across Callinan Mines, a Canadian gold prospecting firm. It has a long operating history, along with some risk factors.

Callinan continues to prospect in areas with proven mineral histories, increasing the likelihood that they'll hit fresh deposits. Prospecting near existing mining infrastructure means lower up-front costs for installing a new mine's support structure (like electric hookups). As far as I can tell, they turn production over to other firms and collect royalty interest from producing properties.

The disadvantage with Callinan is that they don't pay out enough of their revenue to shareholders to make their royalty-income model worthwhile. Their EPS in 2007 was only $0.06, which is probably why they're a penny stock. Other royalty plays like Royal Gold have a much higher EPS. Callinan is a penny stock for good reason. IMHO one key to success for a royalty operation is the ability to spread its risk over a large number of portfolio properties by acquiring different types of royalty interests. Every production locale is slightly different, so diversification keeps steady payouts flowing. Without knowing the quality control measures a royalty operation has in place, it's hard to form an opinion on the likelihood of future payouts.

Mineral royalty companies try to apply the Berkshire Hathaway approach to resource investing. They buy interests in well-run properties with predictable cash flows. The theory is sound, but it's hard to find a company that does it well enough to fit my portfolio.

I really don't go for penny stocks, so I won't buy Callinan Mines. Those of you who are so inclined are welcome to do further research on your own.

Nota bene: Anthony J. Alfidi does not hold any positions in the stocks mentioned here at the time this commentary was published.