The Stealth Bull Market in Gold
Nov 24, 2014
Right under the nose of skeptical investors gold and silver resource shares have been in a wild rally for nearly three weeks. Since early November, the XAU rose 12.38 points or over 20%. The HUI rose 29.42 points for a 20% gain and the GDXJ soared by 29%. All while bruised and battered investors were crying into their beer.
As Rick Rule recently said, you need to buy into fear and sell into complacency. Investors in resources are terrified; investors in the DOW and bonds are complacent. Do they really think the DOW is going up for the next five years in the same way it did the last five years? Do they think bonds are going to the moon? They have already gone to the moon and gravity is about to take effect.
I missed a real opportunity two years ago when I talked to the management of Enterprise Group (E-V) early in 2013. The stock was about $.24 a share. They had a model of buying small companies in the energy space in Alberta and needed attention. We never came to any kind of agreement, they wanted to pay in options and I don’t like doing that.
The shares went from $.12 in 2012 to $1.20 in two years. One of the brains behind Enterprise determined he should copy their business model so he built another company with a similar business plan. I paid a lot more attention this time. The company just got listed.
QE2 Acquisition Corporation (QE-V) buys and develops small and well managed, asset backed infrastructure and utility service businesses in Alberta. They are going to integrate these businesses both vertically and horizontally to add synergy and reduce costs. Their timing couldn’t possibly be better.
QE2 is a new company literally designed around the same game plan as Enterprise Group. They began trading on the 5th of November, which just happened to be when the HUI and XAU hit their low points, and you couldn’t give away resource shares.
The CEO of QE2, Mike Belantis, has 15 years experience in investing and consulting both public and private companies. He is doing nothing more than copying the Enterprise model. The COO of the Enterprise Group, Dug Bachman, recently joined the
Board of Directors of QE2. Enterprise managed to increase their revenue by 150% in the last year.
Actually with the recent decline in the price of oil, QE2 is even better positioned to enter the energy space than was Enterprise. The price of oil is down from where it was six months ago but so are the prices for buying energy related and infrastructure companies.
For the last 20 years, Alberta grew faster than any other province in Canada. The government is aggressive in their plan to continue building infrastructure. Alberta government figures show the economic expansion for 2014 should grow above 3.3% after four straight years of growth above 3%.
QE2 purchased Pillar Contracting in late 2013. Pillar has been operating in Alberta for over 16 years installing street lighting and post painting services. Street lighting sounds like one of those businesses that make you want to snore, but given the energy impact of LED lighting it’s the place to be right now. LED lights cost more money but use 20-30% of the energy of the bulbs they replace and last far longer. Communities are waking up to the incredible cost savings they can make by installing LED light bulbs.
In 2013, Pillar grossed over $3.7 million and netted about $500,000. QE2 anticipates building the company to $6.6 million in sales in three years and doubling earnings. The company may expand their services into neighboring provinces, Saskatchewan and Manitoba.
QE2’s latest acquisition is the Candesto Enterprises Company. Candesto assembles and installs highway signs. They also build guardrails and install fencing. QE2 bought them in April of 2014. The company has a 20-year operating history and management is willing to stay an additional five years to provide continuity.
In 2013 Candesto did $4.4 million in sales and earned over $1.5 million. Given their efficiency and experience any potential direct competitors are likely to subcontract with Candesto.
QE2 aims to grow both organically and through acquisitions. Their goal is to grow revenue to $100 million by 2018. They will be free cash flow positive in 2015. You can expect to see new companies being brought into the QE2 fold on a regular basis.
The economy of the world operates on a foundation of carbon-based energy. For all the smoke and mirrors about alternative energy sources, they remain a 3% solution. We need oil. I believe the new normal range for the price of oil is $75 to $100 and potentially higher given some of the possible black swans. Alberta is growing and will continue to grow and to expand infrastructure for the foreseeable future.
QE2 has a tiny 28.5 million shares outstanding with an additional six million warrants at $.50. With the shares at $.15 as of last Friday, naturally $.50 warrants are non-dilutive. With a $4.3 million dollar market cap, for the share price only the sky is the limit.
There is a giant opportunity in QE2 right now similar to that of the HUI and XAU in early November. One overseas shareholder needs to sell shares. He sold into an illiquid market on Thursday and Friday of last week and cratered the shares from $.20 to $.15, down some 25% in two days. It’s an individual shareholder issue, not a company issue. I expect the shares to rebound just as soon as the remaining shares are sucked up. So if you like the company you may want to put in a stink bid and hope that you get filled.
I missed the opportunity of investing in Enterprise. I don’t intend to miss the opportunity to invest in QE2. I just learned over the weekend about the shares being dumped and literally the market hasn’t been open to buy shares yet.
QE2 is becoming an advertiser. I am biased. Do your own due diligence, please.
QE2 Acquisition Corp
QE-V$.15 (Nov 21, 2014)
28.5 million shares