When it's all said and done, this visit to Australia will have been Motley Fool Global Gains' busiest research trip ever. So it was inevitable that Nathan Parmelee, Nate "The Snake" Weisshaar, and I had to split up to fit five business meetings in five parts of Melbourne all into one working day.
But the confusion and cab fares were worth it. All of the meetings were impressive, and we have a great head start on our special report -- which will include our top pick from Australia -- that will conclude this trip. Although we still have to vet some of the companies we met with, we've already learned two investing insights well worth sharing.
Insight No. 1: nobody knows what gold prices are going to do
Up until now, we at Global Gains have missed out on the bull market in gold. That's disappointing, because we anticipated the weak dollar, we called surging commodity prices, and we have plenty of models for valuing oil companies that we could easily have modified to value a gold miner. Our problem was that we had no confidence in our ability to forecast the price of gold, so we sat on the sidelines as gold ran up to $1,000, then $1,200, and now $1,400 per ounce.
But rather than feel stupid after meeting with Australia's largest gold miner, I feel pretty good about myself. That's because the company has no idea what gold prices are going to do, either. And that's not just a talking point. Thanks to a nearly debt-free balance sheet, this mining company doesn't even hedge the value of its gold reserves!
What it does well, however, is focus on what it can control: its costs. The company's relentless focus on efficiency, its politically benign collection of assets, and its copper reserves that help offset production costs allow it to dig gold out of the ground for less than $400 per ounce. And at that price, you don't need to know much about gold to see that the company stands to make good money for a long time.
In the past, we'd been stuck on gold because we didn't know what it was worth or what it could be used for. But as we learn more about this low-cost miner, we're starting to believe that a little gold exposure might be just what the doctor ordered.
Insight No. 2: Foster's wine business could become a special opportunity
The Australian business press is abuzz over Foster's Group (OTC BB: FBRWY.PK), the company you know as "Australian for beer." Its recent operating results were horrible, and management has decided to split up the beer and wine businesses. And although the beer business is getting all of the media attention and is rumored to be an attractive acquisition target for the likes of SABMiller (OTC BB: SBMRY.PK) or Heineken (OTC BB: HINKY.PK), our meeting with the company here in Melbourne led us to believe that the smaller wine business might turn out to be the gem.
Why wine? First, it has a huge market opportunity in Asia, where the Chinese are just starting to become oenophiles. Second, the spinoff will leave the wine business with $60 million in cash and no debt -- with Foster's previously onerous debt load being the booby prize for whoever acquires the beer business. And third, the mechanics of the split have us thinking that the wine shares might sell off hard once they start trading, thus creating a buying opportunity for savvy investors. The reason is that Foster's shareholders will get just one share of the wine business for every three shares of Foster's they own, which makes it likely that the big institutions that own Foster's stock will just sell their tiny stakes in the wine business rather than deal with the hassle of holding them. This is a well-known phenomenon in special-situation investing, and it's one that investors such as Joel Greenblatt have been happy to cash in on over and over again.
But don't go out and buy Foster's just yet. As of our meeting, the company had not yet decided whether U.S. shareholders would get shares of the wine business or an equal amount of cash instead. Because Foster's wine business is what we want, put this idea on your watch list and wait for the corporate action to go through. If the wine business' stock drops soon after it goes on the market, that would be the time to pounce.
We're ready to leave for Brisbane and take on another hectic day, including meetings with two of Australia's fastest-growing mining-services companies. Stay tuned for more on our Facebook page, or with our dispatches by entering your email address in the box below.