I recently was interviewed by Shelly Kraft as a Wall Street View contributor for his Stock News Now platform. The interview is here for your viewing pleasure.
I'm not presenting the link merely for the purposes of self-aggrandizement. Shelly asked me a great question that allowed me to give my rationale for microcap stock investment.
The markets are so dynamic that it's rare to have the opportunity to actually quote one's philosophy proactively, instead of needing to react to a given percentage move in a given stock's price on a given day.
So, as stated in my interview, to buy a microcap stock, which is an inherently risky proposition, I need to see that the company possesses the following characteristics:
- It participates in an industry that is growing, as measured by unit volume
- It is gaining market share in that growing industry
- It has proprietary technology and/or intellectual property (e.g., patents) that are defensible
- It has a clearly defined pathway to profitability
So, I'm going to present in the coming days different companies that, based on my due diligence, meet my four criteria for investment.
First up is mining company Applied Minerals (AMNL).
I had the opportunity to meet privately with CEO Andre Zeitoun and Head of Business Development Chris Carney on Friday in New York, and it's a company I've researched for the last six months or so. Applied Minerals' main asset is its Dragon Mine in the Tintic Mining District in southern Utah. AMNL produces halloysite clay and iron oxide from the mine.
The company is just now generating revenues. In the first quarter it booked $163,000 in sales, but the key point is that the company has already spent the $9 million needed to bring the Dragon Mine up to production-ready standard. Now management is aggressively marketing AMNL's halloysite and iron oxide to generate sales and profits to provide a return on that capital.
So, to put Applied Minerals through my four tests, one has to understand that AMNL doesn't just compete in one market. The company has identified at no fewer than nine key end-markets for halloysite and iron oxide "verticals," and while growth rates vary by vertical, AMNL management has positioned the company in the fastest-growing ones.
The total global iron oxide market estimated to be $1.35 billion annually and growing at a rate of about 3%. The key market for AMNL's iron oxide product (AMIRON) is pigments. These pigments are used in applications such as wood stains, mulch colorants and foundry sand additives. AMIRON can also be used as a scavenger for hydrogen sulfide in the production of oil and gas. I've spent enough time in the energy space to know that H2S is a very corrosive by-product of the hydrocarbon process and that producers are always searching for processes to eliminate it.
The high level of purity of the iron oxide deposits at the Dragon Mine allow AMIRON to be used instead of the synthetic iron oxides that are commonly used. Those synthetics actually cost more to produce than natural iron oxide, and the average selling price for natural and synthetic iron oxide is $1,000 per ton.
AMNL is gaining market share by replacing synthetic iron oxides with its purer-form Fe2O3. In that vein, the purity of the ore itself is AMNL's proprietary competitive differentiator. As far as a pathway to profitability, AMNL estimates that its iron oxides could cost as little as $50 per ton to produce. With an average selling price of $1000 per ton, that's an amazing contribution margin of 95%. Of course, there are fixed costs to be considered -- the selling price will vary widely based on application -- and those cost-per-ton figures really can't be vetted until AMNL hits full production. But with those economics, the pathway to profitability for AMNL's iron oxide business is quite apparent.
So, iron oxide is a nice business for Applied Minerals, but as I told Shelly Kraft in my SNN interview, when I invest in microcaps, I look for home runs. Halloysite clay and its myriad uses offer the potential home run for AMNL shareholders.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider AMNL to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.