Saskatchewan coal play is dead: Microcap Monday
7/21/2008 11:13:51 AM | Danny Deadlock
Proof of the greater fool theory
As if the
mortgage and crisis mess wasn't enough in the U.S., we nowget to watch tens of millions wiped from microcap investor portfoliosin one fell swoop. Monday morning, high-flying Goldsource (TSX: V.GXS,Stock Forum; $6.10) released results of its first (important word there- first) drill hole. This was the follow up hole to the accidentaldiscovery hole in April. To make a long story short, they were lookingfor diamonds and intersected coal. As a result, and through the use ofsome magical potion combined with insanity, the stock was pushed from20 cents to $19.
So you have ONE accidental drill hole and it justified an increase inmarket cap of almost $400 million, from about $3 million. Along with itwent dozens of microcap companies promoting its stocks like lunatics -typically on millions and millions of shares as they tried to createarea plays in NE Saskatchewan by applying for millions of acres in coalpermits.
We commented in the midst of all this craziness that even IF they didfind coal there, where did they plan on selling it? The closest marketwould be Ontario and they are trying to shut down their entire networkof coal-fired generating stations. Sherritt already has excess capacityat the coal mines in Saskatchewan and Alberta and if it was highergrade met coal, they would never compete with the likes of Fording inthe Rocky Mountains. The whole concept to begin with made no sense.
So what happened this morning? Goldsource announced that this firstfollow up hole did not even come close to hitting what everyone hoped.In fact, it appears to be an outright failure on a scale of beingeconomical. So, as the stock is collapsing (dramatically) all the areaplayers are going right along with them. As GXS is now below $6(remember it was at $19 a month ago after going vertical), reality isfinally starting to set in.
It is not only astonishing that all these stocks were pushed to hugegains on one hole, but GXS even managed to raise $18 million at $11.75this past month. What the heck were people thinking?
Anyone that bought into these coal plays early and managed to sell islaughing all the way to the
bank. The sad part is thousands were buyinginto all this hype and nonsense. As a result, that group of investorshas now lost millions and millions of dollars. And all at a time whenmost should be sitting on the sidelines waiting for this whole creditmess to settle out.
It’s called the Greater Fool Theory. And, believe me, when it comes tomicrocaps and penny stocks, it definitely exists. It’s what all thesepromoters and brokerage firms use to fleece inexperienced investors -and it’s a real shame.
ABOUT THE AUTHOR
Danny Deadlock