Junior exploration meltdown week: Stockhouse Tickehttps://www.stockhouse.com/Columnists/2012/May/18/Junior-exploration-meltdown-week--Stockhouse-Ticke
Junior exploration meltdown week: Stockhouse TickerTrax
Amongst countless others, KGN with $195 million cash found its five million gold ounces worth $2 per ounce
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
I. A Big Week for Junior Gold Destruction
II. Be Very Cautious of an Upcoming PEA, PFS, or 43-101
III. Comments from WGC on $3000 Gold Not Helping
IV. Warrants Attached to Financing are Haunting this Industry
I. Big week for junior gold destruction
Sell in May and Go Away is a common saying in the stock market but this week the junior exploration companies (the golds in particular) saw their valuations destroyed.
I will provide our monthly gold valuation table next Friday but I ran it on Thursday and the average for the 54 gold juniors we track (with minimum one million ounces) fell to $32 per ounce. Thirty percent now trade below $11 per ounce.
The most shocking was Keegan Resources (TSX: T.KGN, Stock Forum; $3.06). On Wednesday its valuation hit $2 per gold ounce. This is a company in a stable region of Africa with $195 million in cash and no debt. Keegan has since rallied back 30% but the simple fact it hit $2.38 this week was astonishing.
The market for exploration juniors was also roiled by unwelcome news from HRN (50% loss), CAN (60% loss), OYL (70% loss), and AMY (50% loss). These were a mixture of metals and oil/gas. Small and micro cap portfolios in general have been severely damaged this past year but losses like this simply drive a dagger into the heart of investors – and twist!
II. Preliminary Economic Assessments (PEA’s) - Warning
In the past with junior exploration companies we could look forward to a PEA or PFS (pre-feasibility study). Now they are becoming a death blow to the pubco as rarely are they living up to expectation – they simply become an excuse for aggressive selling.
Many companies are still using the release of these reports to create an element of excitement or anticipation. Personally I would view them just the opposite. From what I have seen the past couple months in particular, sit on the edge of your seat with your finger on the trigger as they are being released. If they are not dramatically strong, expect a flurry of selling pressure. I will be surprised if this does not continue through the summer or into fall.
Even the 43-101 reports are dealing a death blow to companies.
Canaco (TSX: V.CAN, Stock Forum; 32 cents) released a 43-101 compliant resource update this week and then watched 60% wiped from their already low share price. In fact, the stock has now fallen well below its large cash value. If you follow my Alerts through the week on Stockhouse or Twitter (links below) you will recognize Canaco as one I alerted readers to in the low 30-cent range after it moved off a bottom at 29 cents.
III. Comments from WGC on $3000 gold are not helping
Canaccord had the following quote in a morning update this week and the WGC statement in global media obviously had an impact on money managers holding junior gold exploration stocks. WGC is the World Gold Council (Gold.org).
“Perhaps more impactful than the WGC's gold demand and supply stats was the revelation this week by WGC chief executive Aram Shishmanian who said sharp increases in mining costs mean gold will need to reach US$3,000/oz in five years for the industry to stay profitable. Gold producers currently needed a gold price of US$1,300 to survive but faced steep rises in mining costs, along with the cost of dividends and host nation taxes.”
Whether a coincidence or not, these comments timed with the devastating lows we saw on gold companies like Keegan (KGN). Given the volumes and large share blocks, we are witnessing massive fund liquidation. These firms are re-assessing their investment mandate and taking higher capital and operating costs into consideration.
We must also consider the number of times that analysts or economists have been wrong in their forecasts. To now take the comments of the WGC to heart and assume the industry will need $3000 gold to make a profit, seems unrealistic.
Had someone like Blackrock’s Evy Hambro made these same comments, I would think differently. But he has not from what I am aware - and Hambro is one of the brightest minds in the investment world when it comes to gold and copper trend forecasting.
IV. Warrants attached to financing are haunting this industry
In the past we could depend upon brokers (investment advisors) to buy smaller stocks directly in the market for their clients. Now, however, so many companies are in need of financing that huge numbers are approaching these same brokers and brokerage firms to raise capital.
The brokerage firm makes a nice financing commission plus they typically receive broker warrants. The client gets a share position and typically a warrant is attached to the stock at the same or marginally higher price. For years these warrants have been a mainstay of the junior exploration companies – they are used to entice buyers of their financing.
Unfortunately now those warrants are contributing to dramatic share price destruction. The incentive is to participate in the financing instead of buying the stock in the open market. After four months when the stock becomes free trading, the majority of those who bought into the financing will dump their stock in the market to get their money back, and they will then sit on the warrants as an insurance policy for any upside over the next 12 to 24 months.
When this paper hits the market after the four-month hold period, it is bad enough when it is coming from retail investors. However, funds who bought in quantity can have a devastating impact upon the share price.
Not only are buy orders thinner because we are now seeing fewer retail investors, but the swell of selling from previous financings can overwhelm the share price in a weak market and have the devastating impact we are now seeing on valuations.
The more these companies become desperate to finance, the worse the situation becomes. And as we are finding now, it becomes very difficult to pull out of this share price spiral when everyone is losing money across the board.
If you want to try and mitigate this impact, focus on companies with a good share structure (they have avoided excess dilution) and look for companies that have not financed in the past four to six months and have millions in the bank.
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.
https://www.stockhouse.com/Groups/GroupInfo.aspx?g=50540
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Disclosure: Danny Deadlock does not own shares in any companies discussed above.