On January 4th I listed three of our favourite small stocks heading into 2010. They included cash rich BioMS (TSX: T.MS, Stock Forum), OSI Geospatial (TSX: T.OSI, Stock Forum), and Colombian Mines (TSX: V.CMJ, Stock Forum). We have followed CMJ through my MicroCap.com newsletter since November when it traded near 30 cents, but it still presented strong value at 82 cents as we entered the New Year. The other two picks have been quiet (although still very promising), but Colombian Mines is starting to attract a lot of attention as the land rush continues in Colombia.
Last weekend on Stockhouse, Thom Calandra had some excellent insight into Colombian Mines as a potential takeover target.
The news he uncovered raised a few eyebrows so I am throwing my own take on thesituation as I know a large number of Stockhouse readers own or follow this stock.
It is not uncommon to see analysts or the media discussing potential mergers or takeovers, but you don't often read about it with smaller stocks. I also have no reason to doubt Mr. Calandra as he has been on the ground (off and on) in Colombia for several months now.
I only have one question (concern) with respect to his report. The discussion of a potential merger or acquisition centers around CMJ's estimated 300,000 acres of mineral concession contracts. It is this "hope" that caused me to initiate coverage of CMJ several months ago.
However, it is extremely important to remember that this total acreage – the 300,000 acre number -- includes exploration contracts applied for since 2006 but not officially awarded yet. It is my understanding the total acreage they have been officially awarded to date, is in the range of 60,000 acres - which is still large by Colombia standards.
The odds are very good they will be awarded the bulk of these licenses and although the entire process has taken the company two to three years, there is still no 100% guarantee until official word is received from the Colombian government. The confirmations will occur in stages.
It is very possible that if Serafino Iacono is interested in buying CMJ, it’s that he wants to make the purchase before these licenses are officially awarded. At that stage, the market capitalization of Colombian Mines "should" be significantly higher than what we're seeing now. The expectation was that the company would know their final tally within the next three to six months (or close to it).
Mr. Iacono has over 20 years of experience in the Canadian capital markets and has raised more than US$1.0 billion in the last thirteen years for various natural resource projects internationally. He co-founded Bolivar Gold Corp. He served as the Chief Executive Officer of Coalcorp Mining, and he has been the Co-Chairman of Pacific Rubiales Energy (TSX: T.PRE, Stock Forum) since January 2008.
Guestimating Fair Value
I have extensively researched CMJ and the people running this company and while I could be completely wrong, I have a very difficult time believing they would sell out for anything less than $2 to $3 (at this stage). Even at $3 we would be looking at a market cap in the range of $50 million. Using Galway (TSX: V.GWY, Stock Forum) as an example, they pushed that company to a market cap well in excess of $100 million and even now it’s near $80 million. Compare what GWY has in relation to the massive land position being packaged by CMJ.
I follow these valuations closely as we were the only ones following Galway in February 2009 near 10 cents, and successfully tracked it through to $1.00. Unfortunately we dropped coverage before it ran to $1.87 in December but even now it trades at the same level where I discontinued coverage.
Colombia Mines had the insight to start building this large land position in 2006 and because it takes two to three years to properly secure these exploration licenses, they carry significant value - especially in this country where we are seeing a land rush to secure projects. The quality of these projects was evident in the recent announcement of licenses awarded (completely) surrounding a Yamana acquisition in January.
Serafino Iacono knows that if he can acquire a company like CMJ, he not only picks up the existing licenses (and what’s in the pipeline), but he buys "time" - almost three years to be exact (the time it takes to get government approvals).
For anyone to assume they can acquire CMJ for less than $2 to $3 (or maybe more if we use GWY as the comparable), we would have to assume that management and retail shareholders of CMJ are very naive. With the number of people hunting for projects in Colombia, CMJ management could easily open a data room that shows current projects and what they've applied for since 2006. If that was the case, why not open the whole thing to the highest bidder. I am sure Yamana or any of the mid tier producers would be more than interested.
I think Calandra's article is extremely insightful but should serve as a "warning sign" to existing CMJ shareholders that if someone can steal this company out from under them, they will try before more land is awarded, or we start seeing drill results across several projects.
I would be more than happy to see Bob Carrington raise a few million dollars to expand geologists on the ground and work toward small drill projects on various properties. Combine this with news throughout the year as the government awards their licenses (and grows that large land portfolio), and we will likely see the stock moving closer towards that $2 to $3 mark - even without a takeover attempt. Should they hit anything significant on those projects, the stock would move rapidly because of the excellent share structure.
Disclosure: Danny Deadlock owns 30,000 shares of Colombian Mines (TSX: V.CMJ), 30,000 shares of BioMS (TSX: T.MS), and 40,000 shares of OSI Geospatial (TSX: T.OSI).
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Danny Deadlock has specialized in microcap and smallcap companies for over 25 years and is a registered member of the Stockhouse community since 1997. You can find his website at www.MicroCap.com - a service which has specialized in TSX and TSX.V penny stocks since 1998.