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Rare earth junior could have another good year ... or two

Danny Deadlock Danny Deadlock, TickerTrax
0 Comments| February 7, 2011

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This week… 1) Medwell and how “Not” to run a public company; 2) Follow-up on Beaufield’s drill results; 3) China flexing their rare earth (REE) muscle again.

1) Medwell Capital (TSX: V.MWC, Stock Forum; 23 cents)

Market cap: $21 million/ Cash & investments: $37 million

Shares outstanding: 91 million

Cash & short-term investments: $28 million (31 cents/share)

30 million shares of Spectral (T.SDI, 30 cents) worth $9 million (10 cents/share)

Total debt less receivables: $1 million (a penny/share)

I have reported on Medwell previously on Stockhouse in the mid-20 cent range as it’s a good example of the state of the public biotech sector in Canada and also what happens when senior management has complete disregard for their retail shareholders and treats the company as if it were private.

To pour salt on the wounds of their shareholders they even let their big board TSX listing go so that they could drop down to the TSX Venture Exchange (TSX.V) and save some money. Maybe they should have started with their own wage cuts. Almost all TSX.V companies aspire to some day list on a bigger exchange. Not Medwell. Nothing says vote of confidence like this decision.

This company either has majority shareholders who are great friends with the CEO, or they have so much money they could care less. Either way, I have never seen such complacency. The unfortunate part of seeing a company with this much cash do nothing successful with it, is they are using other people’s money to run the company like a retirement project – and majority shareholders seem content to sit by and watch it happen – very sad.

I am not getting into the fundamental side of the company as it (unfortunately) seems like a waste of bandwidth. They have enough information on their website to formulate an opinion. From the time this stock collapsed from $2.80 in the summer of 2009 (after losing a partnership with Eli Lilly) they have accomplished nothing tangible.

Now with their start of trading on the TSX.V today, shareholders are throwing in the towel (no doubt in disgust). In doing so it is creating some volume again near 23 cents. Assuming they don’t burn through their remaining cash like drunken sailors, and assuming their investment in SDI.T amounts to something, this still might make an interesting speculation (if it keeps trading this low).

I have personally owned 50,000 shares since mid 2009 after it collapsed into the 20-cent range and will likely continue to do so for several quarters. Not because I believe this management group is capable of doing anything with it. Only because I hope someone else is smart enough to take control of it - or maybe the Sepsis trials (being run by their investment in Spectral) will be successful.

When trading at such a large discount to cash and investment value it’s very difficult to ignore this company or sell at these levels. But if the next nine months are anything like the past 18 months, even I will throw in the towel and take the tax loss. Bottom fishing cash has worked great on every stock we use this strategy on.

But Medwell is determined to ruin that track record.

2) Beaufield Resources (TSX: V.BFD, Stock Forum; 42 cents)

I discussed BFD in a report on January 26 (price then was 41 cents). It can be found here:

The speculation centered around their current drill program and whether or not they could replicate the success they had in September when they hit 322 metres of 4.2% zinc, 2.27% copper, 72 g/t silver and 0.53 g/t gold.

Results of the first four holes were released Friday. The numbers look good, but not great. The grades are good but the long drill intersections everyone was hoping for were not there. This is typical of exploration programs and many holes will still be reported. My initial concern is that I would have thought they would target the best locations first to try and keep the market interested.

A week earlier the stock broke 50 cents on good volume so expectations were running high (which was to be expected). However, the stock was hit with moderate selling on this news and while it has strong support to 40 cents, they will desperately need to report bigger numbers on this next batch of results. We will wait around to see what transpires but treat it very cautiously in the interim.

3) China flexing its rare earth muscle (Again)

The Rare Earth (REE) story is nothing new as the sector has performed very well since early 2010. The bigger players like Rare Element Resources (TSX: V.RES, Stock Forum; $14.28) have risen 700% since last summer. Just recently I commented on the industry and reviewed Bolero (TSX: V.BRU, Stock Forum; 39 cents). That report can be found here:

Sunday there was another very important development out of Shanghai. It was reported that China is building strategic reserves in rare-earth metals in an effort to give Beijing increased power to influence global prices and supplies in an industry that it already dominates globally. Apparently the government is building huge storage facilities in Inner Mongolia.

Specific details of their stockpiling plans are not being made public but Asia Today is referencing recent statements from Chinese government agencies, Chinese corporations and reports in government controlled media. It is understood that these storage facilities could hold more than the 39,813 tonnes that China exported in 2010.

Rare earth metals (referred to as REE’s) are being called 21st Century gold because they are critical to most hi-tech devices, weapons, plane components, etc. China physically controls over half the mines and exercises control over 90% of global supply. This gives them huge pricing power and it’s something that the rest of the world is very worried about.

What this means is that rare earth projects outside China, take on huge importance. We have seen great strength in the dominant industry players but we have yet to see a major rally in the junior stocks. Many did very well in 2010 but now we have to wonder if this latest news will not fuel another (maybe stronger) rally in 2011 or 2012. There are not a lot to pick from in the small cap and micro cap space so it will not only boil down to supply and demand of the metal, but the limited number of decent public companies worth speculating on.

Disclosure: Danny Deadlock owns 50,000 shares of Medwell Capital (TSX: V.MWC) and 25,000 shares of Bolero (TSX: V.BRU).

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