Ticker Trax is equity specific research (Canadian Listed and Market Cap < $300 million) published every Monday to paid subscribers but we also want to provide a free publication that is more educational in nature. Stockhouse visitors love reading the Bullboards but many are uncomfortable asking questions. Here you can email Danny in full confidence as origin is never disclosed. You may wish to share insight with others or ask questions that either Danny can answer or Roundtable readers can. We cannot answer questions like “why is ABC company doing so poorly” but most everything else should be fair game. If you are an expert or retired in your field or occupation we hope you visit each week in case you can provide insight others cannot. This column is new Oct 1/11 so it will evolve over time. To ask questions, provide feedback or share expertise please email Danny.Deadlock@stockhouse.comand I will try to include your (nameless) inquiry or feedback in the next Friday Roundtable discussion
This week’s discussion topics
I. Benchmark Pinetree up 40%
II. Junior Gold Valuations
III. The Greater Fool Theory
For those interested in biotech stocks, I will be featuring a new biotech to Ticker Trax subscribers Monday afternoon. This is a longer-term speculation but if trials continue successfully, the returns could be dramatic. The company is completely under the radar, has a world-class pharma partner, trades at almost half its cash value, and is priced below 15 cents. The annual Ticker Trax subscription is very inexpensive at less than $100 annually - further information at the end of these weekly reports.
I. Pinetree 40% rally indicative of Oct 4th bottom
Pinetree Capital (TSX: T.PNP, Stock Forum; $1.44)
www.pinetreecapital.com
For the individual interested in junior exploration companies, you can monitor Pinetree Capital and use it as a (very good) barometer for the TSX and TSX.V juniors. Pinetree began investing in precious metals stocks (half their portfolio) in 2002. They have 136 million shares outstanding and a net asset value per share of $3.63 as at June 30, 2011. Because they own a very large portfolio of junior exploration companies (metals, minerals and energy) they are a great way to gauge the health of the sector - and also the mood of speculators.
Ten days ago I noted a bottom on Pinetree at $1.05. This was a peak of pessimism coming off a very harsh couple weeks for the markets in general. On October 4, it appeared as though many investors and junior company speculators were finally throwing in the towel. Pinetree and many individual companies were driven that week to annual lows.
Since that time Pinetree has rallied back almost 40%. A lot of factors are at play right now with respect to the markets (economic outlook, Europe, unemployment, etc.) and it seems any given day we could see a reversal of the current uptrend. However, if we are lucky a significant bottom was put in place October 4, and maybe now we can look forward to a winter return of speculators on the small stocks.
II. Junior gold valuations
October 12th merger provided very good gold valuation data
An encouraging merger Tuesday morning in the micro-cap gold space. B2Gold (TSX: T.BTO, Stock Forum; $3.32) is buying Auryx Gold (TSX: T.AYX, Stock Forum; 73 cents) for a 78% premium over Auryx's 20-day average price. Of particular interest is the price they are paying for gold ounces in the ground (see bottom of this report).
Since spring the valuations for gold in the ground on the juniors has been terribly low. In most cases the market cap in relation to ounces is anywhere from $15 to $40 per ounce. A few acquisitions have occurred this year that range from $40 to $150 but in most cases there was some strategic advantage for the company making the acquisition - partners on an existing project or proximity to an existing mine in production or under development.
The importance of Tuesday’s merger between BTO and AYX is that the gold valuation is decent and B2Gold has no operations in Namibia where Auryx has this project. They are simply paying this price to secure the asset and the large exploration package in Namibia.
They plan to issue BTO shares to AYX shareholders but the valuation is equivalent to $160 million. AYX had approx. $30 million in the bank so approx. $130 million is being paid for the gold ounces and exploration licenses.
Pre- merger
Auryx had 161 million shares outstanding prior to this merger and at last week's price of 46 cents, they had a market valuation of $44 million (after removing the cash). Their Otjikoto project in Namibia had a gold resource of 1.2 million ounces indicated and 0.7 million ounces inferred (unproven yet by sufficient drilling). Assuming a weighting of 75% on the indicated and 25% on the inferred, the market was valuing the 1.2 million ounces at $28 per ounce and the inferred at $16 per ounce.
Post-merger
The merger takes into consideration the fully-diluted shares, which include stock options and would have to be exercised. This would add another 11 million shares but also about $6 million to the bank. So assuming that is the case, cash would move to about $36 million and shares outstanding 172 million (please note that these are very close- but still rough estimates).
The fair value being given for the merger (based upon share swap with B2Gold) is $160 million. We will pull out the cash of $36 million. This assigns $124 million to the exploration licenses and gold reserves but I won't assign any value to the exploration upside (although it obviously has value). Once again we have to assume the indicated ounces are more valuable than inferred because they have seen extensive in-fill drilling that qualifies them for a 43-101 report.
Their Otjikoto project in Namibia had a gold resource of 1.2 million ounces indicated and 0.7 million ounces inferred (unproven yet by sufficient drilling). Weighting 75% of the price paid to the 1.2 million gold ounces and 25% to the 0.7 million inferred ounces, we arrive at the following:
Value assigned to the merger - $160 million less cash of $36 million = $124 million
> Indicated Ounces = $124 million x 75% = $93 million / 1.2 million oz = $78 per gold ounce
> Inferred Ounces = $124 million x 25% = $31 million / 0.7 million oz = $44 per gold ounce
Valuation summary
Indicated Gold Ounces - $28 (stock market - pre merger) / $78 (industry fair value - M&A)
Inferred Gold Ounces - $16 (stock market - pre merger) / $44 (industry fair value - M&A)
Industry valuations on a merger or acquisition (M&A) will run higher if the projects are more strategic in nature vs. building gold inventory - and also whether equipment and mining facilities are in place.
Two weeks ago Detour Gold bought Trade Wind and those numbers were lower. Indicated gold was worth about $43 per ounce and Inferred close to $23. However in that case, they were 50/50 partners on the project and it was unlikely a third party would have interest in paying a higher price or even participating.
Tuesday’s merger was a very good benchmark case study because they were only acquiring the undeveloped resources and Auryx owned 92%
The pre-merger numbers are in line with what I have seen since late spring where the gold in the ground is only worth $15 to $40 by the market.
It is also worth noting the gold grade. There was nothing too earth shattering here. The average on the indicated was 1.44 grams per tonne and the inferred 1.3 grams per tonne. At today's gold price these are economic grades (at least for Africa). It is also important to note that Auryx has been working in Namibia (and on this specific gold project) for over a decade.
The challenge is trying to identify which companies are on the radar of larger companies looking for acquisitions or mergers. Tuesday’s deal was evidence of how difficult it can be because B2Gold had shown no interest in Namibia in the past.
The best strategy is to spread risk across several companies with cash and low valuation reserves.
Worth noting:
In a Financial Post interview the B2Gold CEO said they have signed more than 150 confidentiality agreements while looking at potential deals. It wasn't until gold stocks fell the past several months that valuations reached a point where they could start serious negotiations with someone.
III. The Greater Fool Theory
Stockhouse reporter Peter Kennedy produces an intriguing publication called the Stockhouse Short Report. It is designed for people interested in shorting stocks - which in itself can be a challenge as many brokerage firms in North America make it very difficult to short small companies.
I personally don’t short stocks (although I will buy Put Options on larger companies or ETF’s) but I frequently find the Short Report very entertaining. This week in particular I had to comment on it as it brings to light something that many of us forget about when it comes to investing in penny stocks - The Greater Fool Theory.
His report discussed a recent promo and run-up in U.S. over the counter listed LOGL.
I am not here to pass judgement on the company as I know nothing about them. I am here, however, to remind (and warn) people toalways check the bottom of any FREE publication you see promoting any public company unless you are intimately familiar with the source. In particular you are looking to see what if anything they were compensated for when talking about a company. Some small amounts for research or distribution might be expected but really look closely for signs of financial bias.
Unfortunately many of these so called research firms or newsletters prey on inexperience and profit from the Greater Fool Theory - that along the food chain of buying, the price can get pushed higher and higher as it is passed along to the next gullible buyer - until it typically reaches a point of collapse.
What caught my attention and made me so mad with LOGL was that there appeared to be a very concerted effort to heavily promote the stock on the part of SmallCap Network, OTCPicks, PennyAuthority.com, Clubpennystocks.com, TopStockAnalysts.com and EastwindResearch.com.
This is ridiculous. PennyAuthority was apparently compensated $50,000 for disseminating (shamelessly promoting) the stock. I have no idea what the others received but don’t be surprised to see them all fishing in the same boat.
This kind of garbage is what gives micro cap stocks and penny stocks such a bad reputation. Most people are fully aware of this nonsense but if you are not, avoid any public companies you see associated with these kinds of promotions. At the end of the day you will be wiser and wealthier by hitting the spam button the moment you see these.
It is one thing to disseminate information on a company through normal corporate communications, it is another to orchestrate mass emailings (and whatever other boiler room method they may use), to take advantage of people.
Greater Fool Theory - Wikipedia definition:
The greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a greater fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price.
It is similar in concept to the Keynesian beauty contest principle of stock investing.
Some consider it a valid method of making money in the stock market, particularly momentum investors; however, fundamental investors believe that market participants eventually realize that the price level is too outrageous (too high or too low) and the speculative bubble pops. The greater fool theory relies on market optimism and market momentum concerning a particular stock, an industry, or the market as a whole.
The opposite of the greater fool theory is value investing, or contrarian investing, which tries to discount, or even go actively against, the prevailing market psychology. Value investors such as Warren Buffett believe that it is corporate profits that are the normal returns from stock investments and any higher return is possible only due to the greater fool theory.