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Equity Analyst Danny Deadlock has 30 years of experience speculating on Canadian penny stocks and targets capital gain opportunities and diversification in metals and minerals exploration, energy, and technology.
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My report this weekend requires a contrarian perspective as we look at Eastern Platinum Ltd. (TSX: T.ELR, Stock Forum) (6.5 cents). ELR has a very large bank account with no debt and trading well below cash value. The stock market values their significant reserves and large mining complex at ZERO yet Invesco Canada has been accumulating the stock during 2013.
Invesco is one of Canada’s leading investment management companies with such well known products under their umbrella as Trimark, Invesco, and PowerShares.
The current low price of ELR may set up a significant opportunity for astute investors in 2014
PLATINUM & PALLADIUM (PGM’S)
The majority of investors are avoiding investment in South Africa because… it’s South Africa. Unreliable power, labor unrest, and political instability. Yet this region produces the bulk of the world’s platinum and palladium (PGM’s) and platinum is expected to experience a supply deficit in 2014 and beyond.
With current PGM prices and higher costs, the majority of producers in the country are operating at a loss. This situation curtails production and with increasing demand should push up prices in 2014.
The majority of platinum produced is consumed by industry and in particular, by the automotive industry where it is used in catalytic converters. As stricter emission standards are being put into place by both developed and developing countries, the demand for platinum will continue to grow.
Demand for platinum as an investment is high in China but pollution from factories and automobiles is hitting critical levels of concern. The image below is from Beijing but the same problem is occurring in all the major Chinese cities and yet only a small percentage of the population owns an automobile.
In the years ahead China will either be forced to dramatically increase automobile emission standards (and platinum use) or start planning for lung disease that will hit epidemic proportions.
Eastern Platinum has fallen victim to South Africa and PGM prices for the past couple years and this summer they put their large mine on care and maintenance with no insight on when production might resume.
As an investment (speculation) at this stage we are ONLY interested in the following:
1) A large Canadian Fund has been adding to their sizeable ELR position
2) ELR has net cash and investments worth $96 Million or 10 cents per share
3) The company has PGM reserves of 4.6 million ounces – the market valuing at ZERO
4) Net Book Value of Mine Assets is $353 million or 38 cents/share - the market valuing at ZERO
WHAT I WOULD LIKE TO SEE HAPPEN:
1) Existing management and directors decide to find a buyer for the South Africa assets, adding the sale proceeds to the large war chest of existing cash, and put the money to work elsewhere or distribute to shareholders as the company is wound down.
2) Funds (the largest shareholders) exert their control to remove existing management and directors – then execute on (1) above.
3) A takeover by the Chinese, an International mining major, or a private equity fund
Eastern Platinum (ELR.T 6.5 cents)
www.eastplats.com
Shares Outstanding: 928 Million
Eastern Platinum stock chart
Financials Ending Sep 30th (released Nov 14th)
Cash & Investments: $98 Million
Receivables: $6.7 million
Total Current Assets: $105 million – Current Liabilities $9 million = Net Cash & Investments $96 Million (10 cents per share) - highly liquid, fully guaranteed, bank sponsored instruments.
Net Book Value of Property & Plant: $353 million (38 cents per share)
Provision for Reclamation: $11 million
On August 1, 2013, the Company ceased production and as at November, 13, 2013, the Company does not have any producing operations
Eastern Platinum is still in the process of determining the cost of keeping their mine on care and maintenance but it should be reasonable based upon what they reported in financials last week. They closed their South Africa administration office in July 2013 and now run a skeleton crew at the mine site and in Canada for administration.
Care and maintenance costs consist of maintenance, pumping to prevent flooding of the workings, underground inspections to ensure that the integrity of critical excavations is preserved, general and administrative expenses and other costs necessary to safeguard the assets.
IMPORTANT – INVESCO CANADA BUYING
www.invesco.ca
If you are not familiar with Invesco, they are a large and powerful investment fund that control ETF’s and the Trimark group of mutual funds. They are brilliant fund managers who do not buy 6 cent stocks simply because they like penny stocks.
Once an investor crosses a certain threshold of ownership they must make a public disclosure. On November 8th it was disclosed that Invesco Canada had reached 15.8% ownership.
Previously they owned 116.7 million shares and now own 146.6 million shares.
The purchase by Invesco of 30 million more shares is very important because this spring and summer I watched unknown investors buy VERY large blocks in the open market. UBS and Canaccord had crossed 43 million shares at 8 cents and in April Dundee moved about 120 million shares in the same price range.
Even to tuck this one away longer term means putting up with volatility and possibly dead (boring) money if no one steps in to buy them at this low valuation in 2014. However, the stock has very good liquidity at 6.5 cents and the bottom “appears” to be 6 cents.
Regardless of the problems in South Africa, a personcan get $96 Million in cash at a 40% discount plus get the large mine and PGM reserves at ZERO cost.
If Invesco is buying it is because they see substantial value that other investors are missing.
CORPORATE PRESENTATION
https://www.eastplats.com/_resources/presentation/Eastplats_Website_Presentation_25Nov2013.pdf
Here is also a good article from International Business Times discussing the supply/demand fundamentals of Platinum: https://bit.ly/18OCmhq
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Disclosure: Danny Deadlock owns 300,000 shares of ELR
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