Straight Talk On Mining Insights on mining from economic geologist Dr. Keith Barron.
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I thought it only fitting in honour of Hallowe’en to provoke a little discussion on The Dead, Zombies, and those Prematurely Declared Dead. My subject is the Junior Mining Sector. But I’m not going to be too ghoulish and hopefully not too pessimistic. Sadly, the damage has already been done to the sector, BUT not fatally so…. for the first time in ages we are starting to see revival and SOME companies are financing. This means that the smart money reckons we are on the cusp of a rally.
The Victorians shared an intense horror of premature burial, especially after the publication of Edgar Allan Poe’s 1844, “The Premature Burial”. On to a good thing, Poe continued the theme in “The Fall of the House of Usher” and “The Facts in the Case of M. Valdemar”. After the public had the bejesus scared out of them all kinds of contraptions were patented in so-called “Safety Coffins” from buzzers, bells and whistles to periscope breathing tubes, even telephones! Hollywood has done the theme to…… ummm… death and there’s a rich cinematic tradition of films involving people getting interred a little before their expiration date. http://www.smh.com.au/entertainment/blogs/cinetopia/top-10-buried-alive-movies-20100929-15x4y.html Perhaps the thought of it awakens some primal fear in us. Gives me the shivers. Whew!
The Dead
Worst case scenario. There are scores of junior mining companies out there that have had cease trade orders issued against them. Usually this is a consequence of being unable to pay filing fees, or auditor’s fees, and the issuer is slapped with a “failure to file”. “Cease trade” means no market for the securities. You may see them quoted, but stuck at the price on the last day of trade. These have flat-lined. What happens to these companies? Well, usually the shareholders have lost everything and it ain’t coming back. Sometimes management has been lax and has missed a filing date, but usually the situation is more dire…no money and no projects. If money can be found for the company, usually from a director with a large shareholding, then it can revived like Lazarus under certain circumstances. Many of the companies in this situation are there because management have raided the treasury, and they don’t really care to stick around if there’s no cash. The longer a cease trade sits there without being lifted the more likely it is that the corpse has started to smell. When it is “delisted” it has had the stake driven through the heart.
Zombies
Hey, who doesn’t love zombies? Dawn of the Dead, Return of the Living Dead (“Send more cops….send more paramedics!”), Night of the Living Dead, World War Z, the Walking Dead, and my absolute favourite….. Shaun of the Dead.
Can’t get enough of ‘em! The Center for Disease Control even has a spoof page to protect yourself against zombie attack! http://www.cdc.gov/phpr/zombies.htm
Anyone who knows anything about zombies knows that singularly or in twos or threes they are easily overcome because they don’t move too fast. Choose your weapon; scythe, shotgun, golf club, cricket bat. It’s when they run in packs that they start to get dangerous, especially when they creep up behind you.
Zombie junior mining companies are companies that refuse to die. Some of these ZombieCo’s have lived through multiple cycles. What keeps them alive? Usually they have a resource in the ground that is patently uneconomic because it is too low grade or too small, but their officers and directors are good at keeping the dream alive. I know of one of these that has had over 20 separate drill campaigns. Guess what happened to that one recently? You guessed it, it merged with a pack of equally undead ZombieCo’s that is now a bigger, badder, ZombieCo “leveraged to the price of gold”. (Where have we heard that before?) These companies are being promoted by brokerage houses that are touting the management rather than the projects. If this market starts to take off you will see these companies appreciate in price because they are gonna be promoted to death. But remember their projects all have problems of one or other type and they will hit the glass ceiling. Back in the early 2000’s when the gold market started to get a head of steam we saw exactly the same thing happen as promoters picked up multiple duds to make a fast buck. Zombies in packs are dangerous. Remember that.
The Afterlife
Because of the nasty and prolonged turndown in the sector we have seen lots of juniors revert to “shells”. This is a company with no business plan and no projects, but an active listing and usually a tiny bit of cash in the bank. After Bre-X many junior miners became shells, were picked up by dotcoms and then reverted to shells once again. In the 1950’s mining promoter extraordinaire Joe Hirshhorn, used to call shells his “Cats & Dogs”, and he kept a stable of them alive, ready to live another day. Entrepreneurs who want to take a venture public have two choices: IPO or RTO. An IPO is an Initial Public Offering and means taking a company public from scratch. It’s not easy in a hard market. After uranium companies got Fuk’ushima’d I had to find 200 shareholders for a new listing and it was a scramble. IPO’s never become popular until well into a boom cycle. On the contrary, when the market starts to tick up, RTO’s or Reverse Takeovers are very popular. An entrepreneur who owns NewCompany or “Newco” is put together by a broker with a PublicCompany or “Pubco”. Pubco which is the object of the takeover, takes over the Newco but issues more than 51% of the outstanding shares to the Newco….so they get control. This is the “reverse”. The principals of the company then usually do a name-change and go on their merry way. Usually the shares are rolled back 10:1 or some convenient ratio. RTO’s come with existing shareholders of course and sometimes quite a bit of baggage. “Clean” shells have had their balance sheets and any potential lawsuits cleaned up before entering into an RTO (hopefully anyway). This is the quickest and easiest way to go public. In a red hot market, shells can be worth substantial money because they save time and legal fees for going public. Today there are heaps of them waiting to be re-energized like the Frankenstein monster.
“I’m not dead yet!”
Do you remember the scene in Monty Python’s “The Holy Grail” where Eric Idle goes around Black Plague-ridden London yelling, “Bring Out Yer Dead!” https://www.youtube.com/watch?v=grbSQ6O6kbs
In the last Straight Talk I stuck my neck out suggesting that we had reached market bottom. Rick Rule says that he’s too clever to call a bottom….and that’s probably wise. It’s certainly not as egregious as Greenspan saying you don’t know you’re in a Bubble while you’re in it….but to my mind the signs of a tentative, cautious pickup are there. In the last day or two Reservoir Minerals and Goldquest both released great drill holes and picked up some traction. This wasn’t possible a month ago.
Way back in May, 2012, John Kaiser wrote an article, “Staving off Mass Extinction with the Big Anomaly”. For copyright reasons I won’t reproduce it here, but here’s the link http://www.kaiserbottomfish.com/s/KaiserBlog.asp?ReportID=526687 This is a really excellent article and I encourage everyone interested in the junior resource sector to give it a read, even though it is 3 years old now. Kaiser talked about the 800 or so junior companies with less than $200,000 in the bank that were staring down the barrel of a gun. He said in all probability there would be an extinction event, BUT that the “mass extinction” could be headed off by a big grassroots discovery, which lifts the whole market. The media of course focussed on the negative and Kaiser’s article and several follow ups might have had unsuspected consequences and negatively reinforced things. The media focussed on the “juniors who needed to go away” and parroted it far and wide, making the junior space as scary as a fairground House of Horrors. Three years later and yes some of these 800 juniors have now thrown off this mortal coil, but not as many as anticipated. For my money I think Kaiser’s main message was bang on target. All it will take is someone somewhere to make a discovery and give shareholders a ten-bagger win in one day and the whole thing will rise like the Phoenix from the Ashes. In the coming months I plan to do a historical focus on the junior mining discoveries that catapulted companies from zeros to heroes: Eliot Lake uranium, Hemlo gold, Eskay Creek Gold, Pierina Gold, Voisey’s Bay Nickel, Lac de Gras Diamonds and my own Fruta del Norte gold story.
So that’s it for now. Gotta run……..I’ve got a pumpkin to carve. Thanks to all the readers who sent me “welcome back” greetings. It’s fun to be writing again.
Happy Hallowe’en everyone. Stay safe!
