TSX/TSX-V/CSE: Kaiser Watch starts 0:00:00
What does the world of resource juniors look like at the start of November?
KRO charts
Kaiser Watch in writing:
Based on the latest quarterly filings which are now up to date as far as June 30, 32% of the 1,175 TSXV listed resource juniors have negative working capital, 15% have between zero to $500,000, and 51% have betweern $500,000 to $50 million. In terms of bottom-fishing strategy this latter group will be the target at the end of 2022. When you separate the companies into those with postive and negative working capital, those with negative working capital owe about $3 billion which is unlikely to ever be repaid and will probably be converted into stock. Of that amount $2.4 billion is owed by companies trading below $0.10. If you assume a $0.05 conversion price that translates into 48 billion new shares for which there is no market, and consequently will be dealt with by 10:1 or higher rollbacks after parties connected with the company have bought the debt at a deep discount to the paper settlement price. On the plus side there is still $893 million positive working capital lurking inside the treasuries of companies trading below a dime. There are 560 companies or 48% of 1,1175 trading below a dime, so the trick is to find those below a dime that have a meaningful amount of working capital. About 30% of the TSXV resource listings trade in the $0.10-$-0.29 range of which those with money are sitting on $1.25 billion in positive working capital while the rest owe $310 million.
The chart which shows how traded value is split between TSXV resource and non-resource listings indicates that since mid December 2021 the resource listings have consistently represented over 50% of traded value. The occasional exceptions, such as on October 11 and November 3, 2022, are due to an oddball listing called Topicus.com which trades at abput $70, has 82 million shares issued, has software-related revenues approaching 1 billion euro on an annulaized basis, and is profitable. It usually trades less than 50,000 shares a day but on bigger volume days it single-handedly drags up the traded value of TSXV non-resource listings. Without this company that doesn't belong on the TSXV exchange the relative performance of non-resource listings is truly dismal. But that doesn't mean things arw wonderful for resource juniors.
During the past week there has been a spike in traded volume by TSXV resource listings, but that was not for positive reasons because this was due to capitulation selling involving two juniors from opposite ends of the exploration-development spectrum. One was Nevada Exploration Inc which suffered a market blowout at the bid that took it to a half penny after announcing it would be pursuing a reorganization. NGE has been a long running KRO bottom-fish recommendation based on its innovative gold-in-groundwater based strategy of generating targets under Nevada's basin gravels where there are no clues in the ranges that might suggest a Carlin type gold system may be lurking under the gravel as proved to be the case with Twin Creeks, Pipeline, Cortez Hills and Goldrush. These world class gold deposits, however, had modest gold mineralization in the nearby ranges to arouse curiosity about the adjacent shallow gravel covered pediments. NGE did succeed in finding a highly altered Carlin-style Lower Plate window at the southern end of Grass Valley where there is no gold whatsoever in the nearby hills, but whatever Carlin-style gold is present it is deep beneath the gravel and layers of unpermissive stratigraphy the junior has had a difficult time testing. The story is not definitively dead, but existing shareholders will be wiped out by whatever rollback is coming, and, if gold is ever found at SGV, the reward will go to the newcomers. Such is the tragedy of innovative resource junior exploration. The other is Pure Gold Mining Inc which put the Madsen gold deposit west of Red Lake into production and filed for bankruptcy protection on Monday. On Wednesday the TSXV shoveled Pure Gold into the garbage can it calls the NEX. As I have mentioned before, we are in a bear market so severe shareholders have no patience left for a comeback from failure.
Most resource juniors this year have a downhill ski slope chart pattern which usually bottoms in December as shareholders collect their tax losses by selling stock which bottom-fishers accumulate at rock bottom prices. But this year bottom-fishing may be far more dangerous than usual because of the macro-economic backdrop of rising interest rates and concern that inflation will not ease without a harsh global recession. So when looking for bottom-fishing candidates one must look very hard for an underlying story that can still inspire fundamental optimism. If fundamental success hinges on higher metal prices, such as is the case with ounce or pound in the ground plays, one has to make sure that there are some big shareholders in place who will not let the asset be raided by predators with a long time horizon.
In this regard I will be looking for a chart pattern different from the usual bottoming washout. 2022 was a year when the market tended not to reward fundamental progress in the form of a higher stock price. What I will be monitoring for when I use the KRO Search Engine to screen for other parameters such as working capital is a chart pattern that has largely gone sideways in 2022. Two companies that are part of the KRO 2022 Bottom-Fish Collection are Endurance Gold Corp and Eagle Plains Resources Ltd. Check last week's KW episode for my discussion of EDG which this week not only confirmed closing of its $1.5 million private placement but confirmed that it had been increased to $2 million with just over half taken down by insiders.
Eagle Plains was a KRO Favorite in 2021 but I did not include it in the much shorter 2022 KRO Favorites because I did not think the prospect-generator-farmout model would interest the market in 2022 though in retrospect I should have had only Verde Agritech on the list given that the rest except FPX Nickel are down at least 50%. At the start of 2022 Eagle Plains was waiting for SSR to complete its acquisition of Taiga for cash which did occur, turning EPL's Taiga "marketable securities" into hard cash and making its $10 million working capital position very real. Not surprisingly none of its farmed out prospects have delivered any upside joy for EPL, but the junior did spend money drilling its 100% owned Vulcan project. Sullivan 2 was not delivered but the results have yielded a much better understanding of why Sullivan 2 was not found by previous campaigns, plus peripheral evidence that a big zinc-lead-silver system is present at not unreasonable depths. The market shrugged, perhaps because it now expects EPL to farm the project out to somebody else. But with such a rich treasury, and a bear market lingering into 2023 likely to hinder farmout activity, some shareholders such as myself are urging Tim Termuende to spend another $1-$2 million on Vulcan in 2023.
Many of EPL's farmouts involve a combination of staged cash, share issuances and exploration expenditure that allow the other junior to earn a majority interest. But in a lot of cases EPL lets the other junior earn 100% and keeps a royalty. The market is assigning no value to this portfolio of royalties which includes one covering part of Banyan's gold project in Yukon. So EPL is trying to figure out a way to monetize this royalty portfolio which could include a spinout to shareholders. In late 2021 EPL also staked the Adamant project in southeastern BC which Critical Elements had explored during Rare Earth Mania 1.0. It covers a trend of nepheline syenite intrusions that includes meaningful heavy rare earth values whose local distribution is not understood. This year EPL did its own prospecting survey over the project while compiling historical work. While a gold or base metals prospect might be hard to farm out in 2023, the rarity of REO prospects could attract a good deal in 2023 for Adamant. All these developments help explain why Eagle Plains, like Endurance Gold, has flat-lined all year within a narrow range despite fundamental progress. Such examples typically indicate a supportive and knowledgeable shareholder base engaged in fundamental outcome slow gambling rather than short term momentum chasing. 2022 has harshly and deservedly punished momentum gamblers. So if you see a flat-lining resource junior, use that as an excuse to look a little closer, not under the surface, but what is there in plain view that only solid long term shareholders can see. |
