Winspear rated ‘outperform' by Deutsche Bank Securities
Winspear Resources Ltd WSP
Shares issued 33,721,333 Feb 11 close $3.45
Fri 12 Feb 99 Street Wire
GUNG-HO
by Stockwatch Business Reporter
In a Feb. 10 research report, Deutsche Bank Securities analyst George V. Albino says Winspear Resources “has advanced Snap Lake to the point where the play has to be taken seriously.” He offers the opinion that Winspear is “one of the best high-risk, high-reward plays in the junior market” and gives the company a rating of “Outperform (Speculative)”. Rumours of the report surfaced on Internet chat sites on Wednesday evening, prompting enthusiastic speculation of imminent European buying and panic covering of short positions that would drive the price higher. Trading activity on Thursday disappointed many of the bullish Internet followers of Winspear with the stock closing at $3.45, up a modest six cents on a volume of 534,800 shares. Mr. Albino's report was in heavy demand even if Winspear's stock was not. There was a waiting list of several hours to receive a fax copy of the report and Winspear's corporate relations officer, Sophie Taylor, was deluged with phone requests. “This has to be the most tedious job of my life,” she commented with respect to faxing the seven-page, graphics-laden report. Ms. Taylor said that she did not have a digital copy of the report and, in any event, did not think that she could put it up on the company's web page.
Excerpts from the report began appearing on the Internet by early Thursday afternoon, with particular attention focused on the upper end of Mr. Albino's range of valuations. Accepting a $301/carat value, operating costs in line with company estimates, and mining 14 million tonnes through 2015, Mr. Albino estimated Winspear's interest in the project at $17.35 per share, using an 8 per cent discount rate. Little attention was given to the lower end of his valuations, which came in at $4.93 per share based on a scenario of $175/carat and operating costs 35 per cent higher than company estimates. Indeed, even Mr. Albino's valuation of $17.35 was considered far too conservative by many of the Internet posters. Nonetheless, most were pleased with their interpretation of the report.
While Mr. Albino's initial coverage may have seemed too conservative to many, he appears to have broken ranks somewhat with other analysts, newsletter writers, and Winspear itself. Little more than a month ago, newsletter writer John Kaiser was roundly criticized for suggesting that Winspear could be trading as high as $20 within the year, and Yorkton analyst Art Ettlinger commented that those projections were “highly premature”. Fellow newsletter writer Bob Bishop commented to a Stockwatch reporter that much of the criticism levelled against Mr. Kaiser was unfair inasmuch as Mr. Kaiser had clearly attached a number of caveats to his $20 prediction that were ignored in media accounts of his coverage. Mr. Albino's report is not without its own caveats but he explicitly discounts Winspear's pointed caution against using the caustic fusion results released on Jan. 26 to predict grade. Mr. Albino writes: “The new data make it clear that the diamond populations in the mini-bulk samples, and the body as a whole, are completely compatible...We therefore feel it is likely, Winspear's caution notwithstanding, that this year's planned 6,000 tonne bulk sample will yield grades in the 1.1 carat/tonne range or possibly higher.”
Apparently satisfied that the available data indicates the likelihood of an acceptable grade, Mr. Albino notes that the main uncertainty is that of value. On page six of his report, he writes, “If the results of this winter's bulk sample program support a higher value than $200/carat then we see the potential for Winspear to appreciate significantly.” In the conclusion, he again raises the uncertainty of the diamond value, observing that the $301/carat obtained from the mini-bulk sample is among the highest valuation ever obtained and questioning whether such a value can be maintained. “As long as the value comes in over about $170/carat we estimate that an acceptable return of investment is possible, however, and if the grade upside we suspect does materialize, this threshold value could drop to the $150/carat range,” he goes on to write. Mr. Albino also has “a major concern that the time lag to production and some of the unique challenges in financing this deposit could weigh on the stock.” According to Mr. Albino, it will take a substantial underground program to sample the deposit in several blocks to establish the value of the diamonds to a bank's satisfaction. He suggests that the results of such a program would be known in early 2002 with initial open pit production beginning in 2005 at the earliest. Alternatively, he suggests the company might opt for an initial small-scale open pit operation running parallel with the underground effort. Either way, he notes, some dilution may be unavoidable. “The future is in the numbers,” Mr. Albino writes. “With grade and value equating to about $185/tonne or greater we see a good probability of a mine. We feel that the available data make such a value likely.” Mr. Albino's research report is already adding to the rumours and controversy, much of which has been generated on Internet chat sites, that have plagued Winspear for nearly a year. Soon after the results of the mini-bulk sample were made available in June 1998, suggestions of salting began to surface. John Kaiser lashed out at another newsletter writer, Eric Charters, for starting the rumour. Mr. Charters has denied saying that the three large stones from the 200-tonne sample were salted, but he clearly suggested the possibility and his comments were a catalyst for the ensuing furore. The occasional salting allegation continues to arise but that controversy has all but faded. The “cone sheet theory” proposed by Dr. Robert Folinsbee provided another spate of rumours and speculation, with many enthusiastically embracing the notion of a uniform 80-million-tonne deposit. Another round of optimistic speculation was engaged when rumours began to circulate that Jim Pattison would be taking a large portion of a private $10.6-million placement announced in November 1998. On December 22, the company disclosed that Mr. Pattison had, in fact, acquired 1.9 million flow through units of the placement. On Jan. 8, 1999, John Kaiser shocked many Winspear followers by issuing a lengthy Bottom-Fish Tracker which was highly critical of the company's disclosure policy and warned of a “dangerous speculative bubble”. Previously seen as an ardent champion of the company, Mr. Kaiser abruptly lost favour with many of Winspear's followers as his concerns fueled more speculation, much of it negative, about the company's prospects. The less than favourable market reaction to the subsequently released caustic fusion results exacerbated the already acrimonious disputes.
While Mr. Albino's report is much more upbeat than most of the coverage Winspear has been treated to in the last several months, it is being criticized by many Internet followers for being too conservative with respect to the suggested tonnage, valuation, and financing concerns. Mr. Albino studiously steers clear of the “cone sheet” theory and talk of 80 million tonnes, venturing only as far as to suggest the possibility of 20 million tonnes and basing his valuations on 14.5 million tonnes. As the Deutsche Bank Securities report becomes more widely circulated and more closely reviewed, all sides will likely find no shortage of ammunition with which to launch assaults on perceived adversaries in the continuing battle over Winspear.
© Copyright 1999 Canjex Publishing Ltd. canada-stockwatch.com
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