INVESTOREXPO
investorexpo.com
Published by: Dan Deadlock / Christopher Gulka, CA CFA
TABLE OF CONTENTS:
1. StockExpo (resource update)
2. BioEnvelope
Good Reading: <http://moneycentral.msn.com/articles/invest/models/6135.asp?special=msn>
For our new subscribers, StockExpo is prepared by an overseas friend of ours
(Campbell) with significant experience working for resource and hedge funds.
The sector continues to struggle but his insight is valuable and will become
even more so when commodities turn. Once our new site is finished he will have
updates weekly.
Stockexpo: Resources and other Smallcap
----------------------------------------
2000 was a year where a lot of our gains came very early in the picture, and
we spent the rest of the year fighting a slow rearguard action where all gains
made seemed to get wiped out from unexpected events and market forces. A couple
of picks (ARQ and ESX) sitting in commodities in extreme bull markets (platinum
and oil) didn't move all year despite the best efforts of management to turn
them around. I found most of my successful picks came from timing gold shares,
which is about as hard as it gets.
The good news this year is that 1) I will be keeping this column a bit more concise
and hopefully more regular and 2) the smallcaps are long overdue for a turnaround
and we have a lot of opportunities.
My theme this next quarter is that this is the time of year that most resource
plays get formed and financed, and most gains are made here. After March/April
the market quietens down and generally it is a good idea to sell most juniors
as the promoters basically put their feet up over summer. The obvious clue to
look out for is financings, where the management essentially compensates the
brokers to run the stock up a bit for them before getting away a placement at
the best possible level (excuse my cynicism!) after which activity either stalls,
as exploration news can take a while to generate, and broker coverage. The junior
resources market has been so tough that most stories are just not going anywhere
without the help of a broker and team of promoters pushing them - you can see
by volumes that the only stocks that get into a decent uptrend are those with
volume and active trade. Consequently, I am going to generally cover stocks that
have a genuine story and volume in them to raise the probability that they will
be successful. To pick resource stocks just on exploration bets at the minute
doesn't make sense, nor does bottom fishing "value" plays regardless of how attractive
the resource. Without support and coverage most of these plays fizzle out quickly.
The best performing commodities at the minute are natural gas and the PGMs. Both
have structural problems in that there is real difficulty in delivery or supply
(gas has too much demand for current supply and platinum/palladium has the issue
of the Russians consistently not delivering). In Australia tantalum has been
a successful story as well, as the material is extensively used in mobile phones
and other high tech devices, and there is a world undersupply at present. The
base metals have real questions over direction, as the probability of a recession
is worrying traders at present about future demand, and we have seen nickel and
copper come back from their highs. Gold has its own problems, the biggest of
all is a lack of new investment demand, despite a bear market in stocks and the
US dollar falling from its peaks. Gold has shown signs recently that it could
be bottoming, and all the signs are there for it to rally - but the price has
yet to follow through. My own opinion is that the gold price will stay at these
levels until a "triggering event" occurs to overwhelm the shorts in the market
and get a solid wave of new buyers into the market. This could be a bank default,
a dollar crash, a derivatives blowup, whatever. The gold price at present is
historically cheap versus just about everything else, and has always moved (usually,
led) with the commodities, which leads me to feel that 2001 is going to be a
better year for it.
Focus Stocks:
Durban Deep (DROOY/AMEX) $0.69
DROOY is the single best gold value play out there at present. DROOY produces
over 650,000 oz, has a market cap of $75m, and is basically option money on gold.
The company is recovering from several bad investments and hedge decisions taken
in previous years and will grow production strongly in the next two quarters.
Durban is one of the key stocks bought by international investors for leverage
on the gold price and has managed to absorb several South African mines which
will grow production by around 25% in the next year. Its cash costs are around
$240, with a lot of leverage from here. It also carries no debt besides some
hedging and has a decent treasury, making it a reasonable low-risk bet with a
lot of upside.
Kinross Gold (K/Toronto) $0.80
Another extreme-leverage play to the gold price, which is a reasonable bottom
fish and is a broker favourite, given its liquidity and volatility. At these
levels we are not confronting a lot of risk in owning Kinross, and the upside
is significant given its near-million oz production and low market cap ($183m).
My view to owning stocks like Durban and Kinross is that your downside is pretty
limited from here, and the stocks have both based. Both offer decent upside if
the gold price moves and institutions and brokers follow them. If you feel like
you want some security to your investment, Placer at these levels is the least
hedged and carries the lowest debt to equity out of the North American majors
and will participate in a gold rally. Kinross has struggled through an ocean
of bad news and is due a turnaround fundamentally, through the restart of one
of its mines.
Geomaque (GEO/Toronto) $0.28
GEO is a gold play which has picked up interest from exposure to a PGM exploration
target and in the process just completed a financing at current levels. It produces
roughly 60000oz per year, which will increase to approximately 90000oz according
to recent financials. The company made a cash loss on operations last year, which
I believe was caused by production problems on their old mine, which caused the
slide in the share price. The story going forward is much more solid, and the
cashflow in the company will be positively influenced by any rise in the gold
price. The reason to look at it now is that it completed the placement to take
up the option in the PGM property, which has a basic resource of 37 million tonnes
averaging 1.1 g/t palladium, 0.27 g/t platinum, 0.38% copper, 0.21 g/t gold,
1.85 g/t silver and 0.032% nickel. These are numbers that aren't tremendous,
but high enough to get the company to a status of a bankable feasibility study,
and the brokers excited enough to start pushing it to clients. I don't have any
idea as to metallurgy issues with recovery or grade here, so I am just using
ballpark guesses, based on current metals prices. With the palladium resource
theoretically over a million ounces, this could be quite a significant play for
the company, which capitalized at roughly C$16m - very cheap for this level of
production and with a PGM play in it that could run. I am trying to find out
more info on this company for the next letter.
Environmental Solutions (ESWW/NASDAQ) $1.30
ESWW is a technology play that leverages off the high current PGM prices. The
company has developed a new catalytic converter that uses ceramics rather than
PGMs for its active catalyst, which is interesting given that the major expense
in the unit is the metals. The car companies are sick of accelerating palladium
prices (they made a bad bet three years ago and switched the majority of catalyst
usage from platinum to palladium, which since has since risen five times) and
are looking for something that will cut costs and keep the regulators off their
back in the face of ever tightening pollution controls. The company recently
entered into a relationship with Chase Manhatten's corporate advisory department
to strengthen their bargaining hand in negotiations with the car companies, which
they are apparently beginning this month. This will be a story which will evolve
this year as the negotiations develop. To my knowledge the product is the best
on the market at present, and with PGM prices going north every day it wont take
long before this product is pushed aggressively. In addition they also develop
technology to clean diesel engines' emissions and a new spark plug that improves
fuel efficiency dramatically. The catalyst is the reason for my interest, but
the other products are also of note. At these levels the market cap is around
$16m, any positive developments will dramatically affect the price.
Starfield Resources (SRU/CDNX) 0.62
This is another PGM exploration play, which is fairly advanced and seems to be
attracting a lot of attention. Essentially the company has a resource that contains
25.0 million tonnes grading 0.84% Copper, 0.57% Nickel and 1.23 g/t of Palladium/Platinum.
This is an inferred resource, which means that the probability of it being inaccurate
(either +ve or -ve) is fairly high. However the geology of the area is favorable,
and the company has performed a fair amount of drilling. My major gripe with
it is that the intersections are deep (around 150-200m) which means that an open
pit situation is unlikely for a mining plan. This means that underground is the
only option and this relies on the PGM prices being high for the duration of
the mine. A fairly minor problem with the company in this stage! I feel at the
current market cap (C$10m) this is a reasonable bet and the fact that they just
completed a small financing may draw attention to it out of the herd. I am familiar
with the management and their ability to deliver to the market. For now, watch
the volume and look out for this one on a pullback.
Pacific Northwest Capital (PFN/Vancouver) 0.75
Another PGM exploration play, with several advanced properties and positive PGM
results. PFN came to life last year and ran extremely aggressively on the back
of some positive drilling results in their River Valley prospect, but since slumped
back due to drilling disappointment to what is quite attractive levels given
the status of exploration. The most attractive thing for me in this play is their
funding by Anglo American Platinum, the worlds' biggest producer - this means
that the property obviously merited the interest of a major who was willing to
earn in to it based on it as a geologic prospect. We should be getting some results
from recent drilling shortly, and the price is gently creeping up in anticipation.
In addition there will be some speculation over the Sudbury prospect, which is
quite interesting as PGMs usually occur in the presence of nickel, and Sudbury
produces a fair amount of PGM as a byproduct. The market cap is again around
C$12m , with dilution which is attractive for this state of play. Palladium and
platinum will continue to be strong and PFN is a stock that will attract attention
due to its track record and relationship with Amplats.
Southernera (SUF/Toronto) 2.34
Southernera I have featured here several times, and it seems to be getting ready
for another run. The company produces diamonds from its mine in South Africa,
which has accounted for most of the cash flow in the last year or two. In addition,
it has diamond exploration targets in Canada and has acquired a platinum mine
near its diamond mine called Messina, which it aims to get back in production
shortly. Southernera is a well followed stock, and has given some great returns
in the past. The management recently was replaced, and the original team seem
back in control, which has settled the market down a bit. They recently closed
a small financing at these levels, which will finance the Canadian exploration
primarily. The old diamond mine will continue to produce cashflow from a new
discovery adjacent to the mine, which will underpin the company. In addition
Messina should begin production this year, following its financing (likely through
debt). The market cap of Southernera is around C$60m, which is a pretty low risk
bet as the future production from the platinum is going to be very profitable
at these prices and the cash flow from diamond production more than underpins
it at present. As I write this, they just made an announcement that their huge
Angolan diamond project has moved to a production decision phase, with the feasibility
study being accepted by all partners. The project, though carrying high political
risk carries an IRR of around 185% on the first phase, which is attractive enough
to warrant taking the risk of production, given the extremely short payback period.
SUF is tremendously undervalued in the market given the advanced state of its
projects, and any success in one of them should result in a big rerating of its
share price.
Olympia Energy (OLY/A Toronto) $2.50
Olympia is a smaller oil and gas producer with production based in Canada, reasonably
valued in the market ($96m on cashflow multiple of around 4-5) and likely to
grow significantly in 2001. The oil sector is coming off a top in the big names,
but the smaller end of the sector has not run as hard and offer great value,
particularly given the potential growth from M&A that will happen this year.
OLY/A was a strong stock in 2000, and is on the radar screens of most analysts,
making it a focus stock in the smallcap end of the market. I believe oil will
tight this year again, as the problems facing the industry in infrastructure
that produced the enormous run last year have not been solved, and the inventories
available to the buyers are still at critical levels. The market is caught between
worrying about future production cuts from OPEC and worrying about the likelihood
that the price will revert to its historical mean price of around $20, making
the price likely to be volatile and range between $24-34 in the year. The gas
situation however is even more bullish, as US power plants are forced for environmental
reasons to adopt cleaner fuels, and I can see the gas market remaining strong
for the year at least. This bodes well for small producers, and funds are going
to increase their allocation to the sector once the commodity prices settle down
a bit. Olympia grew its cashflow 26% in the last quarter from increased production,
and the management has a good track record in M&A and an excellent reputation
in the market. I include it as one of my picks to offer people an idea in the
energy sector that is of a reasonable size, with broker support.
Corner Bay Minerals (BAY/Toronto) $1.37
Corner Bay was a highly successful stock in 1999, with a large silver deposit
in Mexico. The silver price has been extremely poor over 2000, more or less tracking
gold, and the commodity is long overdue a rerating. Silver is an industrial metal
that is used in photography, and demand outweighs supply by around 20% per year,
and the price has been subdued as a tremendous inventory was built up in the
80's which is finally reaching levels I would call interesting. The project itself
hosts around 79m tonnes at around 1.5oz Ag/T, with decent recoveries and the
company just raised money in December to complete a feasibility study and go
to a production decision. The stock is well known among brokers and institutions,
and has a market cap of around $20m, which is extremely low given the size of
the resource. This one should be watch carefully for volume increases as it will
indicate that the stock is being accumulated in preparation for another run.
I will try and update the letter on a weekly basis, with short commentary on
new situations. For the moment, the stocks above are my best picks. Good luck
for 2001!
2. BioEnvelope Technologies (BIE.A:CDNX $1.75) bioenvelop.com
----------------------------------------------
The following has been brought to our attention from a strong group out of Montreal
with excellent credibility. They focus on long term growth potential that is
significant and not the short flips. Chris has followed this a for over a year,
when the stock was a jcp (RFL.a:CDNX), and at one point the stock reached over
$6 per share. Now that the vend-in and the name change has been completed, the
only speculation is the size of their
contracts and timing. The stock came under tax loss selling in December, reaching
a low of $1.16 on small volumes. The stock swiftly moved up to over $2.50 in
a couple of weeks, again on small volumes, but has settled
back again into a reasonable range. A large financing may be in the works, and
speculation is that it will be at higher levels. Outlined below is a breif synopsis
on the Company.
BioEnvelop is a biotechnology company specialising in the conception, development,manufacturing
and marketing of biodegradable protein-based coating solutions and packaging
materials for use in prepared food and packaging.
BioEnvelop has developed two key products:
1. Longevita(TM) is a protein-based coating solution for use in the agri-food
industry. Longevita(TM) increases the shelf life of food by protecting the food
from airborne microbes. It is targeted at large-scale food processing companies;
2. Bioplastifilma(TM) is a biodegradable protein-based coating solution that
is an ecologically sound substitute for synthetic wax, polyethylene and other
products used to protect and transport food. Bioplastifilma(TM) is a replacement
for synthetic wax on milk cartons, for example, creating an impermeable yet biodegradable
surface that allows the carton to be recycled.
BioEnvelop's strategy is to negotiate sub-licences for the manufacture and marketing
of its key products, with strategic partners in relevant sectors of the economy.
The Company is currently focusing its efforts on obtaining strategic partnerships
in Canada, the United States, Mexico and Europe.
In Canada, BioEnvelop is currently completing installation of production equipment
in the agri-food industrial park in Ste Hyacinthe, Québec. As of January 2001,
annual production capacity of Bioenvelop's products will reach 500,000 kilograms.
Initial delivery of the Company's Longevita product for use in the processing
of meat pies by Groupe Premier Chef, a part of Aliments Blais et Breton, will
take place in late January, 2001. The contract with Groupe Premier Chef, which
is renewable, is valued at $8.2 million over five years.
During the past year, BioEnvelop created InterbioEnvelop, a 50%-owned European
subsidiary whose objective is to market BioEnvelop products in European markets.
InterbioEnvelop will shortly begin a series of production trials for its Longevita
product with Harry's, a large bakery products company in France. Production trials
will commence in January 2001.
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