You fellows here aren't looking at all of the activities n insiders behind the scene. From what I have read and the move behind the scene seem to point out that SWG has already made a huge gold discovery in Yunan province. Read JK's report the Birth of a Conflict of Interest Free Predator and figure it out. Robert Friedland put out a NR a day after SWG's new release, Bob Atkinson was in China a few week ago, Mercaldo is a good buddy of Friedland, Rule is also working hard behind the scene whose ambition to emulate Friedland. I'll increase my bet on a pullback or bet the whole farm on it if more evidence in the coming months that would point in the right direction.
Bob Atkinson's Bradstone Equity Partners Inc (BEP.A-T: $1.00) has sold its controlling stake in Peruvian Gold Ltd (PVO-V: $0.59) to unidentified parties as part of a complex merger plan to create a publicly listed merchant bank operated by Murray Sinclair and Brian Bayley. On April 5 Bradstone et al announced the merger terms, which will see three public companies rolled into Bradstone. The normal reaction would be to throw up one's hands and declare "there goes the treasury", but this situation may be an exception because it throws together at least three distinct predatory groups that really do not need each other to do just fine for themselves: the relatively young Murray Sinclair/Brian Bayley team, the not-so-young Bob Atkinson/John Fleming team, and the "their-time-has-come" Rick Rule/Ed Mercaldo team. None of these guys is likely to be the other's dinner at this banquet table, which means that the new Bradstone will have to be a success for everybody including, gasp, minority shareholders. Peruvian Gold will be consolidated 1.7156:1 into Bradstone class A shares, Glenex Industries Inc (GXI-V: $0.45) will be consolidated 2.268:1 into Bradstone, and Stockscape.com Technologies Inc (STKSF-OB: $0.16 US) will be consolidated 4.1387:1 into Bradstone class A shares. After this merger Bradstone will have 24,346,752 class A shares and 4,099,466 class B (5 votes) shares outstanding. The extraordinary meeting has been scheduled for June 18 with May 13 as the day of record. The merger information circular has not yet been filed at SEDAR, so figuring out what the new Bradstone might look like had to rely on earlier separate filings. At current stock prices all the key players and their associates appear to be plugged in on a breakeven basis, meaning that the merged company's stock price will have to go up for them to make any money. Cynics might argue that a publicly listed merchant bank need never go up in price because the people who control the cash through a minority equity stake ("other people's money" or OPM) make their profits peripherally through how the OPM is deployed. Without suggesting that any of these players would actually consider such a tactic if the opportunity presented itself, I can say that the three-way split of the proposed Bradstone ownership structure renders such a strategy very unlikely, if not impossible. In other words, bottom-fishers do not need to worry that the stock will go nowhere except down while Bradstone's capital gradually gets converted into assets of dubious value and limited liquidity. The big question for bottom-fishers is, will Murray Sinclair and Brian Bailey be able to substantially increase Bradstone's net per share value with the backroom support of the Bob Atkinson/John Fleming and Rick Rule/Ed Mercaldo groups? Their history is checkered with winners and losers, but this one does look like it is being put together for a big score, a score that could be very big if we do enter a major resource and energy sector bull market.
What happened when Murray Sinclair and Brian Bayley took charge of cash rich Cheni?
Any concerns I may have about the Sinclair/Bayley team are based on what happened to another cash-rich bottom-fish called Cheni Resources Inc, which nursed its $5 million treasury along for years while first the French parent BRGM and then Normandy tried to figure out what to do about it. In early 2000 Normandy sold the control block to a team of investors headed by Murray Sinclair and Brian Bailey at a slight premium to the cash breakup value. The Toronto Stock Exchange must not have liked somebody associated with the Sinclair/Bailey group, because it promptly discovered that Cheni under the administration of Normandy and BRGM had for years failed to meet minimum TSE listing requirements. In an act of perversity that demonstrates the TSE's willingness to lick big business boots while kicking minority shareholders in the face, the TSE suspended Cheni, even though new management had moved swiftly to steer Cheni into a new venture. Cheni ended up merging with a private network company called Rodin Communications whose capital structure had mushroomed with very cheap paper prior to the Cheni merger. The TSE refused to reinstate trading in Rodin, which managed to raise about $14 million in convertible debt financing, some of it provided through Ned Goodman's Dundee Securities. The last regulatory filing made by Rodin consisted of the June 30, 2001 quarterly financials filed on August 28, 2001. Rodin had lost $1.5 million on $1.4 million revenues over six months, had no money left except $2 million in escrowed funds, and assets in the form of network infrastructure capitalized at $17 million and probably worth zero today. One can infer pretty much the worst from Rodin's failure to keep up its filings. So two things stand out. Somebody at the TSE blindsided Sinclair/Bailey two years ago by maliciously suspending Cheni at a time when the telecommunications sector was red hot and the market might have bankrolled the Rodin project sufficiently to help it survive. Given that the same people are still in charge of the Toronto Stock Exchange, which is increasingly dominated by banking interests with little taste for the maverick style of independent merchant bankers, it is reasonable to have concerns that a Bradstone run by the Sinclair/Bailey team will be undermined by a hostile stock exchange. Secondly, what sort of business judgement did the Sinclair/Bailey team exercise when they decided to risk a perfect shell on a telecommunications story at a time when the sector was climaxing? Merchant banks are successful when they anticipate sectoral uptrends, not when they jump onto the bandwagon at the peak. The Sinclair/Bailey team has a reputation as shrewd cash-flow stalkers, but their Cheni/Rodin adventure made them look awfully similar to Bluefly investor George Soros. One hopes Cheni/Rodin was just a bad experience with a lesson well learned.
Peruvian Gold: downgrade from top to low priority bottom-fish buy in the $0.50-$0.75 range
I last talked about Peruvian Gold Ltd (PVO-V: $0.59) in Tracker 2001-01 issued January 9, 2001 when I reaffirmed it as a top priority bottom-fish buy in the $0.50-$0.75 range after the Patriot deal fell apart. Thanks to my experience with another cash-rich bottom-fish called Cheni Resources Inc, which got suspended shortly after the Sinclair/Bayley team took over in early 2000 and never came back, it is a little hard for me to be optimistic that these new guys in charge of Peruvian Gold will not create further financial damage to my bottom-fish portfolio. To be fair, others will point out that they did quite well when a previous Sinclair/Bayley deal called Quest Oil and Gas Ltd was bought out for $2.35 in 1997. Because a merchant banking asset building strategy involves incremental gains over a variety of investments unless favoured by a roaring bull market, it could be several years before Bradstone achieves the 500% plus gain potential I seek in a bottom-fish. Consequently I am downgrading Peruvian Gold to a low priority bottom-fish buy in the $0.50-$0.75 range. Because of the attrition inflicted on my bottom-fish portfolio by other cash rich wonders like Takla Star Resources Ltd (TKR-V: $0.27), St. Jude Resources Inc (SJD-V: $0.30), Atna Resources Ltd (ATN-T: $0.37) and Cheni Resources Inc ($0.00 suspended), I have ended up by default with too many eggs in the Peruvian Gold basket. So I am giving notice to my readers that though I am maintaining a low priority bottom-fish buy for Peruvian Gold, I will be reducing my position as other bottom-fishing opportunities arise.
Conflict of Interest: the unholy alliance of investment bankers, brokers, analysts and other people's money
For those bottom-fishers able to look at this play without sour grapes, the timing looks right for the emergence of a merchant bank that provides bridge loans and equity financing to projects going public or already public. Brokerage firms, which are really nothing more than custodians of other people's money, are coming under increasing scrutiny and criticism over the conflict of interest inherent when the brokerage firm engages in investment banking. The conflict of interest does not just reside in treating research departments as the marketing branch of the corporate finance department. The conflict of interest lies in the reality that anybody with control of other people's money is vulnerable to having their decisions on how to dispense the OPM in some way compromised. This applies to bankers, fund managers and brokers as well as politicians and bureaucrats. Sometimes the compromise mechanism is clumsy and easily detectable. Sometimes it is sophisticated and detectable only in extreme circumstances such as the collapse of the savings & loans institutions more than a decade ago, and, more recently, Enron. In Canada regulators have already hammered flagrant abuses at the small to medium sized brokerage firm level where outfits like First Marathon and Yorkton have paid a hefty price for letting their conflicts of interest become too obvious. The bigger Canadian firms are for now safe from investigation because they control the Toronto Stock Exchange, whose relationship with the Ontario Securities Commission is one of peace and harmony. But south of the border the situation is different. The Securities and Exchange Commission has now joined New York's attorney general Eliot Spitzer in going after the brokerage industry for abusing other people's money to serve investment banking agenda. Research analysts have already been raked over the coals for their role in fueling greater fool spirals, but now the regulators and media are going after the true culprits, the investment banking business from which the brokerage industry derives most of its official and hidden profits. When the Canadian regulators went after the First Marathon and Yorkton wolves in shepherd's clothing, that was nothing more than stomping on a few rogues whose antics had become too public. But the American attack on the big time Wall Street wolves in shepherd's clothing is an attack on an entire institution whose outcome can only be a fundamental separation between investment banking and the brokerage business. Canadian brokers like Frank Giustra saw the writing on the wall several years ago and left the brokerage industry. Giustra now operates through a private merchant bank called Endeavor Capital which has no "shepherd" style custody over other people's money. A merchant bank, which also goes by the name of venture capital firm, is an undisguised predator that does not have an unfair edge over other predators in getting access to other people's money the way investment bankers do. The role of the brokerage firm as a lead underwriter of equity securities will disappear. Because a merchant bank is at arm's length to other people's money, there is no conflict of interest. It is a cross between a sophisticated investor and a promoter; as such it falls outside the regulatory regimes that govern the brokerage industry and the insiders of public companies. The merchant bank uses its own money to make loans or investments. And when it tries to persuade brokers and fund managers to invest in any of its "projects" the merchant bank is operating as a clearly self-interested party that makes no promises. There is no assumption of trust; it is plain and simple buyer beware. Consequently the merchant bank is free of the liabilities such as fiduciary duty that burden all brokers. In fact, this very liability, which is the price of having power over other people's money, actually hurts the efficiency of equity markets as a capital allocation mechanism because it paralyzes honest brokers while hardly discouraging dishonest brokers. Bradstone's timing is good because it will fill a niche being vacated as a result of the structural changes in the securities industry. If we do get a strong metals and energy market, the experience of Bradstone's key players in these sectors could result in rapid asset growth.
Sinclair/Bayley: sliding in via Glenex
How are the various parties entering the Bradstone equation? The Sinclair/Bayley group is entering the picture via Glenex, a former Earl and Norman Glick company that liquidated its business operations a couple years ago and was on the threshold of approving voluntary liquidation last September when Quest Ventures Ltd scooped a 19.9% control block just as the Kusumoto brothers were about to launch a bid for control. The Kusumoto brothers have proven very adept at seizing control of cash rich treasuries, but considerably less adept at doing anything productive with cash at their disposal. They are a major nuisance to bottom-fishers who bet on cash rich treasuries as well as competing cash stalkers. Last year they squeaked into control of Takla Star Resources Ltd (TKR-V: $0.27) whose $10 million treasury had been whittled down to $4 million by a well-paid management team that served up nothing of interest to its minority shareholders during the bear market following the resource sector's crash in 1997. So far the Kusumotos have limited their Takla activities to legal skirmishes such as defending against what appears to be a wrongful self-dismissal suit. This may be a blessing, because their Peachtree Networks Inc (PCH-V: $0.00 suspended), which they took public in early 2000 as a provider of software solutions for online grocers is now bankrupt. The Kusumotos are currently battling the Sinclair/Bailey group for control of Visualabs Inc (VLI-V: $0.76) and its $4 million treasury. Visualabs was a Yorkton funded technology high-flyer that collapsed last year when its 3D display system turned out to be a rather crude fraud. During Yorkton's Book4Golf heyday in the first quarter of 2000 Visualabs had a market capitalization of about $300 million. In contrast, Glenex, which is the successor to Hal Roach Studios, Stampede and HRS Industries, has been an obscure bottom-crawler since the eighties. I briefly featured it as a bottom-fish buy in 1997 before giving up when it became apparent that management was stuck in a rut. Glenex will bring about $3.5 million working capital to Bradstone in exchange for the 4,223,442 Bradstone A shares Glenex shareholders will receive.
Rule/Mercaldo: sliding in via Stockscape
Rick Rule and Ed Mercaldo enter the picture through Stockscape.com Technologies Inc (STKSF-OB: $0.17 US), the successor to Cornucopia Resources Inc following a 10:1 rollback in July 1999, sale of the Ivanhoe gold project in Nevada to Great Basin Gold Ltd (GBG-V: $1.45) for 2,750,000 shares, acquisition of Stockscape.com from Rick Rule for 10 million shares deemed at $0.50 CAD, and a private placement of 4 million units at $0.50. Stockscape.com was Rick Rule's expensive attempt to build a financial destination site. The web site never amounted to much, but did suck up a couple million dollars and helped the stock to a US $2.50 peak during the dot-com climax of the first quarter of 2000. To stop the cash drain the company gave the web site to the team of Bob Cross and Dan Matthews in exchange for assuming the lease liabilities. The site is still live but it has little substance. Ironically, Cross and Matthews nearly helped empty Peruvian Gold's treasury in late 2000 when Bob Atkinson agreed to merge Peruvian Gold with Patriot Computer Corp, a troubled Toronto assembler of Barbie and Hot Wheels branded computer boxes. Disaster was averted when some lowly creditor pushed Patriot into bankruptcy before Atkinson could consummate the merger. Cross took another crack at Atkinson and Peruvian Gold's treasury in 2001 when he persuaded him to merge Peruvian Gold's controlling shareholder Bradstone with the Financial Cafe, an online brokerage firm also known as One Financial Network. Three months and a US $430,000 loan later Bradstone decided the Financial Cafe did not pass its health inspection and cancelled the merger. Brokerage America has since acquired the Financial Cafe and Bradstone has converted its loan into paper its September 2001 financial report claims is worth US $1,250,000. Bob Cross, who now has his mitts into the treasury of Valerie Gold Resources Inc (VLG-V: $0.34) via Northern Orion Explorations Inc (NNO-T: $0.12), no longer appears to be part of the Bradstone equation. Atna Resources Inc (ATN-T: $0.37), whose treasury has dwindled to $7.5 million from a post Bre-X peak of $18 million, earlier this year mounted a dissident proxy battle to salvage the $4 million or so left in Valerie's treasury before more of it got sucked into the Northern Orion black hole. Curiously, the proxy warriors retained by Atna are affiliated with Endeavor Capital, whose Frank Giustra is the former boss of Bob Cross. How Atna got sucked into this sideshow adventure is beyond my comprehension, but given the complex relationships among all the wolves sniffing around the cash carcasses left over from the Bre-X fueled resource sector mania of 1996, you just never know who is pushing whose buttons with what agenda. Atna, which was rebuffed by Valerie Gold, has gone back to its task of acquiring a copper based cash flow operation, while the handsomely compensated Valerie management team figures out how many more years of a flat-ling stock chart it can stretch out of the $3 million remaining in its treasury. Sometimes one wonders if a fatal heart attack that instantly empties the treasury is better than standing beside of a terminal cancer case hoping for a remission. Stockscape itself has about $3 million working capital plus 2,275,000 shares of Great Basin worth about $3 million at today's prices. With an improving gold market Hunter-Dickinson may be able to provide an exit strategy for Stockscape's Great Basin position. Rick Rule still owns 10 million shares of Stockscape's 26.4 million issued stock. Ed Mercaldo was an associate of Robert Friedland who quit when Friedland bailed himself out of a private financial disaster by dumping the Savage River iron project into cash-rich Ivanhoe Mines Ltd (IVN-T: $3.43). I have never seen the failure risk of a project spelled out with such brutal detail as was done in the information circular for the Savage River acquisition. It was a vintage one-sided Friedland transaction that initially cut Ivanhoe's stock price in half as minority shareholders voted with their feet. But, I have to give Friedland credit for what he has done with Ivanhoe's stock price since then; the stock is up 174% from the top priority bottom-fish buy range of $1.00-$1.25 I recommended on January 5, 2000. Of the 20 top resource sector bottom-fish I featured in the January-February 2000 issue of the Kaiser Bottom-Fishing Report, only Ashton Mining of Canada Inc (ACA-T: $2.54) recommended in the $0.50-$0.75 range has done better. Mercaldo, who provided much of the strategic input during the Diamondfields glory days, is now teamed up Rick Rule, whose ambition to emulate Friedland is hindered by his inability to walk away from the brokerage business. Stockscape will contribute about $6 million in assets in exchange for 6,368,469 Bradstone class A shares.
Atkinson/Fleming: sliding in via Bradstone
Based on last September's quarterly financials Peruvian Gold had about $6.6 million cash and $2 million in marketable securities left. Of this amount US $2 million has been encumbered through a loan guarantee of debts owed by A&E Capital Funding Inc (YAE.B: $0.04), a strange illiquid company run by Bob Atkinson through a complex control structure involving cross-holdings with Bradstone. Its board includes Hubert Marleau as well as Jim Tuer, a Takla Star director and associate of the Kusumotos with whom Quest is fighting for control of Visualabs. Go figure that one out. A&E's September financials show $5.8 million in investments and $8.9 million in real estate on the books offset by $9.1 million in loans and payables. A&E owns 52.7% of Bradstone's multiple voting B shares, which along with A shares will give A&E about 11 million votes of the 45 million voting rights attached to class A and B Bradstone shares after the merger. It is hard to tell what Bradstone's assets consist of because as a TSE-listed company it is not subject to meaningful reporting requirements. The September quarterlies list $14.8 million in "investments" offset by about $200,000 in liabilities. A breakdown of these investments, which we know included 5,552,500 shares of Peruvian Gold, is not provided. Bob Atkinson and John Fleming hearken back to at least the eighties when Atkinson was with Loewen Ondaatje and Fleming launched his own version of a merchant bank called CanCapital from the residue of the seventies oil mania. As with Ed Mercaldo it is not clear how John Fleming is getting an equity stake in Bradstone. In mid-April Bradstone sold its Peruvian Gold shares in the $0.50-$0.55 range through market and off-market transactions to a group of "investors", netting the company close to $3 million. As part of this ownership reshuffling some of Bradstone's shareholders have sold Bradstone stock to "investors". There is reason to believe that other potentially important players beyond the three key groups mentioned are part of the Bradstone merchant banking plan. Their hidden nature does give cause to speculate that Bradstone's price ascent after the merger might be more rapid than I am presently prepared to anticipate. Bradstone has 4,092,466 class B and 4,084,990 class A shares outstanding. Peruvian Gold shareholders will receive 9,761,599 Bradstone class A shares after the merger.
Read the rest at John Kaiser's website |
