Peregrine Diamonds (PGD-T) John Kaiser SVH Tracker - November 19, 2015: Resource sector capitulation washout spooks Friedlands into desperado financing for Peregrine If anybody harbored doubts about the severity of the resource sector capitulation washout underway that can only escalate as we approach the 2015 year-end deadline for institutions to get rid of embarrassing resource stock positions, or, in the case of resource sector themed hedge funds, to undertake all out liquidation to meet the redemption calls that constitute the final solution for exposure to the resource sector, the Friedlands took a major step to purge those doubts by announcing a $7 million rights offering on November 19, 2015 at a 39% discount to the closing $0.165 stock price on Wednesday. The $0.10 offering, which requires 4 rights to buy one share until January 26, 2016, does not include any warrants as did the deeply discounted rights offering in 2014, nor does it this time involve a guarantee as previously provided by the Friedlands and Ned Goodman. The market reaction to the implicit devaluation of the company was very negative, driving the stock as low as $0.125 on 3,380,000 TSX volume (it was 4,101,000 shares when you include all the other trading platforms which the Canadian regulators in their infinite stupidity have mandated as necessary to fulfill purist concepts about market competition while destroying the capacity of a single order book, first-come-first-serve system to function as a price discovery mechanism) before closing it at $0.155, down only modestly. The reaction was negative because the market is operating with the perception that there is knowledge asymmetry between management of a public company and minority shareholders. On November 17, 2015 Peregrine published micro-diamond results for the 2015 delineation drilling of CH7 which dispel concerns that half of CH7's "TFFE" tonnage of 6 million tonnes might be afflicted with a modest grade of 50 cpht or so, and made plausible the outcome visualization that CH7 may grade in the 100-150 cpht range. Unfortunately, to arrive at that expectation, which is not articulated in the disclosures provided by Peregrine as mandated by behind the curve 43-101 reporting standards for diamond results, one has to have a fairly sophisticated understanding of the diamond sector, which I can assure you the market lacks, and is enjoyed by only a handful of brokerage firm analysts who still trouble to follow the diamond sector. As I will argue, these results support the bullish outcome visualization I presented in SVH Tracker - October 28, 2015. If I come across as extremely annoyed, it is because my fundamentally sound recommendation has been turned into road-kill by a confluence of bad markets, regulatory incompetence that is destroying the junior venture capital market, and the Friedlands' willingness to exploit the resulting market inefficiency to feather their own nests in an utterly legitimate manner. Because the rights offering expiry stretches beyond the timeline for fully reported CH7 bulk sample grade results, though not carat valuations, the market understandably jumped to the conclusion that the CH7 grade results are going to be so dismal that management out of sheer desperation to keep ongoing feasibility demonstration work on CH6 funded has put in place financing at a price that is so stupidly low they are almost guaranteed $7 million even if 2016 is greeted with a meltdown in general equity markets that supposedly seals the fate of the resource sector. On the other hand, the cynics, which would be dominated by people with sufficient diamond knowledge to recognize that Chidliak is undervalued even if CH7 is a total Tli Kwi Cho style bust, view the knowledge asymmetry in opposite terms. They see the Friedlands as members of the Chortler Club, an elite which exploits the myopia of both the regulators and the market to organize affairs to serve their interests while acting in complete compliance with the rules of a system at odds with the interests of minority shareholders. What these cynics believe is that the Chortlers have a much better understanding about the potential value of their project than they are required to disclose, partly because the disclosure rules do not yet encompass proprietary internal knowledge that will eventually be validated by considerable additional expenditure, and partly because they simply do not believe management assertions that it is not yet in possession of recovered diamond parcel results for the kimberlite units 3-5 for which DMS processing has already been completed. I personally believe CEO Tom Peregoodoff when he asserts that nobody yet knows the outcome of the 2015 bulk sampling program, but I also know that he is hiding behind the law against "forward looking statements" when I press him on what management internally expects on the basis of the tea leaves that the likes of Dr Hermann Grutter possess the know-how to interpret but are forbidden to disclose under "qualified professional" rules. You start to sense this when you get referred to 43-101 technical reports which by definition represent all there is to know about a project. But I can also sense a frustration with the existing reporting system, and that is where Chortler Logic starts to become a factor. The cynics argue that the Friedlands have exploited the rules of a dysfunctional system to effectively "demote" their own company so that they can boost their net interest by exercising rights at $0.10 and over-subscribing for the rights abandoned by confused minority shareholders who cannot comprehend why one would keep financing at ever lower prices even as results keep shoring up substantially higher value potential outcomes. Chortlers always operate from a position of financial power, and for the moment the market is inclined to believe that the Friedlands are still flush with cash and do not resemble the skeletons that represent many of the movers and shakers of the past decade. I am not so sure. In my view this rights offering is not a trick to suck minority shareholders into bankrolling an endless Chidliak story because the story is fading. It is not a privatization scheme by the Friedlands to make Chidliak look like a fading story so that they can keep boosting their net interest at ever lower prices. This rights offering is about the naked fear Robert and Eric Friedland are experiencing in the face of the worst resource sector bear market in half a century, a fear made palpable by the realization that the institutional sheep that used to respond to the wave of wands have become unresponsive, no longer pushing to get sheared for their wool or slaughtered for their meat. What we are dealing with is a King Rat situation such as presented in the 1962 novel by James Clavell which absolutely fascinated me as a college student, partly because it articulated how power can be constructed in a closed system, but also because how easily that power evaporates when the closed system becomes open. This is a story about a Japanese POW camp where one individual creates an entire closed economy based on breeding rats and marketing them as chicken within the prison system, an organizational feat that bestows god-like status on the Rat King. But when the war ends and the prisoners are liberated, the Rat King fades into a nobody eventually hustled off on charges of profiteering. I do not think this is a case where the Friedlands are on the threshold of being caught peddling cubic zirconia as diamonds, but we are dealing with a situation where the market does not care what yesterday's titans are peddling today. This resource sector bear market is a power stripper of unprecedented scale, and the Friedlands themselves have become impotent. They are trying to finesse a personal crunch point by enlisting the retail investor, for they have been abandoned by their institutional audience on whose reliance during the past decade disconnected them from sophisticated investors. They are like Clavell's Rat King wandering around as a nobody outside the prison after the liberation. The reason the Peregrine market recovered on Thursday after a kneejerk downward reaction is that the interest of the Friedlands is now aligned with that of the retail investor. While in my view Eric has always been receptive to any class of investor interested in his vision, this is something very new for his brother Robert. And while that discounted rights offering makes me gnash my teeth, especially as a US resident whose rights will be confiscated by some Canadian entity with a nebulous fiduciary duty to maximize my interest with its collective selling strategy, I think the rights offering is a gift for just about everybody else, and I recommend that Spec Value Hunters buy the stock ahead of the November 26 ex-rights trading date, and plan to exercise those rights to boost their stake in the best Canadian diamond project. And by "best" I mean it in terms of substantial upside potential, not in the sense of least worthless diamond projects. And believe me, this window where the retail investor will make the Friedlands big again will not likely be repeated any time soon, except perhaps through Clean TeQ Holdings Ltd whose scandium story offers Robert the opportunity to shed the Toxic Bob moniker that was unfairly hung on him courtesy of his Summitville adventure during the eighties.
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