Richie,
I must say that I am glad that there is somebody else out there who is interested in X-Cal - it has certainly been lonely being an X-Cal investor.
>> Let's make believe that I am a prospective investor looking for a good gold/silver junior. I am worried about investing in juniors since I heard about all the problems with Bre-X, et al, last year. I realize investing in juniors is risky and speculative. Tell me with some detail, why I should invest in X-CAL and how do you rate the risk factor with the stock at current levels?
This is a very good question. The way I look at the Junior mining companies is based almost entirely on risk. If you can minimize your risks, then you can increase your chances of success. Here are the risks that I see with Junior mining companies:
1) The company is a scam - let's call this the Fraud Risk. This occurs often enough that it is worth considering. In Fraud Risk, you should probably include the risk caused by a stock that is heavily manipulated by unscrupulous people. An example would be a "pump and dump" type situation where the stock price suddenly shoots up and then crashes resulting in a loss for those who bought the top.
2) There is no mineable ore on their property - lets call this the Exploration Risk. This is the risk that you have with any exploration company. Another side to exploration risk is the possible reward - what are their best chances?
3) The cost to finance the project is such that the current shareholders will be diluted and only owning a small percentage of the final project. This is the financing risk.
4) The company management is unable to close a suitable financing deal, or once the deal is financed, manage to screw things up in some way. This is the management risk.
5) Political Risk: There are currency controls that prevent the company from repatriating profits or high levels of government interference that prevent the company from making a profit, or from establishing clear title to the deposit.
There are other risks later on in the project life, but at the earliest stages, these are probably the most important.
So how do these risks shape up at X-Cal.I will give my assessment of XCL's risks in terms of a high/medium/low ranking which is risk RELATIVE TO XCL's PEERS.
First Fraud risk. First of all, the stock is not promoted by any brokers, and the company does not employ the services of any promotion firm. The stock more or less floats, and is held fairly closely by long-term investors and a couple of big institutions, also Goldcorp owns a chunk of the company. To me this says that there is little chance of a stock promotion fraud happening here.
Secondly, the people behind this company are serious people - not a bankrupt stock broker among them. Here are some examples:
- The late Dr. Franc Joubin, a long-term adviser to the company who passed away last year, was one of the most successful prospectors in Canadian history.
- The president of the company, Shawn Kennedy, is from a well-known Canadian family. I have seen him speak at an annual shareholders meeting and have talked to him on the telephone. My impression of him is that he is a capable, honest and hard-working.
Looking at the people that I mentioned above, plus the remaining managers and directors, it seems to me to be too credible a group to be promoting a scam. Besides they spend a minimum amount of time promoting the company, and any promotion they do require is aimed at knowledgeable institutions and private placement clients, not to unsophisticated individual investors.
Based on this, my conclusion is: Fraud Risk is low
Exploration Risk: So here we are worried about how much ore they have in the ground. To me, this is where X-Cal has some real plusses. First they have 20,000 acres of property which includes a multi-million ounce pit mine. They have already outlined a geological resource of 1MM oz in the pit area. In the West Wood target, they hit a 200ft drill intercept averaging 0.338 ounces per ton, so there is obviously a fairly rich ore body down there somewhere (although we don't know how big, average grade and profitability with respect to mining and milling). Based on drilling, geochemistry, geology, geophysics (the stock in trade of an exploration company) the company has identified 31 targets. They feel that the company has excellent exploration prospects. Also, the original sleeper mine was extremely high grade for an open pit mine. They paid off the development costs in the first 6 months of operation, and had an average cost over the early life of the mine of $59 /oz. If they find another deposit of similar grade, X-Cal will be worth a pile.
Of course, this is all pie in the sky right now, but anyway, compared to other exploration companies at this early stage of development, I would assess the exploration risk as low to medium, and the opportunity as being good to excellent.
Financing Risk: Here the company is in pretty good shape. With the completion of the payment to AMAX, X-Cal now has total control over the property for the next three years. With the completion of the three year option agreement, the risk of dilution has been greatly reduced. Overall, given X-Cal's control of the project, I rate the financing risk as being low.
Management Risk: I think that the management of the company is quite competent. Firs of all, they have been able to raise about $11M over the past few years through private placements and institutional sales. This has all been done at very low cost, much lower than the proposed Yorkton deal which fortunately the company blew out, in favour of additional private placements. Secondly, the formation of the joint venture with Amax was a tremendous accomplishment for the company. Remember that they started with 2,000 acres in the area, and grew that to 10,000 acres. By completing the deal with Amax, they covered 20,000 acres. I thought that the initial JV arrangement was good, but I think that the final option that they just purchased is excellent. My only fault with the management in this regard is that it was a convoluted and costly process that resulted in the final deal. Still they have it now, and I think it looks good.
Also, X-Cal's plan is to option the property to a major company who will operate the property. According to the company's annual report, "The Sleeper Gold Project has attracted the attention of the world's largest gold companies and is now one of the most prospective exploration projects in Nevada". So, if the right major company wins, we will have very good manager's operating the mine. Hopefully this is something that X-Cal's managers will consider when deciding which offer they will accept (assuming of course that we get competing bids). Obviously some companies are better managed than others - Pegasus and LAC (before Barrick bought them out), Royal Oak (with its high cost/oz mines) come across as examples of some of the weaker types of companies.
Overall, I rate the management risk as Medium-Low.
Political Risk: They are in Nevada, the main gold producing area of the USA. The laws and courts in the USA mean that they will be able to establish clear title to the property without worrying about political interference such as might be seen in countries with corrupt officials, meddling bureaucracies and biased judiciaries. So the political risk is low.
Fraud Risk: Low
Exploration Risk: Medium
Financing Risk: Medium
Management Risk: Medium
Political Risk: Low
So I would say that overall, the Risk is somewhere around low or medium.
This is the way I see it, although I am not a professional, and am not recommending any purchase. Any comments, requests for clarifications and criticisms are appreciated.
I hope that this helps.
Regards,
John Sladek |
