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THE COMPANY RESPONDS by Stockwatch Business Reporter
It is one thing when brokerage house analysts start waving a red flag at market
expectations and raising their eyebrows over the enthusiastic predictions of
newsletter writers. Yorkton Securities' analyst Art Ettlinger's comments, reported
in the Globe and Mail on January 7, regarding "huge wild-assed estimates" about Winspear's Snap Lake project and his characterization of newsletter writer John Kaiser's $20 price prediction as "highly premature," have certainly drawn someinvestors' attention. But brokerage house analysts, even mining analysts covering junior exploration companies, still are not considered aggressive enough by many of the more adventurous speculative investors who frequently let such comments pass without much notice. It is another thing altogether, however, when a
newsletter writer who has championed the company begins using his pen as a
broadsword and starts slashing at what he terms "The Winspear Dream Bubble".
That is what John Kaiser did in his Bottom-Fish Tracker issued January 9; and
after Mr. Kaiser's unkind cuts, speculators started thinking seriously about their
assets.
Mr. Kaiser delivered several robust, two-handed swipes, particularly at
Winspear's management. In the synopsis thoughtfully prefacing the lengthy,
wide-ranging Tracker report, Mr. Kaiser declares that Winspear "is on the
threshold of developing a dangerous speculative bubble over the next six months
that could take the stock into the $10-$15 range and finish with a catastrophic
crash akin to the Tli Kwi Cho bust of August 1994 if management does not soon
come clean about the value distribution of the Snap Lake mini bulk sample
diamond parcel." Mr. Kaiser states that he has "reason to believe that the three
largest stones represent at least 75% of the parcel's value." That raises a concern
over whether the 199.7 tonne sample is representative of the diamond value
distribution of the Snap Lake kimberlite system. Mr. Kaiser claims that "it is highly
irresponsible of Winspear and Aber management to keep investors in the dark
about the flimsiness of the foundation upon which their Winspear dream rests."
In addition to cutting up management for "non-disclosure," what he perceives as
their "paranoia and contempt for the public's intelligence," and the company's
apparent lack of interest in educating its investors, Mr. Kaiser is at pains to lay
bare the flimsiness of "the Winspear dream". Reflecting on the results of the 199.7
tonne sample, Mr. Kaiser notes that the market was astonished "that the parcel of
a thousand or so stones contained 21 diamonds with a weight of one carat or
more, including three gem quality stones weighing 10.87, 8.43 and 6.03 carats."
He writes, "That such a small sample could contain this distribution of large stones
shocked the diamond industry." Mr. Kaiser subsequently considers whether the
US$343 rock value yielded by the bulk sample is representative of the Snap Lake
system. After reviewing various data and scenarios, he states: "Consequently, it
makes more sense to speculate that these three stones either don't belong in the
parcel or are present by virtue of pure luck alone, than to speculate that their
presence reflects the Snap Lake kimberlite's value distribution curve." That in turn,
raises concerns about expectations for the upcoming 6,000 tonne sample.
Mr. Kaiser also seems to give short shrift to "Dr. Bob's" cone sheet theory. He
begins by writing: "Dr Robert Folinsbee is a former head of the geology
department at the University of Alberta who has become the self-appointed
promoter of the Winspear Dream. Actually, he has been nudged into this role with
the help of Dave Pescod, an Edmonton-based cowboy with Levesque Securities
whose fax machine aspires to Applefax status." Dr. Folinsbee has proposed the
theory that the ascending magma dispersed radially over a large area, resulting in a
2 metre thick 80 million tonne kimberlite source. What seems to follow from Dr.
Folinsbee's theory is an "unheard of scenario with unlimited potential." Mr. Kaiser
characterizes Dr. Folinsbee's model as an unnecessary "fantasy". ("Applefax" is a
reference to promoter Bert Applegath's penchant for spewing his windy faxes
hither, thither and yon.)
After flirting with the issue several times, Mr. Kaiser confronts the possibility that
the Winspear bulk sample was salted. Given the seriousness of even considering
such as notion, Mr. Kaiser again works through various scenarios, always raising
convincing obstacles to the possibility that the sample might have been tampered
with. In the end, he discounts the suggestion of salting as improbable, despite his
comment about them not belonging in the parcel. Mr. Kaiser acknowledges that
his report will probably have a negative impact on Winspear's share price but
places himself on both sides of the fence with, "I believe that the Snap Lake play
has sufficiently strong fundamentals that it can mount a comeback that will be
much more powerful once unburdened by management's paranoid non-disclosure
policies."
Ironically, Mr. Kaiser's efforts to critically examine Winspear seem to move him
closer to another newsletter writer, Eric Charters, a prolific Internet poster who
has been the target of unflattering comments from Mr. Kaiser. In a July 29, 1998
Bottom-Tracker, Mr. Kaiser reacted to Mr. Charters perceived allegation of
salting by writing: "Charters comes across as somebody gone stark raving mad."
In his most recent issue, he takes another stab at Mr. Charters: "The salting
rumour first surfaced in late June when Eric Charters posted a comment to the
Winspear thread on Silicon Investor that Angolan diamonds had been salted into
the parcel and that the RCMP had arrested the culprits. This was a case of a
maverick just mouthing off." Mr. Charters denies alleging that the Winspear
sample was in fact salted. He claims that many of his comments were
"tongue-in-cheek remarks" that were misinterpreted by over-enthusiastic posters
on Silicon Investor (SI) where he was involved in several heated arguments. Mr.
Charters says: "The arguments on SI had really nothing to do with Winspear. They
had to do with sleazy promoters who try to run you off the threads if you offer a
negative opinion."
In a marathon 'interview' that soon took on the character of a comprehensive
dissertation on the state of mining in Canada, Winspear's Snap Lake project, and
a few fantastic conspiracy theories thrown in for good measure, Mr. Charters was
not surprised by John Kaiser's recommendation to his readers to sell 25 per cent
of their holdings or his sudden cooling on Winspear. "It's not surprising...bad news
always comes by slow freight," Mr. Charters said. As for Mr. Kaiser's advice,
Mr. Charters commented: "Twenty-five per cent? More like 125 per cent. That's
John's characteristic way of following things. He's hot on it, hot on it, and then he
gets right out." According to Mr. Charters, in raising so many red flags and then
telling his subscribers to sell only a portion of their shares, Mr. Kaiser has done an
admirable job of fence-sitting. If Winspear goes sour, nobody can say that Mr.
Kaiser didn't raise some serious concerns. If the dream unfolds as some believe it
will, he hasn't chased his subscribers out prematurely.
Unlike Mr. Kaiser, Eric Charters does lay claim to being a geologist. He studied
at the Haileybury School of Mines, at Lakehead University, and at the University
of Toronto. He has been writing the Canadian Mining Newsletter for three years.
According to him, he has twenty-two years experience in the field, has been
involved in three diamond projects, and has catalogued and read more than 3,000
papers on diamonds.
Mr. Charters claims that Winspear is not providing enough information to its
investors. He suggests that the reason for Winspear's apparent reluctance to
divulge information may be that they really don't know what they're doing.
"They're operating at a man-in-the-street level," says Mr. Charters. "People are
finally beginning to see some of the eccentricity of their program." Mr. Charters
doesn't buy "Dr. Bob's cone sheet theory" either. "It's a fissure vein. That's what
it's known as world-wide and that's what it is." He is convinced, and apparently
willing to tell anyone who will listen, that Winspear's exploration approach is
wrong.
Mr. Charters doesn't think much of Winspear's sampling methodology and
accountability either. According to him, the bulk sample was gathered from two
different areas, processed together, and there is no way of telling which of those
areas, if either, the stones came from. With respect to the three large diamonds,
Mr. Charters suggests that the probability is that a 10,000 tonne sample might
yield three diamonds of that calibre. "There isn't enough accountability," he says.
While proclaiming that his comments about the possibility of salting were
tongue-in-cheek, Mr. Charters doesn't share Mr. Kaiser's opinion regarding the
difficulty of salting a sample. In fact, he thinks it would have been possible at
numerous stages and some opportunities appear to be little more complicated than
child's play. "Anyone could toss a few stones into the DMS tank," he says. "If you
ask me to prove that Winspear is a scam, I can't, but investors are being asked to
believe," he says. Lack of proof didn't prevent Mr. Charters from posting a list of
thirty 'scams' to Silicon Investor on July 14, 1998. Winspear was third on the list,
which he now claims was another tongue-in-cheek offering. While Mr. Charters
contends that many of his posts are facetiously tendered, he is clearly in earnest
when he suggests that investors' faith in Winspear may be misplaced, particularly
in light of "the price rise obviously orchestrated on SI."
Mr. Charters believes that Winspear should be providing investors with
information regarding the chemistry of the samples and other pertinent facts. That
they have not, he remarks, raises some very troubling questions. He suggests that
there are ways of presenting data, including graphically, that would make it easy
for the average investor to grasp the information necessary to make their
investment decisions.
For investors who prefer to wait for at least an outline of the picture, newsletter
writer Robert Bishop was among the first to put a brush to the canvas. Writing in
the Dec. 15, 1998 edition of his Gold Mining Stock Report, Mr. Bishop
suggested that the value of the three largest stones from 199.7 tonne bulk sample
may represent at least half of the total value of that sample. According to Mr.
Bishop, he originally made his cautionary statements in a Nov. 1, 1998 Hotline,
and that he urged his subscribers to sell into Winspear news. That was more than
two months in advance of Mr. Kaiser's revelation that he had reason to believe
that the three stones comprised 75 per cent of the sample's value. Mr. Bishop
went on to note: "While some are describing the Snap Lake discovery as 'the
diamond find of the century,' another way to look at it is as follows: three big
stones in a sample of this size is unprecedented in the history of diamond
exploration." Like Mr. Kaiser after him, Mr. Bishop was concerned that failure to
duplicate those type of results with the 6,000 tonne sample will prove
disappointing.
Having just returned home January 14 "on a red-eye flight from somewhere," Mr.
Bishop offered his perspective on recent coverage of Winspear, beginning with the
Globe and Mail article of January 7 written by Peter Kennedy. "Peter kind of sets
things up, if you will. It's a little unfair to John Kaiser. John did mention the
possibility of a $20 price but only if a number of things occurred. Peter didn't
include all of John's caveats." Commenting on Yorkton analyst, Art Ettlinger, Mr.
Bishop said, "Art has been properly cautious and has raised rather appropriate
concerns over the market's expectations." With respect to Mr. Kaiser's Tracker
report, Mr. Bishop said: "I think John is doing his job. He has raised a number of
concerns and has done his subscribers a service."
Mr. Bishop observed that there are many sceptics with serious doubts about the
bulk sample result that "you won't get anybody to talk about in public." Mr.
Bishop went on: "Winspear isn't my stock. I'm making these comments as a
market observer. There is a big spread between Aber's approach and Winspear's.
I'm much more comfortable with Aber. When you have a sample from a 'unique'
deposit that yields results unprecedented in diamond exploration, caution is
advised, not promotion. Winspear leans toward the promotion end." Mr. Bishop
pointed out that Aber is much more cautious and that their future "isn't dependent
upon the duplication or repeatability of the bulk sample results."
Winspear president, Randy Turner, was presented with Mr. Kaiser's Tracker
report upon his return from Yellowknife a few days ago. "I've been busy and I
have to tell you that I haven't read it in depth," he said on January 13. He had read
enough, however, to understand the thrust of Mr. Kaiser's report, as well as
recent media coverage of the company. Mr. Turner seemed more puzzled than
upset by Mr. Kaiser's sudden cooling.
When questioned as to whether the three large stones did, in fact, make up 75 per
cent of the bulk sample's value, Mr. Turner responded: "Our comment would have
to be that in a sample like this the value is always in the largest stones." Mr. Turner
went on to suggest an analogy: "If you go into Birks and look at a 1 carat
diamond, a 2 carat diamond, and a 5 carat diamond, the value increases. It makes
sense that the larger stones would represent most of the value." That, of course,
raised the question of the unusual occurrence of such large stones in a sample of
that size.
Commenting on the fact that the presence of the large stones invited speculation
that the stones were either salted or were the result of extreme luck, Mr. Turner
clearly didn't think the salting suggestion warranted a response. He accounted for
what Mr. Bishop described as the "unprecedented" occurrence of the three stones
as follows: "This is a unique dyke. It appears to be a cone sheet. Any time you are
dealing with a unique deposit you will see some unique features. We will be the
first to say it." Mr. Turner spoke highly of Dr. Folinsbee, advocate of the cone
sheet theory, remarking that he has decades of experience, is respected in the
mining industry, and is very well regarded by students who studied under him
during his tenure at the University of Alberta. Questioned regarding the suggestion
that such a cone sheet has not been discovered in diamond exploration, Mr.
Turner responded: "There is a cone sheet reported in the literature in 1924 in
Tanganyika. More recently there seems to be a similar type deposit reported from
Greenland. It was brought to our attention about a week ago but I haven't seen
the literature yet."
Mr. Turner takes exception to Mr. Kaiser's claim that Winspear holds the public's
intelligence in contempt and the suggestion that the company is doing little to
educate its investors. He points to the information available on the company's web
site and goes on to state: "Diamond mining is new to Canada but in the past six
years Canadians have done very well in gaining an understanding of the industry.
Up until recently, the investing public has been educated on pipes. Winspear has a
unique dyke. It is relatively consistent and appears to be a homogeneous
kimberlite. We're still on a learning curve, though the bar has been raised
considerably regarding reporting and understanding information. It is very
complex. It isn't what the average investor is familiar with--ounces per tonne, for
example. But we have been doing a great deal to educate the public. John is trying
to learn himself."
Winspear's president had little to say about Eric Charters, noting that he has
received fax copies of some of Mr. Charters' wild claims. Mr. Turner leaves little
doubt that he considers Eric Charters an Internet phenomenon with little more
substance than the medium he so often uses. "Apart from you, I don't even know
anyone who has ever spoken to Charters," Mr. Turner told a Stockwatch
reporter. "Eric Charters apparently claimed to have worked for a company that
both John McDonald (Winspear's vice-president of exploration) and I worked
for. We've never heard of him and neither have any of the people there that we
keep in touch with." Mr. Turner pointed out that Eric Charters' comments
regarding the 199.7 tonne bulk sample were contrary to fact: "The samples from
the two pits totalling the 199.7 tonnes were processed separately. There is no
significant difference in the diamond population of the two samples. That was
reported in the June 12 news release."
Mr. Turner is proud of Winspear's expertise: "As a junior company, this
company's team has one of the highest years of experience. We have about
twenty people, all with a background of between five and thirty years of mineral
exploration. We have a very strong technical background." He is also proud of the
company's endurance: "Winspear has been active since 1992 when there were
about two hundred and fifty companies in the Northwest Territories. There are
about eight of us left."
Mr. Turner stressed Winspear's commitment to the project: "This is a unique
deposit that will require an extensive, aggressive program. Our partner, Aber
Resources, and ourselves are committed to a $12 million program. That says
something."
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