Canarc Resources and the fine art of stock promotion
Last week we had about 44,000 visitors a day to the home page. It's a new record, there is a direct correlation between the price of gold and the number of daily visitors. We are in the correction I forecast a few weeks ago, and gold and gold share prices are going to start glowing red hot.
Since we offer a lot of exposure to what we consider some of the most sophisticated investors in the gold markets, it's natural that when we contact other newsletter writers and request a complimentary subscription that they almost always oblige us. Actually we've never been turned down but I suppose it's possible.
There are two writers I respect so highly that I pay them regardless of the fact I know they would give me their service for free. One of them is Steve Saville of The Speculative Investor. He is so good and so consistently right that I personally feel a responsibility to try and get him into the hands of as many subscribers as possible. I cannot say enough good things about his service, the guy is brilliant.
In his biweekly newsletter published last Thursday, he hit on something that maybe 15% of mining executives actually understand and not 60% of newsletter writers get.
If you have a mining company worth owning, it should be a mining company worth promoting. Yet there are many executives in this industry who view stock promotion on the same level as kiddie porn.
I have a pet phrase I use on a regular basis, if it isn't worth promoting, it isn't worth owning. And I can promise you, stocks unknown will remain the stocks unbought.
But Steve Saville did a better job of explaining the importance of stock promotion and has kindly given me permission to repost his comments.
Extracted from commentary posted at www.speculative-investor.com on 25th September 2003:
The importance of stock promotion
Even at this stage of the gold-stock bull market the stocks of many junior gold explorers/producers remain under-valued. The market will eventually discover all of these companies and their stock prices will rise substantially, but the companies that get discovered first will probably be the ones that do the best job of promoting themselves. In fact, if we look at the gold stocks in the TSI Stocks List there is a definite positive correlation between the promotional ability of management and stock price performance. For example, the senior management of NovaGold, Wheaton River, Desert Sun and Aquiline - four of our best performers over the past year - have demonstrated adeptness at making the market aware of the positive aspects of their respective companies' stories. The management of Cumberland Resources and Metallic Ventures also do a good job of keeping the market informed of progress. Obviously, this task is made easier if a lot of progress is genuinely being made, but many other companies with good stories to tell simply don't do a good job of creating awareness amongst potential investors.
Keeping the market informed via an appropriate number of press releases is only one small aspect of successful stock promotion. It is far more important to attract the interest of large, strong-handed investors, and to gain the sponsorship of brokers and newsletter writers (by selling them on the investment merits of the company, not by offering them any form of payment).
Successful stock promotion not only boosts the stock price in the short-term, it can improve the financial position of the company and thus provide long-term benefits. This is because, to paraphrase George Soros, reality influences perception and perception influences reality. Lets look at a hypothetical example to further explain this point.
Hardrock Mining and Softrock Mining are two junior gold explorers that are identical in almost every important respect. When our story begins they have the same exploration potential, the same number of shares outstanding (10M), and are trading at the same price ($1/share). Now, assume that over the next 12 months the management of Hardrock does such a good job of promoting the company that the stock price rises from $1 to $2 whilst over the same period the management of Softrock does a poor job of making the market aware of their company's investment merits. The stock price of Softrock hence stays at $1.
At the end of the above-mentioned 12-month period both companies need to raise $5M via an equity placement in order to advance their very similar projects to the next stage of development. However, due to the differences in their stock prices Softrock needs to issue twice as many new shares as Hardrock. In other words, the cost of the additional $5M is twice as high for Softrock as it is for Hardrock simply because Softrock's management had previously done a relatively poor job of stock promotion.
A good real-life example of how a low stock price can actually reduce the fundamental value of a company is provided by TSI Stocks List member McWatters Mining (TSX: MWA). MWA needed to raise a lot of money during the first few months of this year to bring its mine into production and, due to a very low stock price, was forced to issue a huge number of new shares and warrants to get this money. We added MWA to the TSI List after the stock had already plunged and after the massive dilution had occurred, but we under-estimated the effect of the huge supply of stock issued at higher levels. While the downside risk in MWA appears to be minimal, the stock is languishing in a gold bull market despite being under-valued and offering huge leverage to the gold price. Furthermore, the problem of excessive supply is being compounded by a poor job of stock promotion being done by senior management. The company has a good story to tell, but senior management doesn't appear to be interested in telling it.
We don't think it makes sense to sell MWA at its current price because the stock is currently close to the bottom of a long-term support range and is extremely under-valued. As far as future buying is concerned, though, this is one situation where buying on strength might make more sense than buying on weakness. Specifically, a daily close above C$0.17 could be used as a buy signal.
But what does stock promotion have to do with Canarc Resources? Good question and I'm glad you asked it.
Brad Cooke, President and CEO of Canarc Resources (CCM-T and CRCUF OTCBB $1.00 Canadian) called me on Friday. He's been advertising on 321gold.com for a year or so. We have met and talked at various metals shows and he was just back from the Denver Gold show where they were the runt of the litter.
Don't ever underestimate the runt of the litter. Canarc may have been the smallest producer at the Denver Gold show but Brad's presentation lit their fire and the stock is up 50% on increasing volume in the last week right in the face of the strong correction I have been expecting for weeks.
Basically, Canarc believes they have their hands on a potential 15 million ounce deposit in Suriname which is neither lode nor placer.
Let me explain that for those already not lost in space. Most of the gold companies we write about are hard rock or lode gold miners. It costs more per ton to do hard rock mining but the deposits tend to be far larger than placer mines because the richest placer mines have long since been mined out.
Two exceptions would be Silverado in Alaska and Golden Eagle in Bolivia, both placer mines.
The giant 1000 meter by 1000 meter by 250 meter deposit Canarc believes they have found in Suriname is a saprolite rock, soft enough to work with earth moving equipment. While it's low grade compared to many hard rock mines, between .5 and 1.5 grams, it's a massive deposit. And the material can be worked with low cost gravity separation as opposed to cyanide leaching.
In short, it looks to me as if Canarc has hit a giant home run at their Benzdorp operation. Brad told me they anticipate processing 50,000 tons per day to achieve production of 340,000 ounces per year at a cash cost of $100 per ounce (US). It will cost about $75 million in capital costs to begin production but that sort of production would value them into the midrange tier of producers and would likely increase their market capitalization 10 fold.
While Benzdorp in Suriname looks just like a home run, Canarc is hardly a one-trick pony. They have the New Polaris mine in British Columbia with 1.3 million ounces of gold in proven resources waiting for more development work. With 56 million shares fully diluted and a price of $1 a share, the market values the known resources at New Polaris at a tiny $32 per ounce US, making the far greater potential at Benzdorp a free option on gold. Other similar gold companies such as NovaGold, Minefinders and Nevsun get a more reasonable $41 to $89 per resource ounce.
Canarc's Benzdorp target economic model estimates production costs of $100 an ounce for an projected 3.0 million ounces of saprolite ore which they would then use the net cash flow of $50 to $100 million US per year to finance the more expensive hard rock capital costs. They guess another 12 million ounces of bedrock gold with an estimated cash cost of $180 per ounce.
Canarc knows Benzdorp is big. It will take another two years of exploration and drilling to fully define the ore body but, stealing a play from the highly successful Hunter Dickenson, Brad Cooke is using the time and the $2.5 million dollars in his treasury to polish the project. When gold prices explode as many believe they will, the project could be put into production far faster than in the US or even Canada. Canarc will make a very attractive target for the resource-hungry majors.
Even with today's prices, the company is attractive enough to have sizable investments from both Barrick and Kinross Gold. David Tice's Prudent Bear fund holds 8.6 million shares of Canarc.
Canarc is actually in production now in Suriname through their Sara Kreek project where they receive 80% of an estimated 10,000 ounce production and an 18% carried interest in the Bellavista project. Neither is a company making project but the revenue does help offset the development costs for the far more attractive Benzdorp and New Polaris programs.
If you like the idea of a conservative gold stock investment with a potential home run warrant attached, Canarc is worth a closer look.
Canarc is an advertiser and we do own shares. We suggest neither buying nor selling shares, we are not investment advisors. In no case should you invest over 5% of your portfolio in any one gold stock. When everyone wants to sell, buy from them, when everyone wants to buy, sell to them.
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