Canarc Resources
and the fine art of stock promotion
Bob Moriarty
October 2, 2003
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.
Bob Moriarty
October 2, 2003
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