Treading cautiously with Sharpe

We introduced Sharpe Resources (TSX: V.SHO.H, Stock Forum, 35 cents) May 12th on our StreetSignal site at 12 cents, but also featured it in the May 25th free editorial at 17 cents as a coal speculation in Virginia. Friday the stock jumped 75% on no news, and its possible we'll soon see updates on the acquisitions it is trying to close in that region. I do not know the management behind this company so at this stage I am being very cautious and will give it the benefit of the doubt for a month or two. I spent a week in Kentucky recently looking at oil & gas projects, and while there, I noticed a major revival in the coal industry of eastern Kentucky. At the same time, however, it was evident that many old mines are very marginal (at best) and their economics are very questionable. Until I see details surrounding the projects Sharpe is trying to acquire and have my own independent sources from that region take a look, I can only say we will tread cautiously with this.

Buying gold for $10 per ounce

The junior gold sector continues to struggle even as the high commodity price holds. How long this will last is anyone's guess but it has created significant value for those with patience. One stock in particular that we've followed in the past is Gryphon Gold (TSX: T.GGN, Stock Forum, 38 cents) – www.gryphongold.com

At certain prices, some of these begin to border on no-brainers if you can ride out weakness in the sector. An important aspect of Gryphon is its focus on Nevada. Finding economic gold deposits has become much more difficult for major miners and they depend upon the juniors for exploration. Many, however, are moving into politically unstable regions and Crystallex (TSX: T.KRY, Stock Forum) is only one example of the disaster many shareholders risk in certain parts of the world. World-class deposits are scattered across Nevada and the stability of the region is becoming very important.

On June 3rd, Gryphon announced its recently completed 43-101 technical report for its Central Borealis deposit. The total gold resource inventory is now calculated to be 1.4 million ounces of measured and indicated gold (M&I) and 1.1 million ounces of inferred gold. This was an increase of 704,000 ounces of gold from the previous study. The company also stated it was likely that much of the inferred mineralization can be upgraded to M&I with a modest drill program.

The importance here is that the one region on its property (Borealis) now stands to host a proven 2.5 million ounces of gold. The company has a clean balance sheet and 62 million shares out. Even at 40 cents the market capitalization is $25 million. This values 2.5 million ounces of gold at only $10 per ounce. Even in a half-decent market we were able to use $25/oz as the bottom-end benchmark. Producers in the small- and mid-tier can typically use $75 to $100 per ounce.

A $10 million acquisition made last year of a private gold company is not included in this $10 per ounce valuation. This acquisition created numerous exploration opportunities across its region. In addition, the Western pediments region, which neighbors the Borealis deposit, hosts the potential for a major gold discovery based upon preliminary work in 2007. A drill program is being formulated for this season on that exploration property.

Cheap proven ounces, political stability, a clean balance sheet, and significant exploration potential combine to make a very attractive situation when a stock is trading near a 52-week low. It’s all about risk management and balancing this with growth opportunities – the key to making money with penny stocks.

Note: If you have never seen it, take a look at the U.S. National Debt Clock – it currently stands at a staggering $9.4 trillion. Until the U.S. election, expect the U.S. dollar to appear "stable". However, you cannot run "any" country with this much debt, and at a rate increasing $1.5 billion per day. This spells serious trouble for the dollar and excellent news for gold. The time to be looking at the gold sector is while everyone else is not.

International Datacasting (TSX: T.IDC, Stock Forum, 38 cents) – www.datacast.com

We first followed IDC in the spring of 2007 (from the 20 cent range) and watched gains of almost 400% by the fall. We took the gains and dropped coverage but now we are jumping back on the bandwagon as a mid- to long-term speculation. The stock has fallen to its 52-week low and there is a large sell order sitting at 40 cents that is creating good liquidity. Who knows why they are selling but there is strong value here as it’s back to mid-2007 levels yet the business model is even stronger.

The company has $6 million in the bank (10 cents/share) and little debt to speak of. If we pull the cash out, the market cap at 40 cents is $18 million. This puts them trading less than one times annual revenue. They incurred a small loss this quarter but have shown eight prior quarters of profitability. A profitable tech should be trading close to two times revenue.

Unlike the nonsense we saw this past week with JumpTV (TSX: T.JTV, Stock Forum, 65 cents) and its merger announcement. If you are a paid subscriber you'll know we took the gains on this news near 88 cents. The structure of that deal was an insult to existing shareholders and the market has now agreed with that assessment as it has collapsed 23 cents. This was a speculation we went into based upon cash value. With this merger, that value was destroyed and it took outside shareholders a good part of the week to realize that – it took us about 10 minutes!

Getting back to IDC. Gains down the road would come from an increased valuation based upon that two times revenue multiple and outright revenue growth. The business model is excellent and it offers the best technology anywhere in its space. It’s a nice spec down here.

Financials came out last week and relevant excerpts include:

"We continued in this quarter to make progress in winning new customers and expanding our applications, especially in IPTV and digital cinema. Bidding and order activity remain robust, and we have stepped up our marketing and trade show activities, along with new product releases, to address these expanding opportunities. The fundamentals of our business remain strong and we plan to continue our aggressive investments in new product development and marketing to grow the company and our market share."

During the first quarter, IDC delivered on its mandate to be a provider of leading-edge technology by releasing several products for IPTV, digital cinema, and professional radio networks.

An industry pioneer since 1984, International Datacasting has long been a leader in products, systems, and services for the distribution of broadband audio, video, and data via satellite. Today, IDC leads the way in providing the latest products and services in digital video broadcast (DVB) and Internet Protocol (IP) technology for content distribution via satellite. Its client base includes major corporations from around the world.

Note: The last financing was done November 2007 when it raised $10 million at 80 cents.

Disclosure: Danny Deadlock owns 30,000 shares of Sharpe Resources, 25,000 of Gryphon Gold, and 25,000 of International Datacasting.