In our StreetSignal report Jan 25th I discussed First Gold Exploration (TSX: V.EFG, Stock Forum) as the stock had been pushed from 25 cents to $1.00 on millions of dollars worth of buying. This 300% gain within a week occurred on news about grab samples. Buying on grab samples is extremely high risk, but once the story was promoted and traders latched onto the momentum, the stock took a life of its own.
Given the strong grades of lithium and very high grades of rare earth minerals, some element of excitement was warranted. But a gain of 300% within a week ? What was most shocking was that people were actually buying that stock in large volumes even as it pushed through 60 cents - a gain of almost 150% in two days.
Even the National Post jumped on the bandwagon to discuss the stock in its January 23 edition. Since late January, the company has released some drill results that look good, but also indicate a lot of work lies ahead of them. Today (February 8th) the company issued drill results that have generated another $2 million in buying, although the stock continues to sell on news.
I am sure it will find a comfort level soon but in typical penny stock fashion, one has to question what the logic was behind paying between 60 cents and $1.00 for this stock in the midst of a huge market selloff. On the same days EFG was hitting huge gains on massive volume, the broader markets were getting killed. What motivates penny stock speculators to throw such caution to the wind that many have now lost half of their investment in a matter of weeks?
If stock promoters could bottle the formula that resulted in an unknown mining stock going from obscurity to trading millions of shares a day (at crazy levels), they would all be billionaires. What is even more fascinating is how greed motivates a penny stock speculator to ignore the environment around him (a market selling off and poor economy), and entirely throw caution to the wind in hope of hitting it big.
EFG in the 40-cent range is starting to look like a pretty fair valuation based upon initial work and if further reports show the tonnage is growing, there is a lot of potential here. In fact, the entire James Bay region is starting to shape up as a pretty exciting lithium and rare earth region.
However, justifying that initial EFG valuation and run-up becomes impossible when you look at the valuation of a company, whichissued very similar results Monday morning - Dios Exploration (TSX: V.DOS, Stock Forum). Dios is not only an interesting story (along with EFG) but it’s the perfect example to demonstrate the power of promotion and day traders on the TSX.
January 19th following a halt, First Gold issued drill results that generated a yawn. Two days later it halted again to release grab samples that highlighted 4.6% lithium and various grades of rare earth elements including Rubidium as high as 1290 g/t. These grab samples generated the massive buying that pushed the stock 300% higher. Drill results within the following week reported Rubidium as high as 2922 g/t (which were excellent) but speculators caught at higher prices were only looking to sell into liquidity and take their lumps.
Now turning our attention to Dios (DOS) and Sirios (TSX: V.SOI, Stock Forum) who both reported rare earth results this morning from their 50-50 joint venture Pontax lithium property, which is in the same region as First Gold and Lithium One.
The companies reported rubidium as high as 4980 g/t (even higher than EFG) along with very good grades of beryllium, and cesium. The company's previous reported grades of lithium were already strong, but if a company is able to incorporate rich rare earth metals into its economic model or mine plan, it can make a huge difference on a feasibility study.
Like First Gold, these numbers are still very early stage. However, positive results like these begin to paint a picture of a region (James Bay, Quebec) that appears rich in lithium and rare earth elements.
The main point worth noting is the trading activity in Dios and Sirios versus what we saw with First Gold. The initial interest in the Dios/Sirios results is decent, but compared to what we witnessed with First Gold, it’s next to nothing, which seems rather shocking when you consider the similarities. The primary difference must lie in the way the story was promoted, and the way in which day traders jumped on the momentum. The unfortunate part however, is that this type of trading activity leaves a wake of destruction in its path as speculators lose sight of reality as they are caught in the hype of a stock running 200% to 300% in a matter of days.
The sad part is someone has to be left holding the bag. And it’s typically the smaller retail investor. Unfortunately though, there is no one to blame but the investors themselves. Greed is a driving force behind the movement in these small stocks, and the promoters and day traders are happy to fleece the sheep if the opportunity arises. Stocks are overbought and oversold on emotion - and always will be. Buyers of penny stocks just need to recognize when they’re on the sharp end of the sheep shears.
For those interested in the future potential of this James Bay region, below is some background information on the companies discussed above.
Dios - 34 million shares out and $3.5 million in bank
Sirios - approximately 100 million outstanding and $1 million in bank
Disclosure: Danny Deadlock owns no shares of SOI or EFG but 20,000 shares of DOS that he expects to hold until the Pontax property is drilled and results evaluated.
To send an email (tips, rumours, research) for consideration in the StreetSignal report, please contact Danny at microcap@telus.net or post directly to our moderated message board at: http://www.stockhouse.com/Groups/GroupInfo.aspx?g=50540.
Further information can also be obtained at www.StreetSignal.com
Danny Deadlock has specialized in microcap and smallcap companies for over 25 years and is a registered member of the Stockhouse community since 1997. You can find his website at www.MicroCap.com - a service which has specialized in TSX and TSX.V penny stocks since 1998.
