Short-term speculators destroy promising project’s valuation: Opportunity or dead money?
Naikun Wind Energy Group (TSX: V.NKW, Stock Forum; 23 cents)
www.naikun.ca
> Estimated cash the end of March: Approx. $8 million (20 cents/share). Shares outstanding: 40 million.
> Valuation assigned to their proposed Wind Energy Project when trading at 23 cents/share: Approx. $1 million.
Click here for last Monday’s Research Report on NKW.
Lesson learned - Issuing a report on a company within days of news that fuelled a rally – a VERY bad idea. Last Monday I did a review of Naikun two days after it was the top traded stock on the TSX Venture Exchange. I warned that the stock still faced significant volatility but I sure didn’t expect to see a 40% haircut in a week!!
Many stocks that had similar runs in Q1 held up well but when short-term speculators get involved, it can also create a mess. Many buy into the first day run and if the momentum drops by the second or third day, they want out. They had no intention of holding in the first place for fundamental reasons.
It becomes a double edged sword. Those who bought want out within days and others see the shift in momentum and avoid it entirely. Now you have millions of shares bought in the first couple days but no one to buy them – except those who believe in the future value of the project. In the case of Naikun, this wasn’t enough to offset short-term traders prepared to cut their losses and hit all the bids. Others then question the reason they bought in the first place and they also hit bids.
The end result... a reason many people learn to hate penny stocks. And it’s very unfortunate because in the case of Naikun, the valuation even in the 30-cent range seemed realistic. Now with only 40 million shares outstanding, a 10-cent move wipes out even that small value and we’re left with something that resembles a cruel joke.
Going forward
Now that traders are out of the picture, it boils down to whether or not investors believe Naikun has a chance of turning this into an economic power project – which needs an energy purchase agreement from B.C. Hydro.
Naikun has spent the past five years and more than $30 million on project planning and environmental review studies in hopes of creating Canada’s First Offshore Wind Energy Field off the coast of British Colombia.
The Federal approval received on March 17 (which fuelled the initial run) is the culmination of years of hard work, and it comes at a time when the future of the nuclear industry is very unclear and coal, natural gas, and wind/solar take on much greater importance.
In this environment I am shocked Naikun’s project struggles to carry a value of only $1 million, but the market is usually wrong and maybe that will eventually prove to be the case here.
For many utilities and energy companies, a few million dollars means nothing to them. I would be shocked to see that even on paper this project and all its permits and approvals is not worth something to someone. Especially when you have several First Nations groups involved. 
If I was a major player in the oilsands or a large oil or coal company, I could buy out Naikun (cheap) or partner with them on this project – if for no other reason than to improve my Green Footprint. I would have the expertise and deep pockets to keep improving the economics, and the clout to work with B.C. Hydro. If the project were to ever receive a power purchase agreement from B.C. Hydro, the resulting capital gain on the investment would be dramatic.
If you’re a shareholder of Naikun I would keep the faith a while longer. The valuation appears ridiculous given the problems we’ve seen in Japan and while wind energy projects can be boring, the industry is taking on much greater importance now.
Disclosure: Danny Deadlock owns 35,000 shares of Naikun Wind Energy Group (TSX: V.NKW).
