Management Issues themselves 6 million cheap options after shareholders took Massive Losses
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
Note: Canaco was originally presented to paid Ticker Trax subscribers on June 4th at 31 cents and featured for free in our weekend Stockhouse report June 15th at 33 cents. The stock hit 42 cents last Friday but has been under pressure all week (I have explained why below). Above is a link to the original June 15th report entitled “Bottom Fishing Canaco’s Discounted $95 Million Cash”.
Canaco Resources (CAN.V 36 cents)
I research Canadian penny stocks for a living and have for almost thirty years now. They create the opportunity for tremendous capital gains and if properly researched and managed, losses can be realistically mitigated.
Every few months I come across a decision by management of some company that simply has me shaking my head in disgust.
Long story short, In 2011 and 2012 Canaco Resources Inc. (TSX: V.CAN, Stock Forum) was a gold play in Africa that over-promised and grossly under-delivered. Several Canadian mining analysts prior to May had targets ranging anywhere from the mid $1 range to several dollars.
May 15th 2012 they released their much anticipated gold resource report. It was a fraction of the several million ounces everyone was expecting. Following the news, large shareholders destroyed the stock as they dumped their positions and took huge losses.
In March 2011 Canaco raised almost $140 million above $5 per share.
Following the share price collapse in May, I overlooked the failed exploration project in favor of the opportunity to bottom fish grossly discounted cash. After all, if the cash burn is controlled, cash is cash. I gave management the benefit of doubt although the street had little good to say about this company.
Buried at the end of an August 7th News Release:
“The board has granted six million stock options to directors, officers and consultants pursuant to Canaco's stock option plan. The options have an exercise price of 40 cents per share and an expiry date of Aug. 3, 2017”
This company’s management simply validated their very poor street reputation by issuing themselves 6 million stock options. The management according to their own powerpoint presentation only owns 2% of the stock outstanding – which in itself is ridiculous. Then they go ahead and “award” themselves this huge stock option position after a year of stock performance that (for lack of a better term) was pathetic.
Stock options were designed to reward good performance. Not be abused and simply serve as a method for management to line their own pockets. Quite frankly I am surprised there hasn’t been a shareholder revolt prior to this that saw management replaced. Not only was the number of options granted grossly excessive (based on past performance) but they are good for five years (not exactly a vote of self-confidence in your ability to grow shareholder value !)
I own the stock simply because of the cash discount and the recent announcement of their involvement with China. However, I can sure see why it sold off again heavily after running over 40 cents late last week.
These people should be embarassed running a public company like this. And I am quite shocked the board of directors continues to support it. However, if the payday (the 6 million options) is a big enough incentive and they are getting a good chunk of it, why wouldn’t they support it ? Obviously the board doesn’t have an ethics committee – or at least a proper one.
All I know, if I was an institutional money manager and owned a large share position in this company, I would be orchestrating something to seriously shake up this management group and board of directors. When a small company has $95 million they could do some amazing things with it in this market (when junior valuations are so deeply depressed).
However, in the hands of the wrong people, that money can be easily wasted or just as bad, becomes a long term retirement project as senior management spends their time cycling through deal after deal simply to ensure they have big expense accounts and big pay cheques – essentially for doing nothing. I have seen this a lot with small cash rich TSX and TSX.V companies.
And given Canaco’s past track record, I have a sneaking suspicion this company may be no different. Without a major shakeup in management, few will have any faith in their ability to grow shareholder value.
I personally will hold the stock for a couple quarters simply because of the big cash discount and hoping senior management is replaced by people more ethical and experienced, but otherwise would dump the paper and move onto something else.
Typically in this type of scenario, management doesn’t really care about small retail shareholders because of the (well paid) retirement project scenario. After the announcement with China on August 2nd I was hoping otherwise, but after they rewarded themselves with 6 million options, I will be shocked if this amounts to anything in 2012 unless we see a shareholder revolt.
As a shareholder who only bought in May at 32 cents I am mad. If I was part of the group who financed the $140 million above $5 per share, I would be furious.
It is a real shame and another reason the small companies keep losing credibility on the TSX and TSX Venture (it is not the fault of the exchange because these companies stay within regulatory guidelines).
This is a question of Integrity (or lack of it) when you are given responsibility for other people’s money.
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.
Disclosure: Danny Danny Deadlock owns 30,000 shares of Canaco.