Junior exploration financing capital is very tight so opportunity exists if they are smart
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.
Bottom fishing Canaco’s discounted $95 million cash
Canaco (TSX: V.CAN, Stock Forum; 33 cents)
Net cash: $95 million/48 cents per share
Shares outstanding: 200 million
Tanzania Gold Project: 700k M&I Ounces / 300k Inferred
There is no shortage of bottom fishing opportunities in this market but some of the cash-rich companies we follow with big discounts to large cash resources are difficult to ignore. Our report this week on Canaco is a short one because fundamentally their “reputation” is flawed.
In 2011, Canaco was an over-hyped gold play that has been on a downward slope for months. Before the recent correction, several Canadian mining analysts had targets ranging from the mid-$1 range to several dollars.
On May 15, they released their much anticipated gold resource report. It was a fraction of the several million ounces everyone was expecting. It was shocking how wrong even the big analysts and money managers were on this one. Following the news, large shareholders destroyed the stock as they dumped their positions and took huge losses.
Focus on the prize (cash)
We are only interested in their discounted cash, which also means their gold project is carried at zero cost. Existing shareholders continue to dump huge amounts of paper in the low 30-cent range and we have to “assume” this is creating an opportunity.
If their cash burn rate was high, their cash discount would not hold the same appeal. However, based on a May 30th news release it sounds like the burn is well controlled. Now this doesn’t mean they don’t turn this into a long-term retirement project paying themselves high wages, sitting in fancy leased offices, and jet-setting around the planet looking for opportunities to put that money to work.
I have seen no indication this will occur, but it has definitely happened with other companies who don’t want to risk the capital or the opportunity to fund their large personal mortgages (with high salaries). In this scenario the stock typically cycles in the same range for a long period of time and becomes dead money.
Financing junior exploration is very difficult right now and valuations are very depressed. A company with large cash reserves and access to further capital could do very well in this market.
However, if a decision is made to turn Canaco into a venture capital company or something similar to a “fund,” then we will run in the opposite direction. Rarely does this work for small companies - if you look at Pinetree (TSX: T.PNP, Stock Forum) there is always a gross discount to the underlying asset value.
If a person can buy the cash at a discount of almost 30%, they participate in the company’s estimated one million ounce gold deposit for nothing. Even if we assigned $20 per ounce to the gold, that project should be worth another 10 cents per share.
Keep in mind that Canaco may continue to see heavy selling pressure in the low 30-cent range for a while because large funds and investors are still very angry at them for missing gold resource targets.
Further Due Diligence:
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 Deadlock owns 40,000 shares of Canaco (TSX: V.CAN) purchased in mid May 2012.