Great stock trades based on fundamentals and technical analysis.
European Minerals (EPM in Canada, EPMCF in the U.S.) is a gold mining company in Kazakhstan scheduled to go into production in October. Here’s a detailed article from December 7 discussing the potential for European Minerals, which could have cash flow of over 50 cents per share in their first year of production: http://www.resourceinvestor.com/pebble.asp?relid=26951
. Today, the stock has broken out of its trading range on strong volume of well over 2 million shares, helped by the huge Kazakhmys stating that they are “"actively looking'' for acquisitions in Kazakhstan and possibly in neighboring countries
EPM started 2007 at $.89, so it’s up 37% on the year to $1.22. The “A” warrants (EPM.wt.a in Canada, EPMWF in the U.S.), discussed in the above article, started the year at $.47, so despite the sharp move up in the price of the stock, the warrants are still unchanged on the year. At the time of the article, the A warrants, which have an exercise price of $1.20 and an expiration date of April 11, 2010, were priced with an implied volatility of about 80 (using Black-Scholes and a risk-free interest rate of 5%). Plugging the same 80 volatility today into the same Black-Scholes calculation (http://www.blobek.com/black-scholes.html
) gives a current value of the A warrants of $.68. When there are takeover rumors on a stock, normally options implied volatility shoots up, so arguably these warrants’ value should be even much higher than that.
Before this month, the A warrants were trading mostly in a tight range between $.45 and $.50 since December, apparently right after that article came out. This month, the warrants have dropped in price to about $.40 before today on the recent global market selloff. We believe if you can get these warrants in this range, at about the same price as when the stock was in the $.80’s in December and again in January, it’s a tremendous value, especially since the shares are breaking out and the gold mine should be in production around October. With the added possibility of a takeover at a significant premium, the upside potential for these warrants that are now “in the money” is very high.
Keep in mind that warrants are leveraged derivatives on stocks, so they are very volatile and can be very risky, and European Minerals has some political risk because they are located in Kazakhstan. Therefore, even though it looks like a tremendous value, it’s best to only buy EPM warrants with money you can afford to lose.
This morning, Metalline Mining (MMG) announced a private offering financing was completed last week
to raise $5.67 million. They will use the proceeds “to initiate an aggressive exploration program on the polymetallic (copper, silver, zinc, lead) mineral system at the Sierra Mojada project.” Despite U.S. rules preventing them from publicly promoting the financing and requiring private offering investors to hold restricted stock for 12 months (vs. 4 months in Canada), MMG was able to price the offering at only a $.07 discount to the market price the day of closing, and an $.08 premium to the market price the day before, and without paying any commissions. The dilution from this financing is relatively small (about 7%), but the potential return to shareholders could be huge if they can prove out significant new resources in this new exploration program.
This financing is great news for shareholders, as MMG can now prove out more of their resources more quickly, particularly the huge amount of silver they have (45+ former-producing mines that only direct shipped very high grade ore), and get valuation in the market for more than just their first zinc deposit. One of our biggest concerns was that the company would get bought out before proving up their silver and other resources, thus not getting credit for that value. If they can get their "aggressive exploration program" going fast enough to prove up new resources before completion of the feasibility study on their first zinc deposit next year, they should succeed in getting additional valuation for those resources.
So far this year, MMG stock has been hit by significant selling pressure as the price of zinc has dropped about 25% on a temporary surge in supply
, zinc mining stocks have taken a big hit in a sector correction exacerbated by the recent global stock market correction, and millions of shares have freed up from their 1-year lockup after last year’s private placement financing for the feasibility study. We believe this selloff has created a tremendous buying opportunity just as the two previous selloffs created great buying opportunities:
In this weekly chart, one can see that the two previous selloffs brought stochastics (Full STO) down to very oversold levels well under the 20 line and also dropped the Accum/Dist line down to a low level while the Chaikin Money Flow (CMF) oscillator indicated strong outflows of money. The recent bottom also was characterized by very oversold stochastics and a low level on the Accum/Dist line, but the CMF oscillator showed very little outflow of money despite the millions of shares freed up from last year’s private placement. This positive divergence on the CMF oscillator, with successively higher lows, looks very bullish to us.
We also like that the recent bottom hit exactly on the uptrend line from the two previous lows. If the stock can now move from the lower Bollinger Band (Bollinger Bands are the "BB" lines on the chart above and below most of the stock trading) to the upper Bollinger Band as it’s done after each of the last 2 selloffs, it should break out of the triangle formation by breaking the downtrend line connecting the previous highs. A move to the upper 3’s in coming months should accomplish that and would point to much higher prices.
Now that one of the more difficult time periods for shareholders is behind us, we believe the technicals are lined up with the fundamentals indicating much higher prices for MMG over the long term.
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