Spec Value Hunter Comment - June 27, 2012: Jervois files lawsuit to have EMC lien removed from Nyngan project
EMC Metals Corp announced on June 27, 2012 that it had received notice from Jervois Mining Inc that it had filed a lawsuit in the Supreme Court of Victoria in Australia seeking the removal of legal claims that EMC placed against the Nyngan scandium project, asserting that the original joint venture agreement was automatically terminated when Jervois management decided the feasibility study submitted by EMC did not meet the standards set out in the agreement. Furthermore, because Jervois has declared EMC to be in default of the agreement, Jervois asserts that the formal dispute notice filed by EMC on March 13, 2012 as provided by the agreement which would have led to arbitration proceedings later this year, has no effect. EMC contends that its feasibility study into which it directly invested about $2 million during the past couple years, plus a lot of human time and effort that could have been deployed elsewhere, does meet the terms of the agreement, and that it now owns 50% of Nyngan. Discussions "without prejudice" between EMC and Jervois to resolve the dispute have now stopped in the wake of the unilateral Jervois decision to pursue the matter in an Australian court. From the perspective of the EMC shareholders it looks like Duncan Pursell keeps calling the shots, this time choosing the legal venue to decide the case. The EMC news release, while sticking to its position that it has earned 50% of Nyngan, gives only a half-hearted welcome to this development.
I cannot speak for either side's management but the phrase which leaps to mind is "kangaroo court", though this phrase has its origins in the California Gold Rush of 1849. Perhaps Duncan Pursell is envisioning an Australian Scandium Rush; his bad faith in rejecting EMC's feasibility study (see Spec Value Hunter Comment - February 29, 2012) seems to be based on kangaroo court concepts of justice. It appears that Pursell is frustrated by the fact that until he can get a court to give Jervois clear title to 100% of Nyngan, he cannot transfer a Nyngan property interest to any other party. It may be that another party is already in the background, or, given Pursell's sleazy silence on what he really expected from the feasibility study as he went along with everything EMC did prior to the agreement deadline, his abrupt rejection of the feasibility study as if this was a foregone conclusion makes one wonder if such party had already revealed itself and its goals. It's as if Pursell plotted a stagecoach ambush that left Jervois in possession of the feasibility study prepared by EMC whose intellectual property can now be deployed exclusively for the benefit of Jervois or its assignees.
Oddly, Pursell did not get much support from his long suffering Jervois shareholders to whom he offered a 5:1 rights offering at $0.002 (no that is not a typo related extra zero) in April which was at a 33% discount from the market price. Only 14% of the 700 million Jervois shares on offer were subscribed, raising AUD $288,872, of which 14% was contributed by Jervois insiders who will suck it all back in the form of management and professional fees. Pursell has 3 months from May 14, 2012 to offer the remainder as a private placement to anybody eager to contribute to his multi-decade exercise in wealth destruction. As far as EMC is concerned, on February 29, 2012 I pretty much wrote off Nyngan and suggested that Spec Value Hunters focus on the Springer tungsten project onto which management is currently focusing its efforts.
At the current stock price of $0.05-$0.06 the market is assigning zero probability to EMC prevailing in a court based in the land of kangaroos. I don't think just because Pursell has chosen the legal venue in which to seek a binding resolution of the dispute that he has a slam dunk victory coming, but one should keep in mind that a victory for EMC will only give it a 50% stake in a project whose other half owner is a dysfunctional Australian junior with barely enough money to keep the lights on for another six months and which desperately needs a thousand for one rollback. It is now clear that Duncan Pursell has no desire to secure anything but 100% of Nyngan and then flip it to somebody with deeper pockets than EMC; if he loses the lawsuit and EMC's 50% stake is confirmed, what follows is a lengthy stalemate. The near term upside for EMC lies in negotiating a funding deal to put the Springer tungsten project back into production without requiring equity dilution, which could trigger a move back into the $0.20-$0.40 range. While this may not seem like much, the implied percentage gains are significant, especially if what emerges is a cash flow producer by 2014.
The longer term and bigger upside lies with EMC's ongoing focus on the scandium sector. EMC continues to look for other potentially scandium enriched prospects, has a summer mapping and prospecting program scheduled for the Tordal pegmatite dyke project in Norway, and remains in possession of in-house scandium processing related expertise developed by its key shareholder, Willem Duyvesteyn. There is no meaningful scandium production in the world and thus no market for scandium; the macroeconomic outlook is thus irrelevant to this story which has a closer resemblance to a technology play than a mining play. In other words, if we are facing a multi-year bear market in the resource sector related to slowing global economic growth and downward pressure on metal prices, this gloom will not apply to any scandium projects EMC gets underway.
There has been a big seller in the market for some time now who has helped brutalize the stock price at a time when capital in general is withdrawing from the resource sector and at a time when EMC management has not been in a position to generate inspiring news. The stock is under accumulation and I suggest Spec Value Hunters not stand on the sidelines waiting to join a chase only when we once again have a rising price. Management has no plan to conduct a rollback, and eventually the selling will dry up, likely when the pieces Willem Duyvesteyn and George Putnam are working on finally come together. If we do end up in an extended resource sector bear market, EMC's scandium focus is the sort of story that can continue to make progress, and which has the capacity to attract an audience outside of that familiar with the resource sector. I confirm that EMC remains a Good Relative Spec Value Buy at current prices.
*JK owns shares in EMC Metals Corp