Bottom-Fish Comment - July 19, 2012: Bottom-Fish Strategy for Kermode Resources Ltd
Kermode Resources Ltd was recommended an extreme risk bottom-fish buy below $0.10 on July 13, 2012 because this junior has latched onto a classic Big Anomaly play through an option that looks expensive today but which within a year may look like the stroke of genius needed to extract Cinderella from her ashen dungeon. But before I explain why Kermode is a most interesting bottom-fish, let me describe what I mean by "extreme risk". There is a school of thought to which simpletons happily adhere that the "market" has the divine attribute of omniscience, that the price it bestows upon a good reflects all that there is to know about an asset in terms of its past, present and future. So when a junior starts trading below a dime, especially one with less than 100 million shares issued and less than $500,000 working capital, which in the current market should only be the case if it has more than 100 million shares issued, the market deems it to be a "piece of shit" destined for a severe rollback and subsequent price retreat to a level where the market capitalization is lower than the cost of creating a new public vehicle from scratch. As some of you may already have guessed from my "bottom-fish" concept, I am not a big fan of the efficient market hypothesis, but I do have a very healthy respect for the market as a mechanism for defining perceived value. However, the beauty about the notion that "perception is reality" is that it does not very easily deal with the fourth dimension called time, whose apprehension is generally real but whose comprehension about the past is generally a muddle, and with regard to the future tends to be guided by the rearview mirror and thus not at all about the future. That is why a stock like Kermode trading below a dime has to be labeled "extreme risk" when in fact it represents "extreme opportunity". Kermode listed on the TSXV by IPO on February 3, 2000 just before the dot-com bubble collapsed, with an option on a property owned by a member of management's stable, a standard bogus way of renting a worthless property to facilitate creation of a new stock promotion vehicle. What Don Moore did not grasp at the time was that he would be competing with a flood of capital pool shells which did not have to waste money on a worthless property before selling themselves to a new control group. Don Moore is an old school promoter whom the last decade left behind. From 2005 onwards he alienated the brokerage community by refusing to do unit private placements which enabled the purchasers to flip their stock into the market after the 4 month hold period ended while clipping the warrant for a payout in case the junior's fundamentals actually got lucky. These brokers no longer played the gatekeeper role of separating the wheat from the chaff; very few stories could be killed within 4 months so the brokers where simply churning their accounts with private placements that yielded 7-14% commissions, well above that earned from trading existing stock. Moore didn't want to accomodate Canadian brokers who might have something useful to tell to their clients, but couldn't find the time to do so thanks to trading commissions that had to be competitive with discount brokerage firms where clients executed trades often with the benefit of knowledge from their full service broker. Canadian brokers used to play a critical role as network hubs for speculators in the junior resource sector, but that role has been rendered uneconomic by the efficiency of deregulated trading and the proliferation of information provided by the Internet. The trouble with the new reality is that it has annihilated the "story" brokers used to communicate, not without having spent considerable effort on understanding what the junior was trying to accomplish. Today brokers try to convince clients that they deserve to be paid a substantial management fee for parking their capital in random assets guaranteed to yield next to nothing or be exposed to hideous loss risks. They point toward ideologically tainted macroeconomic wisdom from stars like Don Coxe or Eric Sprott as the reason for participating in financings, and tend to avoid the project fundamentals. It is precisely because Don Moore and his troop is badly out of synch with this poisoned atmosphere that bottom-fishers must pay attention to "extreme risk" bottom-fish like Kermode.
During the last decade Kermode worked on a low grade gold project in Newfoundland that could not muster even a wimper from the market after the 2008 crash when gold reached record nominal highs. In 2011 Don Moore realized that he was stuck in a time warp and attracted young blood to Kermode, which included Steve Chan who helped Joe Martin build Cambridge into a conference powerhouse, as well as Adrian O'Brien who earned his stripes in the brutal role of IR Man for a list of companies not posted in his online Kermode resume. Unfortunately for them, Don Moore has been ahead of the curve, promoting a Big Anomaly copper play in Labrador called Seal Lake, which KRO members unprofitably encountered in early 2011 as a bottom-fish recommendation called Playfair Mining Inc. Seal Lake was a great story, but the market treated it like a lottery ticket, failing to bid up the price with any anticipatory excitement, and when the draw in the form of drill results came up empty, it dropped the stock like a hot potato, presaging the massive "glass half empty gone totally empty" mentality that dominates the market today. Kermode's timing, however, seems to be much better. O'Brien spent nearly a year negotiating with a "prospector" for a deal on the Eastgate project within the Walker Lane of Nevada where small scale miners had high-graded a vein from 1900-1920 and again from 1935-1957. The deal announced May 10, 2012 is not cheap; Kermode must issue 2.5 million shares within a year and pay $1.1 million over 5 years to earn 75%, at which point the vendor can choose to pay his share or get 3 million shares and collect a 3% NSR. Although steep, the Eastgate deal offers a huge Big Anomaly story in the form of a low sulphidation epithermal vein play with Midas style bonanza gold potential at depth. The property hosts a vein with a minimum strike of 600 m that the old-timers mined to a maximum depth of 100 metres, and which several majors such as Freeport McMoran, US Borax, and Echo Bay have checked out for potential as a near surface open-pittable heap leach oxide resource with negative results. The problem is that the space between the veins is pretty much dead, but the boon for Kermode is that no modern exploration has been geared toward delineating a high grade underground mining gold vein scenario where the goal is 1 million plus gold ounces at a third of an ounce or better. The only vein focused drilling occurred in 1999 on a single fence by a junior controlled by Bill Burton, who inherited the project after US Borax shut down its exploration defence and laid off all its geologists. Those results in retrospect were very good, intersecting the vein at higher grades twice the depth mined by the old-timers, and the obvious question for Kermode is what happens if the Eastgate vein is drilled off along stike and extended to depth, and what is the meaning of a single high grade intercept to the east of the vein that suggests a parallel blind vein. A bottom-fish strategy comment is not the place to articulate this Big Anomaly story, so I'm leaving it as an extreme risk bottom-fish recommendation below a dime, with more detailed coverage hinging on Kermode's ability to drag itself out of its perceptual gutter and attract the $2 million in funding it needs for a serious core drilling program to sort out the Eastgate vein system's potential as an analog to the Midas vein discovered by Ken Snyder who tried to get this property for Franco Nevada in 2000.
*JK owns shares of Kermode Resources Ltd