$884 Million of a Serbian King’s Gold (Republished from the Friday File)

By Travis Johnson, Stock Gumshoe, December 23, 2010

Though the “secret” stock behind this teaser has been identified many times in the comments here and elsewhere, I continue to get a lot of questions about the “Serbian king’s gold” — so since I wrote this one up in a Friday File for the Irregulars about two weeks ago I can now share my thoughts, such as they are, with everyone else if you’re interested. The following first appeared in the Friday File on December 10, it has not been updated or edited at all except to clarify that the disclosure (I don’t own the stock) still stands.

This week the competition for the Gumshoe’s attention has been fierce, with two of the largest publishers blanketing the internet with aggressive ads that are getting many of my readers all hot and bothered. The first of those I covered yesterday, so now the second comes — yesterday was Frank Curzio and his Manganese “outer space supernova gold” teaser, today it’s Byron King, arguably a far more accomplished resource-focused editor (Curzio is a small-cap generalist), and his teaser for a company that’s aiming to reopen an old Serbian gold mine that was closed down right around World War II to keep the Nazi’s from getting their mitts on the shiny stuff.

And though King’s teaser for his Energy & Scarcity Investor doesn’t actually include the text transcript, I’d say it was even more aggressively hype-tastic than Curzio’s — lots of chatter in there about how investing in this kind of little Canadian miner can get you rich, quick, and very little about the risks.

Likewise, since there wasn’t a transcript of the ad this time I won’t quote directly from it as much as I usually do (though I did force myself to listen to it a couple times), but it may well be that you’ve already sat through the very long presentation and are familiar with the basics — King is teasing that there’s a small Canadian company that is about to re-open a mine that used to supply gold for Serbia’s King Alexander I.

He even visited the mine and went down the shaft, apparently, and he also tells us that the samples taken in the old mine are ridiculously rich in gold — though as such editors are wont to do, he extrapolates those small samples and compares them to the output of South Africa’s high-volume, lower-purity mines, which isn’t necessarily an apples-to-apples comparison (though the bar chart looks impressive, with the marginal South African mines lingering near the bottom and this hidden Serbian mine shooting up nearly off the chart with a 200 grams/ton sample).

The potential gains are promised at “2,932% or more” (love the precise numbers!) He thinks the gold mine left behind by the King is worth more than $884 million, but the war destroyed the above-ground workings of the mine and most of the records of the mining … so it was hidden until now, when this little company is about to make “a very select few” rich (including you, naturally). And this company has exclusive rights to this exploration project … and is teensy, King says it’s a $29 million company and is priced at about 90 cents a share (that’s not true anymore, thanks to the attention from his ad — but heck, if it’s going up almost 3,000% then who cares if you miss the first 50%, right?)

So who is it? Well, he also goes on to tell us that this company’s portfolio in Serbia also includes some alternative energy projects, specifically some run-of-river hydropower to supply the EU’s growing demand for clean energy. He goes so far as to tell us that this tiny company is not considered, by investors, to be a mining company at all — it’s viewed as a hydropower and geothermal company, with high-potential projects in those areas also in Serbia …

… which makes it fairly simple to conclude that he’s talking about Reservoir Capital (REO in Canada, RSERF on the pink sheets), something many of you no doubt already sniffed out.

And yes, the shares are already up about 50% over the past week, which I’d guess is entirely because of the attention of Byron King — so it wouldn’t be surprising to see the shares fall back substantially from the current $1.40 or so, especially if King’s ad campaign stops soon. Then again, if he keeps pushing it and/or some good news comes out, the shares could easily climb still more in the near future. He also says he thinks the company will spin off the mining operations from the green energy company in the near future, further adding to returns.

So who is Reservoir Capital? Well, they are a Canada-listed company that is focused on projects in Serbia — the mine that Byron King visited, the one with the sample of over 200 grams/ton of gold (actually 209 grams) was the Deli Jovan mine … and yes, as you might imagine, the average of their samples is far lower, closer to 10 grams/ton. Still reasonable, but not as shockingly different from other mines as the 200 number makes it sound.

They have several other exploration projects in both Western and Eastern Serbia — they have licenses focused on the Timok Belt (copper and gold) which are partnered with Freeport McMoran to go along with the license for Deli Jovan, which is joint-ventured to Orogen Gold. Reservoir Capital fancies itself a “project generator,” similar to the “prospect generator” model of companies like Altius who wish to find and delineate resources and projects, but then bring in other companies to fund the exploration and/or development and keep a minority stake or royalty of some sort.

And yes, they have already said in corporate presentations that they are in the process of spinning out their minerals projects into a separate company, which would make for two even teensier stocks but would perhaps add some clarity and “pure play” potential to both resulting companies. The new company that’s to be spun out looks like it will be called Reservoir Exploration, they have a presentation here describing the portfolio of that future company, into which they say they’ve so far sunk $6 million (so the cynics among you might say that perhaps that’s roughly what the company is worth) — and yes, I assume they would be able to raise far more money after the spinoff and/or IPO of this mining division if the mining projects have a higher profile, so I expect they were delighted to welcome Byron King for a visit.

The specifics of the mining operations aren’t going to be relevant to actual earnings performance from Reservoir for a while, one expects, but I do like that they have earn-ins with Freeport McMoran and Orogen Gold (though Freeport is obviously a far more impressive company — Orogen was a small private Irish investment firm, though they were recently bought by what had been a medical company, MedaVinci, which is listed in London at MVC). Orogen’s deal for this particular mine, the one that King pitches with the King Alexander I connection, is that they can earn 75% ownership of the mine by investing $3.5 million over the next three and a half years — remember, they’ve done only preliminary sampling so far and this mine has been a Reservoir project since 2007, so it’s a fair reminder that the urgency of teaser ads often understates the huge time lag in exploration and production projects, even ones that are re-opening old mines.

The big spiel for the mine is similar to that made for other companies that are reviving old mines or old mining districts — that there was a lot of gold produced in thi