Friday File articles, like “Idea of the Month” writeups, are generally password-protected for our paying members — this commentary was made available to all readers on October 7, 2011 but the content not been edited or revised since the original publication date.
The author continues to not have any personal interest in the stocks mentioned and will not trade in those investments for at least three days.
The promise of Byron King’s new teaser is a hot and heavy one — it starts like this:
“Tiny Ottawa Company Discovers Revolutionary ‘New Silicon’ Replacement… That’s 200 Times Stronger than Steel
“And starting today, you could get in on this incredible $2.5 billion discovery that could literally change the world we live in…”
And there’s a quote that backs up the claims, from a respected newspaper:
“‘It’s not often that a new substance comes along that is so useful it defines an era’ (UK Telegraph)”
The ad is one of those irritating presentations that doesn’t default to a transcript when you get sick of it, so here’s the gist:
Apparently this “new silicon” is a candidate to replace silicon in chips and bio sensors. The silicon chip changed the world when it was introduced in 1961, revolutionizing the electronics industry when it made vacuum tubes obsolete.
Silicon’s reign might be ending — King quotes PC World as saying that “new silicon” has transistor speeds up to 10,000 times faster than “old silicon” and is cheaper to produce and is only one atom thick.
And the New York Times is quoted as saying that …
“it is not only the thinnest material in the world, but also the strongest: a sheet of it stretched over a coffee cup could support the weight of a truck bearing down on a pencil point”
That’s a cool image!
This stuff is apparently thinner and stronger than steel, and conducts electricity better than anything else known. Potential includes lighter aircraft and satellites, replacing silicon in transistors, improving batteries with “new silicon” powder, stronger turbines, stronger implants, advancements in pretty much any cool gee-whiz products you can imagine.
King proposes almost limitless possibilities — crash-proof cars, buildings that wouldn’t have fallen in the latest Japanese earthquake, and then we get into the tease about a company that controls a huge supply of this “new silicon” …
“…this explosive Ottowa penny stock, priced under $1 per share, has exclusive rights to over $2.5 billion of this valuable “new silicon” material.
“…discovery is in safe, mining-friendly Canada….
“… in the hands of a tiny, unknown $58 million company.”
Did people actually become millionaires because of silicon?
Could soar 30-fold and still be grossly undervalued. And you don’t have to “send your money out of the U.S.”
And of course, if word gets out on Wall Street it will start a “feeding frenzy” and the gains of 4,510% that he expects could turn your $50,000 into $2.25 million starting “just days from now”
And the ultimate promise that is behind pretty much every penny stock teaser, and which catches most of us right in the gut:
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“If just this ONE penny stock takes off … you could retire rich — without worrying about your future financial security.”
Which is pretty much the same thing the lottery ads say. Though I will stipulate that the odds of a penny stock performing very well are certainly better than the odds of winning the lottery.
So who is he touting in his new FREE (ifyousubscribetohispaidnewsletter) report, “How to Make 4,510% Gains from a Tiny Ottawa Company’s ‘New Silicon’ Discovery?”
Must be … Focus Metals (FMS on the Venture exchange in Canada, FCSMF on the pink sheets)
This one is very tiny, which helps to make it a more reasonable one to look at on a Friday for the relatively small number of Irregulars (that’s you! And yes, we love you). The market cap is indeed about $58 million — currently C$56 million and trading at 99 cents at the moment.
And that magical “new silicon?” That’s graphene … the great promise of it was described pretty well in the article King quotes from the Telegraph, though that article also closes with the more sober assessment that graphene might replace silicon in chips … in 20 years.
After all, the Nobel Prize in Physics given for the groundbreaking research on graphene by two scientists at Manchester University was awarded just last Fall. Companies are certainly experimenting with it in batteries, touch screens, and lots of other applications, but it’s early days. The NY Times article that he also quotes, by the way, is about the Nobel award and you can find it here.
And interestingly, we learn that the scientists who won that Nobel originally got their thin sheets of graphene from the graphite in pencils … by peeling off thin pieces with tape and folding them over and over again until they got to the thinness of one atom. Other scientists have since synthesized graphene from sugar. So what’s with this “controlling $2.5 billion worth” of this vital breakthough compound?
Well, Focus Metals holds a major flake graphite deposit — in a presentation given by the CEO back in January he described it thus:
“Lac Knife, large flake graphite property near Fermont, Quebec. It holds the best economic concentrations of technology grade graphite in the world.”
After that presentation — and perhaps after King’s initial recommendation that probably also came a few months back — the stock jumped like crazy, going from about 50 cents to, briefly almost $1.80 per share. It fell back pretty quickly after that jump and is now trading right around a buck again.
And yes, it is an “Ottawa stock” — that’s where their headquarters are … but all of their assets are in Quebec. In addition to this “new silicon” flake graphite deposit they also have a rare earths and copper deposit, also in Quebec — that project is not nearly as far along, largely because the graphite deposit has been known and studied several times over the past 20 years (but never mined).
King says that “a ton of pure 99.99% ‘new silicon’ will set you back over $20,000,” and that demand should boom and help this stock boom from 95 cents to $43 per share.
So, will that happen? The “road show” from the company certainly got investors excited, and their plan sounds pretty impressive — though it will be based largely on demand for graphite for lithium ion batteries in the near term, not on next-generation graphene products that may or may not take over the world — graphite is used in technology products now, largely in batteries but also in heat sinks and as a thin conductor, but graphene is more of a nanoscale product (like buckyballs, or nanotubes) and it’s not going to take off instantly, it was really discovered only about six or seven years ago.
And if graphene does become the most revolutionary product and define an era with its many critical uses, the critical factor won’t necessarily be the supply of graphite — I assume that most of the cost would probably come from processing graphite into graphene. Somewhat akin to the fact that the raw material silicon is cheap and no one talks about huge bonanza silicon discoveries, but processing it into polysilicon for semiconductors and solar panels can, depending on production capacity, be a lucrative business). It’s also worth noting that roughly half of the graphite business now (according to the CEO of Focus) is in synthetic graphite, which is made of coal — I have no idea if there’s also likely to be a synthetic source for the graphene nanomaterials, or if natural flake graphite will be a critical source.
The company’s presentation indicates that they need only a $10 million additional plant investment (beyond the basic mine infrastructure and plant they’re already planning) to get from 97% purity to 99.99% — 99.99% is the benchmark for lithium ion battery use, and apparently the price difference between 97% and 99.99% is at least 1,000% ($2,000/ton vs. $20,000+/ton). So they seem to have plenty of things to spend money on that ought, assuming that the graphite market doesn’t collapse, increase their margins considerably once they get up and running in a few years.
Graphite is largely sourced from China, just like rare earth minerals (though it’s not quite the same monopoly — only about 80% of graphite comes from China, versus nearly 100% of rare earths). They’re not likely to be selling the super-pure $20,000/ton stuff soon, but they are in a mining-friendly area with good transportation assets and plenty of electricity, so they might well start producing something fairly soon. The presentation indicates that they can be producing graphite from the Lac Knife deposit within three years, I have no idea whether or not that will really happen (it’s always worth padding those estimates — mining executives are, shall we say, “optimisitic.”)
You can see CEO Gary Economo’s presentation that I assume Byron King attended here, that’s where much of the info from the teaser clearly came from. And their website is a promotional ad for graphite and reiterates the presentations assertion that their graphite and REE/copper projects represent “shock and awe” for the markets.
It’s worth noting that Focus Metals has been listed in Toronto for just about a year, and that you could have bought shares of this same company, with the same assets, for about a dime a year ago. They’ve added value by studying and releasing more reports about the assets, but most of the value has come from growing interest in graphite in recent months and, secondarily, in rare earths. Like many rare earth deposits, this graphite asset has been known about for decades but never developed — that’s largely because of past price collapses, but also because some of the companies that ended up owning the property from time to time (like Iamgold) got access to it as a result of broader transactions and weren’t focused on becoming graphite producers. There were two studies of this property done over the last 20 years or so, which form the basis for their assessment, and they’re apparently in the process of releasing an updated study.
They have enough cash for the year and for a little bit of next year, including $2 million for exploration this year that will go mostly toward the potential copper and rare earths project. They’ll need to raise more late this year or early next year for further exploration of that asset, and they’ll need bucketloads of money to actually build the graphite mine, though if graphite prices stay solid they shouldn’t have any trouble getting funding — most of the exploration money is for rare earths and copper, they already know about eight million tons of graphite at 17% concentration, so there’s plenty of graphite known to justify building the mine. It seems likely that if they do build the graphite mine and plant it will be with help from potential customers who would probably pre-order, since most graphite is processed and sold for specific end customer specifications.
I’ll admit that I’m a bit tempted by this one now that the shares have come off the early excitement from January and February and the shares are down near a buck again — there are other graphite deposits being explored and developed too, so it’s not like they’re going to have a monopoly, but there are many folks projecting a substantial shortfall, particularly because of the demand from lithium ion batteries. It is worth noting that they have nothing to do with the discovery of graphene and its near-miraculous qualities, and they certainly don’t own the idea, though they have done a bit of patenting lately — no idea if those patents will be worth anything or not.
And actually, now that I’m looking at his stuff again it occurs to me that some of King’s other heavily teased microcap stocks of the last six months are starting to look a little more reasonable now than they were shortly after I first wrote about them, too — That list includes Stans Energy (RUU in Canada, HREEF on the pink sheets), which I last wrote about here, but I’ve been more intrigued lately by Reservoir Capital (REO in Canada, RSERF on the pinks), which also still gets teased as a “special report” subject in this latest ad.
Byron King teased Reservoir back in December because of their potential in building new mines on the site of King Alexander I’s old gold mines in Serbia, but it’s also an active alternative energy developer in Serbia, an area that I think should grow pretty substantially with strong EU renewable energy requirements (and it doesn’t hurt that the Germans are killing their nuclear power program) — they’re in the feasibility study process, with plans for hydro generation assets in place by 2014. Reservoir is also in the process of spinning out the mining and exploration projects, so sometime in the next few months this is likely to be split into Reservoir Capital (the hydro and geothermal company) and Reservoir Minerals (the gold explorer). I don’t know how much emphasis we should put on the timeline for this spinoff, or if it matters much at all — back when I first wrote about these guys in December they also were planning the spinoff, though at the time they referred to the potential mining company as Reservoir Exploration… the latest press release in March indicated that it would take three or four months, which would mean to the spinoff should take place in the next six weeks or so.
Currently, the spinoff is planned to give Reservoir Capital shareholders slightly less than half of the new Reservoir Minerals company (9 million of 22 million shares). The other ownership is established through a private placement that they just completed — the private placement price of 65 cents/share indicates that the total value of the spinoff would be about a little under $15 million (the combined company’s total market cap is not much over $50 million), and Reservoir Capital shareholders would probably get something like one share of Reservoir Minerals for every five shares of Res. Capital. If the company is right that the separation of these two very different Serbian projects allows investors to value them more fairly as “pure plays” on either Serbian hydropower or Serbian gold exploration, then perhaps both stocks will rise after the split, but all of their projects are a few years out. I’d probably wager on the hydropower assets first if forced to choose, though I don’t own shares.
I first wrote about King’s teasing of this story on December 10 when the stock was right around a dollar — not sure if he recommended it much before that point or not, but given the wording of the ad back then I suspect not. It rocketed after that new attention, not surprising for a $50 million stock, and eventually got up well over $2, but it’s back down to a somewhat reasonable area again at about $1.25 — it’s still a speculation, but perhaps now not quite as much of an inflated one.
So that’s what we’ve got for cogitating about this weekend — a graphite play that’s one of many trying to fill the expected void in graphite supply over the next several years, and a reminder about a gold and hydro teaser stock that’s finally come back down a bit closer to earth after the hype campaign. I hate to urge folks to buy these kinds of stocks after they’ve jumped by 50-100% based almost entirely on newsletter recommendations, since that kind of attention almost always fades away … but if you like the story and think the stock’s financial plan makes sense, sometimes they make a good wager a few months later, when news has thinned out and the recommendation has aged a bit and quelled the ardor of investors. For what it’s worth, Focus Metals, like some of the rare earths stocks before them, is actively promoting itself by pushing the graphite story on their website and in their presentations, and they’ve not been shy about telling folks about the potential and their relatively aggressive development plans — that’s often a good thing, as long as the promotion isn’t all they do. It’s not much of a real story yet since they haven’t done much beyond buying a mine that folks already knew was there — but as they get more financing and proceed with more concrete development plans and publicize those plans, it certainly wouldn’t be surprising to see the shares jump again.
Have a great weekend!