Tuesday, January 18, 2011

No, There Are No Guarantees

Anyone who's spent some time in the gold exploration world knows that certain parts of Africa are exciting. One of them is the Hadeni region of Tanzania, made hot by a huge find by Canaco Resources. A much smaller company, Northern Rand Resource Corp., hoped to get in the area through an optioning agreement for two Hadeni-region properties. The complex deal, between Northern Rand and Eden Gold Ltd., Eden Minerals Ltd. and Falco Goldfields Ltd., would have resulted in Northern getting exploration licences for two different properties. The announcement was made of Sept. 23rd of last year. Just before the news was announced, Randgold had been halted. It hasn't traded at all until today.

Beforehand, it had been a thinly-traded stock, but the trend was definitely up. This was one of those times when the rumour mill seemed to have it right. When the halt was announced, Northern Rand was at 42 cents. It had gotten as high as 54 cents two session prior to the halt. This one-year chart, from Stockcharts.com, shows a definite (if spotty) uptrend:

Today's resumption shows that something went wrong on Northern's way to a hot area play. Something did; the company announced it was canceling the agreement to take on the properties. Why? For something we in the developed world take for granted: a title issue. The vendor companies couldn't prove that they owned the exploration licences they were selling.
Based on the results of detailed due diligence conducted in respect of the vendors' title to the licenses purported to be conveyed to the Company, it has been determined that it is in the best interest of the Company to terminate the agreements. After management's initial review of the titles, the Company retained counsel in Tanzania whose view was that the vendors did not have title to the vast majority of the licenses that they purported to convey to the Company. Notwithstanding ongoing assurances from the Vendors that perfection of title was imminent, the Company has determined that it is not in the Company's best interests to continue to countenance such delays by the Vendors. As a result, the board of directors of Northern Rand decided to terminate the agreements.
In a nice world, company due diligence would be little more than a formality - paperwork to satisfy the requirements of the exchange. This surprise shows that the world isn't so nice after all. When trading resumed at market open today, the stock briefly plummeted to 20 cents - the same price it had been when it had no prospects.

This low proved to be ephemeral due to a desperate seller. The fact that only 70,000 shares' worth of market order could plunge the stock from 30 to 20 cents, shows how little buying interest there was after Northern Rand pulled out. Even at 30 cents, where it started and eventually rebounded to, the stock's still showing a 28.6% loss.

The Moral Of The Story: It's experiences like this one that call for a bit of fatalism, not to mention diversification. Even if the rumour mill had been working properly while the company's due diligence had been conducted, there would have been no way to get out of the stock until the news was announced. This tale does illustrate why diversification is a good idea.

It also illustrates a habit well worth cultivating: non-judgmentalism. When a stock comes along and the i's aren't dotted, it's sometimes best to non-judgmentally say "no thanks."

A Side Moral: Desperate sellers and illiquid stocks add up to a lot of money being lost. Getting a reasonable price not only requires limit orders but also a little bit of stubbornness. When used properly, being stubborn is being disciplined.

Disclosure: Nothing except sympathy.

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