Wednesday, January 5, 2011

A Very Cautionary Tale

Pity the shareholders of Gem International. The company is a diamond explorer that recently branched out into gold with an area-play property in Tanzania. It announced on September the 14th that it had acquired an option for 80% of Eden Gold's gold and precious metals licences comprising a propery in the Hadeni region; the market took notice. That property adjoins one owned by Canaco, which had a spectacular showing in one of its drill holes. There's some evidence that the anomaly on Canaco's property extends to Eden Gold's Hadeni licences.

The company announced a $2.45 million private placement soon after, whose proceeds would be used to pay Eden for the property and to explore it aggressively.

Needless to say, the stock took off. What's surprising is the extent of the jump. From a thinly-traded 36 cents prior to the announcement, it exploded upwards to almost a double on the day: 60 cents. Needless to say, the private placement was either oversubscribed beforehand or was quickly oversubscribed on the 15th. The opportunity to buy 60-cent shares at 35 cents (albeit restricted) does that.

The i's were dotted and the t's were crossed on the private placement and option agreement by December 1st, at which time Gem International was at $1.37. I kid you not. (Chart here.) The way things were going, the lucky placees were going to pay 35 cents for restricted shares that were selling for more than 390% above the payment price. That restriction forbad them from trading the shares for four months and a day after the private placement closed.

As it turned out, the restriction did matter. On December 10th, Gem asked for a halt of the stock pending news. Five days later, after the markets had closed, Gem announced that the ownership of Eden's licenses was in dispute. Given that conflicting ownership claim, Gem's optioning was put aside until Eden's title was cleared.

What was a $1.31 stock on the day of the halt became a 60-cent stock when trading ended on December 16th. That day's low was 42 cents; the high was only 75 cents.

Gem recovered somewhat, to 67 cents by December 31st, but has slid back down to 58 cents come the new year. It makes for a real tale of woe for the shareholders, especially the ones who bought excitedly at over a dollar a share.

But what about the private placement subscribers? After all, despite the beating, 58 cents is still much higher than 35 cents. As it turned out, those lucky people lost their luck on December 24th when the shares were at 56 cents. That day, Gem cancelled the entire private placement.

It may have been at the company's request. Despite that disaster, the placees would have got shares at a much lower price than the stock is at even now. Its cancellation may have saved Gem shareholders from what, in retrospect, would have been an excessive dilution.

So, even the lucky private-placement subscribers saw their luck run out. The chart below, from, shows the rocketing and flattening of the stock:

The moral of the story? Every stage of an exploration company's evolution carries risk. This area-play optioning looked like so much of a sure thing, the stock quadrupled on it. No-one thought that a title dispute would kibosh the deal, but it has for the nonce; as a result, the stock got slaughtered.

Pity the shareholders. It would be wise not to join their ranks by remembering there are risk in every stage of an exploration company's life.

Disclosure: I don't own any Gem International.

No comments:

Post a Comment