(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
This article is about discovering an upcoming pump-n-dump before the stock has started to go up.
Looking at one of the pump-n-dumps mentioned by Seeking Alpha posters warning readers about it led me to a very interesting tidbit. It was being promoted with a Standard & Poor's Factual Stock Report, supposedly issued by S&P Capital IQ, supposedly a part of McGraw Hill Financial. I was suspicious about S&P being involved. It's my nature.
I called McGraw Hill and verified that S&P Capital IQ is indeed one of their divisions. I was transferred to S&P Capital IQ, but no one I spoke with knew anything about Standard & Poor's Factual Stock Reports, which has issued reports covering about 500 micro-cap companies.
They referred it upstairs for someone to call me back. Meanwhile, I looked at some of those 500 micro-cap stock reports.
Of the dozen or so companies promoted with a Standard & Poor's Factual Stock Report that I looked into, many were not registered with the SEC. Many had no revenues at all. All of them looked like typical pump-n-dumps. Not one of the reports said that it had been paid for by the company in the report. The only disclosure that it was a paid report was a statement that:
All of the views expressed in this research report reflect Standard & Poor's research models regarding the issuer and securities mentioned in this report. No part of the compensation received by Standard & Poor's was, is, or will be, directly or indirectly, related to the specific recommendation expressed in this research report.
Someone did call me back. I questioned why S&P would be involved promoting stock scams. They were very defensive telling me that these were paid reports and that they did include disclaimers like "development stage company," etc. I pointed out that the reports said that they were based on "Standard & Poor's research models regarding the issuer and securities mentioned in this report."
I mentioned one report by describing the company in the report without naming it. I told the caller that one typical company in their reports that I looked at is in the business of owning and developing gold mineral rights on 600 square kilometers in Ghana and Tanzania. This one is not registered with the SEC. It is listed on the Toronto Venture stock exchange (TSX-V) and trades for about a half penny to a penny a share (daily volume of about $250 worth of stock). It has 194,228,000 shares outstanding, giving it a market cap of about a million dollars. It has managed to lose over $3 million in 2012 without any revenue. Since 2003, it has managed to accumulate a deficit of $31 million "exploring" for gold in Ghana and Tanzania. Most of its expenses seem to be in salaries and payments of fees to related third parties. None of the money it has lost came from gold since it hasn't yet mined a single ounce of gold or produced a single dollar of revenue. It all came from stock sales, warrant sales and other financing activities. The stock price has been pumped and dumped several times since 2003 and volume has hit over 5 million shares daily. The price has been as high as $.32 as recently as September 2010. I then asked him which of Standard & Poor's research models was used in evaluating this company. Of course, he did not know and said that he would ask management to take a look at how they are screening the companies they write reports on.
The company is Midlands Minerals Corporation, listed on the Toronto Venture Stock Exchange as MEX-V and in the OTC markets as (OTCPK:MDLXF).
I then went to do some research on sedar.com, which contains company profiles and filings for Canadian listed companies, much like the SEC does for US companies. I found what I was looking for -- the signs of a pre-pump-n-dump.
I then went back to re-read the Standard & Poor's Factual Stock Report. It was gone. S&P had deleted it. Okay, I'll just go read it on the company's website. It had been removed there, too. I did a search on PRNewswire.com and it was no longer available there, either. Man, those guys move fast! So I had managed to inadvertently squash the first prong of the planned pump.
What about the others?
The huffy-puffy press release? Yup, it's there. The company has agreed to sell its controlling interest in the Akroma Gold Company (gold project in Ghana) to its joint venture partner for $3,400,000. The company has received a $340,000 deposit and a Letter of Credit for the balance of the purchase price, which it can draw down upon shareholder approval by the company's shareholders. The press release can be found here.
Note: I am linking to the company's website for documents because it's easier to navigate than sedar.com. I have compared each document to the one posted on sedar.com and they match.
The significance? The company has 192,228.000 shares outstanding. It was last quoted Friday at $.003 bid $.015 offered. At the mean, that's a market cap of about $1,730,000. Take out the company's net cash assets minus liabilities of $730,000 and you have a value of about $1,000,000 even. This deal adds $3.4 million cash to a company with a market cap of $1.7 million with $.7 million in net cash. On a net asset value basis, the deal quintuples the value of the company in one fell swoop. The $3.4 million is about $.0177 per share. Here are the March 31, 2013 financial statements.
Will it close? The board has recommended it and the shareholder meeting is set for July 31. I would expect more PR immediately after that.
Pump-n-dumps cost money. The scammers have to buy the advertising, pay the pumpers, manipulate the stock by buying some, etc. Often, they can use "free-trading" stock, but that costs much more money and creates witnesses who can testify about the criminality involved. So money is preferred. The company has about $830,000 in cash and cash equivalents and only about $100,000 in liabilities, so it would seem to have enough.
What's in it for the pumpers? Hard to tell, since we don't know how much stock they own. We can tell what's in it for the "key" employees. They were each recently granted stock options exercisable at $.10. Each has about 1,000,000 of them, about 6,700,000 in the aggregate. This is not significant dilution on 192,000,000 shares outstanding. One director also holds significant numbers of options exercisable at higher prices ranging from $.25 to $.40. So my guess is that the pump will target at least $.10 per share.
The stock just opened. In the OTC market, it is $.008 bid for 415,000 shares. As recently as last week, the size of the bid was 2,000 shares. The stock is offered at $.0086 for 15,000 shares.
I'm going to try to take that 15,000 shares at .0086. That will give me a total investment of $129. Enough to put my money where my mouth is, but not enough to give me an interest in pumping this thing.
My usual practice when I find one of these is to put a few hundred dollars on the table. More than half the time, I write it off. Sometimes I make a bunch. I much prefer to profit by shorting them on the way down, but that is a dangerous business. I'll get to that later in this series.
I do not recommend betting more than the price of a good meal (whatever that is for you). Many of these do not get off the ground. And these guys do not seem to be particularly expert at the game. Also, the older unexercised options at $.10 are evidence of a prior pump-n-dump attempt that failed. So they may not pull it off.
Disclosure: I am long OTCPK:MDLXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My total investment is $129. If they don't pull it off, I won't miss it.