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Summary

  • West Face Capital - Mandalay Resources' top shareholder - will divest 40 million shares through a secondary offering through BMO Capital Markets.
  • This will increase supply significantly for a stock that trades 720,000 shares per day.
  • With the stock trading near all-time highs and with metal prices weak, this could trigger a sell-off.
  • This was unanticipated in January, but I think it can provide an opportunity for long-term investors.
  • I am not a buyer at current levels, but I am expecting weakness that could lead to a buying opportunity, and I am a buyer under $0.90/share.

Mandalay Resources (OTC:MNDJF) just announced that its top shareholder - West Face Capital - plans on selling 40 million shares from its 137 million share position. West Face Capital will continue to hold 28.6% of the company. Naturally as supply hits the market this can generate near-term weakness in Mandalay Resources' shares, which have performed incredibly well over the first part of the year and having dramatically outperformed the rest of the gold miners over the past couple of years, as the following chart of Mandalay vs. the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) illustrates.

(click to enlarge)

(Source: Stockcharts.com)

This weakness can present shareholders with an opportunity to take a long-term position in one of the highest quality precious metals mining companies that I follow. As I argued in January the company is one of the few that has kept its costs down over the past couple of years while many of its peers have reported negative cash-flow due to rising costs and lower gold prices, as well as substantial asset write-downs as mineral reserves are no longer economic at current metal prices.

That's the good news. The bad news is that this sort of company generates a lot of investor demand and the stock ends up trading at a premium. While I argued that some premium is justified back in January, the stock is overextended here. With this in mind the potential for stock to come onto the market and put pressure on prices without any fundamental shift is excellent news for investors who recognize the opportunity.

Since the news broke Thursday the shares are down somewhat, and they took a dive during Friday's trading session only to rebound sharply. However, given that 40 million shares are going to be coming on to the market I think this weakness will reemerge, and investors should get ready to add to their positions. I am currently targeting around $0.85/share, which is $0.10/share higher than my recommendation point back in January: given positive sentiment in precious metals miners as of late I don't think we will see that level.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Update: Mandalay Resources' Largest Shareholder To Divest 40 Million Shares - Expect Near-Term Weakness And A Buying Opportunity