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It is like a bad sequel to Oceans 11. Let’s get the gang back together one more time for one more gig. Maybe this one it will be our last, but one never knows….

With a story that lacks the appeal of a Frank Sinatra or a George Clooney, but will certainly leave you scratching your head asking, “doesn’t anyone regulate this?”, I introduce to you Terra Nostra Resources (OTC:TNRO).

In the late 1980s there was a Vancouver Stock Exchange Company called South China Resource Corp that had a joint venture with the Chinese Government to farm prawns. The CEO of the company was James Poe. After some flashy announcements, the stock jumped but the company never delivered on promises to shareholders. One of Mr. Poe’s directors was his own wife Paula Poe.

After the stock collapsed, Poe and his wife moved onto another great “China story”. This time it was another publicly traded company in Pan Asia Mining Corp. The company established another joint venture with the Chinese government, this one to develop the Changma Mine, billed as China’s only producing diamond mine. By the end of 2002 they had raised as much as $39 million from investors … and lost it all.

This document from the British Columbia Securities Commission (dated less than two years ago) describes the level of abuse of trading done by the Poe’s for which the BSCS leveled sanctions and bans from participation in the securities business. Ms. Poe went as far as to set up nominee accounts in the name of a housekeeper.

But not filing trading reports was the least of its problems. The stock was later halted for misinformation to the public and overstating its assets.

The CFO Don Nicholson was sanctioned for knowingly putting out false information to the public.

A more detailed article about the Poe’s was written by Vancouver business reporter David Baines.

Ladies and Gentlemen, introducing Terra Nostra Resources.

In the Family

Believe it or not, this gang has now formed a join venture in China under the fearless leadership of James Po (he has decided to drop the “e”) The holding company is Po(e)’s Bahamian corporation RTO investments, which holds over 59% of the stock.

The CFO is one Don Nicholson – no, not the original Don Nicholson, but his son (while the father serves as advisor to the company).

This time the director is not James Po(e)’s wife, but his 20-something year old daughter Crystal Poe.

In some crazy joint venture, that no one seems to understand the terms of, Mr. Poe has brought us some “partnership” that is as implausible as a Danny Ocean heist. Even though the company has just raised an additional 5 million dollars (terms $1.75 less discounts, noted below), the company’s financial filings have more red flags than a Chinese May Day parade.

At present, based on current operations, the Company does not have sufficient cash and liquid assets to satisfy its cash requirements on a monthly basis.

[..]

As of August 31, 2007, the Company has negative working capital of $30,105,783 and shareholders’ equity of $27,348,334 compared with negative working capital of $28,784,699 and shareholders’ equity of $13,067,007 as at May 31, 2007.

Promoted from Within

It appears to me that in order to “kick off” this promotion the company has even gone to fax blasts (see here, here, here and here).

Speaking of promotions, the company has engaged Boca Raton “investor relations” firm Mirador Consulting for free stock. Mirador’s other “current client” is the nearly insolvent and notorious Charys Holding Company (CHYS.OB), noted as a role player entangled in highly dubious transactions in the current drama of Home Solutions of America.)

Terra Nostra has also recently given free stock to Andrew Barwicki, a “seasoned” IR professional whose recent credits included the high-profile outrageous pump-and-dump operation Rocket City Automotive.

Copper and steel factory, or paper factory?

Yesterday, Terra Nostra announced the “completion” of a $12.5m paper selling round, which means the cheap shares they just issued have been registered. Laughably, the company calls this “institutional financing”.

How cheap? In July they sold $4 million in “units” consisting of a share plus a $1.75 warrant for $1 apiece. Then, in this convertible note deal just two months ago that is now deemed “complete”, they sell notes convertible at $1.75. But it gets worse. The financing comes with $1.75 warrants for 80% of the amount of the notes, plus the company paid an 8% brokerage fee plus 7% coverage in warrants to broker Axiom, plus a 2% “introduction fee” plus 1% in warrants for the introduction to Mirador. And the notes are collateralized by even more stock. This looks to Citron like a not-so-fancy way to sell millions more stock at little more than $1 per share raised by the company.

Metal profits or paper profits?

The stock is running (up 500% in the last two months) on a single quarter of announced but unaudited “profits”. Meanwhile, an encyclopedia would be required to untangle the web of reasons the results cannot be relied upon.

“Related party” is the biggest factor in the company’s financials.
The company’s largest customer is a related party. The balance sheet is loaded with receivables to a related party (nearly $33m), and “Other Liabilities” to a related party ($35m). The company rents a production facility from a related party, and sells the output to the same related party.

The new frontier of the China deals we are seeing in the market these days is joint ventures with Chinese partners. It remains to be seen how many of these will pan out. But Terra Nostra raises the bar further….way further. They are booking the profits for their Chinese joint venture deals that they haven’t even finished paying for yet. Even with the recent financing, Terra Nostra is still $12.8m short of paying for its copper joint venture over two years after founding it. Meanwhile it operates with negative working capital near $30 million. With the capital structure of one of its two current operating entities still undetermined, Citron cannot fathom how earnings in “cents per share” can be deemed to have any meaning whatsoever and reported to the public, when the underlying joint venture isn’t paid for. (Even presuming it could be disentangled from its pile of related party transactions)

The company’s auditor, Rotenberg & Co, a small firm in Rochester New York, is half a world and half a year away from being able to bring sufficient professional scrutiny to this pile of uncertainty to lend any professional credence to this claim of profitability. Meanwhile, investors’ best valuation metric is the price at which the company sells its own shares.

Keep Counting

With the financing announced yesterday, the company’s fully diluted share count is 75.6 million, up 16 million or 27% in just the last year. But the company is far from done. The company claims it needs to raise an additional $35m to $40m to complete its capitalization. At the current price is it commanding for its paper, the dilution for this financing, if it can be achieved at all, will be staggering.

From Terra Nostra’s 10-Q filed 10/22/07:

At present, based on current operations, the Company does not have sufficient cash and liquid assets to satisfy its cash requirements on a monthly basis. The operations of the Company as at August 31, 2007, are undertaken by the Subsidiaries, two Sino-Foreign Joint Venture Companies in which the Company holds a 51% interest, operating under the laws of the PRC. There can be no assurance that the Company will be able to raise the required funds to fulfill its capital contribution commitments under the respective STJMC JV. Should the Company be unable to provide the funds required according to a schedule as determined by the STJMC Board of Directors, the Company could potentially be subject to a diminished ownership percentage.

Conclusion

In our opinion, Terra Nostra is a paper mill masquerading as a metal mill. The dilution is out of control, run by a family with serious history of securities fraud run out of a Bahamian holding company.

It is predictable that the public’s passion for China stocks will be met by all kinds of opportunists. But the ones from Vancouver and Boca – with bad operators behind them – afford every reason to stay away.

Disclosure: Author has a short position in TNRO.OB

Source: Red Flags at Terra Nostra Resources