Shmulik Karpf's  Instablog

Shmulik Karpf
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Shmulik Karpf works as an economist at the Tel-Aviv Stock Exchange, he is also a certified corporate attorney in Israel. Shmulik constantly attempts to come up with new creative investment ideas that go beyond the standard line of analysis.
  • Buy CERX On Future Prospects 0 comments
    Dec 22, 2011 6:13 AM | about stocks: KOL, ARCH, BHP, PCXCQQ
    Coal, together with other commodities, has taken a beating this year: The price of KOL, the ETF which tracks the performance of coal shares, has dropped from an area of $50 back in January down to around $30 today, an impressive decline of approximately 40%.
    In facta few of the shares consisting this ETF, such as Arch coal Inc. (ACIhave even experienced a bigger drop during the same timeoften erasing more than half the Company's market value. To this notorious list, one can also add the other big names in the industry such as James River Coal (JRCC), Patriot Coal Corp.(PCXand the famed BHP Billition (BHP).

    Indeed, coal stocks have become much, much cheaper today. An investor in any one of the names previously mentioned is expected to perform well over the long term. Nevertheless, one is not likely to stumble upon a 10 bagger in this list of mature, highly publicized companies.

    The place to look for a potential 10 bagger in the mining industry is usually in the field of exploration stage companies. These companies are usually at their initial  stage of existence, they are likely to suffer from very 'thin' financing and their stocks tend to be extremely volatile. Probably One out of every 1,000 potential candidates makes it to the famous 10 bagger list.

    One specific coal gem, though, stands out from the rest while no one is paying any attention. Yet.

    The name of the company I am writing about is Columbia Energy Resources Inc. (CERX.OB). CERX Inc. has been in the exploration stage as of March 31, 2011, is developing coal mining, coal coking, and clean coal technology operations, initially in Colombia, South America. The company plans to build mines to produce both metallurgical coal and thermal coal and implement advanced coal technologies.

    Why Do I believe that CERX may grow to become a 10 bagger?
    1. Management: the management of CERX is Tier 1 management, with highly regarded and famous industry names like Ronald Stovash, Peter Lilly and James wolf, each of them with dozens of years of experience in the coal industry. Not less important, management has been incentivized as shareholders by the use of an out-of-the-money option plan. 
    2. Location: Colombia is a GREAT place to be in if you are a coal company: Excavation & maintenance prices are much, much cheaper than in developed countries, making CERX operate with a higher margin against competitors. I will also remind everyone (and myself) that Colombia is the world's 4th largest exporter of coal. There are many prospective buyers out there.
    3. Balance sheet: In contrast to a typical exploration company, CERX is well financed. It  successfully completed an $8ML investment round lately (which initially started as a $2ML round but expanded with the demand of some "in-the know" large investors). Not only that, but 90% of its debt was converted to preferred shares, so its balance sheet is relatively neat and does not seem, in any way, like a typical debt-loaded balance sheet of a coal start up.
    Nevertheless, the risks are obvious:
    1. CERX is a development stage company. It is only in the process of conducting feasibility tests of its coal reserves.
    2. Colombia, although very kind to Foreign investments and corporations, is not exactly the prototype of safety.

    Conducting a thorough analysis on an exploration stage company is something beyond the scope of this article. From this point on , every investor must perform her own due diligence on the company and its prospective future.
    One thing I can say is that I recommend you patiently watch CERX.OB because Wall Street has yet to do just that.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am Long CERX.OB
    Stocks: KOL, ARCH, BHP, PCXCQQ
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