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Dirk Burhans
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Dirk Burhans has worked as a biologist and data analyst for 20 years in the fields of avian ecology, wildlife management, and hospital research. An amateur musician, he also authored the potato chip history CRUNCH! (2008, University of Wisconsin Press) and currently is author and artist of the... More
My company:
Towsley Gulch Resources LLC
My book:
Crunch! A History of the Great American Potato Chip
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  • Re-entry velocity: Examples with five junior miners


    The past several months have been just chock-full of unbelievable one and two-day gains for certain junior miners and explorers, most of them based on virtually unforseeable events.

    For example:
    If nothing else, the above events show just how dependent on external events--mergers, permitting, court rulings, and geopolitical risk--that mining shares, especially those of juniors and explorers, can be. This caprice can work the other direction as well, as when South American Silver (SAC.TO; pink: SOHAF) lost 38% of it's value over several days with news of a Bolivian threat to "recover" state ownership of mines.

    Fair enough; as Groucho Marx said in Animal Crackers: "all the jokes can't be good; you've got to expect that once in awhile." Similarly, not all juniors can be winners (although SAC.TO remains an excellent company in my book!).

    What to do?
    If you already own shares in the five miners bulleted above, you're a happy camper! Your only regret is that you didn't buy more! But what if you don't own them yet? Or, what if you already own them, and want to increase your position?

    Lucky you! The mining sector sells down hard, especially with drops in broad stock market sentiment... and we certainly have had our share of recent volatility! As Sean Brodrick said the other day, "it's hard to analyze a market when you can't read Angela Merkel's brain." The ongoing European debt crisis makes for buy opportunities not only within the ups-and-downs of today's headline-driven markets, but also at the end of what is almost certainly to be a new low in the ongoing secular bear market that began in 2000.

    How to initiate this? Taking a look at Revett's recent rally and pullback as an example:



    As many know, stocks have predictable reversal levels that can be projected using Fibonacci retracements. By plotting the retracements at the start of the advance (or decline) as above, it is possible to make fairly reliable estimations of likely re-entry points. For example: waiting patiently for your pullback to $4.75 on Nov 25th was certainly a better strategy than euphorically chasing $6 shares of RVM.TO with the rest of the crowd on Nov 16th! Had you timed this perfectly, you could have booked 20% profit in under two weeks... despite having missed the initial breakout!

    So given all of the above, what are some reasonable re-entry points for the 5 stocks above? Here's what I would be doing (note: this is not investment advice!):
    • RVM: look for re-test at about $4.68 (RVM.TO ~ $4.82 CDN)
    • RPM.V: re-entry at 50% (0.60 CDN) and 61.8% (0.56 CDN)
    • CZN.TO: it might be best to wait for the high to play out, but right now 0.70 CDN appears to be a likely pullback area;
    • MGN: 2.20 or 2.30 USD would be the 61.8% retracements depending on whether you use the high or the close, but... MGN seems to have a true-love affinity for the region between $1.90-2.00; personally, I snap up MGN anytime it goes below $2.00! This one is both a trading monster and terrific long-term prospect (but that applies to any and all of these companies).
    Finally...
    • What about SQI.V? It's already retraced to 50%-61.8%... we've already missed the boat!
    Or have we? There's a saying in technical analysis that "gaps are always filled." While demonstrably untrue--"breakaway" gaps may never be filled --in addition to acquiring a few shares in the 50% retracement range (to which it is close as I write), it nonetheless may be worth placing a bid at the base of the original run (here, 0.89 CDN):


    Can I rationally defend my belief that SQI.V will hit 0.89 CDN? Nope. But when I look at my miners as a group, all 30-to-50 charts together, there's often a couple of charts like SQI.V that seem "uneasy"... unresolved... or something like that. I could be wrong (and here's where it gets close to a trading-by-tarot sensibility) but my bet is that SQI.V fills that gap and hits ~0.89 when the European debt crisis finally drags all markets down worldwide--a 2008-like event--making for some terrific entry points for those brave enough to buy, as Danielle Park points out in a recent audio piece.

    Some caveats
    Trading and holding penny miners can be a notoriously risky business, as in the example below. A couple of rules of thumb may help:
    • Never spend any more $ on penny stocks than you can afford to lose;
    • Use stops;
    • Use the "sell-half rule"... when your stock doubles, sell half; you make back all of your initial expense, and you can let the rest ride. Even if the company goes out of business, you've at least broken even. Take the case of Azteca Gold, which had some very exciting findings in 2009 that were later revealed to be questionable. I bought this stock in the teens and could have broken even or doubled my money had I stuck to the "sell-half rule!" But did I? NOOooo! I was left holding the bag (along with many others) when the bad news emerged, and sold at a 50 percent loss! Wow, that was fun! Azteca is now trading under 1 cent per share!
    But even with the associated risks, the junior and penny precious metals mining sector remains extremely promising in the intermediate-to-long term. Miss the exciting recent run-up in miners? Never fear... even though the long-term trend is bullish, within the trend the sentiment in resource stocks at some point almost always becomes not simply muted, but so pessimistic that it reverses direction completely. With continuing high valuations for silver and gold, this makes for great buy opportunities in the compelling sector that mining has and will continue to become.
    __________________________________________________________________

    Disclosure: Dirk Burhans owns shares in all of the companies mentioned above except Azteca Gold.


    Dec 09 11:45 PM | Link | Comment!
  • Broad markets tumble: bad for stocks... buy opps on the way for miners!
    The fact that European sovereign debt crises are unresolved almost 3 years since Greek riots commenced shows how very reluctant politicians are to impose measures necessary to remedy the situation... this alone should tell us that the problems are both huge, and far from over.

    Today, the broad market indices are all down ~ 2.5% as I write, and gold and silver are taking a tumble. Think gold should be going up? Think again... until the bond markets ultimately fail, investors will continue to sell gold to pay margin calls, and run to what they consider the temporary safe-haven: the US $.

    Some indicators for the ongoing broad stock market breakdown:
    1. "death crosses" of 20, 50, and 200-day moving averages on $SPX and $COMPQ; see my charts, p. 5.



    2. Downward crossovers on Bullish Percent Index ($BPSPX)... now added below...



    How to trade this breakdown? One way is TZA, a leveraged 3X short small cap ETF.... must use great caution here because these leveraged ETFs can kill you on the way down... must use tight stops... if you don't know what "tight stops" are, best not to get involved here at all!

    But! Today's broad market breakdown is great for mining shares, which are not only below market valuations (in what Stewart Thomson calls the "gold and silver stocks gulag") but take extra-hard dives on such news. Even though gold & silver drop also, they will likely remain at decent support levels, making valuations of these companies one of the few bright spots in an otherwise baaaad stock market.

    If, like me, you bought mining shares over the past weeks, do not despair... today's losses will be the size of a flea on next year's charts....and better to be in the mining markets than not. Expect volatility until further notice!

    This can be a source of great anxiety for investors, especially new ones; to be in these markets, you have to have some faith in these sectors... if you can't take the stress, you may not want to be in these markets, period.

    How to proceed "going forward," as the pundits say nowadays?

    If you have dry powder left, continue watchful waiting for a bottom to be put in... I am looking at support levels across all miners on my chartlist, including a gapfill for SQI.V... (on page 5 of list) as clues/cues.



    Can prices drop lower? Oh, you'd better believe it. Stewart Thomson, interviewed in the September 2011 Morgan Report, talks of "risk capital" in juniors especially, and looks at it as a pyramid:
    "...Set that fixed amount of total risk capital and break it into chunks across what I call a price grid. So if you came in at $4, you want to be able to buy, preferably in a pyramid formation, so that your buys are getting bigger if and as the price goes lower. Of course you can take a break in the buy program and start another one. It’s like one pyramid stacked on top of another one. Those buys should go to core positions that aren’t sold."
    In other words?

    If we believe in the strength of precious metals, that metal values will make miners one of the few bright spots in the stock markets, and that fund managers will one day wake up to this, we ADD to miner positions on the way down instead of selling at a loss... and we keep these core positions. This is contingent on the particular miners we choose being quality outfits with good management. How do we know which miners are good? Do Your Own Due Dilligence (DYODD), subscribe to newsletters, and listen to the audio and video segments available for free from Howe Street, Morgan Report, Korelin Report, Jay Taylor, Zealllc, Sean Brodrick, and Jim Puplava... oh my gosh, there's so much good free information!!! and it's all out there if you just look.

    There's a "world ends not with a bang but a whimper" quality about market bottoms; they occur when we have given up all hope for a turnaround; we may be so resigned that we don't even notice them. But we are not in despair! We embrace the fall; we are looking to pounce (on miners), and will not let our emotions cloud our vision. End of sermon!
    ______________________________________________________________
    Disclaimer: I don't care for the off-the-cuff-say-whatever-pops-into-my-head nature of blogs and mostly don't read them, but my previous "instablogs" here involved such considerable research that they became daunting to write. In the interests of posting more frequently (and with the selfish motivation of keeping myself keep on top of markets), I now write more frequent and less in-depth blog-like blogs such as the above. And by the way, you are responsible for your own investment decisions; nothing I say here should be construed as investment advice!

    Nov 21 12:23 PM | Link | 1 Comment
  • The Blue and the Gold: Battle for the Drumlummon, Part II
    It's been a challenge for me to imagine the workplace atmosphere around the ol' Drumlummon Mine over the past month and a half. 

    Whether RX Exploration Inc's headquarters are brick, pole barn, or trailer, when I visualize the Drumlummon, I see a place where the CEO, CFO, Chairman, and founder skulk about the halls, pinning notes on doors, averting eyes, avoiding contact, not speaking... and probably far worse.

    How much worse? When prospective board nominees wanted to visit the mine at the end of May 2011, they were denied entrance, mostly on the basis of confidentiality agreements. A two-day battle ensued between the two parties, after which the prospective members finally were allowed to see the mine.

    I last wrote about the proxy contest for the Drumlummon on June 10, 2011, and in that article provided a brief history of the famed gold mine formerly run by the Rothschild family.  RX Exploration (TSXV: RXE.V; pink: REXXF), owner of the Drumlummon, in the historic mining town of Marysville, MT, is in the midst of a heated proxy battle for control of the board.

    On one side are the Gold: founder and VP of Mining Operations, Mike Gunsinger; Max Polinsky, Director, and President and CEO, Murray Nye. On the other, the Blue: CFO John Ryan, and Chairman John O'Donnell. To keep it simple, I am calling the "founders and management" the "Gold" group and the other group of managers and directors the "Blue" group, in accordance with their respective proxy ballot designations.


    According to an affadavit filed by former director Ted Ellwood, the serious problems began this spring, when Nye, Polinsky, and Gunsinger each submitted retroactive compensation agreements of $250,000 (to be increased later to $300K), also adding other options, bonuses, and perks. The Ellwood affadavit states that Nye, Polinsky, and Gunsinger "refused to back down from their unreasonable demands," thereby "causing considerable friction with the board throughout the early part of 2011." Events came to a head when Nye, Polinsky, and Gunsinger allegedly purchased over $1 million in equipment without first consulting the board. But all seemed well by mid-May, when, after removal of Polinsky as CFO, a compromise slate was agreed upon, and a proxy circular mailed.

    All that changed literally the next day on May 17, 2011, when Nye, Polinsky, and Gunsinger mailed the "Concerned Shareholders" group's alternative Gold proxy. Admittedly blindsided by the move, the Blue side regrouped, changed the June 7 meeting and election to July, and proposed a new board comprised of Darren Blasutti, Lorie Waisberg, Hugh Argo, Alex Davidson, Louis Dionne, and Paul Parisotto -- four of the latter also board members of Noront Resources Ltd. (TSXV: NOT). 

    Regarding the original charge -- about Nye, Polinsky, and Gunsinger's compensation agreements and dismissal of Polinsky as CFO -- the Blue group alleges that Polinsky was dismissed because of improper and unauthorized purchases, including the equipment mentioned above. The Blue group further argued that Nye, Polinsky, and Gunsinger's compensation demands were "significantly out of line... for a company at RX's size and stage of development."   When I asked Max Polinsky about the charge that the compensation documents were excessive, he told me that early on, Nye, Polinsky, and Gunsinger did not take compensation, were provided with no contract, and that the contoversial compensation agreements were "templates." "In January, I said, 'look -- here's a draft of what a contract should look like'," Polinsky told me, "and they went ballistic.

    "We would have clearly negotiated. It's a starting point," he said. When I asked Polinsky about his dismissal from the board, he replied that "they fired me because I questioned a $700,000 invoice, not because of the reason stated" (equipment purchases).

    The charges, counter-charges, and counter-counter-charges that continue are enough to make your teeth hurt, and unraveling them is like disentangling the nylon filament on an 8-year old's jammed fishing reel. As the battle wears on, new allegations that were absent the day before emerge like Russian Matryoshka nesting dolls. Nonetheless, I will try to list some of the main charges, named according to the proxy group's color:
    Gold charge: invoices of > $700,000 (over 4 years) from John O'Donnelly, mentioned above, were excessive.
    Blue response: Ryan said that these fees from 4-5 years' of work were standard, and would have been incurred by anyone doing the same work. Former board member Ted Ellwood, a friend of Nye who appears caught in the middle, at first questioned the charges but ultimately agreed that they were fair.
    Gold counter-response, Polinsky: "Sure, they're standard, if you consider $475 an hour standard."
    Gold charge: there is a conflict of interest regarding Ryan's involvement with JV partner Spruce Ridge Resources Ltd. (TSXV: SHL.V).
    Blue response, Ryan: Spruce Ridge's holdings only concern the old Drumlummon tailings, not future production -- RXE owns 50 percent of the tailings as well.
    Gold counter-response, Polinsky: Because of the relationship, Spruce Ridge could somehow make use of the RXE treasury. "Spruce Ridge owns [7.5 million] shares of RX, and they're out of money. What's the easiest way for Spruce Ridge to survive?"

    Blue charge:
    Bob Bannerman, Gold board nominee, is a "car dealer."
    Gold response, Polinsky: "He is a car dealer. He's a household name in Toronto" but was also a VP of Regal Goldfields LTD.
    Gold charge: The Blue slate does not have hands-on experience. Polinsky told me "I'm not here to disrespect anybody... but they're not really mining people." [They] "may not be familiar with the specialized mid-tier mining approach that is required." 
    Blue response, Ryan: "This is foolish. We needed to have a mining engineer; we needed to have a geologist. We have a mining engineer [Dionne], and Alex Davidson is a geologist."
    There are more charges about improprieties, billings, purchases, and loans that were not even publicized (to my knowledge) back in May when this first became public; if you can make sense of it, some of them are linked here are by Gold and Blue respectively.

    In the meantime, Sprott Assetts, well known to hard-assets investors, has endorsed the Blue proxy, as has Glass Lewis, "a leading independent governance analysis and proxy voting firm." About the former, Polinsky told me that "obviously someone spoke to them" and that Sprott is "probably not totally informed about the situation and ramifications..." Both Gold and Blue have Facebook pages, the latter page having been on Facebook longer as RXE's original page.

    Any prospective board member who has the guts to take all this on is to be congratulated for his/her bravery, and I wish the best of luck to RXE and the venerable Drumlummon. The board meeting is July 6, 2011, and the proxies must be filed by July 4. If you are a shareholder and want to vote Blue, click here. If you wish to vote Gold, click here. The order of mention of the previous was determined by coin toss.
    ____________________________________________________________________
    I thank John Ryan and Max Polinsky for their time. The previous article in this series incorrectly stated that Mr. O'Donnell has stepped down as Chairman; in fact he has agreed to step down as Chairman if Mr. Waisberg is elected to the board.

    Jun 21 11:51 PM | Link | Comment!
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