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I Used This Analysis To Make 40% Shorting SFMI

Updated: May 16 2010 3:08 PM EDT

Silver Falcon Mining Inc Independent Research

Summary: Here's how this company works. The CEO is running two companies: Silver Falcon (OTC:SFMI) and Goldcorp but only actually owns a significant share (potentially a majority) of Goldcorp. Silver Falcon is renting some old problematic mines from Goldcorp for $1M/year but does not own the mines. Meanwhile the public is pumped Silver Falcon as if it is a viable venture, complete with a "live progress webcam" of some construction. The common stock doesn't have normal voting rights and is diluted constantly to pay expenses and salaries. SFMI can go bankrupt and the owners 1) make money from the property lease and 2) keep the land and mineral rights, the only asset involved between the two companies. 

Business Plan: The mines with historical output are owned 29% by Goldcorp. Therefore shareholders have legal rights to 29% of earnings after expenses. With Gold at $1250 this means an effective sales price of $375/oz. It gets worse. Anything transferred through Sinker Tunnel is subject to a 15% of net proceeds fee, payable to Goldcorp. This means that of the 29% owned properties, 29% - 15% = 14% is owned by shareholders of SFMI. For the stock to be worth anything at all, SFMI needs to be profitably mining from the 100% owned properties. 

There is enough weirdness here to assume this company has all odds stacked against it by way of the structure of the business and its minor progress in attempting to turn a profit. They literally have no money and are operating on hot air.

When a market goes into mania mode (as with gold) then anything related to gold is capable of doing irrational things, especially penny stocks. That's where a lot of the internet stock market gurus came from - they invested in penny tech stocks in the late 90's and made small fortunes (Lebed, T.Sykes, Michaell Parness, etc). None of those stocks are around today but at the time they were getting market caps in the hundreds of millions.

For a trader the most important point is that a stock like SFMI could go to ridiculous highs fueled by message boards and Gold itself. There could be a long period where the fundamentals do not matter because the people buying have no conception of fundamentals. If the people in the market don't care or are not aware that the business plan is doomed to failure, then the price will not reflect that either. A standard daily MACD indicator is great for timing stuff like this because it can keep a buyer or shorter out of trouble (don't fight the trend).

173,023,494 shares outstanding as of March 19, 2010. Market cap scenarios:
0.25: $43M
0.50: $86M
1.00: $172M

Stock promoters: Lebed.biz, The Stock Wizards, OTC Picks, Stock Egg. Promotions are quoting the War Eagle mines are adjacent to an open-pit mine owned by Kinross (NYSE: KGC) that produced $1.8B. These are references to the DeLamar mine that was closed in 1998 and has completed reclamation

Working capital: -$2,142,089. $1,500,000 needed to commence first phase of operations. $83,333/month due to Goldcorp beginning July 1st.
br> Annual Net Income
2008: -$3,294,256
2009: -$3,399,970
The company is leasing 174 acres of land from Goldcorp (filings) on War Eagle Mountain, Idaho for $1,000,000/year payable monthly. The same person is CEO and chairman of Silver Falcon and Goldcorp, Pierre Quilliam. The first thing to note then is that Silver Falcon Mining does not own any land and is paying Pierre Quilliam's other company, Goldcorp, six figures every month for the rights to the land. This represents a conflict of interest. Goldcorp gets paid whether Silver Falcon makes money or not. Where is the incentive for the founder of Silver Falcon to run a profitable business if his other business is going to make $1,000,000/year regardless of the outcome?

More...Pierre Quilliam owns 1% of the common shares of SFMI. He owns 33.7% of the shares of Goldcorp. Why would the CEO choose to own Goldcorp instead of SFMI? The reason is Goldcorp owns the only real assets between the two companies and is set up to make a ton of cash from SFMI. If SFMI fails, Quilliam and his partners get paid and does not lose any assets in the process. 

Goldcorp ownership breakdown:
Pierre Quilliam 67,201,796 33.7%
New Vision Financial BVI 51,944,080 28.0% *** WHO DO YOU SUPPOSE OWNS THIS OFFSHORE COMPANY? 
William Martens 16,750,000 9.1% 

An interesting summary of the conflict of interest

In 2009 the company diluted the stock by 51% to pay employees and rent. NYC office space is secured with 1.25M of common stock.

Some quotes from the most recent annual report:

"At December 31, 2009, we had two employees."

"Generally, from November to April of each year the road leading to the property is impassable because of snow." 

"We do not have any operating history as a mining company upon which to base an evaluation of our current business and future prospects. Furthermore, no member of our management has any technical training or experience in minerals exploration or mining. "

"We still need to raise approximately $1,500,000 in additional capital to finance initial operations at our mining site, which will consist of processing tailings left over from previous mining operations. We will need approximately $600,000 in additional capital to complete the next phase of our development program, which is a confirmation program to prove and locate reserves on our mining properties."

Some other research

Mr. Breitkreuz is employee #2 and estimates that he spends about 25% of his working time on activities related to the commencement of mining operations on War Eagle Mountain through Goldcorp and Silver Falcon.

The common stock is Class A and has 1 vote per share. Class B has 40 votes per share. The net effect is the directors control 27% of the voting rights.


Disclosure: Short

Disclosure: Short