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7/27/08

Anatomy of a Canadian Stock Promotion (part 2)

In part one of this series, I outlined the idea behind this upcoming series of posts. I've identified (to my own satisfaction) a stock that trades in Canada and soon will be subject to a pretty classic promotion campaign. As a small reminder, I said these things about the stock
  • A junior explorer-stage miner
  • Excellent prospects at its new prospects and concessions
  • A team well versed in stock promotion
  • The promotion techniques I'm expecting the company to use will be (and I want to stress this) 100% legal.
So today a bit more about the bones of the promotion.

There are a few key ingredients for this kind of money making operation. The most important is that the company in question has a believable content. In the case of this junior miner, it has taken control of a large geographical area that will almost certainly return excellent drill results when the time is right (which is, by my reckoning, early next year). It will also have positives on its geographical location, absolute size of concessions held, low relative political risk to peers and other advantages. The project does have several weak points imho, but I expect these will not be dwelled upon too long by its IR department.

The second most important ingredient is to assure the key players have a clearly laid and profitable exit strategy in place before the promotion process begins. In the case of this stock, the track record of the assembled team suggests that the end objective in this company is not to make a mine; the end objective is to make money. Therefore the timing of the promotion is likely to coincide with the time that the original private placements that funded the company are totally vested and those holding the stock are allowed to sell, according to TSXV rules.

The make-up of the assembled team is important. In the case of our target stock, many of the assembled team have worked together before, including the company directors and managers, the placement holders who provided the company with seed capital at favourable terms, the investment relations manager, to even the original concession holder that sold the promising concessions to the company. Also, the team has a track record in other stocks that leads one to believe they have the objective of short-term financial profit, and are not so interested in actually moving a mine towards production. This claim is one that can be denied by the company, of course. However I make this call by looking back at the track records and not at the company's own forward-looking statements.

Another key element is good bona fides. In the case of our company, it is able to point to on-board geological experience amongst managers etc, clear financial know-how and track record in fund-raising, a leading Canadian brokerage house as consultant (that will most probably publish a positive report on the company at the appropriate moment) and a very large producing miner as an early-stage strategic partner. All these things will lend the necessary credence to the project.

As mentioned before, I believe that the promotion will be 100% legal and will try my hardest throughout this series not to pass any moral judgement. The idea of these posts are to inform a wider audience on exactly how stock promotions take place and how the retail investor is at a considerable disadvantage. So now that the scene is more-or-less set by the first two posts, next time I'll reveal the name of the company I have identified and we can start looking at the specific details of its operation and how the promotion will probably unfold.