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4/6/09

Capella Resources (KPS.v): A fraudulent scam for the ages

My jaded cynicism of Canadian junior miners, their scams and dubious managerial decisions designed to screw retail shareholders is well documented on this humble corner of cyberspace. However, every now and again a story comes along that leaves my jaw 100% dropped in amazement. Thus begins this post on Capella Resources (KPS.v) a company that has screwed its shareholders so far into the ground they're currently visiting the Mohorovicic discontinuity.

This story is so impressive it's difficult to know exactly where to start, so let's start here with the 12 month price chart

Yep, that's one helluva price jump recently, isn't it? The reason behind that jump is in this press release. The company hit a very nice drill return at its 'Lajitas' project in Chile (just a couple of clicks from XRC.v's Caspiche project, matter of fact). Here's the moneyline from the PR:

CAPELLA RESOURCES LTD. (TSX-V: KPS - News) (Capella or the Company) is pleased to announce drill results (drill hole LJ-08011) from the Company’s 100% own Lajitas gold project in northern Chile. The core drilling intersected a zone of continuous gold mineralization of 261 meters grading 0.91 grams per tonne (g/t) gold between 90 meters and 351 meters down the hole. Contained within the intersection is 104.7 meters grading 1.59 g/t gold

The PR comes with other bits of good news, but to cut a long story short KPS.v hit paydirt on this drillcore and the price shot up. Nothing wrong with that, of course. This is the whole reason behind the high risk high reward world of junior mining investment. Except that just before this sexy press release hit the wires, KPS.v took all the reward away from its shareholders and gave it to its own management team, gift-wrapped with a bow. You need to follow the time line here to get the full picture, so here are a few bullet points:

  • On June 19th, KPS.v announced it had stopped drilling due to bad weather at Lajitas. Anyone who knows the region in question at that time of year will understand why. The drilling was stopped when the final hole reached 91m depth. It beats me why they were even attempting to drill there at that time of year, to be honest. 'Hostile environment' is putting it mildly.
  • On October 30th drilling started on the 2008/2009 campaign. Note that the first drillcore that was taken from the 4,000m program is the one that had its results announced on April 2nd 2009 and made the stock fly. Don't you find it strange that it took KPS.v five months to drill 261m, log it, split it, send it down the hill to the SGS labs in Chile (SGS is a labtest company with an impeccable reputation, it must be said) and then finally get the news out in April 2009? Well it's even stranger when you find out what went on at the company between October 2008 and April 2009.
  • On October 31st, the fun began. KPS.v decided to do a 10-to-1 reverse share split. Here's the moneyline from the PR:

The Company currently has 66,832,174 issued and outstanding common shares. If the Consolidation is conducted on a ten (10) for one (1) basis, the Company would have approximately 6,683,217 shares outstanding following the Consolidation.

Or in other words, if you were (just as one example) one of the shareholders who had participated in the $10m placement back in 2007 organized by Dundee, every 10 shares you owned at the time (that you bought at $1.10) were to be converted into just one share.

  • On December 24th, Capella began trading again at just three cents. Amazingly, it's the very same day that the CFO locked in that price by awarding herself stock options priced at 3c. Merry Christmas to you, Barbara Wolanski.
  • On March 4th, the big switcherooney. Firstly, KPS.v quickly and quietly raised $1m in capital by offering a share at 6c and a warrant at 15c. This means that suddenly the share count that was slammed down from 68m to 6.8m was now back up to a fully diluted 40m or so (and those 15c warrants are now waaaaay in the money). Then KPS.v management decided to swap debt owed by the company to insiders for shares at 6c. (For future reference, the escrow period ends June '09). The deal, for example, handed two million shares over to the CEO, Richard Bachman. Plenty others got their slice, including the "43-101 independent qualified person".
  • On March 24th, the transaction closed. Adding the debt-for-shares to the share count, we're now at 46m or so shares out. It's extremely suspicious that the company didn't want to have 68m shares outstanding to any old shareholder back in 2008, but suddenly it was cool about having 46m shares out when those shares had been sweethearted to friends and insiders.
  • So we return to April's drill result announcement when that very same "qualified person" signed off on the five month delayed drill results that shot the share price from pennies to over a buck! More coincidence is that the paydirt drill return started at 91m below ground, exactly the same place where drilling was stopped in June 2008. Well, better said "supposedly" stopped, because if you believe in this many coincidences that bridge of mine is still for sale.
  • And then two days later on April 3rd (last week) the company announces it's raising $5m with a $0.73 placement! Not only that, but KPS.v announces that it's going to give away nearly 2m stock options as "incentives" for management.

Ladies and gentlemen, these people belong in prison. This is fraud, quite plainly and simply. People like CEO Bachman should be arrested, locked away until tried, then stripped of assets, liberty and social standing by an honest day in court. On December 24th 2008, the company had a market cap of $204,000. At Friday's close, that market cap had shot up to around $38m, an increase of nearly 200X in a touch over three months and it's all suddenly in the majority hands of management and friends of management. So where is the OSC on this one? Who will stand up for the people screwed by KPS.v in 2008? Where is Dundee and why haven't they said a thing about this? Who were the "lucky ones" that so quickly bought in to the $1m share offering in March that added a cool 33m to the S/O total?. Canadian mining reporters at FP/NP, Globe&Mail etc, why aren't you on this case yet?

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