Matthew McConaughey and Bryce Dallas Howard in ‘Gold.’Lewis Jacobs
It had the trappings of a Hollywood hit: greed, gold, love, treachery.
No wonder the titanic hoax that was Bre-X Minerals Ltd. of Canada got a little star treatment this year, with the inspired-by-actual-events movie "Gold," starring Matthew McConaughey (reviews were mixed).
Bre-X, which collapsed 20 years ago, may be the craziest story that ever came out of the wild west of the junior mining world -- but it's hardly the only one.
Unproven penny-stock companies, in Canada or anywhere else, are never for the faint of heart. But add to that the strike-it-rich ethos of energy and mining, major drivers of the Canadian economy, and the results can be explosive.
No one is forecasting another Bre-X or suggesting these are frauds. Most juniors, as penny stocks are known in Canada, are perfectly legitimate. But volatility and unproven finds call for a heightened sense of buyer beware.
Take West High Yield (W.H.Y.) Resources Ltd., a Canadian miner that was virtually unknown before Thursday, when its stock surged as much as 956 per cent on the TSX Venture Exchange after it said it sold a magnesium deposit for $750-million -- 46 times its market value.
According to its statement, the buyer is Gryphon Enterprises LLC, which has no website. A Google search shows it operates from a modest two-story, beige clapboard apartment in Janesville, Wisconsin. The West High Yield filing says it's based in Swanton, Md. The Toronto legal firm Baker McKenzie, listed as representing Gryphon in the purchase and sale agreement, said it has no knowledge of the deal.
West High Chief Executive Officer Frank Marasco said the sale shows the company's shares have been "suppressed" for the past four years due to poor market conditions for junior miners. Stephen Cummins, CEO of Gryphon Enterprises who's had a previous run in with the Colorado Securities Commissioner for operating without a license, said via a Linkedin message that the sale is "absolutely a legitimate transaction."
"Deals like this, $750-million, are rare -- that should be enough to attract the attention all the way up to guys like Warren Buffett," said Tony Simon, a former junior mining deal-maker and co-founder of Canada's Venture Capital Markets Association.
Ask Questions
"The transaction takes two halves so it's a pretty basic question -- where's it going to get $750-million?" he said. "I would hope somebody would be calling and asking questions."
The stock was halted Thursday before the press release went out. When trading resumed, shares soared as high as $3.80, from just 36 cents the previous day. The stock was halted again Friday and hadn't resumed trading as of Wednesday.
"Given the magnitude of this transaction, we are in contact with the company to get additional information," said Hilary McMeekin, a spokeswoman for the Alberta Securities Commission, which regulates the Calgary-based company.
Brady Fletcher, head of the TSX Venture Exchange, wouldn't comment on the West High Yield case but said there are investor protections in place if there has been a "fraudulent misrepresentation."
"If there's something happening here that shouldn't be happening, we have the ability to unwind the trades and protect the investors," Mr. Fletcher said in a phone interview.
Eyebrows Raised
It's not the first time that companies on the TSX Venture Exchange have raised eyebrows.
"It's the wild west of exchanges," said Matthew Zabloski, managing director of Delbrook Capital Advisors Inc. in Vancouver, where many of the junior miners are based. "It tends to attract smaller-cap, less credible companies. My belief is that sometimes the exchange is more concerned about attracting listings then the quality of those listings."
The TSX Venture Exchange, with 1,710 listed companies as of Friday, is unique in its focus on small-cap companies. Traditionally considered an exchange for junior resource companies, it has recently been working to diversify its listings by attracting technology startups. It's an uphill battle, with 50 per cent of its market value and 60 per cent of its listings coming from the mining sector as of Aug. 31.
"Whenever you get into small and microcap land, you're going to end up with a less liquid market with less sophisticated investors -- and that always creates the opportunity for people to take advantage of retail investors," said Mr. Zabloski.
Stock Swings
The exchange is an attractive home for junior miners because its listing standards don't require any net tangible assets, earnings or revenue, but rather look for "significant interest in a qualifying property," along with investment pledges.
"We are not here to make investment decisions for people but we're here to make sure that those companies that list with us have at least the merits of a viable business plan," Mr. Fletcher said. "We're not interested in a company listing with us and being bankrupt two months later or six months later."
Penny stocks can gyrate wildly as individual investors chase high-risk, high-stakes gambles. They quickly dip in and out of positions, populate anonymous web forums, and can follow stock tips circulated by newsletter writers en masse.
Lately, that's led to stomach-churning stock swings.
Northern Dynasty Minerals Ltd., which holds rights in Alaska to what could be one of the world's largest copper and gold deposits if ever developed, peaked with a market value of almost $2-billion in 2011 before tumbling to less than $50-million. Its sole project, Pebble, appeared all but dead only a year ago after it was abandoned by Anglo American Plc and Rio Tinto Group amid a commodity rout. Then its shares more than tripled from October 2016 to February 2017 amid speculation U.S. President Donald Trump's administration would allow Pebble to move ahead. Since then it's lost 48 percent.
Novo Resources Corp. has spiked 10-fold since July after the company said it thinks it has stumbled upon a long-lost sibling of South Africa's Witwatersrand -- the world's biggest gold resource -- in a dusty corner of Western Australia. A two-inch lump of gold shown by the company in a YouTube video sparked investor euphoria, prompting geologist Brent Cook to say even if the theory held up, the company's $1.2-billion valuation was "just absurd."
The Venture Exchange says it's trying to give retail investors the opportunity to tap into early-stage, high-growth companies.
"That's what investors that participate in this market are looking for: that potential outsize return, but it comes with outsize risks too," TSX's Fletcher said.