Stock Market Research Report, Penny Stock Research Report

1)Friday April 8, 2011

If you've been with me for a while you will recognize that we have been very fortunate with my oil and gas picks. Usually only one or two per year and they end up being bought out. The past few months however we have ramped up that oil exposure to take advantage of the very strong outlook for oil

In 2009 I picked Highpine (HPX) near $3.80 and within 3 months it was bought out for $7. Next pick was Great Plains (GPX.T at $0.28) and while we received $0.48 on a buyout by Sept 2010, the price was lower than expected because of excess dilution in the summer.

Prospex (PSX.T $2.35)
www.psx.ca

This was my next pick in October 2010 at $1.25 and from day one I have said it would likely be bought out within a year. Initial target was $2.50 to $3.00 but this morning a buyout has been made for $2.40.

While we have now made almost 100% within six months, I personally think we're getting shafted. The company is very heavily weighted to natural gas (which obviously hurts the valuation) but their book value was over $3, they increased production significantly in 2010, and they recently announced they should be able to grow (minimal) 2011 year end production to at least 6000 boepd.

Even with all these "positives" and stating earlier they would shop the company around because they felt it was so undervalued, the board of directors this morning has accepted a ridiculous $2.40 offer (or share swap) from natural gas heavyweight Paramount Resources (POU.T $32.60).

What I find particularly annoying is that management and directors have voted unanimously in favour of accepting this deal from Paramount. They only own 5% of the outstanding stock !! How can this decision to accept such a low offer be in the best interests of the other 95% ?

I agree that pricing for natural gas is weak, but the outlook (because of nuclear) just started to improve and they stated publicly they would increase their weighting to oil - which is now over $110. This seems like a very opportunistic bid that benefits no one but Paramount. I am shocked that this is the best PSX management could come up with.

Normally I would personally sell into the open market, take the cash and the gain, and then look for other areas to invest the money in - as I have no interest in owning a $32 natural gas stock (Paramount). However in this case, I am waiting until the shareholder vote in May to see what general consensus will be.

If the majority vote in favour, I will sell then. Otherwise I will hold out for a better offer from Paramount or someone else. If nothing decent by summer I will sell regardless. For now I am treating this Paramount price of $2.35 as the new benchmark and we'll see if there is any decent value in natural gas or not.

2)Tuesday August 23, 2011

Rockwell Diamonds (RDI.T $0.55)
www.rockwelldiamonds.com

This company came to my attention months ago and I was extremely impressed with the fundamentals. However, they had 525 million shares outstanding and I always avoid companies with that type of share structure. Fortunately in July they took the plunge and did a 15:1 rollback so now there are only 35 million shares. The next challenge was monitoring to see how much paper would come out because trading has been thin the past couple years - even with so much paper outstanding.

As I watched through July it was very tightly held. As markets continually sold off in the first ten days of August, shareholders still sat tight. Even on the worst days of the recent market collapse, sellers still struggled to sell in the $0.50's. Between August 1 and 8 it sold a total of 184,000 at an average of $0.57. While there are good and bad aspects to this, it was a perfect time to test the resilience and support levels of the current shareholder base. In particular, August 8th when the markets were collapsing, RDI had a positive news release out and the only selling was mid/high $0.50's - there was zero selling pressure on one of the worst market days in two years - a major vote of shareholder confidence for Rockwell.

Because of how tightly held this shareholder base is, this cannot be viewed as a short term trade. My personal plan is to hold one, maybe two years. Given the underlying fundamental value and how significantly undervalued this company is, it may take time to fully realize its potential - which I believe could be worth several dollars within 12 to 18 months. The outlook for the diamond industry (thanks to India and China) is strong and Rockwell specializes in big investment grade rocks - for the past several years they have produced several of the world's most valuable diamonds.

During the market selloff I noticed one seller finally appeared with 60,000 shares at $0.60. This will create much needed liquidity at $0.60 but my hope is that he (or others) will continue to feed paper in the high $0.50's in an effort to raise extra cash while new buyers are available. At some point liquidity will improve overall but we don't know the price point for that - and the whole point is to try and accumulate paper from bored shareholders as cheap as possible and while the market outlook is uncertain.

Many wealthy investors around the world like to invest in expensive diamonds.. Few of us can afford this and there is poor liquidity in such a strategy. I believe the alternative is to invest in the miner of such high quality rocks and do so while the overall valuation of the company is completely overlooked.

A perfect example of how this can work was provided August 8th when Rockwell announced at one of their mines a windfall day in which total carats recovered was equivalent to two weeks production - within that batch were four large gem quality stones of 180, 94, 43, and 34 carats. Rocks from this mine typically average $2000 per carat - by comparison, Canada's Ekati produces small rocks valued at $440/carat (but in much larger volume).

Rockwell also has an agreement in place with one of the world's most respected diamond cutters and jewellers (Steinmetz Diamond Group). The agreement states that anything over 2 carats will be cut and polished and split 50/50 with Rockwell. This means that while the 180 carat stone just recovered may have wholesale value in the range of $360,000 (180 carats x $2000 avg carat price), it could be worth well in excess of a million dollars to Rockwell by the time it finds a retail buyer.

Today is a basic introduction of Rockwell only so please visit their website and view the videos on their home page. In coming months I will provide much more research as to why this will form a core longer term holding for us.

Liquidity will improve as it moves into the $0.60's, but in theory a person wants to pick away in the $0.50's and try to attract sellers on weak market days.

GENERAL OVERVIEW

Shares outstanding: 35 million
Market Cap at $0.60: $21 million
Net Book Value of Processing Plant, Facilities & Equipment: $63 million (cost $101 million)
Revenue for Year Ending Feb 11: $42 million (cashflow $8 million)
Q1/11 diamond sales estimated at $9 million

Current Financing: Estimating $20 million at $0.75
July obsolete equipment sale raised $6.5 million

Rockwell owns 14 prospecting rights comprising about 30,000 hectares of alluvial diamond potential in South Africa. They arefocused on increasing production to 10,000 carats per month within five years. The Company has the capacity to deliver this growth, organically, through the development of its significant resource base, and is advancing plans to access the capital necessary to meet its production goals. Current production of some 2,500 carats of large gem quality diamonds per month is derived from two operations, the Holpan/Klipdam mine and the Saxendrift mine - both in South Africa.

For the past several years Rockwell struggled with profitability and mine efficiency. In May to help turn the company around, they hired James Campbell as CEO. James spent 20 years with DeBeers and was also a former personal assistant to Nicky Oppenheimer, the Chairman of DeBeers. On the board of Rockwell is Mark Bristow who is expected to become Chairman of Rangold. The following is a recent media quote from Bristow:

"Mark Bristow has described Rockwell as a 'platform to build a very exciting business, not too dissimilar to the way we started Randgold', which has grown from a penny stock ten years ago into a company valued at over $5 Billion. Alluvial diamond deposits, though rich, can be erratic, and Rockwell is targeting improved recovery rates."

1) Resource Properties per Financial Statements: $130 million / Adjusted Book Value: $155 million
2) Total Projects Value per 3rd Party Evans & Evans discounted cashflow method: $125 million *
3) Total Projects Value per May 2011 Internal Economic Assessment : Avg $139 million / Using Escalated Diamond Pricing $363 million **

* In July Rockwell released the results of an independent valuation. The valuation was conducted by Jennifer Lucas, MBA, CBV, ASA, of Evans & Evans Inc. following an in-depth review of the company's publicly available information and filings, in addition to interviews with management from which she gained an understanding of the history, background and future growth plans. That valuation of $125 million is shown in (2) above.

** Following the appointment of James Campbell as CEO in May, they released the following:

"We have a sound understanding of our resources and have published a technical report for each of our properties. Having completed a strategic review of the business at the beginning of this year, we have a full understanding of what we need to do to improve our financial performance. We are totally committed to sustainably improving our diamond recovery and thus accreting revenue and profitability in order to close the value gap."

Preliminary Assesment: Project NPV (net present value) at 20% discount rate - I also showed the comparable valuation arrived at by Evans and Evans.

1) Wouterspan - recommision within 2yrs - $53 million or $130 million NPV using escalated diamond pricing. 42 million m3 at 0.7 ct per 100m3 / $2,029 per ct average sales value / 11yr mine life / capital $18 million. Evans valuation: $50 million

2) Niewejaarskraal - recommision within 2yrs - $54 million or $128 million NPV using escalated diamond pricing. 21 million m3 at 0.84 ct per 100m3 / $2,029 per ct average sales value / 6yr mine life / capital $19 million. Evans valuation $40 million

3) Saxendrift - reaching end of mine life - $10 million NPV. 5 million m3 at 0.5 ct per 100m3 / $2,029 per ct average sales value / 3yr mine life / capital - nil. Evans valuation $16 million

4) Tirisano (Production target mid 2012. Awaiting transfer of mining rights) - $22 million or $95 million NPV using escalated diamond pricing. 41 million m3 at 2.4 ct per100m3 / $606 per ct average sales value / 19yr mine life / capital $11 million. Evans valuation $19 million

The realistic valuation of this company based upon discounted cashflows (both internal review and by Evans and Evans) appears in the range of $100 to $130 million - much higher if escalated diamond prices are taken into consideration. This number is also backed by the value of plant and equipment - keeping in mind the discounted cashflow or NPV value takes into account future cashflows generated from future diamond mining production - the NPV is always dramatically lower because it takes into consideration the time value of money, risk, etc.

I then compare this value to the current trading range to assess our risk/reward. In this case that risk/reward appears very strong if a person can get paper in the $0.50's because current market valuation to $0.60 is only $21 million and it leaves tremendous room for capital appreciation.

3)Tuesday December 13, 2011

Takeover Offer for Crocodile Gold at 60% Premium

I know cash has been tight for many of you but I sure hope a few were able to take advantage of my report two weeks ago on Crocodile Gold. I took some flack for this one from a few professional money managers who said I must be out of my mind for writing CRK up -in fact, I had to follow up with another report the next day to further explain myself (although I am still not sure why I felt that was necessary).

Well for all those Crocodile Haters - the company has a takeover offer tonight and anyone who bought will have made 60% in two weeks. I know these little stocks have been terribly frustrating lately but this takeover is the perfect example of why my bottom fishing strategy makes sense in this market. I expected we would wait one or two quarters into 2012 for "any" type of decent bounce on CRK but the whole point was to manage risk and target realistic gains for next year.

As I indicated at the time, CRK also gave us the opportunity to lock in tax losses on less attractive companies, and re-deploy the money into something stronger. Hopefully that worked for a few of you.

Tonight's offer on a "per ounce basis" is still terribly low but I have been saying since summer that junior gold stock speculators need to have a much more realistic outlook on valuation. The Croc offer only re-affirms that companies are trying to build ounces as cheap as possible - and unfortunately these offers are very opportunistic. Luxor Capital is the large shareholder making the offer and depending upon what the board suggests, we "may" be able to hold out for a higher price.

Even with the beating gold has taken the past week, I still think these golds are going to bounce back in January (somewhat). If that occurs before this goes to vote, then we might squeeze out more. Personally I am going to hold my position for a month or so and see what transpires. Either way, the 60% should be a lock-down.

Crocodile investor Luxor to make 56-cent takeover offer

2011-12-13 18:57 ET - News Release

Investment funds that Luxor Capital Group LP manages intend to directly or indirectly initiate an offer to acquire up to 215,386,435 common shares of Crocodile Gold Corp., which, together with the common shares already owned and controlled by funds managed by Luxor, would constitute approximately 85 per cent of the outstanding common shares. The purchase price under the offer will be 56 cents per common share in cash.

The offer represents a premium of 60 per cent to the closing price of the common shares on the Toronto Stock Exchange on Dec. 13, 2011, the last trading day prior to the date of this announcement. It also represents a 61-per-cent premium to the volume-weighted average trading price of the common shares for the last 20 trading days prior to the date of this announcement.

Original November 30th MicroCap.com Report

Assuming Wednesday is indicative of a near term bottom, I am introducing another company in the gold sector as the commodity continues to look great. Just keep in mind that microcaps will need to eat through three more weeks of tax selling.

The following is a very interesting bottom fish in the gold sector. Their gold in-ground valuation (especially for a producer) is extremely attractive and their chart position makes it a good one to do some portfolio shuffling.

Because it trades in the $0.30's a person can sell something less appealing in their portfolio and possibly swap it out for this one. For example, you might own 10,000 shares of XYZ stock trading in the $0.20's, $0.30's or $0.40's. If you paid substantially more and could use the tax loss, you would sell XYZ and re-invest in CRK and get a similar number of shares in a stronger company (in theory).

The risk in this strategy is that CRK remains stable or drops heading into January, while XYZ moves higher.

Crocodile Gold (CRK.T $0.36)
www.crocgold.com

Crocodile is a Canadian company with operating gold mines in the Northern Territory of Australia and a land package of over 3,300 sq. km. They are currently producing from the Howley, Princess Louise, North Point and Mottrams open pit mines. The flagship property for the company, Cosmo, is currently being developed as an underground mine with production ramping up into 2012.

Crocodile Gold has 3.2 million ounces of NI 43-101 compliant measured and indicated resources and 2 million ounces of inferred resources. Their main focus is on the Cosmo/Howley corridor which contains a substantial amount of the Company's resources within a five kilometre strike length of a 25 kilometre trend.

52wk High $1.63 Low $0.32
Shares Outstanding: 320 million / market cap $115 million / Financials as at Sept 30th
Cash and Receivables: $60 million / Inventory $9 million / Plant and Equipment $38 million
Accounts Payable: $15 million / Provisions $14 million
Last financing March 2011: $81 million at $1.05 with $2.25 warrant

Nine month revenue: $90 million ($3 million operating loss)

Very Attractive Gold Ounce Valuation

I am offsetting their $14 million in provisional liabilities with their inventory and ignoring the value of the plant and equipment. If we then take their $60 million in cash & receivables less the $15 million in accounts payable, we are left with $45 million.

Subtract the $45 million from their market cap of $115 million and the market currently values their gold resources at $70 million. We will assign 80% of that value to measured and indicated (M&I), and 20% to inferred.

I. M&I $70 million x 80% = $56 million / 3.2 million oz. = $17.50 per ounce
II. Inferred $70 million x 20% = $14 million / 2 million oz. = $7 per ounce

Heavy rainfalls last year this past year hurt Croc's production targets and operating costs. The company hopes to turn this around in 2012 but even without this, the underlying value of their gold is incredibly low for a producing company with large reserves in a stable country.

The large share float is hurting their share price even worse than normal but I am convinced there is substantial opportunity here.

WE ARE ALSO ADDING VICTORIA GOLD

Victoria Gold (VIT.T $0.36) - volume 256k
www.vitgoldcorp.com

Shares outstanding: 341 million
Yukon Gold Project: 6.3 Million Oz. (valued at $14/oz)
Cash: Approx. $30 million
Institutions own 65% including Kinross at 16%

Victoria Gold is targeting the Yukon's first new gold mine by 2014. Production would be 175,000 ounces per year with cashflow in excess of $200 million annually at current gold prices.

Corporate Presentation:
http://www.vitgoldcorp.com/site/vitgoldcorp/assets/pdf/VIT_November_Corporate_Presentation_V4__3_.pdf

I am not a fan of the shares outstanding but it doesn't take away from the grossly depressed value of their gold ounces. This is another one that really stands out from the table I posted last week on ww2. Their last financing was only 2 months ago when they raised $30 million at $0.46 with a $0.55 warrant. I find it very frustrating to see these companies financing when prices are so depressed at it really hurts existing shareholders who paid much higher. However, so long as we are on the bottom-fishing end and not the ones being thrown to the sharks, it is a mute point for the time being.

The company hopes to release a feasibility study in Q1/12 and targeting a mining license by Q3. They estimate initial capital cost of $350-million to build an open-pit mine at Dublin Gulch, with mine life at 40 years. In Nevada, they are also drilling a project which is adjacent to Barrick's recent discoveries.

4)Monday January 30, 2012

China / Volta Strength / Our Other Gold Picks

China's economic growth is a mystery to the number crunchers.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100014380/china%E2%80%99s-very-mysterious-data/

... also their insatiable appetite for gold

http://www.theglobeandmail.com/report-on-business/international-news/global-exchange/financial-times/china-leads-the-goldbugs/article2301468/print/

1) Volta Resources (VTR.T $1.19)
www.voltaresources.com

Shares outstanding: 155 million
Working capital Sept 30th: $55 million
Last financing: August 2011 - $40 million at $1.90

I have been reporting on Volta since December with updates as low as $0.85 - the last was January 16th at $1.02 because the drill results released were excellent. The company has an estimated 5.5 million ounces gold which is valued around $23 per ounce - this excludes over 700 million pounds of copper.

Their first prefeasibility study is due within the next two to three months. While this should add more value, our primary interest in Volta was buying dirt cheap ounces. Now that money is beginning to assume more risk, stocks like Volta are attracting attention again. Mid December this stock could be bought for half the price they raised $40 million at in August.

Today there was an abnormal jump in price (18%) on solid volume. Every time the stock tried to break $1 throughout January, it was slammed back down. Finally that trend was broken today and the new support level should now be the previous resistance point at $1.

This has been a priority gold speculation for us and we will continue to hold and follow them into Q2. Crocodile gold (CRK) was another but we were fortunate to see it bought out within two months. I am not expecting the same for Volta anytime soon but I would hope we can do much better than the 40% we have seen since mid December.

2) Victoria Gold (VIT.T $0.47)
www.vitgoldcorp.com

Victoria was another of the core gold group. Featured December 19th at $0.36 we were up 35% by today but the stock pulled back once testing $0.50. Last week they announced that mine construction will begin sometime this year. They have $33 million in the bank and 6 million ounces in the ground. That gold is only trading at a value of $20 per ounce so we still have plenty of room for appreciation. My main concern is their sloppy share structure with 340 million shares outstanding but with half-decent sector strength (or a move in the price of gold closer to $2000), we should still do very well with it.

3) Kiska (KSK.V $0.29)
www.kiskametals.com

Coverage started in November but with several updates we have been able to bottom fish this stock as low as $0.26 - by early January we were up 50% on a run to $0.42. Unfortunately some seller under "anonymous" continues to pound the stock.

Since the first of January they have dumped 2.9 million shares and are by far the biggest seller in January - 2.3 million in the past week alone. Given the size of the orders and the fact they are selling through an anonymous firm, it is likely a fund liquidating their position. Hopefully they are done soon. Exploration will not start again in Alaska until spring so this is hurting the stock, but the value is very low at $10.75 per ounce.

Gobimin as I have discussed extensively over the past week has ridiculously cheap ounces but they are also based in China. For many of you it is hard to overlook the risks of China and I can fully appreciate that - which is why I have presented several excellent gold alternatives over the past few months in CRK, VIT, VTR, and KSK.

I also featured Sunridge (SGC.T $0.54) mid November at $0.38 and we are currently up 40% but I am on the fence with this one as I am cautious over Eritrea. Majescor (MJX 0.23) I briefly noted a month ago at 0.21 but they are in Haiti and the country risk there is also an issue for me. If both these don't move higher in coming weeks we might sell them.