From Rouyn-Noranda, Quebec:
Kent Exploration (KEX, TSX-V) has been beaten up badly since May 27 when it came out with very encouraging drill results from its Gnaweeda Gold Property in Western Australia. The stock gapped up that day to 21 cents and closed at 18.5 cents on just over 3.5 million shares. Including today, it’s down 7 of the last 8 trading sessions and as of 1 pm eastern time today Kent is off another penny to 11.5 cents. What are we to make of this?
The primary problem with Kent is that it and many other companies, big and small, got blindsided recently by Australian Prime Minister Kevin Rudd’s ridiculous proposal for a 40% tax on profits generated from resource projects in that country. Capital can be scared very easily by government stupidity and incompetence anywhere. And when capital gets scared, it often flees very quickly to safer, more hospitable jurisdictions. We’ve seen excellent examples of that in Canada with how the socialist NDP regime in British Columbia in the 1990’s nearly killed the mining and exploration business. In Alberta, a Progressive Conservative government introduced higher royalties for the oil and gas sector in 2008 which had an immediate and damaging affect on that sector in Alberta – capital fled to neighboring Saskatchewan where it was greeted with open arms. There have been so many examples throughout the world where governments have simply come out with bad tax and mining policies that have ultimately come back to haunt them. As investors, we need to be very careful about this important risk factor.
From here in Rouyn I contacted Kent President and CEO Graeme O’Neill yesterday afternoon (Kent was at the World Resource Conference in Vancouver). Needless to say, O’Neill is flabergasted at the Australian government’s proposal but boldly stated, “It will never see the light of day”. In a case of horrible timing, Rudd’s proposal last month came out at almost the exact same time as Kent was nearing completion of a $1 million financing for its Archean Star spin-off. Investors got spooked, not surprisingly, and the Kent spin-off now appears to be on hold for the time being.
O’Neill says he’s reviewing many options and insists Kent is going to “survive and thrive”. He’s a tough competitor and effectively steered Kent through some very difficult times in 2008 and early 2009 when the market crash threatened the very existence of many junior exploration companies including Kent.
Another unfortunate aspect of the Australian’s government’s proposal is that it has taken the attention away from a very good drill result Kent reported from the Bunarra Zone at Gnaweeda – 18 metres grading 11.09 g/t Au at a shallow depth (below 150 metres). Results from the more advanced Turnberry Prospect weren’t as good but that property still has excellent potential.
Besides Gnaweeda, Kent has a valuable asset in its Alexander River Gold Project in New Zealand which, unlike Australia now, is regarded as politically safe territory. In Washington State, Kent has a high grade barite project at Flagstaff.
Kent‘s stock has very strong technical support at 10 cents, so the downside risk at current levels appears to be quite low.
Elections are coming up in Australia later this year and the possibility of the Rudd government getting defeated or dumping its proposal certainly exists. Rudd is under increasing pressure as evidenced by Xstrata’s move last week as it announced it will axe investments worth $496 million in two projects in Australia which puts the creation of 3,250 jobs at risk.
At BMR, we still like Kent from a long-term perspective – and we like it even more at current levels. The near-term picture is obviously a little cloudy. Quite simply, the company needs to raise some money but we’re confident it will. O’Neill says he will continue to fund the company personally if he has to.
This experience with Kent demonstrates the critical importance of holding a basket of stocks in a junior resource portfolio and not putting everything in just one or two plays. No matter how good a particular stock may look, there are no 100% guarantees and there’s always the risk of getting blindsided by an outside event. The greatest stock picker in the world can never be right 100% of the time. For those who are looking for a strategy to minimize risk in the volatile junior markets, automatically selling a stock as soon as you have a 10% loss is not such a bad idea.
Another good strategy quite often, of course, is to buy when everyone else is selling. Investors have been dumping Kent ruthlessly lately and at some point soon the selling is likely to abate and bargain hunters will jump in.
