Tuesday, January 05, 2016

Kaizen Discovery And Japan

Kaizen Discovery (Canadian ticker KZD.V, US ticker CCNCF) is another junior resource development company. It touts its connection to major Japanese trading house ITOCHU Corporation as validation for its project generator model. Strategic support for a raw material supply chain is nice to have but it cannot be a dominant factor in a company's valuation. Corporate customers can only buy what a resource company can produce. Only economically attractive properties go into production or get acquired because industry will never overpay for any globally available commodity.

The current CEO trained as a lawyer, not a geologist. Folks, a mining company must have a geologist at the helm if it wants my respect. Geologists are people who find valuable ore in rocks. Lawyers argue about what the word "rock" means in a lawsuit. It's nice that their exploration EVP has a doctorate in geology. I hope lawyers don't overrule his exploration plans. Hope is not a method but it's all some junior resource companies own sometimes.

This company has over half a dozen projects currently under exploration in different parts of the world. I can't call any of them successful until they demonstrate discovered ore grades an acquirer would find attractive. That is the whole point of a project generator business model. The grades discovered on those projects so far, even with NI 43-101 reports, aren't getting me all excited about future mine viability.

I checked out their most recent unaudited quarterly financial statements dated September 30, 2015. They had CAD$2.5M in cash on hand and a net loss of -$3M, so they need to keep raising new capital pretty much every quarter with such a burn rate. That's probably why they have an accumulated capital deficit of almost -$23M. American accountants would call that the equivalent of negative retained earnings. Maybe ITOCHU could pony up the cash to keep this thing afloat. Yeah, sure, whatever.

Project generator models are always neat ideas. I have yet to find one that fits my own preference for solid earnings from a history of successful acquisitions and spinoffs. Markets currently price Kaizen's shares in the pennies; they traded over a buck in early 2013 and have since fallen into the pink sheet basement. Kaizen expects its minerals to feed Japan's industrial appetite. Japan's economy has enough problems getting away from two decades of stagnation. I look for better strategies, and I don't need to look at Kaizen again.

Full disclosure: No position in Kaizen Discovery at this time.