Sovereign Lithium (SLCO) Makes Me Scratch My Head

I got a random freebie mailer from some "economic advice" newsletter promoting Sovereign Lithium (SLCO).  I generally don't read newsletter publishers who claim to give advice because that is the proper function of financial advisers who hold NASD securities licenses.  I searched FINRA BrokerCheck for the newsletter's publisher and did not find a listing for his name.  Anyway, this article should be about the stock and not the PR.

Sovereign Lithium's management team has broad experience in corporate transactions but only one person listed at present has obvious experience specific to lithium production.  They have an option to acquire ownership of the Big Smoky Valley lithium property.  That's it, folks.  There's very little in the information they have posted that makes me think they have a solid plan to mine the site if they can raise the capital to buy it.

Read the 10-Q from October 25, 2013.  This company used to be called Great American Energy, and before that it was Southern Bella.  I have no idea what the previous entities' involvement in catering and entertainment has to do with lithium mining in Nevada.  Note the option to explore a property in British Columbia for rare earth elements.  I have no idea what that has to do with lithium either.  Note the admission of going concern doubts.

Here's the part where I sigh and scratch my head.  The SEC suspended trading in SLCO on November 19, 2013.  Sovereign Lithium issued a statement on the matter, and said statement is included in that 8-K dated November 19.  I'm not interested enough in this company to stick around for the opening bell when trading resumes in SLCO.

Full disclosure:  No position in SLCO, ever.  I am not a financial adviser.  I do not give financial advice to investors.  

Great American Energy (SRBL) Has Options on Unconfirmed Deposits and Little Else

It's time to examine the merits of another free pump-action mailer.  MicroCap Market Place sent me a teaser touting Great American Energy (SRBL) and how it's somehow positioned to benefit from rare earth element demand.  I have quite a few doubts about how this company can succeed.

The present Chairman and CEO have zero experience in operating a mine, based on their published bios.  Experience in packaging properties for acquisition is not the same thing as turning them into producing mines.   These guys aren't even geologists.

Their web pages on lithium and REE are industry projections with no descriptions of their properties.  They ignore the likelihood that all projected lithium demand for the foreseeable future can easily be met by existing production from the world's top three producers.

The chief advantage of the option they hold to acquire the Big Smoky Valley lithium project is its proximity to Rockwood's existing Silver Peak lithium mine.  Bear in mind this is merely an option, not a working interest or producing mine.  Determining the value of this project means Great American Energy must have a firm 43-101 estimate of 2P reserves.  The expected life of Rockwood's mine could be a factor in this project; if Rockwood needed to replace declining production then acquiring this Big Smoky Valley project would be a natural fit.  Rockwood's interest in such a deal is unlikely given DOE's $28.4M grant support for Chemetall Foote's expansion of the Silver Peak mine.  There is little need to bring a new lithium mine into production if the existing mine in the neighborhood is growing on its own.  Chemetall Foote is the Rockwood Holdings (ROC) subsidiary operating the Silver Peak mine.  We might as well call it Rockwood Lithium.

Great American Energy also has an option to acquire a working interest in an REE project at Bear Creek.  They have a preliminary report on the project's geology but it does not appear to be 43-101 compliant.  It only covers surface samples and its mention of market values does not suffice as a calculation of project NPV that would complete a preliminary economic assessment.  REE prices have collapsed since 2011, just as I predicted in my interview with the Gold Report in December 2011.

Their annual report for April 1, 2013 doesn't shed much light on their progress other than announcing their business change (they used to be named Southern Bella, hence the ticker).  They ended 2012 with a whopping $4218 in working capital.  That report admits their auditor's going concern doubts and also admits the need for further equity financing.  Shareholders can thus expect further dilution.  I can't understand why the stock has an $88M market cap given these uncertainties.

Great American Energy owns options to acquire properties rather than the properties themselves.  They have a long way to go to raise the capital to buy these properties outright, let alone complete exploration and start production.  The company does not not have firm confirmation of deposit quality for either project that would pass regulatory muster.  There's sufficient lithium production from existing sources for the industry to ignore new deposits for a long time.  The worldwide REE price collapse makes new production of anything other than known high-grade concentrates a very risky proposition.  This is why Great American Energy isn't for me.

Full disclosure:  No position in SRBL or ROC at this time.  

Orocobre Ltd. (OROCF) Looks at Lithium

Orocobre Ltd. (OROCF / ORL.TO) is a junior Australian company moving into lithium development.  Normally I think of kangaroos and Crocodile Dundee when I hear about Australia, so this means I need to broaden my perspective.

The company's page describing its leadership does not explicitly identify the CEO.  Maybe I missed something, but titles like "general manager" don't necessarily mean CEO.  Exactly who is in charge here?  Even their financial statements aren't clear on that one.

The Salar de Olaroz, Argentina project has MII resources and their Borax Argentina division is producing revenue.  They are also developing three other early-stage projects.  I have a difficult time understanding their quarterly financial statement dated March 31, 2012 because its format is unlike the U.S. and Canadian statements I usually read.  Since their business model is a mix of developmental and established projects, it's fair to consider their fundamentals from a value investing standpoint.

The bottom line on Orocobre is that their earnings and ROE are still negative, so the revenue from their borax operation contributes isn't enough to subsidize their ambitions for other properties.  That's why I'm not investing in this one.  The major lithium producers have more than enough capacity to satisfy world demand.  Junior explorers in lithium are redundant.

Full disclosure:  No position in Orocobre Ltd. at this time.  

Pan Global Resources Goes For Lithium

Pan Global Resources (PGZ.V) wants to mine lithium in Serbia.  There's a global supply glut for lithium right now, with the world's top three producers more than able to meet the world's needs from their existing reserves for the forseeable future.  This company's valuation will be driven by its borates, not its lithium.

The CEO's background is hard to understand.  A degree in science does not necessarily include a focus on geology.  Directing business development and regional exploration are the kinds of things an MBA guy like me could do.  Directing a mine from exploration to production is something else.  The directors have diverse mining backgrounds but they're not the ones doing the work or making daily operational decisions.

Two of their projects have NI 43-101 reports.  Further development of Jadar West and Valjevo will require US$585k each, or $1.17M if you can't add.  Neither report contains verification of any MII resources so there's nothing to justify a higher valuation yet.

Check out their most recent financial statements, specifically Q2 for 2012.  Pan Global had $1.6M in cash on hand at the end of July and their burn rate is about $250k/month.  Their exploration program is progressing but at that burn rate they would have run out of cash  in January 2013 were it not for their successful non-brokered financing on December 11.  That $1M will keep them alive until the end of May 2013.

I do not know whether they will complete their drill program next spring with sufficient data for a 43-101 report on MII resources.  That uncertainty, plus the world market's oversupply for lithium, makes me shy away from this company.  Maybe their borates will prove to be worth something.

Full disclosure:  No position in Pan Global Resources at this time.