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Bottom-Fish Action
 Mon Oct 6, 2008
Bottom-Fish Action Report for Sept 14-Oct 4, 2008
    Publisher: Kaiser Research Online
    Author: Copyright 2008 John A Kaiser


Bottom-Fish Action Report for Week of Sept 14 to Oct 4, 2008

Markets just want to Tank

Since my last Bottom-Fish Action Report on September 14 the situation in the broader market has worsened considerably. First came the $85 billion bailout of the insurance giant AIG, then the seizure of Washington Mutual by the US government, followed by the decisions of Goldman Sachs and Morgan Stanley to switch their status from an investment bank to a regular deposit taking bank. This enormous stress on the financial system prompted a ban on short-selling of over 900 financial institutions and a $700 billion government bailout intended to shore up the banking system by swapping illiquid mortgage securities and derivatives for government backed paper. The bailout has been deemed critical because a credit freeze is fostering a cascading foreclosure process that is relentlessly demolishing real estate prices, the foundation of American wealth and retirement assumptions. Gold had soared in response to the AIG news, but retreated when markets rallied in response to the initial bailout proposal. Base metal prices also rebounded, and a number of the stronger resource juniors recovered, creating the start of a sharp V-shaped bottom on their charts. This prompted a number of inquiries from readers wondering if I had managed to pick the bottom by suggesting that speculators should crystallize losses sooner than later to raise capital in anticipation of a brutal round of general tax loss selling during the fourth quarter of 2008. I had also warned that I would be purging the list of active bottom-fish cycles in preparation for an extraordinary bottom-fishing window.

Should we instead, came the question, be holding on to existing positions and aggressively bottom-fishing now? The answer is still no; we should be selectively holding on and selectively bottom-fishing as we await proper washout conditions and macro developments which justify optimism that the real economy will muddle its way out of this mess while the financial economy fades away into oblivion or reverts to the stodginess of the traditional banking industry. At the same time we should be working overtime to identify those companies which have the capacity to weather another year of misery and be the survivors which flourish first once it becomes clear that positive global economic growth remains intact and that a major push is underway to mobilize the new raw material supply which the ongoing Rise of Asia will require. Metal prices, which have been the focus of a "war on commodities" indirectly engineered by the Federal Reserve according to a plausible argument from Don Coxe, are now in retreat across the board as end users respond to the slowdown in global growth and, in the case of those which have futures markets, as speculators seeking downtrends still open to short-selling have become net short sellers. China, which shifted its economy into a lower gear in an effort to clean up the air for the Beijing Olympics, is not finding it easy to shift back into a higher gear as OECD consumer demand subsides; this is evident in a decision to reduce a key interest rate for the first time in six years and a refusal to accept Indian iron ore shipments unless the price is lower than $75 per tonne even while BHP Billiton is pushing for $140 per tonne. Copper, which had not followed the downtrend of other metals such as nickel, zinc and lead, has been the last shoe to drop and has now retreated below $3 per lb. Unless a global depression ensues, and the media has certainly increased its allusions to 1929, the metal price weakness will be temporary, but that "temporary" period will likely stretch at least into the new year, and make the final tax loss selling season particularly nasty.

The bailout plan will not turn the situation around any time soon, and it involves a deep transformation of the financial services sector that will impoverish a class of workers that had become the new masters of the universe after the IT celebrities of the dot-com boom had been reduced to peons of the universe. Participation in the dot-com bubble had been voluntary, but everybody who owned a home participated in the real estate bubble. A deep psychic crevasse is opening up and its full impact has yet to be felt, with eventual healing requiring a vision of the future which has not yet materialized. To seek exposure to the resource sector, in particular the resource juniors, you have to be an optimist. The sharp market sell-off on Monday October 6 after the bailout plan was approved, which mirrored the sell-off Monday September 29 a week earlier after the bailout plan had been rejected, makes it very hard to be an optimist.

What WAS with that rebound when the bailout plan was first floated?

The sharp general market rebound while I was returning from a conference in Newfoundland the week of September 15-19 baffled and perturbed me because it made no sense whatsoever, though in the subsequent weeks the negative market sentiment re-asserted itself as both Democrats and Republicans questioned the wisdom of Henry Paulson's bailout proposal. The investment banking community had deservedly become the culprit in the eyes of the public, which started to view the bailout as geared more toward saving the skins of the people who created this mess, than being an effective means to stop the slide in real estate prices. Even Republicans, sensing that this was the final looting of America by the interests served so diligently by the Bush administration, took umbrage. So Paulson was forced to retreat on a number of his demands and add a variety of measures which look like they are designed to help ordinary households. Although the new bailout plan was approved on October 3, the negative market reaction on Monday October suggests that Main Street, whose real economy has started to feel the pinch from the credit squeeze created by the paper economy, has little confidence that the bailout plan will work.

Many misperceptions about the nature of the "assets" taxpayers are buying

Americans are right to be suspicious about whose interests are served by the proposed bailout, but they do not appear to understand how and why. They seem to think that the government is "nationalizing" a giant portfolio of underwater mortgages, which the government will be in a position to restructure in a manner that will allow the homeowner to avoid default and foreclosure. The most important task for Bernanke and Paulson is to stop the decline in real estate prices which is being driven by the unwillingness of banks to lend in a climate of cascading defaults and foreclosures. The downtrend in real estate prices is still in place, the risk of a further 10-20% decline is very real, and a plausible narrative about what will grow the American Main Street economy without a vibrant real estate and financial services sector remains absent. Potential buyers with substantial down payment capacity, to whom the banks would lend, are staying on the sidelines until at least the logic that can define a bottom is in place. That logic involves stopping the price destroying foreclosure cascade. The only way to do this is for the owner of a mortgage to negotiate new terms with the borrower that diminish the default risk. While the government certainly is in a position to "fix" the mortgages owned by Fannie Mae and Freddy Mac, the paper it is acquiring through the bailout proposal does not represent direct ownership of mortgages. The government is in effect acquiring the rat-turd riddled fruitcakes that Wall Street baked up during the past decade. Because these securities consist of fragments of mortgages, the ownership of each mortgage remains dispersed, and the ability to renegotiate the terms prior to a default remains absent. The foreclosure process for each mortgage is now in the hands of a trustee who has no independent ability to renegotiate the terms, but does have an obligation to follow the mortgage covenants. Only the owner of the mortgage can override or suspend this mechanical process, and the nature of mortgage securitization is that ownership of a mortgage has been dispersed. The banks are in a pickle because instead of owning mortgages like they used to, today they own mortgage backed paper. If they owned the mortgages directly, the banks could restructure them and create a transparent value which would create a market for them. The fruitcake diagram below is designed to make it very easy for everybody to understand the nature of the problem.

The ownership of mortgages has been massively fragmented through the pooling of a large number and variety of them into security containers of which slices have been sold to many investors. Some of these slices in turn have been pooled into new security containers which in turn have been sliced up and sold to other investors. It has become well known that the Triple A rating stamped on these securities was never deserved because these mortgage pools included rat-turd like sub-prime mortgages which should never have been included with the nuts, raisins, candied fruit and other things that go into a fruitcake. These sub-prime mortgages have turned into a flood of defaults and foreclosures which have pushed down real estate prices, which in turn has put higher quality mortgages underwater, resulting in a cascading waterfall of foreclosures that is glutting the real estate market with homes for sale at a time when banks are unwilling or unable to grant new mortgages. They are unwilling to lend because the structural downtrend in real estate prices is so strong that a substantial down payment is needed to cushion further real estate price declines, or unable to lend because their capital base consists of these securitized mortgages which are not just illiquid because they may or may not be contaminated by rat turds, but because the current environment is encouraging rot and mold to randomly afflict bits and pieces of these fruitcakes, further reducing their value. The bailout plan would shift these deteriorating fruitcakes into the hands of the government in the hope that banks would then be in a better position to lend so as to put a floor under real estate prices, and thus stop the proliferation of fruitcake rot. It should be obvious, however, that the banks are not going to become active lenders overnight, and that the situation will continue to be in a state of decline for some time after the bailout. Furthermore, government ownership of these mortgage securities does not give it the clout to restructure specific mortgages unless it has ownership of the entire mortgage. To be in that position it has to own all the fruitcake slices and slices of packaged slices, disassemble them, and then reassemble all the ingredients into their original form. Wall Street is in fact rubbing its hands over its future employment for this task, and the fact that this latest crop of highly paid masters of the universe should be handsomely paid to undo the mess they created rather than be kicked out onto the street to stand in line for low paying jobs just does not sit well with the American people and their lawmakers.

The insidious impact of the Mortgage Foregiveness Debt Relief Act

The default process has been accelerated by the Mortgage Forgiveness Debt Relief Act of 2007 which suspends a deadly tax consequence of foreclosure for the years 2007 through 2009 in the United States. If a borrower defaults on a loan, triggering a foreclosure by the lender, who forgives the difference between the value of the loan and what the lender is able to recover from the sale of any seized assets, that differences is treated as taxable income for the borrower. So a plumber making $40,000 per year who with a minimal down payment bought a home for $300,000 in recent years that is now worth $225,000, and who defaults with resulting foreclosure this year, would find the $75,000 loss eaten by the lender added to his income for 2008 if the lender chooses to forgive the debt rather than pursue the plumber into bankruptcy. The result would be an enormous tax liability for income the plumber never saw, and which with penalties and interest would enslave him to the government for the rest of his life. The Debt Relief Act suspends this tax consequence until the end of 2009, and in effect encourages everybody with a mortgage that is significantly higher than the value of the property to default and walk away. This does not apply to "non-recourse" mortgages where the collateral pledged by the borrower is the only security for the loan. In the United States non-recourse mortgages are generally only granted to fund the initial purchase of a home where the loan represents no more than 80-90% of the purchase value. Sub-prime mortgages generally do not qualify as non-recourse, and any mortgage that results as a refinancing of the initial mortgage also does not qualify as non-resource. A typical sub-prime borrower, however, is not likely to default to avoid the tax consequences because he is quite likely going to be insolvent anyways, which also exempts a person from having the foreclosure loss tacked onto his income. A sub-prime borrower will default because he cannot make the interest payments.

The Debt Relief Act will encourage defaulting by higher end borrowers who ended up with non-recourse mortgages. The price uptrend created by the real estate bubble coupled with mortgage securitization and low interest rates unleashed a refinancing boom during the past five years which encouraged home owners to tap the growing equity in their homes by refinancing the existing mortgage with a larger mortgage that in effect withdrew equity from their homes as though it were an ATM machine. The result has been a slew of non-recourse mortgages. A report from zillow.com distributed by Bloomberg in August suggested that a third of homeowners who bought during the last five years have mortgages worth more than the current value of their homes. Those who have non-recourse mortgages have financial reason to walk away from their homes. But there is probably a much larger group which refinanced to tap the increased equity in their homes to finance lifestyle, home improvement, medical expenses and college educations. This was the positive wealth effect that goosed consumption in the wake of the dot-com bubble's collapse. At the peak of real estate prices in 2006 following an average 120% gain from 1998 it was estimated that Americans had $24 trillion in net equity in their principal homes. Now the economy is suffering a drastic reverse wealth effect as real estate prices decline. In taking advantage of re-financings homeowners eroded the cushion of equity that had been developing in their homes, a resulting smaller cushion which is now disappearing amid real estate price declines. To add insult to injury the IRS is now investigating how the proceeds of a refinancing were spent, because only that portion of a loan used to buy a home or fund improvements are eligible for the mortgage interest deduction. Because hardly anybody bothered to figure out the proper allocation of mortgage interest and simply deducted the whole amount, almost every taxpayer with a mortgage is vulnerable to an audit which inflicts back taxes, penalties and interest. Crashing stock and real estate prices along with disappearing jobs are wiping out the asset base of middle-class homeowners, many of whom now have non-recourse mortgages. If Paulson's bailout plan does not stop the real estate crash, a significant portion of the middle class will be wiped out. So if you are a member of the middle class, have negative equity in your home, and have insufficient assets outside your home to deter the lender from forgiving the loss should he foreclose on your home, do you really want to wait until 2010 before defaulting? Do you want to risk the possibility that in 2010 your non-recourse mortgage might end up in the hands of a single owner after Wall Streeters on the government payroll of taken apart all those fruitcakes and reassembled the pieces into a "single" mortgage that has been sold at a deep discount to somebody in the private sector who will go after your home and all your assets to recover the face value?

A trend is forever, right?

The core premise behind the willingness of Wall Street to accept increasingly risky mortgages and blend them with less risky mortgages into "Triple A mortgage securities" was the assumption that real estate prices would trend higher indefinitely, interest rates would remain relatively low, and the refinancing cycle made possible by the unprecedented large scale securitization of mortgage debt would fix any problems that might develop with individual mortgages. By the time a zero or negative equity sub-prime mortgage with initial teaser rates reached the point where it was required to adjust to a higher rate, enough equity would have emerged in underlying property value to allow the refinancing and risk reclassification of that initial sub-prime mortgage. The march of time would allow all local problems to be fixed.

Was the dot-com windfall the foundation for the real estate bubble?

The problem with this logic is that real estate boom-bust cycles have existed throughout history. It is beyond comprehension that Wall Street investment bankers and Main Street bankers would assume that this real estate boom which began in 1998 was somehow different while steadfastly denying that the commodity price boom of the past five years was any different from the boom-bust supply cycles of the past 50 years. But it did happen, and the unusual factor that may have been the driving force was the windfall wealth created by the dot-com bubble for an entirely new class of people who were in the right places at the right times when the Internet blossomed during the nineties. Not everybody made and lost fortunes; quite a few kept their fortunes and as they witnessed the wealth evaporation in the technology sector after the dot-com bubble ended in 2000, they were beset by a deep conservatism focused on preservation of their windfall wealth. What they never counted on, however, was that Greenspan would slash interest rates to 40 year lows in an effort to stave off the recessionary fallout from the collapse of the dot-com bubble. 2% treasury bill yields were simply unsatisfactory, and when Triple A mortgage backed securities offering yields several percentage points higher came along, they were irresistible to the mountain of cash that had been created through a stock market cycle characterized by breathtaking quadruple returns and staggering subsequent 90-100% losses. It was the dramatic contrast between the low returns of securitized mortgage paper and the extreme returns of the dot-com bubble that made this paper so appealing to a new class of risk averse nouveau riche whose capital parked in private equity and hedge funds seeded the real estate boom cycle.

A selling deluge as the hedge fund world unwinds

Whenever a large pool of capital moves into a sector whose nature is utterly unrelated to the origin of that capital, it will create boom conditions if the financial community jumps onto the bandwagon. The greater the resulting scale and degree of "magic", the bigger and longer a cycle will run, which in turn encourages a widening blindness toward the intrinsic vulnerability of the boom. Only observers outside the boom have the ability to stay clear-headed about the risks, and more often that not this clear-headedness is rooted in resentment rather than discipline. The relentless humiliation of the nay-sayers and their gradual capitulation helps fuel the boom, but eventually the flaws within the boom's conceptual logic assert themselves and the boom ends. The hedge fund world is now suffering systemic withdrawal of capital because the flawed logic has become tangibly evident in the demolition of real estates created by a cascading foreclosure cycle at a time when the mechanism to fund real estate mortgages has frozen. What makes this particular disgorgement of capital especially brutal is that the assets within hedge fund accounts in large part consist of unique debt based securities which were never intended to be resold. They were designed as "term deposits" whose value was marked to a theoretical model. Now that the theoretical premise of ever-rising real estate prices in a low interest environment is in shambles, these securities have to be marked to a new "market" based value, which is considerably lower than the theoretical value while the underling premises were still intact. But what these unique securities are worth is anybody's guess, not just because there is no transparent market for the exchange of these securities, but also because these securities have been randomly contaminated with toxic elements whose presence is not readily quantifiable. Unfortunately the absence of a price discovery mechanism is feeding the foreclosure cascade and downward pressure on real estate prices that has reportedly put one third of American residential mortgages underwater

Third quarter redemption cycle done, fourth quarter cycle just starting

A major redemption cycle just ended on September 30 and fund managers have been selling anything that can be sold to be in a position to pay out as cash the pro rata share of their fund's "value" to those who managed to submit redemption notices. This has created enormous pressure on resource sector equities and commodities themselves whose uptrend during the past five years has attracted hedge fund buying. The $30 billion in private placement equity raised by TSXV juniors since 2002 in large part came from institutional sources. And precisely because the end of the real estate bubble and ensuing financial crisis threatens to undermine the Rise of Asia, whose infrastructure buildup during the past few years has been a dominant driver of base metals demand growth, there is extra reason to bail out of the resource and commodity sector before a deep global recession and possibly even a depression demolishes metal prices. One of the biggest institutional seller is AIM listed RAB Capital which has invested heavily in resource juniors through its RAB Special Situations Fund. RAB has been a heavy seller of juniors during the past quarter as it tried to deal with redemption runs which got so bad the company called a special meeting to ask fund holders to vote on a three year redemption lockup or immediate liquidation. The latter choice would have dumped what at the time was quoted as US $790 million worth of assets onto the market, so the holders agreed to the lockup rather than forced liquidation. This decision hardly spells a reprieve for the market for RAB is continuing to dump its resource junior positions.

This indiscriminate selling of resource juniors by institutions liquidating whatever they can to meet redemptions has resulted in massive bid destruction which has inflicted widespread paper losses on portfolios with exposure to the resource sector. But because no significant new money has yet come into the market, the washout needed to build a true bottom has not yet developed. We are now into the fourth quarter during which we will likely see another round of redemption notices as hedge fund investors call it quits. At the same time we are now in the traditional tax loss selling period. In the case of Canadians who are entitled to carry capital losses back into the prior three years and secure "refunds" for the upcoming year representing taxes paid at the top marginal rate in prior years, there is strong incentive to sell losers during the current quarter. For Americans, who face the prospect of stiffer capital gains rates if the Democrats win the US presidential election, there is the incentive to sell everything even if it results in a net capital gains profit. The overwhelming fear that the economic situation is destined to worsen during the next couple years gives further impetus to "sell everything". For these reasons I believe it is imperative that investors review their portfolios and restructure them so that they consist of profit-loss neutral positions in stocks whose prices are unlikely to go significantly lower except in the extreme scenario of a deep recession or global depression where only cash is king.

Short selling abuse thanks to the abolition of the Uptick Rule

There is also now the additional pressure from predatory cashed up hedge funds who are exploiting the abolition of the Uptick Rule, the negative market climate, tax loss selling and further hedge fund liquidation to manipulate stocks lower. The Uptick Rule required that a short sale could take place only at a price which was higher than the last different price traded. Pressure from Wall Street prompted the SEC to suspend this rule in July 2007. Now you can conduct a short sale at any price so long as that trade does not create a lower price than the prior traded price. This limitation is extremely easy to abuse as follows, which for simplicity's sake involves a small cap stock: Trader Long first buys a small amount of Stock A. Trader Short sells Stock A short at the last price until the bid is gone. Trade Long hits the new bid with a board lot from his long position. Trader Short then fills the bid with further short sales until a new bid shows up. Trader Long sells another board lot at the bid. This process of bid destructions repeats until a washout happens that creates a bottom. There are multiple players in this team, so it is hard to prove a conspiracy is at work. There are also lots of other players who are not part of the conspiracy but who understand the nature of the game, know how to spot such a game in action, and join in themselves. And then there is the stock's existing shareholder base, which includes players with stop losses, margined positions or redemption problems which trigger large scale long selling that destroys the bid side of the order book and in doing so increases the selling capacity of the shorts and panics other longs into selling. The short selling is "naked" in the sense that formal borrowing arrangements have not been made in advance of initiating the short trade, which is often closed out the same day so that no action on the "intent" to deliver physical paper within the 3 day settlement period is necessary.

This type of abusive short selling has been targeting financial stocks since June because this sector's fundamentals have clearly been vulnerable, but the process has been accelerated in recent weeks after Paulson shooed short sellers away from stocks that deserve to be shorted so that the longs have a proper chance to sell those financial service sector dogs. But now that financial stocks have crashed and been put on the restricted list for short-selling, and the recessionary implications of the mess are obvious to everybody, the short selling marauders have taken on the resource sector whose valuations are threatened by the prospect of sharply lower metal prices in the event of a deep recession. Mercator Minerals Ltd (ML-T: $2.76) and Thompson Creek Metals (TCM-T: $8.00) both appear to be victims of short selling marauders. Short selling is an important mechanism in markets, and should not be abolished, but to work in a productive manner the Uptick Rule needs to be in place. I'll elaborate why in a future commentary. Canadian regulators, unfortunately, in their desire to remain competitive with American stupidity, also abandoned the Uptick Rule, and now our junior resource sector is trapped in a brutal process of bid destruction.

More bid destruction in October, with washout conditions after the election

In my last commentary I argued that a washout would occur during October prior to the US election. A washout occurs when existing shareholders capitulate at the same time that money parked on the sidelines moves into the market. I now believe that we will continue to see bid destruction during October but a proper washout that builds a healthy bottom may not happen until after the US elections on November 4. Firstly, the severity of the financial crisis has increased during the past couple of weeks and the resistance to Paulson's panicky bailout proposal has boosted the determination of capital to stay on the sidelines. Secondly, the enthusiasm Americans showed for the prospect of having the cast from the Red Green show in the White House has waned, and McCain's clumsy theatrics during the past weeks have reminded Americans that this is no time for fun and games. The vice-presidential debate between Sarah Palin and Joe Biden did produce a "split" decision according to CNN in the form of giving Biden a big victory margin over Palin who in turn impressed a vast majority of viewers as having done far better than expected. The economy, however, always trumps ideology, and the bad economy Democrats and Republicans alike are now thinking about is hopelessly linked the Republican ideology of the Bush administration. The probability of another Republican administration and the implicit continuation of the policies of the past 8 years which contributed to this mess has diminished. The connection between Wall Street and the Bush administration which has steadfastly battled for lower taxation of the super salaries "earned" by the architects of this financial mess is too obvious and collides with the public's need for a ritual burning at the stake of an appropriate scapegoat. McCain is stuck with the linkage to the financial meltdown, and as the American voting public's appreciation of the implications deepens, the desire to give the Republicans a four year sabbatical from the White House will grow. The situation is so bad that intelligent Republicans are praying for a Democratic White House.

Beware the negative parabolas with tiny V-shaped bottoms

Because of the growing uncertainty about the success potential of bailout plans, and diminishing concern that another Republican administration will occupy the White House during the next term, we have ended up with a "no bid" market that prevents full-scale liquidation. Investors seeking to crystallize tax losses cannot readily do so except at rock bottom prices, and because there is still reason to be optimistic that the secular commodity bull market will emerge intact within a year, there is still reluctance to liquidate at any price. There is also no desire to rotate capital arising from liquidation back into other positions because of the uncertainty over the bailout plan, so there is nothing to stampede sidelined capital into the market. While many stocks do have bottoming patterns, these are the weaker companies which have been in serious decline for a year and have considerably weaker survival prospects than the better financed companies with strong projects or strategies which developed accelerating downtrend chart patterns in June. These are the companies with failing V-shaped bottoms which are most likely to lead the recovery when the overall outlook has clarified in a positive manner, but which first need a washout bottom that cleans out those shareholders selling for tax loss reasons or fund redemptions. I expect this washout to happen in November and December after we know the outcome of the US election. Andina Minerals Inc (ADM-$1.13), has a 9 million ounce low grade gold resource in Chile, and Canplats Resources Corp (CPQ-V: $1.40) which has a new discovery in Mexico for which it is soon expected to report a multi-million ounce gold resource, are just two examples of fundamentally sound juniors whose charts have parabolic downtrends with the occasional hiccup created by bottom-fishers lacking the muscle to catch a falling anvil. These charts are a recipe for a series of descending V-shaped bottoms that will slice to pieces unwary bottom-fishers.

Bottom-Fishing Hazard: severe rollbacks thanks to competition from capital pools

So if it is too dangerous to bottom-fish for quality juniors with parabolic downtrends, should one perhaps go to work on juniors that already have a bottoming pattern in place? The short answer is, only with extreme caution. Bottom-fishing for juniors which have already reached bottom is quite hazardous for several reasons. There is a large inventory of clean capital pool shells whose management's willingness to do a major transaction on terms unfavorable to the capital pool's shareholders is enhanced by the ticking clock of the 18 month deadline to complete such a transaction and reasonable concern that it will take more than 6-12 months for the secular bull cycle to reassert itself and breathe capital back into the resource juniors. Well organized groups with projects in their private bags will prefer launching new speculation cycles through an RTO of a capital pool rather than a reorganized shell with lots of skeletons in the closet. The eagerness of capital pool administrators to do a deal before the 18 month deadline will encourage them to accept rollbacks of capital pool paper demanded by the RTO group so as to minimize the public float and reduce the headache of tying up the shell packagers' escrow paper to just a nuisance. The competition from the capital pool shells will encourage the administrators of juniors with bloated capital structures to conduct rollbacks sooner than later so that there is time to clean out the skeletons in time for the next cycle. And these rollbacks will be brutal, much worse than the 5:1 that characterized past bear cycles.

Bottom-Fishing Hazard: super-dilutionary hail mary financings

Juniors which have promising works in progress involving pounds or ounces in the ground but which have insufficient capital to push them forward will be vulnerable to transactions that diminish the upside of minority shareholders, which will include recent bottom-fishers. We are now seeing Australian style financings at very low prices which are diluting the capital structure as much as 100%. These are hail mary financings betting that the turnaround will happen within a year and are guided by management's goal of keeping the project alive so that the junior can participate in the recovery. The price percentage upside, however, is limited when the fully diluted capitalization exceeds 100 million shares. But these transactions will get done because the investors putting up the capital are seeking "modest" gains in the 100%-200% range via mergers and acquisitions down the road, and will typically have a warrant to boost the reward.

Bottom-Fishing Hazard: asset stalking debenture financings

A new type of treacherous transaction starting to emerge for pounds or ounces in the ground projects are large convertible debenture financings with 2-3 year maturities to which the company assets are pledged as security. The conversion price is typically well above the market, and really exists only as a hedge against the possibility that the resource sector will turn around sharply sooner than later. In that case the debenture holders can capture a capital gain, though there is no real expectation of such a gain. This type of financing is coming from players who have long term confidence in the secular bull market, and are counting on the junior to whom they are lending money to run out of money before the turnaround happens. They have the benefit of being paid interest from the debentures funds at a generous rate, and should the company run out of capital and be unable to finance, foreclosure proceedings will be initiated. The settlement result will be massive dilution of common equity shareholders that hands majority control of the asset to the debenture holders. This type of transaction was never a risk in the past because the junior sector was dominated by exploration plays from 1982-2002 and companies typically ended the bull cycle with no pounds or ounces in the ground where a rollback and eventual refinancing was a matter of course. But the $30 billion that poured into the TSXV juniors during the past five years, plus the substantially larger amount poured into TSX resource juniors, has created a significant asset legacy.

Bottom-Fishing Hazard: Paper takeover bids from sinking blobs

Another process that limits the upside potential for bottom-fishers that is particularly frustrating because it targets the best bottom-fish whose prices have been demolished by structural selling linked to fund liquidation is the paper based takeover bid from a somewhat stronger junior or intermediate company. This targets both cash rich juniors with weak projects and cash poor juniors with strong projects the company is unwilling to finance at current stock prices, or unable to do so because capital is staying on the sidelines. The recent acquisition of Aurelian by Kinross on the bigger scale and acquisition of Sheffield by Nevoro and Aurea by Newstrike on the smaller scale are examples of this type of predatory takeover bid which offers a modest premium to bottom-fishers. Sometimes these takeovers come in the form of merger deals done in desperation by the smaller company with a larger junior which is a big sinking blob whose downtrend is worsened as the shares issued by digesting assets come into the market. This sinking blob that engulfs smaller companies is a deliberate strategy conducted by a management which knows that it can restructure the blob when it hits rock bottom on terms that favor insiders. We have had over $53 billion worth of cash and paper takeover bids during the last four years involving junior to intermediate resource companies listed on the Canadian exchanges, most of which were at least initially rewarding to shareholders who got paper. The takeover mania will continue, but its result will not always be pleasing to bottom-fishers, whether they owned the acquired or acquiring company.

Prepare for a drastic winnowing of resource juniors

The nature of the "reboot" is such that many programs which managed to get themselves loaded during the past five years will be flushed out of memory, reducing the clutter and enabling the essential programs to run faster. In resource sector terms this means that the 1,500 or so junior to intermediate resource companies listed in Canada will be winnowed drastically unless there is a rapid turnaround in the outlook for the resource sector. Only those companies with competent management teams and either structure or assets in the form of pounds or ounces in the ground that are not hopelessly marginal will survive. I emphasize "management" because during the past five years the age skewed demographics of the mining industry has only worsened. The forced and voluntary exodus of geologists, mining engineers and other resource sector technical expertise from the majors into the juniors is bound to undergo a reversal as these people aged 55 and older contemplate the impact a funding drought during the next couple years will have on salaries and option profits within the junior sector. The big mining companies are focused on the longer term assumption that the secular bull market in metals remains intact, and they may be eager to hire skilled personnel during the current downturn, giving them the security of gainful employment during the last decade of their working careers. This will reduce the expertise available to the junior sector, and it is my view that capital will steer clear of juniors which do not have a committed technical and management team in place. My criteria for the ideal bottom-fish will be as follows: sufficient working capital to keep projects alive for at least another year, a project with pounds and/or ounces in the ground whose rock value at current metal prices is still higher than the associated cost of mining such ore, a well rounded management team committed to the company and each other, and evidence of significant third party shareholders with long term vision and which are supportive of management. If these are not present, what, pray tell will keep the junior from sinking into oblivion.

Good thing I've waited to pick new bottom-fish, not so good that I didn't bail earlier

I have received some criticism for appearing to bail now on my bottom-fish picks, in response to which I admit that I should have closed out many bottom-fish cycles earlier in the year before prices deteriorated to current levels. I did not do so for two main reasons. First, the better quality juniors out there which never had a chance to be recommended as bottom-fish because of the manner in which their speculation cycles were launched had not undergone sufficient bid destruction during the first half to justify recommendation as bottom-fish except in a few cash rich cases such as Kobex, Sennen and IMA, and even these have ended up trading below cash breakup value. While nobody has actually complained, my inner voice has been sarcastically thanking me for recommending stocks trading a little bit above cash breakup when I could have waited until they were trading below cash breakup. The absence of decent replacement picks and the hope that the disconnect would resolve itself in favor of higher stock prices rather than lower metal prices discouraged me from doing the dirty deed of purging the list earlier in the year.

Second, I have been busy developing the data infrastructure needed to sift properly through a large universe of juniors, and so there was insufficient time to gently and fairly say goodbye to old bottom-fish while there was still hope for a reversal of the disconnect between metal prices and junior prices that characterized the first half of the year. Although I have not had time myself to exploit the resource estimate system unveiled during the past month so as to separate the wheat from the chaff among low priced pounds or ounces in the ground, the surge in subscriber activity pulling these web pages tells me that many subscribers are using Kaiser Bottom-Fish Online to do their own homework. That pleases me immensely because this capacity to facilitate focused research represents a large part of membership fee's value. After spending a good part of September on the road attending conferences in Las Vegas, St. John's, Zurich, Geneva and finally Toronto this past weekend, I will have a clear field during October to focus on the stock picks which the other half of my subscriber base wants to hear about. As threatened, I am purging my list of many open bottom-fish cycles so that my readers can focus their bottom-fishing strategy effectively. Although I have reviewed most of the open bottom-fish recommendations, writing a thoughtful goodbye will take time, and in the interest of letting readers know which way I am leaning, I am grouping the bottom-fish into several categories which have a recommended strategy.

Group One: Sell in the money good companies whose charts are vulnerable to further declines

The first group consists of companies that are intrinsically good and are still trading above the original bottom-fish prices. They are, however, off their peaks, and vulnerable to further downward pressure during the final quarter of 2008. At best their charts exhibit V-shaped bottoms, but I view the risk of a descending series of V-shaped bottoms very high in the current situation, and I would rather re-recommend these stocks as a new bottom-fish buy when I see a proper bottom develop than hold them in the hope that they are as low as they will go. These bottom-fish cycles will be closed out because the speculation cycles of these companies are still in the unwinding stage, and the companies are not suitable for bottom-fishing at the present time. They are: Almaden Minerals Corp (AMM-T), Azimut Exploration Inc (AZM-V), Energold Drilling Corp (EGD-V), Exeter Resource Corp (XRC-V), Golden Band Resources Inc (GBN-V), Humboldt Capital Corp (HMB-V), Lexam Explorations Inc (LEX-V), Orezone Resources Inc, Solitario Resource Corp (SLR-T), Sterling Resources Inc (SLG-V), and Thompson Creek Mining Corp (TCM-T).

Group Two: Sell bottom-fish which are well below their recommendation range

The second group consists mainly of companies which are well below their initial bottom-fish buy range and may be suffering from a variety of problems that raise the probability of a corporate reorganization. It also includes those such as Calibre, Freeport, Huldra and Tintina whose management has not been particularly effective at launching a speculation cycle during the past five years. And it also includes several bottom-fish such as Brazalta, Eaglewood and Groundstar which mutated into oil and gas juniors whose evaluation with regard to future prospects will require more time than I am willing to allocate to them right now. Readers hopefully appreciate that the field of bottom-fish candidates exceeds 500 and is growing; this candy store is so bountiful that not any old bonbon will do for bottom-fishing in the current climate. None of these companies have any obvious reason to move up significantly in the short term, and some of them are already at rock bottom. There are a few such as Beaufield, Coastport, Cornerstone, Dios and Radius which would qualify as decent bottom-fish buys at current prices if not viewed through the jaundiced eye of having bought or recommended them at significantly higher prices. None of them, however, would qualify as top priority buys, which is why I am comfortable closing them out now and perhaps revisiting some of them at a later date. These are: Beaufield Resources Inc (BFD-V), Calibre Mining Corp (CXB-V), Channel Resources Ltd (CHU-V), Coastport Capital Corp Inc (CPP-V), Cornerstone Capital Resources Inc (CQP-V), Dios Explorations Inc (DOS-V), Eaglewood Energy Inc (EWD-V), Eastfield resources Ltd (ETF-V), Everton Resources Inc (EVR-V), Freeport Resources Inc (FRI-V), Gateway Gold Corp (GTQ-V), Gitennes Exploration Inc (GIT-V), GLR Resources Inc (GRS-T), Huldra Silver Inc (HDA-V), Intl Northair Mines Ltd (INM-V), Manson Creek Resources Ltd (MCK-V), Mindoro Resources Ltd (MIO-V), Newcastle Minerals Ltd (NCM-V), Northern Lion Gold Corp (NL-V), Pele Mountain Resources Inc (GEM-V), Radius Gold Inc (RDU-V), San Anton Resource Corp (SNN-V), Southwestern Resources Corp (SWG-T), Sirios Resources Inc (SOI-V), Tintina Mines Ltd (TTS-V), Tumi Resources Ltd (TM-V), Vaaldiam Resources Ltd (VAA-T), Valdez Gold Inc (VAZ-V), Vencan Gold Corp (VCG-V), and Windarra Minerals Ltd (WRA-V).

Group Three: Companies still in the recommendation range that need to be reviewed

The third group consists of companies which have traded above their recommendation range but have fallen back into or below it, and which require a more detailed review before I can make a decision. These are Atna Resources Ltd (ATN-T), Golden Goose Resources Inc (GGR-V), Gold-Ore Resources Ltd (GOZ-V), Intl Barytex Resources Corp (IBX-V), Kinbauri Gold Corp (KNB-V), Medallion Resources Ltd (MDL-V), Redhawk Resources Inc (RDK-V), Skeena Resources Ltd (SKE-V), Skyline Gold Corp (SK-V), and Solomon Resources Ltd (SRB-V).

Group Four: Hold successful bottom-fish awaiting a takeover bid

The fourth group consists of companies with advanced speculation cycles that are in the money and effectively waiting for a takeover bid. While they may exhibit volatility I am comfortable maintaining them as Spec Cycle Hold 100% recommendations until we get fundamental closure on their stories. These include Corriente Resources Inc (CTQ-T), Minera Andes Inc (MAI-T), Mountain Province Diamonds Inc (MPV-T), Nevsun Resources Ltd (NSU-T), and Polymet Mining Inc (POM-T).

Group Five: Keepers - good bottom-fish trading within recommended range

The fifth group consists of bottom-fish keepers which include companies such as Arapaho, Corona Gold, Full Metal, trading in their initial bottom-fish buy range below which they are unlikely to drop, companies such as Avalon, Brett, Creston, Diamonds North, Eastmain, Geologix, Karmin, Lithic, and Vulcan that have been the subject of detailed coverage in recent years whose basic story remains intact, and recent recommendations such as Kobex, IMA, Moss Lake and Sennen. These are the companies about which for better or worse I intend to maintain closer coverage using the Daily Bottom-Fish Action Report as a vehicle to keep readers abreast of develops. This will, of course, also apply to any new bottom-fish recommendations which will have been made on the basis of a story that I have investigated and understood. This group consists of: Arapaho Capital Corp (AHO-V), Bitterroot resources Ltd (BTT-V), Brett Resources Inc (BBR-V), Copper Fox Metals Inc (CUU-V), Corona Gold Corp (CRG-V), Creston Moly Corp (CMS-V), Diamonds North Resources Ltd (DDN-V), Eastmain Resources Inc (ER-T), Eureka Resources Inc (EUK-V), Freewest Resources Canada Inc (FWR-V), Full Metal Minerals Ltd (FMM-V), Geologix Explorations inc (GIX-V), Golden Valley Mines Ltd (GZZ-V), Grayd Resource Corp (GYD-V), IMA Exploration Inc (IMR-V), Intl Enexco inc (IEC-V), Karmin Exploration Inc (KAR-V), Kobex Resources inc (KBX-V), Lithic Resources Ltd (LTH-V), Moss Lake Gold Mines Ltd (MOK-V), Pacific Wildcat Resources Corp (PAW.H-V), Sennen Resources Inc (SN-V), Serengeti Resources Inc (SIR-V), Skygold Ventures Ltd (SKV-V), Troon Ventures Inc (TVN-V), Vulcan Minerals Inc (VUL-V), and Western Troy Capital Resources Inc (WRY-V).

The above breakdown is intended only as a guide to my readers about my intentions. During October I will be issuing formal comments on these bottom-fish which will show up in the Daily Bottom-Fish Action Report. A closer review or interim developments may require me to change my mind on some of these companies. My initial focus will be to get rid of bottom-fish that do not strike me as high priority candidates for new recommendations, but because it is easier (and more fun) to update the keepers, I will mix these good buys with the goodbyes.

Above Bottom-Fish Range Within Bottom-Fish Range Below Bottom-Fish Range Recently Closed Out
Updated this Week New 2 Year High New 2 Year Low New Bottom-Fish High New Bottom-Fish Low

Bottom-Fish Recommendations made from September 14, 2008 to October 4, 2008
Company Date
Price Recommendation Action Net
Gain New Status
Arapaho Capital Corp (AHO-V) 9/19/2008 $0.75 Confirm BF MP Buy $0.50-$0.75
$0 1,333 0% BF MP Buy $0.50-$0.75
Creston Moly Corp (CMS-V) 9/19/2008 $0.32 Confirm BF TP Buy $0.30-$0.49
$0 2,041 -36% BF TP Buy $0.30-$0.49
Diamonds North Resources Ltd (DDN-V) 9/19/2008 $0.62 Confirm BF TP Buy $0.50-$0.75
$0 1,333 -17% BF TP Buy $0.50-$0.75

New Comments
Volume High Low Close Chg Status
Arapaho Capital Corp (AHO-V) 29,000 $0.870 $0.600 $0.600 ($0.280) BF MP Buy $0.50-$0.75
Creston Moly Corp (CMS-V) 5,930,900 $0.335 $0.250 $0.260 ($0.040) BF TP Buy $0.30-$0.49
Diamonds North Resources Ltd (DDN-V) 1,241,700 $0.790 $0.550 $0.600 ($0.100) Spec Cycle Hold 100%
Peregrine Diamonds Ltd (PGD-T) 1,514,000 $0.530 $0.300 $0.350 ($0.050)

Bottom-Fish Action Comments for Sept 14 to Oct 4, 2008

Peregrine Diamonds Ltd (PGD-T: $0.42)Profile Search Web Site Tree Forum SEDAR Quote

Spec Value Hunter Comment - September 23, 2008: Decision on Peregrine Metals merger imminent

Peregrine Diamonds Ltd, which was the subject of an Absolute Good Spec Value Buy recommendation at $0.34 on August 28, 2008 based on my assessment that the diamond junior's Chidliak project in the southern part of Baffin Island had the earmarks of the next Ekati, is on the verge of making a decision on the proposal made on July 7 to merge Peregrine Diamonds with privately held Peregrine Metals. While the proposal made strategic sense at the time, two developments since then have turned the proposal into an incompatible "apple and orange" situation which apparently all interested parties have recognized. Peregrine Metals has reported a significant copper resource for its Altar porphyry deposit in Argentina that has apparently attracted attention from major mining companies that could lead to a lucrative farmout or perhaps even a private buyout. Peregrine Diamonds meanwhile has leapfrogged an entire exploration season with the surprise discovery of 3 outcropping kimberlites on the grassroots Chidliak property, one of which has already yielded a coarse micro diamond size distribution curve that suggests a medium to high macro grade. The samples from the 2 CH-1 phases were relatively small, but a larger 1,000 kg sample has been collected and is being processed by SRC, with results expected in late November. If what we are seeing in CH-1B is not a fluke attributable to a mantle xenolith, the larger sample should confirm and possibly improve the size distribution curve. Should this happen, it will be very bullish for the stock. SRC is also processing a 300 kg sample from the CH-2 outcrop located 1.5 km from CH-1, and 200 kg of kimberlite rubble associated with a third target, CH-3, located 12 km from CH-3. All 3 kimberlites have abundant indicator minerals, though their chemistry is not yet known. No targets have yet been drilled, so the belief that the outcrops and rubble are associated with pipes rather than dykes hinges on interpretation of geophysical data. Interpretation of geophysical surveys has identified over 300 anomalies, of which 25 were subjected to ground followup during the 2008 season. Some of the targets have been explained, three yielded kimberlite outcrop or rubble, and some need to be drilled because they are obscured by swamp, water or overburden. Of note is that none of these kimberlites appears to be associated with the G10 heavy trains that have emerged within the north and south regional anomalies. All of this suggests a prolific kimberlite field, and the comparison with Dia Met and Ekati in early 1992 is stunning.

What is keeping the market from bidding the stock higher is a desire for definitive confirmation that Chidliak hosts pipes with medium to high macro diamond grade, and uncertainty about the dilution a merger with Peregrine Metals would create. Micro diamond results during the next two months could boost optimism significantly, but, given that these bodies were discovered through ground checking of the more prominent geophysical anomalies, without the support of local diamond prospective indicator mineral trains for the simple reason of insufficient till sampling density, weaker micro-diamond results than indicated by the initial CH-1B sample would inhibit explosive upside action during the short term, but would detract nothing from Chidliak's overall potential. One should keep in mind that the initial Point Lake pipe discovery at Ekati was largely due to Chuck Fipke noticing garnets in the beach sands. The Point Lake micro diamond and subsequent mini bulk sample results woke up the market to the diamond potential of Ekati, but the Point Lake pipe itself proved marginal. In contrast to the Altar copper deposit, whose potential value can be readily quantified in net present value terms, meaning that it has an obvious upside limit based on grade, tonnage and projected copper prices, Chidliak at this stage has a potential value ranging from zero to $4 billion. Peregrine Metals and Peregrine Diamonds represent the difference between a pounds or ounces in the ground development play and an exploration discovery play. The upside limit of the former hinges on beliefs about long term commodity prices, and the upside limit of the latter hinges on what exploration will reveal about mother nature's largesse or penury at Chidliak. In my view the market during the next 12 months will shun discovery plays until sledgehammered on the forehead by spectacular results, and cautiously poke away at development plays until the longer term global economic outlook stabilizes with an uptrend. This glass 90% empty and draining away perception of discovery exploration plays can result in good speculative value, and while I am inclined to bottom-fish for ounces or pounds in the ground, I wil not ignore exploration juniors with quadruple digit percentage upside potential. What makes Peregrine Diamond's Chidliak play special is that its upside "limit" is more than just an extreme possibility; the available information and its context signal that Chidliak is in the game for a $2-$4 billion dream target.

How does one value an early stage project with such huge potential? That is indeed a tough question for anybody not familiar with my rational speculation model. (If you need a refresher check out Understanding the Rational Speculation Model. Assuming that BHP Billiton exercises its back-in rights, and fully discounting the 72% owned DO27 diamond resource and other projects such as Nanuq, the market is pricing Chidliak at about $75 million based on 78.9 million shares fully diluted, which is fair speculative value for a $2 billion dream target. Moving to the next exploration stage where mini bulk sampling is justified would double the price in rational terms, but as the IPV Chart above demonstrates, the market can drive valuations far beyond "rational" limits as it starts to realize a new discovery has world class scale. The green band in the IPV chart represents the IPV range Dia Met underwent at each exploration stage as BHP walked the Ekati project through the exploration cycle. If Peregrine underwent a similar "awakening" the stock would be trading 5-10 times higher than current levels. Because there is considerable overlap between the Peregrine "Diamonds" and "Metals" shareholders, my guess is that the merger plan will be abandoned, which should result in an immediate bounce for Peregrine Diamonds. According to Eric Friedland a decision may be made by the end of the week.

Peregrine Diamonds has now spent over $3 million on Chidliak and BHP Billiton is entitled to give notice at any time of its intent to back into the project to earn 51% by spending five times what Peregrine spent. Upon receiving such notice Peregrine would have to suspend all non-contractually obligated exploration activity for 45 days.One might think that BHP would be eager to back in sooner than later, both to save money and from a logistics planning perspective. But that is to ignore the fact that upon vesting for 51% BHP Billiton can elect to fund all costs needed to deliver a bankable feasibility study to earn 58%. Doing so would allow BHP Billiton to have the diamond marketing rights until payback is achieved; sticking with 51% would leave Peregrine Diamonds with the immediate right to take 49% of production in kind, a status which would make the junior very attractive to third parties seeking a supply of diamonds and willing to fund its availability. In my view it is thus a given that BHP would go to 58% if Chidliak shapes up with economic potential, so there is no cost-saving urgency for BHP Billliton to back in immediately (ie worrying about spending $50 million rather than $15 million to earn 51%). In fact, there is a strategic advantage to letting Peregrine fund the first $10 million and weaken itself by having to raise equity at a time when the general market is still in turmoil and confirmation that Chidliak is an Ekati is not yet a slam dunk. However, if we get very good micro diamond news during the next two months, Peregrine will trade sharply higher and Eric Friedland will be able to raise the necessary capital at considerably less dilution than would happen at the current price. It would then make sense for BHP Billiton to back in immediately so that it can have control over the project's evolution, and possibly allow Peregrine's well rounded and competent diamond exploration team to operate the exploration phase while bringing its own experience in the environmental permitting and social license arenas to bear. Since I am assuming Peregrine wil net 42% if Chidliak is world class, such a back-in decision by BHP Billiton would be a very positive development. For all these reasons I am confirming my Absolute Good Spec Value Buy recommendation, with the added emphasis that Peregrine's Chidliak diamond project is the best shot I see out there for a major homerun in the diamond sector.

Diamonds North Resources Ltd (DDN-V: $0.68)Profile Search Web Site Tree Forum SEDAR Quote

Bottom-Fish Comment - September 23, 2008: Countdown begins for Amaruk project

Diamonds North Resources Ltd has been sliding since the diamond exploration junior closed a $12.5 million private placement on July 7, 2008 which boosted its working capital to $17 million. The market turmoil in mid September has knocked the stock back into the bottom-fish buy range of $0.50-$0.75 which has been in effect since October 15, 2002. Since the initial recommendation Diamonds North has generally traded above the bottom-fish buy range and we have maintained a Spec Cycle Hold 100% on the stock based on our view that Diamonds North offered the best chance among diamond juniors for a major field discovery generated by regional reconnaissance work. With regard to the Good Absolute Spec Value Buy issued at $0.90 on January 31, 2006 when BHP Billiton dropped out of the Amaruk project after spending just short of the $10 million required to vest, and confirmed at $1.09 on May 28, 2008 when Diamonds North published results that supported its "crush theory" explanation for the skewed micro diamond size distribution curve from the Tuktu cluster, that recommendation is now underwater. The Spec Value recommendations arose on the basis of Diamonds North's 100% ownership of a large project in the east Arctic on which regional till sampling had yielded excellent diamond indicator mineral chemistry. Diamonds North has found 25 kimberlites on Amaruk using a percussion drill to test numerous geophysical anomalies within a magnetically noisy background. Many of these kimberlites are pipe-like bodies, but none has yielded a definitive micro diamond curve with a robust distribution curve that promises a decent macro grade. In early 2008 Diamonds North produced results for pipes within the Tuktu and Qavvik clusters which had unusually high counts in the smaller size fractions, but sharply lower to none in the larger sizes. Because the percussion drill had powderized most of the sample, concern arose that the larger diamonds had been crushed. A larger sample of similar percussion drill material for a Tuktu pipe appeared to support this theory by extending the curve somewhat, and this, along with high grade nickel results from the Tunerq gossan discovered in 2007 helped Diamonds North replenish its treasury in early July. The diamond prospective nature of the KIM chemistry for the pipes with the better curves suggested that proper core samples would deliver robust curves.

On September 18, 2008 Diamonds North reported that it had recovered 20 tonnes from the Tuktu 1-3 complex using HQ diamond core, and 15 tonnes from Qavvik 4-6. Diamonds North has submitted this material to SGS Lakefield for dense media separation (DMS) processing, with results expected within 8 weeks. A 0.5 mm cut-off sieve will be used to collect that portion of micro diamonds "missing" from the percussion drill samples processed by caustic fusion. Based on the delineation drilling Diamonds North now believes that Tuktu 1-3 are a single multi-phased pipe. We await a news release describing the physical outline of the Tuktu complex, which appears to have decent tonnage potential based on the geophysics data derived outline presented by Diamonds North above. To confirm the "crush theory", and force us to treat micro diamond results from percussion drill samples as a qualitative rather than quantitative indicator of grade potential, the DMS results need to deliver macro grades in the 50-150 cpht range for Tuktu. If Diamonds North achieves this milestone, it will signal that the area of the Amaruk project near Pelly Bay contains medium to high grade kimberlite bodies with meaningful, bulk mineable tonnage, overcoming the curse that has haunted other projects in Nunavut such as Aviat and Churchill which have yielded high grade kimberlite only in the form of dykes whose tonnage is either small or not amenable to low cost bulk mining. Such confirmation would give a solid foundation to hopes that Amaruk contains an Ekati scale cluster. If the results, which are due about the time the July private placement stock comes free trading, are considerably less than 50 cpht, Diamonds North will suffer a sharp sell-off. The company expects to have $6-$7 million working capital left at year end, plus a prepaid fuel cache for the 2009 season. If the mini bulk sample results are lousy, we will have to toss the crush theory out the window and treat the micro diamond results from percussion drill samples as "what-you-see-is-what-you-get". On the plus side, this disappointing outcome would allow the market to pin hopes on the micro diamond results for any new kimberlites expected in early 2009, rather than wait another year for confirmation that the newest Amaruk pipes have macro grade potential. Diamonds North has been busy using its percussion rig to scout drill additional targets, with 3 confirmed as kimberlites in June. The company has been silent on how many targets it tested during 2008, but has promised an update during the next couple weeks. It would be nice to see a new batch of kimberlites beyond the 3 reported in June.

Because nothing fundamental has changed since our recommendations earlier this year at higher prices, we are confirming that Diamonds North is a top priority bottom-fish buy in the $0.50-$0.75 range, and that positions bought at higher prices pursuant to our Spec Value recommendations be held in the absence of tax loss considerations. Like the Chidliak project of Peregrine Diamonds Ltd, Amaruk is an exploration discovery play of the sort that is out of favor with the market right now, but it is a project with world class potential that has an implied project value of only $61 million based on 100% net interest and 86.5 million shares fully diluted. If the Tuktu mini-bulk sample delivers a macro grade in the 50-150 cpht range, the world class potential of the Amaruk kimberlite field will be validated, and, based on the "rational speculation model", which indicates that Amaruk currently represents good speculative value for a $2 billion dream target, we can expect the stock to double so as to reflect Fair speculative value, and given the historic tendency of new world class discovery plays to substantially overshoot "rational limits", one should hold for much bigger gains.

Creston Moly Corp (CMS-V: $0.31)Profile Search Web Site Tree Forum SEDAR Quote

Bottom-Fish Comment - September 23, 2008: Creston Moly awaiting Red Hill results and El Creston resource estimate

Creston Moly Corp has held up well during the market bloodbath of the past couple weeks, despite being late with a resource estimate for its El Creston molybdenum project in Sonora state of Mexico. The company had hoped to report a new estimate by mid September, but now does not expect to have the report until some time in October. The explanation offered for the delay is a decision to include the transition zone between the molybdenite (sulphides) and the molybdic oxide. The oxidized mineralization which caps the deposit is not included in the resource estimate because it is too small to justify the cost of a separate recovery circuit. The market will be looking for a combination of grade and tonnage improvement from the historic resource. Creston is awaiting assays for the last of 11 holes on the Red Hill zone, which includes 2 holes 120 m apart drilled to a depth of about 500 metres that yielded a visual surprise not expected based on holes drilled in the area by an earlier operator. These holes apparently are visually similar, with sulphides increasing at depth. Creston hopes to report assays for the Red Hill zone in two weeks. Depending on the results Creston may have to rethink its mine development strategy for El Creston. Condemnation drilling to the southeast of Red Hill is turning up a different rock unit in an area suited for mine infrastructure, which is good news that balances possible good news from Red Hill. The company has been conducting studies on water availability in the valley; a key milestone will be demonstration of both water availability and the securing of rights to such water. The drilling program at El Creston is winding down, though management is considering a 6 hole program on the new Alejandro Zone to the east before wrapping up. According to Jon George the company expects to have about $4 million working capital left by March 2009, leaving it in good shape to weather an extended funding drought, but in need of a friendly financial backer if it wishes to continue rapid development of this major moly project. The stock has held up well during the recent market turmoil because it has been the subject of institutional dumping since September 2007, with most of the stock traded in the $0.30-$0.49 range recommended on December 11, 2007. Creston's shareholder base has thus already rotated out of the hands of weak hedge funds who bought during the March 2007 MolyMania surge into the hands of investors with a longer term vision in mind that sees Creston Moly Corp being acquired by a mid tier producer. Except for some delays the El Creston story is evolving along projected lines, and I am comfortable confirming Creston Moly Corp as a top priority bottom-fish buy in the $0.30-$0.49 range.

Arapaho Capital Corp (AHO-V: $0.69)Profile Search Web Site Tree Forum SEDAR Quote

Bottom-Fish Comment - September 23, 2008: Arapaho Capital confirmed a medium priority bottom-fish buy

Arapaho Capital Corp was adopted as a medium priority bottom-fish buy in the $0.50-$0.75 range on February 3, 2005 based on its status as a company with a tight share structure controlled by a strong group with the capacity to generate a good project for it. In November 2005 Brian Bayley and Murray Sinclair sold most of their control block to a group headed by Northfield Capital's Robert Cudney. The stock quickly ramped up into the $2.00-$2.50 range on light volume and in late December 2005 the stock was halted for an RTO of an oil & gas project in India which included a condition that Arapaho complete a $25 million private placement. The initial flutter to $2.75 represented an interim 267% gain. By April 2006 the stock had been allowed to resume trading, but when the RTO was cancelled in late May 2006 due to market turmoil and the inability of Jones Gable to raise the money Arapaho fell back into the $1.00-$1.25 range where it drifted until the September 2008 general market meltdown pulled the price back into the $0.50-$0.75 bottom-fishing range. On September 23, 2008 the open medium bottom-fish buy recommendation in the $0.50-$0.75 range was confirmed based on the continued status of Arapaho as a tightly held shell with only 6.6 million shares controlled by a strong group, and $1 million working capital which should be sufficient to fund the due diligence costs of a major acquisition. Bottom-fishers should hold their existing positions and accumulate more stock if any becomes available below $0.75. This stock is illiquid and should be bought only by bottom-fishers willing to hold for the long run. Because Robert Cudney has access to any number of shells, it is unlikely that one like Arapaho in which he probably did not pay a low price for his stake will be wasted on an unproductive dilutionary deal that hands all the reward to the private side of the transaction. An alternative to an RTO would be a decision to acquire a project on delayed payment terms and split the stock to create a greater stake for the "insiders" and liquidity for the market. This latter possibility would be the best scenario for bottom-fishers. The $1.5 billion takeover by Goldcorp in late September 2008 for Gold Eagle Mines Ltd in which Robert Cudney is a key player should underpin his ability to turn Arapaho into a big play.

New Bottom-Fish Highs
Volume High Low Close Chg Status
No Records

Top 10 Bottom-Fish Volume Traders
Volume High Low Close Chg Status
Thompson Creek Metals Company Inc (TCM-T) 22,918,500 $14.740 $7.830 $8.150 ($7.200) Spec Cycle Hold 100%
Orezone Resources Inc (OZN-T) 17,288,000 $1.090 $0.320 $0.345 ($0.345) Spec Cycle Hold 100%
Freewest Resources Canada Inc (FWR-V) 11,632,500 $0.350 $0.230 $0.255 $0.010 Spec Cycle Hold 100%
Vaaldiam Resources Ltd (VAA-T) 10,392,700 $0.125 $0.040 $0.050 ($0.070) BF TP Buy $0.50-$0.75
Nevsun Resources Ltd (NSU-T) 9,632,000 $1.500 $0.840 $0.960 ($0.140) Spec Cycle Hold 100%
Creston Moly Corp (CMS-V) 5,930,900 $0.335 $0.250 $0.260 ($0.040) BF TP Buy $0.30-$0.49
Sterling Resources Inc (SLG-V) 4,823,000 $1.780 $1.080 $1.080 ($0.620) Spec Cycle Hold 100%
GLR Resources Inc (GRS-T) 4,762,000 $0.100 $0.030 $0.040 ($0.015) Spec Cycle Hold 100%
Minera Andes Inc (MAI-T) 4,241,700 $1.200 $0.890 $0.950 ($0.040) Spec Cycle Hold 100%
Energold Drilling Corp (EGD-V) 4,017,500 $2.600 $1.550 $1.670 ($0.880) Spec Cycle Hold 100%

Top 10 Bottom-Fish Value Traders
Value High Low Close Chg Status
Thompson Creek Metals Company Inc (TCM-T) $258,457,450 $14.740 $7.830 $8.150 ($7.200) Spec Cycle Hold 100%
Orezone Resources Inc (OZN-T) $11,084,742 $1.090 $0.320 $0.345 ($0.345) Spec Cycle Hold 100%
Nevsun Resources Ltd (NSU-T) $10,697,581 $1.500 $0.840 $0.960 ($0.140) Spec Cycle Hold 100%
Energold Drilling Corp (EGD-V) $8,411,732 $2.600 $1.550 $1.670 ($0.880) Spec Cycle Hold 100%
Sterling Resources Inc (SLG-V) $7,193,649 $1.780 $1.080 $1.080 ($0.620) Spec Cycle Hold 100%
Corriente Resources Inc (CTQ-T) $6,014,774 $5.090 $4.050 $4.310 ($0.050) Spec Cycle Hold 75%
Minera Andes Inc (MAI-T) $4,640,396 $1.200 $0.890 $0.950 ($0.040) Spec Cycle Hold 100%
Polymet Mining Corp (POM-T) $4,103,986 $3.100 $2.080 $2.350 ($0.750) BF MP Buy $0.50-$0.75
Queenston Mining Inc (QMI-T) $3,583,382 $2.000 $1.350 $1.370 ($0.480) BF TP Buy $0.30-$0.49
Freewest Resources Canada Inc (FWR-V) $3,279,747 $0.350 $0.230 $0.255 $0.010 Spec Cycle Hold 100%

Top 10 Bottom-Fish Price Gainers
Volume High Low Close Chg Status
Exeter Resource Corp (XRC-V) 1,395,700 $2.690 $1.750 $2.100 $0.150 BF MP Buy $1.00-$1.25
Grayd Resource Corp (GYD-V) 973,000 $0.345 $0.270 $0.330 $0.080 Spec Cycle Hold 100%
Talon Metals Corp (TLO-T) 371,400 $0.590 $0.390 $0.500 $0.050 BF TP Buy $0.50-$0.75
Kobex Resources Ltd (KBX-V) 325,100 $0.480 $0.380 $0.400 $0.030 BF TP Buy $0.50-$0.75
Dios Explorations Inc (DOS-V) 883,500 $0.220 $0.150 $0.220 $0.020 BF TP Buy $0.30-$0.49
Tumi Resources Ltd (TM-V) 365,300 $0.215 $0.150 $0.200 $0.015 BF MP Buy $0.30-$0.49
Freewest Resources Canada Inc (FWR-V) 11,632,500 $0.350 $0.230 $0.255 $0.010 Spec Cycle Hold 100%
Copper Fox Metals Inc (CUU-V) 2,302,800 $0.260 $0.180 $0.210 $0.010 Spec Cycle Hold 100%
San Anton Resource Corp (SNN-T) 369,600 $0.260 $0.185 $0.250 $0.005 BF MP Buy $0.10-$0.19
Skyline Gold Corp (SK-V) 1,517,600 $0.130 $0.065 $0.110 $0.005 BF TP Buy $0.10-$0.19

Top 10 Bottom-Fish Price Percentage Gainers
Volume High Low Close Chg Status
Grayd Resource Corp (GYD-V) 973,000 $0.345 $0.270 $0.330 32% Spec Cycle Hold 100%
Talon Metals Corp (TLO-T) 371,400 $0.590 $0.390 $0.500 11% BF TP Buy $0.50-$0.75
Dios Explorations Inc (DOS-V) 883,500 $0.220 $0.150 $0.220 10% BF TP Buy $0.30-$0.49
Tumi Resources Ltd (TM-V) 365,300 $0.215 $0.150 $0.200 8% BF MP Buy $0.30-$0.49
Kobex Resources Ltd (KBX-V) 325,100 $0.480 $0.380 $0.400 8% BF TP Buy $0.50-$0.75
Exeter Resource Corp (XRC-V) 1,395,700 $2.690 $1.750 $2.100 8% BF MP Buy $1.00-$1.25
Skeena Resources Ltd (SKE-V) 524,000 $0.095 $0.065 $0.075 7% BF TP Buy $0.20-$0.29
Copper Fox Metals Inc (CUU-V) 2,302,800 $0.260 $0.180 $0.210 5% Spec Cycle Hold 100%
Skyline Gold Corp (SK-V) 1,517,600 $0.130 $0.065 $0.110 5% BF TP Buy $0.10-$0.19
Freewest Resources Canada Inc (FWR-V) 11,632,500 $0.350 $0.230 $0.255 4% Spec Cycle Hold 100%

Top 10 Bottom-Fish Price Losers
Volume High Low Close Chg Status
Thompson Creek Metals Company Inc (TCM-T) 22,918,500 $14.740 $7.830 $8.150 ($7.200) Spec Cycle Hold 100%
Energold Drilling Corp (EGD-V) 4,017,500 $2.600 $1.550 $1.670 ($0.880) Spec Cycle Hold 100%
Polymet Mining Corp (POM-T) 1,646,400 $3.100 $2.080 $2.350 ($0.750) BF MP Buy $0.50-$0.75
Sterling Resources Inc (SLG-V) 4,823,000 $1.780 $1.080 $1.080 ($0.620) Spec Cycle Hold 100%
Queenston Mining Inc (QMI-T) 2,139,300 $2.000 $1.350 $1.370 ($0.480) BF TP Buy $0.30-$0.49
Geologix Explorations Inc (GIX-V) 2,399,900 $1.270 $0.720 $0.720 ($0.380) Spec Cycle Hold 100%
Orezone Resources Inc (OZN-T) 17,288,000 $1.090 $0.320 $0.345 ($0.345) Spec Cycle Hold 100%
Southwestern Resources Corp (SWG-T) 2,282,500 $0.570 $0.240 $0.260 ($0.300) Spec Cycle Hold 75%
Troon Ventures Ltd (TVN-V) 93,900 $0.850 $0.510 $0.510 ($0.290) BF MP Buy $0.20-$0.29
Solitario Resources Corp (SLR-T) 90,600 $4.500 $3.300 $3.360 ($0.280) Spec Cycle Hold 100%

Top 10 Bottom-Fish Price Percentage Losers
Volume High Low Close Chg Status
Eureka Resources Inc (EUK-V) 13,800 $0.300 $0.135 $0.140 -65% BF MP Buy $0.10-$0.19
Vaaldiam Resources Ltd (VAA-T) 10,392,700 $0.125 $0.040 $0.050 -58% BF TP Buy $0.50-$0.75
Everton Resources Inc (EVR-V) 2,211,200 $0.210 $0.085 $0.085 -55% BF MP Buy $0.30-$0.49
Southwestern Resources Corp (SWG-T) 2,282,500 $0.570 $0.240 $0.260 -54% Spec Cycle Hold 75%
Orezone Resources Inc (OZN-T) 17,288,000 $1.090 $0.320 $0.345 -50% Spec Cycle Hold 100%
Windarra Minerals Ltd (WRA-V) 377,800 $0.110 $0.050 $0.050 -50% BF LP Buy $0.10-$0.19
Thompson Creek Metals Company Inc (TCM-T) 22,918,500 $14.740 $7.830 $8.150 -47% Spec Cycle Hold 100%
Karmin Exploration Inc (KAR-V) 13,000 $0.450 $0.330 $0.330 -45% BF MP Buy $0.30-$0.49
Western Troy Capital Res Inc (WRY-V) 149,000 $0.270 $0.150 $0.180 -44% BF TP Buy $0.30-$0.49
Northern Lion Gold Corp (NL-V) 655,000 $0.090 $0.055 $0.060 -40% BF MP Buy $0.30-$0.49

New Bottom-Fish Lows
Volume High Low Close Chg Status
Channel Resources Ltd (CHU-V) 548,700 $0.035 $0.025 $0.025 ($0.005) BF MP Buy $0.20-$0.29
Coastport Capital Inc (CPP-V) 696,400 $0.075 $0.045 $0.045 ($0.020) BF MP Buy $0.50-$0.75
Creston Moly Corp (CMS-V) 5,930,900 $0.335 $0.250 $0.260 ($0.040) BF TP Buy $0.30-$0.49
Diamonds North Resources Ltd (DDN-V) 1,241,700 $0.790 $0.550 $0.600 ($0.100) Spec Cycle Hold 100%
Dios Explorations Inc (DOS-V) 883,500 $0.220 $0.150 $0.220 $0.020 BF TP Buy $0.30-$0.49
Eaglewood Energy Inc (EWD-V) 167,500 $0.300 $0.190 $0.260 ($0.100) BF TP Buy $0.50-$0.75
Everton Resources Inc (EVR-V) 2,211,200 $0.210 $0.085 $0.085 ($0.105) BF MP Buy $0.30-$0.49
Gateway Gold Corp (GTQ-T) 799,900 $0.180 $0.080 $0.125 $0.000 BF TP Buy $1.25-$1.50
Gitennes Exploration Inc (GIT-T) 399,600 $0.110 $0.060 $0.070 ($0.040) BF TP Buy $0.30-$0.49
GLR Resources Inc (GRS-T) 4,762,000 $0.100 $0.030 $0.040 ($0.015) Spec Cycle Hold 100%
Golden Valley Mines Ltd (GZZ-V) 967,300 $0.190 $0.140 $0.140 ($0.030) BF TP Buy $0.20-$0.29
Intl Northair Mines Ltd (INM-V) 89,700 $0.080 $0.070 $0.080 ($0.010) Spec Cycle Hold 100%
Lithic Resources Ltd (LTH-V) 743,500 $0.135 $0.070 $0.090 ($0.040) BF TP Buy $0.20-$0.29
Manson Creek Resources Ltd (MCK-V) 522,300 $0.075 $0.045 $0.050 ($0.020) BF MP Buy $0.10-$0.19
Newcastle Minerals Ltd (NCM-V) 1,615,600 $0.055 $0.030 $0.040 $0.000 BF MP Buy $0.10-$0.19
Northern Lion Gold Corp (NL-V) 655,000 $0.090 $0.055 $0.060 ($0.040) BF MP Buy $0.30-$0.49
Radius Gold Inc (RDU-V) 983,500 $0.140 $0.070 $0.085 ($0.035) BF TP Buy $0.50-$0.75
Sennen Resources Inc (SN-V) 395,500 $0.305 $0.210 $0.255 ($0.065) BF TP Buy $0.30-$0.49
Serengeti Resources Inc (SIR-V) 725,800 $0.380 $0.230 $0.250 ($0.115) Spec Cycle Hold 100%
Sirios Resources Inc (SOI-V) 836,500 $0.150 $0.070 $0.090 ($0.010) BF MP Buy $0.10-$0.19
Skyline Gold Corp (SK-V) 1,517,600 $0.130 $0.065 $0.110 $0.005 BF TP Buy $0.10-$0.19
Solomon Resources Ltd (SRB-V) 506,800 $0.080 $0.030 $0.055 ($0.015) BF XP Buy below $0.10
Southwestern Resources Corp (SWG-T) 2,282,500 $0.570 $0.240 $0.260 ($0.300) Spec Cycle Hold 75%
Talon Metals Corp (TLO-T) 371,400 $0.590 $0.390 $0.500 $0.050 BF TP Buy $0.50-$0.75
Vaaldiam Resources Ltd (VAA-T) 10,392,700 $0.125 $0.040 $0.050 ($0.070) BF TP Buy $0.50-$0.75
Vencan Gold Corp (VCG-V) 2,134,900 $0.040 $0.020 $0.030 ($0.010) BF MP Buy $0.10-$0.19
Western Troy Capital Res Inc (WRY-V) 149,000 $0.270 $0.150 $0.180 ($0.140) BF TP Buy $0.30-$0.49


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