Another gold mining company making big moves in the market and causing quite a stir these days is El Capitan Precious Metals, Inc (OTCBB: ECPN) following the November announcement of the acquisition of the privately held Gold and Minerals, Inc, the company’s partner in its primary gold properties.
The stock, which was stable with limited liquidity in the $08 to $.10 range from May 2009 until January 2010 when it popped up and stabilized in the $.15 range for a few months before beginning a steady climb to $.50 through the middle of December 2010. That’s when things got really interesting.
Coincident to the company’s filing of a Prospectus disclosing the acquisition of Gold and Minerals, Inc, the stock took off, peaking momentarily at $1.57 before settling back as profit takers took over. With volume peaking over 3 million shares and sustaining over 1 million, we decided to take a look and see if the facts support the excitement in the market.
According to their website, El Capitan Precious Metals, “along with our partner Gold and Minerals Company, Inc., owns what we believe to be one of the largest undeveloped, surface mineable precious metals deposits in the continental United States. ECPN and Gold and Minerals Company, inc. are currently working towards the completion of the merger of the two companies.
“While the El Capitan deposit comes with metallurgical challenges, the near-surface, pervasive nature of this deposit, all of which occurs above the regional water table, provides the potential for both a low mining cost and a long life operation. An investment in ECPN represents an investment in a late-stage exploration / early-stage development company with a gold, silver and platinum group metals discovery that has already seen almost 13,000 feet of successful core and reverse circulation drilling within a 200 acre resource block. In addition to developing a better understanding of the metallurgical issues associated with this deposit, the Company is focused on acquiring federal and state permits to conduct sub-surface exploration on a 2,000 acre claim block extending east, west and south of the current resource area.”
With the acquisition now complete, El Capitan Precious Metals has about 240,408,660 shares outstanding, making the current market cap well beyond a quarter of a billion dollars. That’s a lot of market cap to sustain for a company without any current or historic revenues.
Looking at El Capitan’s website, it’s difficult to gain a comprehensive understanding of their business plan. For years, they have been working on acquiring and/or testing El Capitan but never seem to get around to actually mining anything. I would like to think with the four top executives in the corp paying themselves a combined total of more than $700,000 in cash and free trading stock plus another $80k worth of restricted stock per year, that they might actually produce some revenues. We are strong proponents of the theory that development stage company executives show restraint when it comes to compensating themselves with investor dollars with the understanding that when the cash starts rolling in, they will be appropriately rewarded.
Their plan, however, is revealed in a September 2010 announcement/letter to their shareholders and confirmed by the following disclosure about their plan for success: “The Company supplied with an economically feasible recovery model for the precious metals for the El Capitan property ore, we believe we can contract with an investment banking firm to sell the El Capitan property to a major mining company.” So the plan is not to mine the property but to develop a feasible mining plan then sell the property to a major mining company. The possible flaw in this plan is that, they have been trying to come up with proof of significant recoverable resources since 2005 without noteworthy success. We further note this disclosure: “Over the years, samples taken on the property, including samples taken by ECL, have given low-grade precious metal results when using standard fire assay methods” This is not an encouraging piece of information.
From their 10K: “In September 2010, we announced that our team of chemists and metallurgists had developed a gold recovery process which uses “lead collection with silver inquarting.” This process was used by Copper State Analytical Lab (“CSAL”) to produce a certified report on metal recovered from samples that came from 3,000 tons of El Capitan head ore. This report by CSAL states a value of 0.421 ounces of gold per ton of ore to be recovered from the El Capitan head ore.”
While .421 oz per ton could be encouraging, it’s not awe inspiring but it’s sure as heck not a quarter of a billion dollars exciting. What’s more, much of El Capitan Precious Metals’ mining claims are subject to Bureau of Land Management regulations which could have a significant impact on the economic viability of the mines.
Additionally, the deal the company made with Planet Resource Recovery, Inc, seems to have hit a snag.
Rating: Based upon a business strategy calling for raising a lot of money on an ongoing basis to cover executive salaries equaling 4 times explorations costs and an all or none approach to sell the property to a major company thereby eliminating the possibility of revenue producing activities, I would rate the business strategy a 5 out of 20.
Potential for Exponential Upside
The only property that is currently being worked is the El Capitan property and given the above disclosures, we don’t see any substantive potential for exponential upside. Still, there’s always the chance to stumble upon a mother load and that’s gotta count for something.
Rating: We rate El Capitan Precious Metals’ potential for exponential upside at 3 out of 10.
Reviewing the combined proforma financial statement really raised some eyebrows as the company is booking the acquisition of the balance of the El Capitan property at a whopping $73,905,704. While this might work in a private company, we doubt very much the auditors or SEC will let this one stand. Look for it to be reduced to the actual amount of cash invested in the project or some other tangible number steeped in reality.
Looking at the just filed 10K, we see that prior to the acquisition the company has $1.8 million in assets against $493k in liabilities and a current asset to current debt ratio of about 2 to 1. Not bad for a penny stock. We would advise against any investment decisions based upon the $73 million evaluation until such time as it has been certified by an auditor.
The company has had no revenues since its inception in 2002 with none anticipated in the near future according to the 10K. With expenses running at $1.2 million a year, the bulk of which is executive salaries and professional fees, there seems little doubt that shareholders will experience continuing dilution.
Rating: I rate El Capitan Precious Metals’ financial statements at a 9 out of 30 with a significant penalty for what we perceive to be an unjustified attempt to book the acquisition at an unrealistic figure in the proforma.
Stock and the market
Since mid December, El Capitan Precious Metals stock has been showing a significant increase in volume and price. Prior to the move up, the stock was relatively stable in the $.50 range. The stock started its big move up when it filed the acquisition prospectus with the $73 million added to the balance sheet. The stock hit $1.58 before settling back down and is currently trading in the $1.20 range, still a nice gain from half a buck. Still, the market is going to have a lot of trouble supporting a $280 million market cap on a stock with no revenues… ever… when that $73 million disappears off the balance sheet.
Volume, while still quite good, is declining and, with a declining volume, it would be unusual for the stock not to retrace more of the gains as well.
Rating: Given all the factors, I rate the El Capitan Precious Metals’ stock and the market at 8 out of 20
Charles Mottley, age 76, is the President and CEO and the only executive with any relevant experience. Prior to El Capitan, he was Chairman and CEO of the just acquired Gold and Minerals from 1978. While there are no specific details yet on prior revenues, G & M does not have any indicated for 2009. While it’s hard to imagine there have never been revenues generated by Mottley in his long career, it is disclosed that G & M has accrued losses of over $16 million since inception. Apparently producing revenues has not been high on Mottley’s professional to-do list.
According to filings, Stephen Antol, the CFO, is only working part time despite his $153,256 compensation package for 2010. In addition to acting as CFO for the company, he also is providing similar services as a “consultant chief financial officer for a number of small and medium size businesses requiring technical expertise on a limited or recurring basis.” He has no disclosed experience in mining beyond his work for El Capitan Precious Metals.
No other officers or Directors disclose any relevant mining experience. The corporate offices are about 450 miles from the El Capitan mine. This raises additional concerns about the amount of time and attention the operations are getting from the company’s employees. I find no evidence that any of the executives are working anything approaching a 40 hour week on this project despite their generous compensation packages.
Given these facts, I rate Management at 5 out of 20.
Summary: There is little to like about El Capitan Precious Metals. While they do appear to have claims and rights to a sizable area, there is little solid evidence to indicate that these mining sites possess exciting potential. Management seems self possessed with completing an acquisition of property they already had significant equity interests in and their other focus is on raising cash and issuing stock to support their very generous compensation package without displaying much of anything to suggest they are working on making the corporation profitable through revenue creation. The idea that they will find a legitimate buyer for El Capitan at a price beyond a quarter of a billion dollars flies in the face of all current evidence strikes us as being a plan that allows management to continually speak in future terms without having to address the lack of revenues.
Since, according to my due diligence, the stock seems significantly overvalued and I see nothing to suggest the stock can sustain these levels for the next few quarters, I am of the opinion that the forces of economic gravity (a powerful force indeed) will not be denied and the stock will retrace much of its gains.
Our rating of 30 out of 100 suggests that El Capitan Precious Metals isn’t a stock worth considering for a spot in your speculative portfolio.
NOTE: Always do your own due diligence and consult a professional advisor before investing in any stock, including this one.
Disclosure: We are not long or short El Capitan Precious Metals stock nor do we have any financial interest in the company or in writing this review.
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