After foolishly declaring PJX Resources Inc is unlikely to trade below $0.30 after its drill permit was finally granted on July 8 I have been scratching my head why the stock is now below $0.20. It is too early for the street to smell a drilling bust but these days the market frets that something will block a drill program such as a stakeholder protest or fire. I managed to get hold of CEO John Keating and he says drilling is underway, and there is no fire threat nor is there any issue with stakeholder. On July 30 I had assembled a graphic showing the wildfire situation in southeast BC which showed there was an out of control fire 20 km to the east of the Dewdney Trail drilling site but the two locations were separated by several north-south valleys. On August 16 I assembled a second graphic showing what the fire situation is today. That fire 20 km to the east is still "out of control", but in 2 weeks it has only grown from 11,382 ha to 11,903 ha. Most importantly, a very large area has gone from very high to low fire risk. So for now fire is not a problem, and drilling is underway, though the drillers are not happy that it is pissing rain so hard they have to keep drilling because the helicopter cannot bring replacement crew.
However, PJX has a new problem which will keep the stock under selling pressure for the next 6 weeks. In late November 2023 when PJX was raising money on the basis of the Sullivan style boulders it found in the talus the base of a mountain slope at Dewdney Trail it had a hard time raising money and was approached by somebody who specializes in arranging flow-through financings. The TSXV bulletin shows that 13,816,422 units were flow-through sold at $0.105. The TSXV used to disclose the identities of placees but more than a decade ago stopped naming even insiders and brokers due to privacy concerns. Keating won't tell me who took down the flow-through paper, but apparently 60% was taken by flow-through funds as opposed to high net worth individuals. Some of these funds began selling in late March as soon as the stock was free trading, but the recent price slump is due to stepped up selling. What puzzles ordinary investors is why start selling now when drilling of a potential world class Sullivan 2 target is finally underway?
I suspect what is happening is the same thing that torpedoed James Bay juniors like Dios Exploration Inc last year which had a Toronto fund called Marquest as an FT shareholder. This selling ramped up even as the James Bay juniors were finally getting boots on the ground after losing most of the summer prospecting season due to fire closures, a problem that does not exist this year in Quebec. It turns out that this type of flow-through fund has a distribution deadline which I think is October 31. There is an earlier deadline whereby the fund unit holders must elect to take stock or cash or perhaps a combination. It is even possible unit holders can make the election when they invest and would probably elect 100% cash because they don't know what the fund is buying and are only there for the tax benefits. Once the private placement is free trading the fund manager faces the tricky challenge of maximizing the amount of cash returned to fund investors so that they are inclined to invest in the next flow-through fund. That is why some selling starts four months after the financing closed.
Last year the problem was that the majority of fund holders elected to take cash because the market had turned so bad in H2 of 2023. So Marquest and all the other funds with a similar distribution structure were pounding out stock to raise cash. I think the way it works is that if as a fund investor I hold 1% of the fund when it closes, and I elect for 100% shares, I will receive 1% of each the fund's original position in each stock. So if a fund owned 1 million units of PJX, I would receive 10,000 PJX shares. I do not know how the warrants, which are supposed to be non-transferable, are handled. If I elected 100% cash I would get 1% of the cash generated at the time of distribution. If 60% of the PJX FT financing went to this type of fund, and everybody opted for 100% cash, there would be about 8 million PJX shares that need to be sold by the distribution date.
PJX has been a cult stock for a long time with high net worth individuals buying and never selling based on their enthusiasm for Keating's exploration strategy in southeastern British Columbia which includes not just the Hunt for Sullivan 2 but also a big picture theory that this reason is host to younger copper and/or gold mineralized intrusions. Keating has generally avoided doing flow-through with FT funds because they are just grinding out their commissions and could not care less about the fundamental outcome which they assume will be negative. But times were desperate and Keating did not know that the story would end up on the radar of Crescat and Quinton Hennigh. So PJX capitulated and now has the added complication that it granted a full $0.20 warrant to the flow-thru share. That means the fund manager has to convert any warrants in the money into cash by selling and exercising the warrant for the benefit of those fund holders who elected a cash distribution. This means that until the distribution date, which should be public knowledge, there will be a lid as high as 8 million shares hanging above $0.20 linked to those warrants. Keating says there have been no warrants exercised, probably because the first challenge is to liquidate the long position which process is now accelerating as the deadline later this year approaches.
The Crescat financing is now free trading but all that paper is betting on the fundamental outcome, and Quinton Hennigh will not have much to say on behalf of Crescat until there is news confirming a discovery. Such news is unlikely until late September. So what we are facing is an air pocket where there are "distressed" sellers (the FT funds) during a window when the market remains extremely bearish for resource juniors, and anybody who liked the story is already long. Potential new money will wait on the sidelines until there is a discovery game on signal.
Since the purchase price for the FT stock was $0.105 it is reasonable to assume that the funds will sell stock at least that low. So I will not be surprised if the stock sinks into the $0.10-$0.15 range where people like myself have a chance to average down until news emerges that the Sullivan 2 hypothesis is correct. Because these flow-through funds are not really supporting resource juniors, just engineering a tax dodge whose execution is indifferent to the needs of the juniors, the regulators should require such investments to be disclosed. But the regulators only work for the financial establishment, so any disclosures that help retail investors understand structural market risks unrelated to exploration fundamentals will never happen. Company principals like Keating are bound by confidentiality so they cannot help us, just quietly fume.
This situation would not have evolved if it were not for Canada's UNDRIP linked permitting system. The drill permits should have been in place by May, but because of the consultation merry-go-round they were not granted until July 8, and then came with a last minute requirement to do an extra check for "endangered species" within the vicinity of the drill sites which added another couple weeks of delay. As bad luck would have it, this meant the drill pad building crew lined up to start in early July took on another job and the start of the program was delayed another couple weeks so that drilling could not start until the second week of August. Had the permits been on time drilling would have started in mid June and we might know by now that we have a Sullivan 2 discovery on our hands. This would bring in new buying from investors who understand the upside, and the FT funds would have been selling into the buying rather than crushing the bid side of the order book. Now the funds are stuck selling into a no bid market because fundamental news will not come until close to their distribution deadlines.
There is a certain historical irony to this. When PJX appointed Chuck Fipke to its advisory board I asked Keating why and all he would say is that Chuck likes the story a lot. But I found out from another source that when Chuck saw that news release last year in late October, he knew immediately knew what it meant and bought a bunch of stock, including through the private placement.
This is interesting because his company Dia Met Minerals during the late 1980s had become a cult stock, especially among people in Kelowna where Fipke's lab was based. Diamonds were an alien concept so you had to be a true believer to buy and hold Dia Met. But Dia Met also raised flow-thru money from Ned Goodman's CMP funds. In November 1991 Dia Met and its farm-in partner BHP announced they had discovered a kimberlite pipe in the Northwest Territories that was diamondiferous. The disclosure was in the form of micro and macro counts, but the distinction at the time between micro and macro was based on a measurement in the longest dimension, which was effectively meaningless though it took a decade for a meaningful reporting standard for micro-diamond data to emerge. However, there was enough information about the harzburgitic chemistry (G10 garnets) that Dia Met attracted international buying from people who understood the diamond game and realized that there was something different and special about the Ekati discovery. And of course when the existing cult shareholders started to see their stock go up after years of flat-lining and sensed the excitement they didn't sell, but rather bought more of what was technically an illiquid stock.
But thanks to CMP there was plenty of liquidity as its fund managers unloaded the flow-through paper as the stock ascended from $0.60 into the $5-$10 range during H1 of 1992, and then, when results of a mini-bulk sample were released, confirming that true macro gem diamonds were present, the stock took off in H2 of 1992, surpassing $60 in mid 1993 when additional and better pipes were revealed. I have created a chart of Dia Met which includes the pre-split price calculated from the post split stock price to show how Dia Met fared until its buyout in 2001 by BHP at an implied project value of $2 billion.
So this situation of flow-through funds forced to sell by the end of October will keep the stock from going to the moon until they are done because the information flow by then will not definitively confirm a world class discovery, but reveal enough to signal to knowledgeable investors that it is game on. This forced selling will create welcome liquidity for newcomers willing to extrapolate the tea leaves PJX reveals between now and then, just as happened in H1 of 1992 with Dia Met. The high net worth PJX cult shareholders will probably not sell. Since this will be a multi-year exploration cycle if a discovery with implied scale is delivered, it will be good to see new money discover the story at a reasonable price and perhaps rekindle the belief that Canadian resource juniors can still ignite Canadian animal spirits. So maybe Chuck Fipke's arrival is a positive omen. |
