This Is Not A Gold Company, Its A Stock Price Arbitrage

Notwithstanding the results posted on the same day as financing was announced, GBN.V is not really a gold company, but more some sort of a stock price arbitrage.

The timing of the news release could not be worse for this company(or better, depending on your point of view.) With the $IRX rising in the last week, releasing news on the rise is an indication there is no interest whatsoever in creating shareholder value, just control of the stock price.

Short term yields were at their peak on the Tuesday when news was released, so its clear there is no intent whatsoever to advance the share price here, regardless of results. The sell-side broker will be reacting to this latest surge in short term yields, selling shares they don't own(running into several hundred thousand shares per day) or whatever inventory they've accumulated into the market.

The resulting share price this week on events is an unmitigated disaster. Note that this is not the first time stellar results are released into the off-season, and that grade dilution is part of the business plan. No explorer in their right mind would wait until the off-season in the gold sector to release world class results which would otherwise have been rushed breathlessly to market, and no miner would intentionally dilute the grade far below the known grade of their project. This is what I call deferring to the bond holder's interest.

The bond holders in this case hold all of the risk in the form of equity swaps against the failure of the company. That indicates a very heavy short interest in the stock, all depending on the decline of the gold price, or some sort of crash in the markets.

Now, since there was no gold price correction on which these interests could depend to release news into, this should also be an indication that perhaps they can no longer rely on gold price declines, so they switched to co-ordinating rises in the discount rates, which was equally effective, but short-term.

Actual buyers in the shares(who are exceptionally few) at market held off until the price fix was in, getting a major discount in already discounted shares. Very likely GBN.V will close the financing, as its already become over-allotted. Note that the rollover of risk is required, thus insiders participate who are probably bond-holders. We have seen insider purchases preceding the issuance of shares over and again. This time is no different.

Should the tables turn, then I speculate that the insiders holding equity swaps will be selling their shares, so this is something to watch for. Let's say you have a speculative interest in the stock. You see through the lowballing of grades, the dilution of the shares, and the suprressed share price and you buy relentlessly until the arbitrageurs give up the ghost, solely to control the stock. You would see first the sell-side brokers head for the exits. Then the insider would eventually sell their portion of shares involved in the equity swaps. But it would also mean a lot of resignations on the board.

Buyers in the stock at market with a large amount of risk capital to parry on a struggling gold stock must take place for the stock price to see the light of day, but these buyers have been absent from this stock. The liquidity providers here are overwhelmingly the sell-side brokers.

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Note that the 'National Bank' is primarily selling shares here, and that they have been selling in large quantities for several days. Formerly, they were on the buy for a lengthy period, but they were settling shares they sold into the market for a lengthy period prior to that. This is the notable change in strategy. All of the other sell-side brokers are on the buy, seeing their opportunity to settle shares in adhoc fashion they themselves sold into the market without buying or holding any inventory.

Buyers in large quantity are few, and kept at bay by participating in private placements.

So with no interest in the stock, and a rise in the discount rate, there is no choice but for the stock price to go down. A 20% decline in one week is a stock price crash.

Insider Buying

Why Ink Research is showing net sales here is puzzling, because there have only been buys.

The Discount Rate

These last couple of weeks we've seen a brief reprieve in the decline of the discount rate. What is leading to the change is the floating of the Yuan, which preceded the announcement. My take on the Yuan is that no government policy ever determined the outcome in the markets, so the eventuality is that the proposed floating of the Yuan is jawboning aimed directly at raising the discount rate. This is primarily in advance of the G20 meeting in Toronto.

Now, the discount rate is not something you can change in a very short space of time, no matter how big a speculator you are. Central banks set their policy rates on the discount rate, not the other way around. Very likely any advance in the Yuan against the $US will result in lower interest rates at the short end of the yield curve. There is no upward momentum in the discount rate, no matter how much you want to believe in higher interest rates.

I would characterize the move in the markets so far this way:

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stockcharts.com

A short-term rise in the discount rate brought a decline in GBN.V shares, so an actual decline in the discount rate should bring support for the share price, and an outright rout of the discount rate should force the net settlements of the outstanding sell-side arbitrage(and its huge). The conclusion I draw from action in the stock this week is that a move in desperation is occurring, where 'going for broke' is the plan.

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stockcharts.com

Weekly Chart GBN.V

So what about GBN.V? Has the share price been damaged to the point that the pending bullish breakout has been snuffed out? The technicals are not so great on the charts, but the analysis remains firm:

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stockcharts.com

U.S. Yield Curve

Yields in the U.S. have declined in the past week, with the exception of short term rates. I presume that lower yields for treasuries will follow long term rates down:

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

-F6