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Stock investing : stock devaluation from new investors

Discussion in 'Non-Vegas Chat' started by JWBlue, Nov 5, 2012.

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  1. JWBlue

    JWBlue VIP Whale

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    I am considering investing further in a mining penny stock.

    The stock price is about .04.

    There is likely to be a significant additional investment in the near future by
    another company.

    Someone mentioned on a message board that when this company invests and
    is given shares that current shareholders stock will be devalued

    Is this a forgone conclusion or avoidable?

    Is this stock dead in the water for current shareholders?

    Does it depend what price I buy at?
     
  2. mike_m235

    mike_m235 Tourist

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    I hate to give you this answer, but 'it depends.' If they are increasing the float (the total number of shares outstanding) then that has a negative effect on current shareholders, as you now own a smaller percentage of the company. A typical metric for companies is EPS, or earnings per share. If the company has the same earnings but more shares, EPS is going down.

    Is it dead in the water? Hard to say with just this info. You'll want to see how much new stock is going to be issued as a percentage of the current float.

    But with a penny stock like this you're really looking for upside potential, so you have to consider what the other company might bring to the table.

    What I would be looking for is why is the other company buying in? Do they think there's a synergy there? If so, perhaps they increase earnings to offset the additional float.

    And to answer your final question, it ALWAYS matters what price you buy.
     
  3. JWBlue

    JWBlue VIP Whale

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  4. shifter

    shifter Degenerate Gambler

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    Devaluation due to issuing new shares is a very real concern. It can significantly reduce your profits in the long run.
     
  5. JWBlue

    JWBlue VIP Whale

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    Here is the share data.

    Below is the share structure of the company.

    As of
    October 4, 2012
    Issued and outstanding shares 177,211,441
    Fully diluted share structure 184,211,441
    Fully diluted market capitalization $14,736,915
    Current share price $0.05 (Canadian)
    52-week range CDN $0.05–$0.15
    Working Capital Approx. $3.2 million
    Debt None

    Here is information about the investor.

    • Invested approximately CDN $12M in the company as of
    May 2011.
    • Largest shareholder with 45.14% ownership.
    • To commit $50M in debt financing with option to purchase
    additional shares.


    Other information.

    • Economic studies show potential
    for a combined 15-year mine life
    and revenue of CDN $2.8 billion.


    Based on the share data and future issuance of shares to the investor with $50 M debt financing is there any objective reason to not invest in this company?

    Someone posted this on another message board. Is there any validity to this?

     
  6. mike_m235

    mike_m235 Tourist

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    Yes, there's validity to it. They appear to be taking on 3 times their current market cap in convertable debt. I wouldn't invest unless someone showed me a plan that would indicate some seminal event that would unlock shareholder value.

    I'd also want to see the margin that their making on the projected potential 2.8 billion in revenue (and you know that's probably a high end estimate). Revenue is nice, but if there are 2.7 billion in expenses, then earnings are negligible.

    I'm not a penny stock investor -- let me state that up front -- so I don't know how much risk you should expect to take on and how much potential reward you should be looking for. But this is not a healthy company.
     
  7. Chuck2009x

    Chuck2009x VIP Whale

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    OK, you probably know this, but this is how 99% of penny stocks work:

    The company exists to issue stock, periodically juice the price a little by one of many methods, most commonly by putting out "promising" press releases or buying some of its own stock, and then sell some of its own holdings into the price rise. Issue more stock. Lather, rinse, repeat.

    The fact that this company (Adex) has been putting out press releases for 5 years and its price is 5 cents should be a clue.
     
  8. JWBlue

    JWBlue VIP Whale

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    I have never invested in penny stocks so I was not aware a lot are scams.

    Time will tell.
     
  9. mike_m235

    mike_m235 Tourist

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    Oh. Run away. Run away fast. Never invest in something you don't understand.
     
  10. DonD

    DonD Super Moderator

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    If you do buy penny stocks, check their volume action. One buddy of mine bought a bunch of penny stock and when he went to sell it on the market, there were no buyers at all. Finally his stock broker bought it from him for almost nothing just so he could claim a loss on his taxes.
     
  11. Chuck2009x

    Chuck2009x VIP Whale

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    Well, if the "investor" is Great Harvest of Hong Kong, guess what? Great Harvest consists of the CEO and Chairman of the Board of Adex.

    Great Harvest
    http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=23376346

    Adex
    http://www.adexmining.com/directors.php
    http://www.adexmining.com/management.php

    When they did the private placement with Great Harvest in 2010, they paid CWN Capital of Hong Kong a finders fee of:
    • $336,000 in cash
    • Warrants for 5,600,000 shares
    • A $144,000 "retainer" fee
    • 7% of the value of the proceeds Adex gets from warrants exercised by Great Harvest (up to $506,000)
    • 1.5% of the principal of any loan Great Harvest makes to Adex (1.5% of 50 million is $750,000).

    Who is CWN Capital? Why, it's Joe Tai, a Director of Adex.

    See how this works? It's just an endless shell game.
     
  12. JWBlue

    JWBlue VIP Whale

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    Thank you for that information. Where did you get this?

    I am not following. Does this mean it is 100% a scam?

    I don't think it would be unusual for someone like this to be a director when he has a financial interest in the company.
    I am sure he became a director after the investment and not before.
     
  13. hammie

    hammie VIP Whale

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    Chuck, nice homework, you are obviously well informed. May I ask is this information readily available to the average investor or do you need to subscribe to some kind of service to get this level of detail?
     
  14. Chuck2009x

    Chuck2009x VIP Whale

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    I took your post about the share structure of the company, took the phrase "Economic studies show potential for a combined 15-year mine life" and Googled it. That's how I found Adex.

    Then I read a few press releases on their web site and saw that they're the usual stringing along of "developments".

    Then I read the 2010 press release that announced the private placement with Great Harvest of Hong Kong and Googled Great Harvest, and it turned up the link that showed the owners of Great Harvest are the same people running Adex.

    In that same press release, the finders fee paid to CWN Capital is disclosed and a Google search on CWN Capital turned up Joe Tai, who's also a director of Adex.

    Now, Adex isn't exactly trying to hide all of this, I think the listing for the Chairman says he's involved with Great Harvest, and the bio for Joe Tai says he's involved with CWN Capital.

    So the President/CEO and the board Chairman of Adex also are the principals of Great Harvest.

    So why did they need to pay another Adex director a finders fee to find themselves?

    I suppose it's possible that that 2010 placement was that trio's first involvement with Adex and that they became executives of Adex as a result. I didn't do any checking on that. I don't know what the Canadian equivalent of the SEC is and what kind of filings are required. If you established that the chairman was involved with Adex well prior to that private placement, then that would indicate that the deal is pretty fishy, again because of the finders fee.

    The drip drip drip of press releases that go nowhere is typical of this sort of thing and is mostly how I make my judgment of this particular company.

    If you read the bio of the chairman of the board, you'll see that he says he does shipping and trading of metals. Mining isn't his game. What he's doing here is just more trading, imho. Of stock, not metals.
     
    Last edited: Nov 7, 2012
  15. woodsie

    woodsie Low-Roller

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    Time has already told. Penny stocks are always scams. Anyone who has been around the block knows this.

    Think about all the times you've watched cnbc and they've interviewed guys who got rich in penny stocks. Oh wait, they've never done that because it's a complete pipe dream. :)

    Save your money and invest in real companies with real profits.
     
  16. elswam

    elswam Low-Roller

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    hi!!!

    to me the best invest is FOREX, but is very risk, i got it aprox 2% monthly
     
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