Graphite stocks have been slammed considerably after the initial run up in the spring. I believe this is creating a second buying opportunity for those of us who missed the initial powerful run to buy shares in graphite stocks. Not only that, but we have the one graphite stock with a quite special story due to their unusual and rare vein graphite discover (ZEN)
I am going to be blunt…..buy Zenyatta Ventures on this pullback! As you see on the chart, we are right at the 200 DMA and only 3-5 cents off its long term trend support line (21-22 cents). The pullback has been on relatively light volume and once the stock breaks the sloping downtrend line (seen in blue), we may very well be off to the races again. There has been some concern about the arrangement/contract with Cliffs Resources and the Albany Graphite deposit. I have finally spoken to management to address this issue and am quite comfortable with even a worst case scenario in terms of ZEN percentage ownership in the project.
I believe the most likely scenario for ZEN will be the 80% earn in by spending $10MM leaving Cliffs with 20% of the project. There are three other potential scenarios on how this shakes out. Cliffs can back in the this agreement and take 70% of the project but they would have to bankroll the project to a feasibility study, which would allow ZEN to skate in terms of cash outlay for drilling up the deposit to that point. There is another moving part option where ZEN spends the $10MM and Cliffs pays $27.5MM to back in to 70%. There is also the possibility they agree on some new terms, even ZEN taking the whole project, which may be tough to do but this project is quite early in its development for Cliffs to make any big commitments in my opinion. So, the most likely scenario is the 80% earn in for ZEN spending $10MM. The worst case, if you want to call it that, is the project is bankrolled considerable by Cliffs and ZEN ends up with 30% of Albany.
Here’s the thing. If ZEN has what we think they have with this deposit, the stock could be worth $5 a share on a 30% interest-easy. I am not concerned about any real risk in how this agreement shakes out…..any scenario is fine, even though I would prefer they secure the 80% plus ownership. The key here now is clearly metallurgical results pending from Lakefield on purity. They have up to two months to get the initial lab results out but certainly could be a lot sooner. I’ll tell you something; if the metallurgy comes back with very high purity, we’re going to explode on the upside quite fast, which is why down near long term trend line support and the 200 DMA, you want to be buying/adding to your position before these lab results hit.
There’s always downside risk in early plays like this and I think we’re experiencing it now. I’d be very surprised if we go below 20 cents, but anything is possible in a global environment like this….it would be a macro event to make that happen. But, I think we’re near/at the lows in ZEN and am a buyer of stock here as this story could catch fire again in a violent fashion so be a prudent investor and buy when most out there are wondering what’s wrong. There’s nothing wrong here…..Zenyatta has massive potential with this graphite deposit! For more conservative investors/traders, you can wait to add aggressively when the stock breaks its sloping trend line at about 30 cents. Personally I bought more today and if/when it breaks the downtrend line, I will aggressively load up more.
Purity is the potential lynchpin in this story in the short term but I’m quite hopeful we’ll see good results, even though that is nothing but speculation on my part. With huge upside there’s always correlated risk, as with anything in life, so use your head in terms of how much you want to own. BUT, if you loved it at 40-50 cents…..what are you waiting for down here when all we’ve had is terrific news!