Zenyatta: A Tiger by the Tail
From time to time in an investor’s career an opportunity surfaces where all of the stars seem to align. I discovered Zenyatta Ventures (ZEN.V/ZENYF.PK) in late March of 2012 when the Graphite space caught my attention due to the outperformance and lack of correlation the sector had to the overall market. Nobody told me about ZEN, I found it on my own as I conducted my proprietary due diligence procedures online. Since that time, ZEN has had quite a ride and virtually every other Graphite stock that is public has been smashed and is trading at or near record low prices. It is fairly rare and a sign of significant strength that a stock bucks the trend of its overall sector but this is what we’re seeing in spades for ZEN:
**We appreciate the feedback we’ve had from subscribers who noticed that we were pounding the table to buy in August when shares were trading in the teens.
Notice the contrast in trading patterns via the chart below of a ‘leader’ in the Graphite space (Northern Graphite):
This chart pattern is common throughout the space and may or may not improve in the near term, although we do certainly believe most, if not all, of the “hot money” that zipped into graphite stocks in the spring has sold. Long term, graphite has a bright future and should see growing demand from all types of applications both old and new. This includes heat spreaders in flat panel displays, laptops, tablets, smart phones, lithium ion batteries, solar technologies, fuel cells, the nuclear industry, and in Graphene (which may transform the semiconductor industry via ultrahigh speed microprocessors), amongst other things. The opportunity and significance regarding Zenyatta’s Albany vein graphite discovery sets them way apart from the rest of the flake graphite companies surfacing in the market.
One of the keys we have been talking about for a while has been the long awaited purity results from SGS ‘Lakefield’. Approximately one month ago, we saw the first tranche of purity results:
The more I learn about synthetic graphite, what it takes to produce it, and the significant value thereof versus a flake graphite end product, these results are outstanding. Not only is it extremely rare to have a vein graphite discovery (the fact is that there are only producing vein graphite mines located in Sri Lanka and these resources are depleting), and hit purity levels over 97% on the first crack, but this discovery may very well prove itself to be massive. http://www.zenyatta.ca/upload/documents/l_tau_db_dt_june15.pdf
We can already read between the lines from the successful 450 x 800 meter step out drilling to date, impressive grades of over 7% in certain areas, and recently robust purity received from the lab. The amount of tonnage can be speculated upon unofficially (official 43-101 reports will eventually confirm what ZEN has in the ground) and with a likely finalized synthetic graphite product that can be sold into the market at $7,000-$20,000 plus per ton, I am speculating that we have a resource potentially worth multi billions of dollars in the ground. I believe part of the opportunity here with the market only valuing ZEN at less than a $25MM market capitalization, is the lag we have and will continue to see in the investment community understanding the value of the Albany vein graphite deposit.
Graphite is a new commodity to evaluate for investors and 99% of the opportunities that they assess contain flake graphite drill results. I have certainly had a learning curve understanding the graphite market and am continuing to learn more as I go. But frankly, I don’t care what the end product is, if you have an undiscovered/undervalued stock that you identify before the market does, with a new discovery at an early stage, with huge room to grow the deposit, and the right people running the business, I want to be involved and in a significant way. The number of potential catalysts in the coming months for ZEN are many, not the least of which, are further purity results from SGS. We expect continued positive results in the near future based on timing and information provided in previous press releases and the potential for clarity on the terms of ownership and responsibilities between Cliffs Natural Resources and Zenyatta Ventures.
I’m also very excited about the next phase of drilling and the decisions that management and the board make regarding where to drill and if they decide to test other areas on their large properties. Remember, initially ZEN was drilling for base metals, which may indeed exist on prospects outside of Albany (and is why we saw a company like Cliffs get involved in Zenyatta in the first place). The moves by ZEN up to this point since I’ve been following the stock have inspired confidence, including the additions of highly impressive and qualified individuals which can help them maximize ultimate profitability and value for shareholders: http://finance.yahoo.com/news/zenyatta-ventures-ltd-adds-experienced-134319208.html
Early on I made comments about Zenyatta having significant upside potential and mentioned a $2-5 per share price possibility somewhere down the road. This is indeed a speculative assessment on my part but I am now 10x more confident in this possibility post purity results. With my “back of the napkin” analysis on potential tonnage in the dirt thus far, we could only need to see a 1% value of ZEN’s shares against what they have in the ground in asset value to hit this price range. Certainly, much more drilling and success in drilling will need to be seen, along with formal 43-101 resource estimates, for more conservative investors to justify this equation. In fact, we all know that taking any exploration project to a producing mine takes a lot of work and $10’s of millions of dollars in capital.
All of this being said, I believe shareholders in Zenyatta have some potentially very exciting days ahead of themselves. Anything can happen in the market and all companies involved in mineral exploration take on a high degree of risk. However, we feel the risk/reward here justifies a larger than normal amount of exposure in our reader’s portfolio and, for long term investors, we’re raising our “buy up to” price to 65 cents per share from 50 cents. A fairly likely scenario, and one we’re hoping for to buy time to accumulate more shares, is a near term re test of 12 month highs between 62-64 cents followed by a short consolidation before seeing new territory on the stock. However, when you have a Tiger by the Tail, shares could reset virtually overnight to multiples higher than we have seen thus far due to any number of possible positive developments.
Although it has come to my attention that ZEN was named after a late Police album: http://en.wikipedia.org/wiki/Zenyatta_Mondatta; this story is reminding me more of the thoroughbred racehorse http://en.wikipedia.org/wiki/Zenyatta (also named after the Police album). Zenyatta won 19 consecutive races in a 20 race career and “In Zenyatta’s 20:19–1–0 racing record she defeated multiple Grade I winners” which I believe we will see either gradually or swiftly for Zenyatta Ventures, as it is viewed by investors as the leader and general in the graphite sector.
Disclaimer: Eric owns shares of Zenyatta Ventures
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