Sunday, May 1, 2011

My Rebuttal to "LEXG.OB, THE SCAM"

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This is my rebuttal to the article "LEXG.OB, THE SCAM".

Without getting into the specifics of this stock's run from 10 cents to $10 this year, a reason that came up several times during the whole argument is that the company has no revenue. It's an argument that I've seen before and frankly it kind of annoys me. It's the reason why some of my TSX Venture mining plays have done terribly over the past year despite rising commodity prices and probably the reason why the Venture is not already trading at 5,000 and the TSX at 20,000. Probably more than half of the Venture-listed stocks haven't had a penny of revenue in their lifetime, but their leader is likely Copper Fox Metals, CUU.v:

You can see from the above link that CUU trades at $900M market cap despite not having a penny of revenue to it's name. Why is that? Because they have so much copper on their property that they will likely be bought out by TCK or some other major company with cash before they ever have to lift a pitchfork.

American investors are particularly touchy about companies that have no revenue. Maybe it's because they went through hell and back with the tech bubble 10 years ago. Maybe it's because their OTC market is so poorly regulated that LEXG-type of events happen far too often. But there is a huge difference between a tech company with no revenue and a resource company with no revenue. A tech company with no revenue might have a product, even a good product, but has no transparent plan on how to profitably sell it. See my blog post on Intertainment Media for an example of this.

A resource company is much, much different. The resource that they have in the ground is set in the market. Whether it's lithium, gold, oil or something else, they can sell it at a world price that fluctuates with the market. As long as you think that commodities will remain stable or rise in the next several years - and with China, India, Brazil etc all getting richer and with the world's population exploding that's a pretty safe bet - then all resource companies, whether they make money now or not will be great investments. All that has to be determined is how much of the resource they have and how much it costs to take it out of the ground.

If they have a 43-101 report out on their property then how much they have can reasonably be estimated. With potential upside for more. Costs are also relatively easy to estimate based on grade, thickness, depth until the resource is hit, location (with respect to delivery infrastructure) and the characteristics of the ground they are digging through. The only real risk is share dilution if they have to capitalize to bring the project to fruition themselves, although the bulk of these projects will likely be bought out by big players with the funds to do it themselves before that time.

So as in other words, a resource company with no revenues but a 43-101 report out is much, much less risky in this environment than a counterpart tech company. Less risk, in theory, comes with a greater stock price but we haven't seen that yet with many of these resource plays.

Now getting to the specifics of LEXG. If Copper Fox can trade at a $900M market cap with no revenues to its name then LEXG *could* conceivably be worth $300M in market cap if the 5 permits it holds on Valleyview contained a whole boatload of Lithium. That *could* be the speculation that has run up its stock price.

However, if we are going to look at LEXG's holdings, then we have to look at how they got them:

Reviewing this link you see that First Lithium ( in the US, MCI.v in Canada) optioned out 10.5K of their 90K hectares of this property to LEXG. Now I could get into the details of how First Lithium represent tremendous value if the speculation is based on Valleyview as written in all those "research" articles over the last little while for LEXG, but I'll just defer to the numerous posts on it below:

It would be logical that First Lithium, not LEXG is the true play here if you're going to speculate that Valleyview holds the motherlode. However FLNTF trades at a mere 13 cents with the same amount of shares outstanding as LEXG. Why is that?

Because of First Lithium's TSX Venture symbol MCI.v. It's not so easy to pump FLNTF's symbol sky high because all of us smart Canadians rule the trading on this stock. That being said, if there is something behind Valleyview to justify this obscene price of LEXG, First Lithium is the definite better play because of its volume and price spike on Friday but still very reasonable market cap of $8M compared to LEXG. Oh and the fact it owns EIGHT times more than LEXG in addition to 6 other unrelated gold/silver/lithium/potash properties. Even if LEXG were to go back to 10 cents, logic would state that MCI should be closer to 80 cents if both companies were valued equally.

Based on my tone, I think it's quite obvious that I am one of those smart Canadians who picked up shares in MCI.v this week.

PS. I feel bad for the poor yokel that supposedly invested a million dollars in LEXG on Friday based on the average price over the past five days, assuming that's the truth. Who knows? So many people are in on this as a pump and dump that it could actually rise again based on contrarian views or a short squeeze. Or maybe that yokel was one of the insiders who dumped his $1M worth of shares at this mystery price at $10 all the way down to under $4 as a final middle finger to the poor outsider looking in, because, as you know, 10 cents to $10 on millions of shares is clearly not enough money to scam out of small investors already.

The key is they at least have a million dollars to find something big on those properties, assuming that money doesn't just go to Ferrari repair bills through their salaries as they sit and do nothing with it as the BoD. But if they do find something big, imagine what that does for First Lithium.

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