March 27th, 2009

These are pretty good times to go scavage-hunting for good stocks that have crashed mostly because of fear. GoldSource would be one such example. In 2008 GXS were looking for diamonds in Saskatchewan and happened to find a lot of coal instead. The stock rocketeered up to $20 and then as everybody started freaking out in the autumn, the stock fell back to about $1 and is now trading at about $2.50.

Other coal-miners/prospectors dropped heavily as well. But the fear that nobody would be wanting to buy coal seems pretty overdone - just recently the contracts for 2009 were signed and the price for the highest valued coal are at about $130/tonne. According to GXS management, their discoveries are of a high quality coal, perhaps not the best kind but from what I've understood it's among the better types of deposits.

The property of GXS's find is estimated to hold 500M-1B tonnes of coal, at least. The company has accumulated other properties in what they perceive to potentially be a coal trendline going from Saskatchewan into Manitoba. The drill-results in so far this year have confirmed the continuity of the deposit and I expect that more of these positive results will be coming in and resulting in further appreciation for the GXS-stock.

In 2008 the company took in $18M in a private placement and I think they should have a lot of that money still with them. They have no debt and the mcap today is at about CDN$50M. Let's say there really is 1B tonnes of coal in the property (called Border), and assuming a lower coal price at, say $50/tonne, that means that the in-ground coal would be worth $50B, which is obviously a lot compared to the mcap. A large North American coal-mining company would probably be very interested in purchasing 1B tonnes of coal for $50M, or why not $500M? Mining large coal-deposits isn't generally that expensive and this property would probably have a real good profit-margin - even at much lower prices.

In conclusion, I really doubt that buying this stock would not make you money. The only fear really should be in the overall economy, but that fear is only short-term - coal is a very inexpensive source of energy and there is technology to clean up emissions from it. The demand for coal isn't likely to go away any time soon; the price might drop but I don't think it could drop so much that a large high-quality coal-deposit in North America would become worthless.