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Strategic Resource Acquisition (SRZ)


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Anyone know these directors?

 

 

Victor Wyprysky, President, CEO & Director

• Managing Principal of Toronto-based Crescent Financial Corporation

• Founding partner, past President and CEO of Harris Partners Inc.

• 25-Year Investment Banking Career with Burns Fry, Gordon Capital and Scotia Capital

 

Paul Carroll, Chairman

• Chairman and CEO of Diadem Resources Ltd. and President of Carnarvon Capital Corporation

 

Bill Shaver, Vice Chairman

• Co-founder of Dynatec, with over 40 years of mine development experience with Inco, Falconbridge, Barrick, Newmont, Goldcorp, Aur Resources and FNX Mining

• EVP, Denison Mines

 

Ian MacNeily, EVP, CFO & Director

• Former CFO of North American Palladium Ltd. Past CFO of Tiomin Resources Inc. and Pangea Goldfields Inc.

 

Jim Roxburgh, VP Project Co-ordination

• Over 40 years in the minerals industry – has developed a track record of project evaluation, acquisitions, operations, and executive responsibility

• Previous experience with Rio Tinto and Dynatec

 

Ken Gum, General Manager

• Previous MTM General Manager under Pasminco

• Will oversee restart of Cumberland, Gordonsville, and East Carthage mining and milling operations

 

John Thompson, VP Resource Development

• Over 30 years of experience as a geologist and geological engineer

• Has supervised and evaluated major greenfield exploration and mine development programs worldwide

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Here are some company details; this could be a good way to play the plummeting zinc inventory levels:

 

1. SRZ should be in production before the end of this year, and should be in commercial production early next year.

2. Market cap approx US$140M of which ~US$105M is working capital ($70M of this will be used for mine restart capex). Debt is ~$51M.

3. Primary asset is a zinc mine in Tennessee that closed a few years ago due to low zinc prices. All the equipment is still in place and is being restored to operation. They have contracted with Dynatec to get the mine back to operation.

4. Mine life of 6 years.

5. Inferred resource will add another 9-10 years of mine life if zinc prices stay high.

6. Cash costs are estimated at $0.77/lb zinc. This includes royalties and G&A but not corporate taxes. It also does not include germanium byproduct credits.

7. At estimated 2008 production level, SRZ will generate higher revenue next year than its current market cap, even if zinc prices fall to $1.15/lb. Payback will be less than one year if zinc stays at current prices.

8. SRZ is basically unknown right now other than the few institutions who participated in their recent IPO. The company was somewhat difficult to value because they have not had a financials release post-offering and their website isn't fully updated yet. Per email exchange, they are working on putting together a comprehensive investor relations program.

9. Their website is hard to find; here's the address: www.sra-corporation.com

10. For those of you invested in Breakwater, SRZ has higher leverage to zinc than BWR.

11. I don't think they have a pink sheet symbol; I had to pay my broker extra to purchase directly on the Toronto venture exchange. Volume is very light so use limit orders.

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  • 3 months later...

Yaay! I finally figured out how to add a graphic to a post.

 

Interesting volume in SRZ today, but from what I can tell it looks like one large block trade.

Latest news is that production is still on schedule for November startup. I was fortunate enough to load up on that bottom in August...

 

735492173c.jpg

 

 

8fa502f305.png

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A good (experienced) management team - that's a real plus in this case

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  • 4 months later...
» February 12, 2008 - SRA Closes Agreement with FNX Mining Company Inc.

 

» February 11, 2008 - SRA Announces $10 Million Convertible Note Issue

 

» February 6, 2008 - SRA Announces Strategic Investment by FNX Mining

 

Anyone wondering why junior share prices are underperforming? Because operations continually underperform. These guys raised plenty of money in the IPO; they should not have had to return to the capital markets to get this mine running and generating positive cash flow.

 

Anyway, this is only strike one for this management team, and the news is not entirely bad. The investment by FNX is a good thing, as FNX is very intimately familiar with the operations (their subsidiary Dynatech is the mine startup contractor.) It indicates that there is a potential for a takeover in the future. I still don't like that convert issue, however, especially at this share price.

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  • 3 weeks later...

Zinc February 28,12:09

Bid/Ask 1.2475 - 1.2521

Change +0.0501 +4.18%

Low/High 1.1857 - 1.2658

 

 

Zinc price rises, just in time for SRZ who will have concentrate for sale any day now. Share price is still in the gutter.

Got zinc?

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  • 1 month later...

Strike two for this management team. This stock has been a real dog in my portfolio. They have burned through cash like crazy on this startup, and now announce the third financing in 3 months!

At least I don't feel as dumb as FNX Mining, who with insider knowledge gave them $2.85/share a couple months ago.

We really need some cooperation from zinc price here.

 

SRA Announces Details of Unit Offering

TORONTO, ONTARIO--(Marketwire - April 18, 2008) -

 

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES. ANY FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF U.S. SECURITIES LAW.

 

Strategic Resource Acquisition Corporation ("SRA" or the "Company") (TSX:SRZ)(TSX:SRZ.NT)(TSX:SRZ.NT.A) today announced the price and size of its previously announced offering of Units. The Company has agreed to sell a minimum of 5,000,000 units ("Units") at a price of $2.00 per Unit for minimum gross proceeds of $10 million. Each Unit will be comprised of one common share and one half of one common share purchase warrant. Each whole warrant will be exercisable into one common share at a price of $2.50 per share for 18 months from the date of closing of the offering. The offering will be co-led by agents Blackmont Capital Inc. and Haywood Securities Inc. (the "Agents"). The Company has also granted to the Agents an over-allotment option exercisable for 30 days after closing to acquire up to an additional 15% of the common shares and warrants sold at the closing.

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What do you make out of that?

I have found out about this stock recently and been following it for a couple of weeks - just bought "quite a bit" on Friday... I thought I was getting a good deal but was still wondering the cause of that drop.. Well now I know (and feel a bit stupid). Thats the danger of part-time investing I guess!

 

Anyway, I understood that the last capital raising was to increase productivity.. That financing sounds more like they are not really in control of their cashflow.. A bit scary...

 

I am a bit pessimistic about Zinc prices though (mostly based on most likely Chinese slowdown (?) and the H&S pattern on the chart that has a target of 0.8)

 

Do you know how to subscribe to the offer? (I still believe they are a good value for long-term)

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CHARTWISE -it is not a happy story

big2ea4.gif

 

And the latest dump came on high volume.

Maybe the shock of this price move will be enough to change management direction in some

important ways.

 

Shows the risks of backing a start-up, i suppose.

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Dr Bubb, I completely agree with you the chart looks ugly...

 

And the Zinc prices (to which SRZ is highly leveraged) chart does not look to good either:

 

Note the Head and Shoulders pattern I was referencing to - which to me indicates a further risk of price drop to $0.80. That would not be good for SRA I believe (although they are hedged with Zinc put options).

 

3dd5929ec2.gif

 

c747c79145.gif

 

Note that SRZ share price closely follows the Zinc price.

 

I have been thinking quite a bit about the development in that story with this new financing and I can see 2 ways to look at it:

 

1: Management has hit some issues and just need an extra "one-off" financing to then "be done with it" and finally hit full volume production sometime this year - which would ease cashflow pressures and allow them to implement their plan. The last financing ultimately enhances long-term cashflow by increasing prouction output, hence adding value. They might have a "good reason" for this extra financing which will keep the company back on track.

 

2: Management has underestimated the costs of production per ton of Zinc and are burning much more cash than anticipated, hence the need to turn to the markets to raise extra cash. This combined with a possible further Zinc price decrease will further stretch their cashflow. This, in turn could affect their project for 2009 of building a plant to retrieve Gallium and Germanium from Zinc smelting residues. I believe this is a big risk as the Gallium and Germanium add a real plus to that company's story. One could therefore see this new financing as a sign/proof that their plan does not really hold water and that they will be really exposed to low Zinc prices.

 

 

Now... I believe in the long-term Zinc price potential as well as for the Germanium/Gallium and this still makes me feel bullish about that stock on a long-term basis so I am tempted to buy some more... But maybe some patience would make it possible to grab it at a better price. However it is quite hard to make some cashflow projections for this company as it really relies on the Zinc price abd therefore valuation estimates are tricky too.

 

I have thought about the Unit offering and tried to compare its relative value. That might be of interest to some people who are still not deterred by this financing news (the jury is still out as far as I am concerned):

 

I tried to compute the equivalent buying price if one subscribes to the offer ie if one subscribes at $2/share + 1/2 warrant at $2.5, the gain if the share price moves to $3.5 would be (3.5-2) + (3.5-2.5)/2 = 2. This would be equivalent to buying the share at 1.5 (since 3.5-1.5=2)

 

I have computed the equivalent buy share price for multiple future share price:

 

Future price ----> Equivalent buy price

 

0.5 ----> 2.0

 

1.0 ----> 2.0

 

1.5 ----> 2.0

 

2.0 ----> 2.0

 

2.5 ----> 2.0

 

3.0 ----> 1.5

 

3.5 ----> 1.0

 

4.0 ----> 0.5

 

4.5 ----> 0.0

 

5.0 ----> -0.5

 

6.0 ----> -1.5

 

7.0 ----> -2.5

 

8.0 ----> -3.5

 

9.0 ----> -4.5

 

 

So obviously the offer is interesting only if the share price moves over 2.5 in the next 18 months. On the other hand if one believes that the price is going to get higher the offer could mean a substantial discount to the curent close price (at $4.50, for example it is equivalent to buying the shares for free! Over that you get paid to buy the shares...).

 

I think that people who believe that the share price will rise from here will not be interested in buying shares in the market (at current price) as they could get it cheaper with the offer. That should weigh on the price. On the other hand if people dont think the price is going to rise, then obviously they would sell the share in the market and this would weigh on the price also. Does this mean that the share price is bound to fall until the offer is fully subscribed? What do you guys think of this analysis? Logic seems to dictate shorting this company on a short-term basis...

 

I need to try and find out more info about this offer and how to subscribe to it, so that I can try and make up my mind about this. Although this will be hard as I believe the long-term potential is great but so are the shorter-term risks both in term of Cash flow and exposure to Zinc price and potential share price downside.

 

I have tried to put some thoughts on this but being a newbie, I am not sure if I am talking rubbish or not... Hopefully this makes sense ;-)

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1: Management has hit some issues and just need an extra "one-off" financing to then "be done with it" and finally hit full volume production sometime this year - which would ease cashflow pressures and allow them to implement their plan. The last financing ultimately enhances long-term cashflow by increasing prouction output, hence adding value. They might have a "good reason" for this extra financing which will keep the company back on track.

 

 

2: Management has underestimated the costs of production per ton of Zinc and are burning much more cash than anticipated, hence the need to turn to the markets to raise extra cash. This combined with a possible further Zinc price decrease will further stretch their cashflow. This, in turn could affect their project for 2009 of building a plant to retrieve Gallium and Germanium from Zinc smelting residues. I believe this is a big risk as the Gallium and Germanium add a real plus to that company's story. One could therefore see this new financing as a sign/proof that their plan does not really hold water and that they will be really exposed to low Zinc prices.

 

Welcome Lardoon.

You are in a much better situation than me as I bought my shares soon after the IPO. The press release says that Blackmont and Haywood are the agents for the placement. Other than that, I have no details. If you have a canadian broker they should be able to point you in the right direction.

 

I think it's too soon to posit item #2. They're still ramping up production, which has taken longer than expected, so we still don't know what the actual production costs are going to be at full capacity. It appears to me that they just significantly underestimated the capital costs of putting the asset back into production.

If the production costs were underestimated as well (I believe they were estimated at around $0.77/lb total including shipping) then SRZ will be in a world of hurt if the zinc price doesn't recover. And you're right, they may not even be able to cash flow enough to get the gallium recovery circuit into operation. The G&G potential has always been the real attraction of this play; management needs to figure out how to recover the G's without diluting the equity unreasonably.

 

I am certainly not buying more at this point. There's too much risk with zinc this low and SRZ carrying substantial debt.

But I'm not selling my shares, either. To this point, they have only hedged part of 08 production so SRZ is likely one of the most highly levered zinc plays available right now. These guys are professionals; there is a lot of experience in management and on the board which is what allowed them to pull down the huge IPO in the first place. I'm going to give them a chance to actually operate the mine. If they can do that successfully and can lower the production costs, the share price will recover eventually or a major will step in.

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OK - I think I found a flaw in my logic above (re: the short-term evolution of the share price) and I thought I might expose it to the public (well this forum audience at least...) as this might be of interest.

 

My main assumption was that anybody who would want to buy SRA shares would have the choice to buy them in the market or subscribe to the offer; and only a subsequent price drop in the market would justify buying there...

Well this choice is not really accessible. As I am potentially still interested in buying some of these shares (especially through the offer) I called Haywood Securities this morning (as they have a London office). The friendly chap there did not know too much about it and recommended me to call one of his colleagues in Canada - which I did early afternoon - UK time. That guy told me that the initial 5,000,000 units offer had already been fully subscribed and they were now looking to fill the books for the over-allotment (15% extra), He advised me to put my order in asap this morning (afternoon UK time) if I wanted to get some units. I was then passed to the desk to try work out the details of how to be able to subscribe to that offer. I was asked if I was registered with the FSA/sophisticated investor/HNWI, which I am not really and after putting me on hold, I was kindly told that the offer was not available in the UK for non-instutions... Bummer!

 

Not sure if I sounded like I was punching above my weight and was just politely told off or if I am genuinely not eligible for this offer. Anyway I find this (restricting this kind of offer) slightly stupid though - from a "protecting the small investors" angle (which I believe why sophisticated investor checks are put in place for these offers - officially). There is nothing stopping me from buying that share at $2.05 in the market last Friday... But I have to be a sophisticated investor to be able to buy the share at $2.00 and get a free warrant on top.. Much riskier investment, innit? Is this rather not a sort of "elite club" restriction...

I thought I was done trying to handle club bouncers and worry about not wearing sneakers to get in, back in my student days... But 10 years later there still seems to be hurdles in the way to get in the best places - Sorry about the rant..

I'll read more on private placements in this forum as it sounds like me that good bargains can be had if one can get through the hoops.

 

Additionally this means that the equity will most likely be diluted by over 22% (38.9m shares fully diluted prior to the offer and 5m shares offered + 2.5m warrants + 15% over-allotment = 8.63m shares). Taking a rough average share price of $2.30 recently, this would give a resulting share price of $1.79 where the share is trading now...

 

Mmmmh what to do?... I'll let you know what I decide... But I do feel like a sheep (ie relatively ignorant market participant) having been "mildly" slaughtered last Friday (I bought some just below $2.00). I do agree with you AceofKY (thanks for the Welcome) that point 2 can only be proved after SRA has reached full production..

 

 

 

 

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My main assumption was that anybody who would want to buy SRA shares would have the choice to buy them in the market or subscribe to the offer; and only a subsequent price drop in the market would justify buying there...

 

The vast majority of USA citizens are excluded from participating in these offers. Our SEC requires a participant to be an "accredited" investor, which means your net worth must exceed $1MM or you must have at least $200k in income per year.

I agree, it is a bad policy. I think the Canadian rules are much less strict.

 

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  • 1 month later...
  • 2 weeks later...

This stock has not been a very happy story... It closed at C$ 1.00 last Friday..

 

AceofKY,

are you still invested in it? What do you make of the -48% in the last 2 weeks just after the company released a press statement saying that they got into an agreement for resale of Germanium and Gallium rich leachate? Of course Zinc prices have gone down quite a bit more but over the last 2 weeks they are only down a few pct.. So I am thinking there must be something else going on.. A fund getting rid of its holdings? Have you heard anything on this? I could not find any relevant info explaining the drastic drop..

 

Is the market disappointed because the agreement shows that the company will not execute its plan to poduce gallium/germanium itself (I am expecting that they are not going to get a price as good as they would have done if they could extract the gallium/germanium themselves).

 

I am not buying any more but I definitely think it is very good value at C$ 1.00 now if you think that Zn prices wont go much lower.. (it looks like it has nearly reached the 0.8 target from the H&S pattern on the 5 year chart and is only 70% up from the 50 cents it was trading 4/5 years ago)

 

 

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This stock has not been a very happy story... It closed at C$ 1.00 last Friday..

 

AceofKY,

are you still invested in it? What do you make of the -48% in the last 2 weeks just after the company released a press statement saying that they got into an agreement for resale of Germanium and Gallium rich leachate? Of course Zinc prices have gone down quite a bit more but over the last 2 weeks they are only down a few pct.. So I am thinking there must be something else going on.. A fund getting rid of its holdings? Have you heard anything on this? I could not find any relevant info explaining the drastic drop..

 

Is the market disappointed because the agreement shows that the company will not execute its plan to poduce gallium/germanium itself (I am expecting that they are not going to get a price as good as they would have done if they could extract the gallium/germanium themselves).

 

I am not buying any more but I definitely think it is very good value at C$ 1.00 now if you think that Zn prices wont go much lower.. (it looks like it has nearly reached the 0.8 target from the H&S pattern on the 5 year chart and is only 70% up from the 50 cents it was trading 4/5 years ago)

 

Still in it, unfortunately. It has been my worst performing stock this year. Volume has been too low for fund selling, I think. The problem is that no one is interested in bidding for zinc equities right now. My understanding is that the plan is still to eventually extract the G's themselves but since zinc is so low they needed to sell the next couple of year's G's to attain positive cash flow. I'm not sure what chart you are looking at because SRZ is only about a year old. They IPO'd last spring.

 

Zinc won't stay this low forever. Breakwater and several other juniors will likely go bankrupt at this level. Teck is closing a mine early, I heard. The question is: can SRZ attain positive cash flow from operations with the G credits, service their debt, and avoid overly diluting their equity until zinc price recovers? Like you and myself, no one knows the answer and so no one is buying the equity. It would be nice if they'd give us better details on the G credits that were negotiated and issue an update on the production ramp up. Don't forget they sold puts at $1.20 zinc on about six months of production, so we'll at least have a nice gain on derivatives in the 2nd quarter financials.

 

It is friggin crazy that SRZ is trading at a market cap of about half of what they've invested into this asset in the past year.

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I'm not sure what chart you are looking at because SRZ is only about a year old. They IPO'd last spring.

 

Sorry, I was referring to the zinc chart...

 

Did you check the blog from Daniel Wahl I mentioned above? He reckons (he put a post ) that with zinc prices at 1.10 and even assuming equity dilution by 50% the stock could still reach C$ 5.00 in 2010...

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Did you check the blog from Daniel Wahl I mentioned above? He reckons (he put a post ) that with zinc prices at 1.10 and even assuming equity dilution by 50% the stock could still reach C$ 5.00 in 2010...

 

I have corresponded with Daniel for over a year now and read his blog periodically although I'm not sure if I've read the one you're mentioning. Yes, it is very possible that SRZ will be a $5 stock and I'd say it will be sooner than 2010. That's not a lot of consolation for someone who bought shares at $4! There is a lot of upside potential here, but not without a cooperative zinc price.

 

 

 

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  • 1 month later...

Just saw someone visiting my blog from the forum here and came to see what's up. Forgot that Ace was here--an investor I highly respect. Though I've written a lot on SRZ at my blog, a decent view of where I think it can go over the next two years can be seen via the numbers I've put up here:

 

http://spreadsheets.google.com/pub?key=pnI...Kr4dg&gid=0

 

As Ace has pointed out, the future value here is highly dependent on how much SRZ has to dilute before the cycle turns. I don't think it will have to do too much more--but I also thought that one dollar was "the bottom" for zinc prices. And I didn't count on a (very good) operating team pushing back production so much, which has in turn pushed up costs per pound. Not much fun in a frozen market for debt, and not even a little bit of fun in a bear market for both equities and zinc.

 

If production does ramp up quickly from here, allowing SRZ to delever, and the zinc price starts to head back up to a dollar, the Company won't need to dilute more. Taking on a partner (like FNX) to help fund the germanium and gallium by-products looks likely. This will further decrease cash needs.

 

In any case, at the above spreadsheet, I assume different dilution cases from 50 million to 100 million, and think it's a homerun at some point. I don't expect one any time soon, and am underwater on my shares, but am not complaining too much. Hopefully other stuff works out nicely for me before this one does. And I can buy a lot more before it makes its move higher.

 

One note: the above spreadsheet is not a recommendation to buy the shares or anything like that. Just some assumptions on zinc and g prices, as well as potential market caps at a multiple of 5 and different dilution numbers. Not that anyone is wanting to buy zinc stocks now but if you are more work is required and that's not meant as a full analysis. The recent Haywood report, which sets a target of 4 dollars at a dollar zinc assumption for 2009, is a very good one. Highly recommended.

 

--Daniel

http://danielwahl.blogspot.com/

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Hi Daniel, I put in a bid for Photochannel the other day after reading your writeup and doing a little DD. Not sure if the order filled or not; I don't log into my brokerage account these days since it's too depressing. I'm just concentrating on my primary business and waiting for the market to turn around.

 

I don't want to talk about SRZ right now.

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  • 3 weeks later...

Second quarter financials are out on SEDAR now.

 

Gentlemen, I think we can officially write SRZ off as a failed company now. My sole hope over the past few months was for some decent operational performance which might allow SRZ to at least continue as a going concern until zinc prices turn around. Instead we got bad grades, low recoveries, insufficient grinding capacity, and less than 25% of forecast production. More capital is needed to solve these problems.

 

SRZ needs to raise $40MM right now to avoid bankruptcy. That's not going to happen with zinc prices this low.

She has substantial debt, so there will be nothing left for shareholders even if the assets are sold. SRZ's proposed 125MM lb/yr production will not materialize and it will become part of the zinc supply destruction that will (eventually) contribute to a rise in zinc prices. SRZ is a dead fish, and yours truly is a bagholder.

 

Hopefully other GEI members can at least learn from my mistake, the principle mistake being (I think) buying a high cost miner with no hedge and no exit plan in case the underlying commodity falls.

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Second quarter financials are out on SEDAR now.

 

Gentlemen, I think we can officially write SRZ off as a failed company now. My sole hope over the past few months was for some decent operational performance which might allow SRZ to at least continue as a going concern until zinc prices turn around. Instead we got bad grades, low recoveries, insufficient grinding capacity, and less than 25% of forecast production. More capital is needed to solve these problems.

 

SRZ needs to raise $40MM right now to avoid bankruptcy. That's not going to happen with zinc prices this low.

She has substantial debt, so there will be nothing left for shareholders even if the assets are sold. SRZ's proposed 125MM lb/yr production will not materialize and it will become part of the zinc supply destruction that will (eventually) contribute to a rise in zinc prices. SRZ is a dead fish, and yours truly is a bagholder.

 

Hopefully other GEI members can at least learn from my mistake, the principle mistake being (I think) buying a high cost miner with no hedge and no exit plan in case the underlying commodity falls.

 

 

Well that wont be a consolation but I am in the same sh*t...

That will definitely teach me a/few lesson(s) too. I'll have to ponder over it to think which ones they were

 

What are you doing with your shares? Is it worth holding on to it you reckon?

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