Strategic Metals Ltd. (SMD.V) – New Recommendation

by JDH on February 9, 2007

New Recommendation: Strategic Metals Ltd. (SMD.V)

Today I present a new stock for your consideration: Strategic Metals Ltd. According to the company’s website:

“Strategic Metals Ltd. is a well funded junior mining company specializing in generative exploration in northwestern Canada. Its business model entails acquiring quality prospects, advancing them to drill stage and then arranging an option or outright sale. This generative model is designed to minimize shareholder dilution while maximizing exploration expenditures and the probability of success. Strategic has extensive property holdings in BC, Yukon and NWT which contain a wide suite of commodities. Many of these properties are drill ready and meet the criteria as qualifying properties for IPO or CPC transactions. ”

1 Year Chart
Courtesy of Yahoo! Finance
  In other words, they go and find good properties, start drilling, and if they have potential they form joint ventures with larger companies, while retaining options on the properties. 

Ideally, they let their partners fund further exploration, while Strategic Metals retains an interest in the properties.

SMD is not just a concept. They have a track record of success. Over the last year SMD gave Twenty Seven Capital Inc (TSC.V) all of its uranium projects in return for 5 million shares in TSC. SMD then participated in a small financing to add to its TSC position. Twenty Seven was just bought out by MGA.TO – Mega Uranium Ltd. As a result, SMD will end up with lots of cash (more details below). SMD has more commodity packages that it could spin-out into a new company to repeat this success.

Here’s what an insider told me: “Three additional spin out transactions are being discussed using the highly successful Twenty Seven capital transaction as a model.”

(Okay, I lied, I got that off their website, but it sounds so much better if I pretend I have some kind of insider knowledge; that’s what you’re supposed to do if you are some anonymous guy writing a blog, right?).

Even better, their website says: “Strategic will receive cash payments and share issuances that are several times higher than it’s administrative burn rate, giving the company positive cash flow.” In other words, they are an early stage exploration company with a positive cash flow! How cool is that?

Here’s more cool stuff. Strategic owns 5.65 million shares of Twenty Seven, which are worth over $13 million. As of next week those shares become Mega Uranium shares and warrants, which means Strategic will own 1,883,333 shares of Mega, and 941,666 Mega warrants. Strategic’s policy is to sell shares in it’s investments when there is good liquidity, which obviously there will be after the Mega transaction is completed next week. Presumably Strategic will sell some or all of it’s Mega shares, in an orderly fashion, which are worth over $11 million at today’s prices. That means Strategic will have $11 million in cash, and still own Mega warrants. (I assume they will hold the Mega warrants as an inexpensive way to play the upside on Mega specifically, and the uranium market in general).

It appears that Strategic has $3.5 million in working capital (ie. cash), which combined with the Mega proceeds (say $13 million in total), and another $1 million or so in other shares, the company has liquid investments and cash of almost $18 million.

The company has about 46 million shares outstanding (fully diluted), which give Strategic a market capitalization of around $31 million. Since they have $18 million in cash and cash equivalents, there properties are valued at $13 million. They have over 50 properties available for sale or option. Obviously the properties could be worthless, but given their past history, 30 properties for $13 million sounds like a steal.

In fact, the entire company appears to be dirt cheap. With only a $31 million market cap, any of the big players could snap them up without even thinking about it.

And guess what? Our old friends at PNP.TO – Pinetree Capital Corp. just bought 1,500,000 common shares of Strategic Metals Ltd., and 750,000 share purchase warrants (each warrant entitling Pinetree to acquire one additional common share at an exercise price of $0.75 until February 2, 2009). As a result of this transaction, Pinetree holds an aggregate of 4,500,000 common shares and the 750,000 warrants, which represents approximately 11.8% of the total issued and outstanding common shares of Strategic as of February 2, 2007, calculated on a partially diluted basis (assuming the exercise of the warrants only). Pinetree paid 60 cents per share (read the press release here), so they have already earned a nice profit (on paper at least). As Strategic’s price increases past 75 cents, the warrants have value, which is extra profit for Pinetree.

Based on my review of the SEDI Insider Trading Reports, it appears that insiders hold about 4.4 million shares, and a further 1.33 million warrants. With Pinetree owning a further 4.5 million shares, and assuming there are about 38 million shares outstanding, insiders and Pinetree own over 23% of the shares. That’s good news, because the “float” is not the full number of shares outstanding, so any buying puts upward pressure on prices. I reviewed the insider trading reports going back to 2005, and the vast majority of the transactions by insiders were purchases, not sales. That is also good news.

The only aspect of this that I’m not crazy about is that fact that they have sold all of their uranium properties; they still have lots of other metals in the ground (like silver), but no uranium. However, I like the model, and I think it’s worthy of a position in my portfolio. Today I will start accumulating, with a view to having about 5% of my portfolio in Strategic Metals.

As always, feel free to post your comments below, or on our Buy High Sell Higher Forum – Strategic Metals Board.



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