GREENCASTLE RESOURCES:
A ROCKET PREPARING FOR LIFT-OFF?
PLUS…VENTURE EXCHANGE RALLY IN THE WORKS
August 24, 2008
Something indeed appears to be up with Greencastle Resources (VGN, TSX-V), and we’re not referring to the Thursday-Friday share price increase.
Friday evening, August 22, Recognia Inc., which provides technical trading tools for E-Trade clients, issued a startling price target for Greencastle. My eyes nearly popped out of my head as I stared at their prediction on the screen - $1.50-1.70, a target based solely on chart analysis.
“Wow”, of course, was my first reaction. My next thoughts were, “Is this even possible right now, or in the near future? Are drillers about to discover the mother-of-all wells at the Primate oil field? Is Greencastle sitting on a huge coal seam in Manitoba? Is a major discovery about to be reported near or at their Nevada or South African gold properties? Will the shale gas play in Quebec deliver big-time? Is the company about to announce an attractive new project? Is Greencastle “telegraphing” a major upside move in the Venture Exchange? What on earth is going on here?” In this special report we’re going to explore the Greencastle story in considerable detail and try to make some sense out of what could be developing with this profitable little Venture Exchange company.
The way we analyze stocks at SolomonSmallCaps is through a combination of technical and fundamental analysis. We believe it’s foolish to use only one of those methods in determining whether or not to invest in a stock. At certain times, one may place more emphasis on one method than the other. But both have to be looked at closely. The “fundamentals” of Greencastle are exceptionally strong, and we’re going to examine those in greater detail in this report with second quarter financial results about to be released. Let’s first look at the “technical” side of the equation, though, which relates directly of course to where VGN’s share price could be headed.
The Technical Side
First off, we’re certainly not here to promote E-Trade or Recognia. As a matter of disclosure, I do have an E-Trade account and I also deal with another discount broker and a full-service broker. However, after doing more research on Recognia this weekend, I can tell you that I’m adding their tools to my toolbox. I probably should have done that earlier as last October Recognia made a great call on a huge move with MacDonald Mines (BMK, TSX-V) that I used as part of my analysis in a BMK stock purchase that made me a small fortune. That should have been a clue for me at the time to use Recognia more regularly (sometimes we can be stubborn when it comes to accepting new ways of looking at things, not just with the market but in all facets of life).
What is really impressive about Greencastle, technically, is that despite the market carnage that started July 2 and ended (we believe) August 19, a period that saw the Venture Exchange drop a whopping 29% over 34 trading sessions, not once did the stock close below its rising 100 and 200-day moving averages. On Monday, Tuesday and Wednesday last week, the stock did drop below its 100-day moving average on an intra-day basis but recovered each day to close at or above the 100-day (0.26). Tuesday the 19th was the turning point - VGN got knocked down to 22 cents, only a penny or so above its 200-day moving average, but quickly bounced back to close at 0.265. A definite “truism” in technical analysis is that one of the best times to buy a stock after a huge upside move is when it first touches, or nearly touches, its rising 200-day moving average. VGN did that last Tuesday and a day later, after reviewing other technical indicators, we correctly called a bottom in the stock and issued a buy alert.
Other technical tools we pay very close attention to are the Relative Strength Index (RSI) and the “Slow Stochastic Oscillator”, and both presently give us strong comfort that VGN has further to go on the upside. The RSI has moved up with VGN but remains in “neutral” territory, indicating the stock is not in an overbought situation, and the Stochastics give us a very bullish reading. In fact, they’re very close to the lowest readings we’ve seen all year with VGN, dropping substantially from overbought levels in June. This is very important.
Technically, the next challenge for Greencastle is to plow thru its rising 50-day moving average which we now believe it will do next week, quite possibly on Monday given Friday’s clear breakout. VGN encountered resistance Friday at .375, exactly at its rising 50-day moving average. But one of my theories is, if this stock had enough underlying strength to remain at or above its 100 and 200-day moving averages through seven weeks of market mayhem, it certainly should have the power to bust through some minor resistance at its 50-day moving average and, generally, around the 40 cent area.
VGN stock is rather tightly held. Only about 40 million shares are outstanding, and much of that is in very solid hands. It would not take much for this stock to blast off.
So what does Recognia see in VGN, technically, that has prompted it to issue a $1.50-1.75 price target? In layman’s terms, they see the quick, sharp move in June, which came with record volume for VGN, as the beginning - not the end - of a new phase in the history of this stock. After a bullish “continuation wedge” was identified on Thursday, a bullish “flag” formation occurred Friday, according to Recognia. “After a steep rise in price, the pennant reflects a temporary pause in the uptrend, consisting of two parallel trendlines that form a rectangular flag shape,” as explained in Friday’s price target call. I double-checked Recognia’s technical interpretation with a well-known technical analyst who does this stuff for a living (I have great respect for his work). He says what in fact has happened is that VGN has formed a “bullish falling wedge”, not a “flag”. Nonetheless, his view is that VGN has indeed “broken out” and is a “buy”. No price target from him, at least not yet, but I sensed he’s of the opinion VGN could make a move close to its June high where of course it will encounter very significant resistance (if it were to bust through that high, then of course the stock could really go crazy).
Recognia’s price targets sometimes prove incorrect just like anyone else’s, naturally, and it would be a mistake to accept their current $1.50-1.70 prediction for VGN as gospel. But neither should we take this bold call lightly or dismiss it. On July 11, when Greencastle closed at 44 cents, Recognia turned short-term bearish on the stock and issued a price target of 16 to 22 cents - an exceptional call to say the least and one that many people may have shrugged off at the time. On August 8, following a 31 cent VGN close, Recognia again warned of trouble ahead with a new price target of .14-.18. That target proved slightly overly bearish but didn’t miss the mark by much. Everything changed last Thursday, August 21, when Recognia identified the start of a new Greencastle uptrend (a day later than we did) and issued a price target of 61 to 67 cents. That target was then raised substantially on Friday. The only price targets Recognia has issued this year on VGN are the ones described above, and so far they are essentially 2-for-2 with a bang-on call last Tuesday when VGN touched 22 cents.
There are many examples of how effective Recognia’s technical analysis can be. Hathor Exploration (HAT, TSX-V) is a stock we like a lot at the moment, and on April 7, after HAT closed at $2.22, Recognia issued a price target of $3.30-$3.50. Bang-on with that one, too. On July 15 Recognia warned of a “downside breakout” in the CDNX and we all know how prophetic that turned out to be (by the way, Recognia is now giving bullish readings on the Venture Exchange). When combined with other technical tools and of course fundamental analysis, we believe Recognia’s system offers value to investors.
Technical analysis is so fascinating and effective because it reveals so much to the astute investor as to what the market is “saying”. Yes, the market “speaks” in its various movements, and those who are listening closely and have discernment through technical analysis can have a huge advantage over other investors.
So what can we discern from “listening to the market” and “reading the tape” in the case of Greencastle? Here’s where we now shift to fundamental analysis because relying on technical analysis alone is insufficient in our view.
The Fundamental Side
Greencastle is a true “gem” in a market that is now placing far greater importance on a company’s financial strength and management quality. Does VGN have the ability to grow well beyond where it is today and become that dollar-plus stock? Absolutely it does, and the reasons why are sound management and a terrific balance sheet. The building blocks are firmly in place here, folks. CEO Tony Roodenburg has been a wise steward of Greencastle’s resources - and we’re sure he’ll continue to be - and he has a clear vision for where he wants to take this company to maximize shareholder value. We would like to see Greencastle communicate more effectively with its shareholders, but that is also a process that develops as a company like Greencastle matures and grows.
We’ve said this before and we’ll say it again, though we stress that this is just pure speculation on our part and it’s based solely on the fact that some “rabbits” have already been pulled out of the hat with Greencastle this year: Roodenburg has an “ace up his sleeve,” we believe, and perhaps that ace is what’s going to help produce the “Rocognia VGN Rocket Launch” (please forgive the flamboyance of that language, we’re not trying to be cheerleaders!). Just two months ago, Roodenburg stated the following in a news release: “We are also currently examining several other opportunities (our emphasis) where Greencastle can leverage a strong balance sheet with over $4-million in cash and monthly cash flow of over $200,000 for the benefit of our shareholders.” The opportunities Roodenburg is searching for are “high-impact” opportunities (his words). We don’t believe he’ll disappoint.
Greencastle’s Q2 financials are coming out shortly and we suspect the highlights could be provided in a news release that also includes an update on current projects.
Our estimate with regard to Q2 financials is that they will show VGN with over $5 million in cash at the end of June and net earnings for the first six months of two-and-a-half cents per share. Given the trends that we see in the company’s financials, the generally positive pricing outlook for heavy oil (assuming $80 per barrel), and increased production levels through the balance of the year at Primate, Greencastle’s monthly cash flow should exceed $300,000 through the balance of the year. Our projection is that the company could earn approximately six cents per share for the year which means the stock is currently trading at only six times its estimated 2008 earnings. We have not taken into account possible gains on any sales of marketable securities, and we’ll be looking closely at the upcoming financials to get clarification on what holdings Greencastle actually has.
Greencastle of course earns its revenue thru a royalty on the Primate oil field in Saskatchewan where it made a discovery in 2003. A total of 13 wells (11 oil and two gas) are currently in full production at Primate and prospects are good for more discoveries (we will explore this very interesting “Primate” in further detail in another upcoming report). The 11th oil well came on stream at Primate late in Q2 and Greencastle should have started receiving income from that this month.
A company in such solid financial shape as Greencastle - regular monthly income and millions in the bank - is in an excellent and enviable position to leverage that strength to maximize shareholder value. Greencastle also already has a very impressive portfolio of exploration projects (coal in Manitoba, shale gas in Quebec, gold in Nevada and South Africa, and uranium in Africa and Wyoming to go along with the revenue-producing Primate oil field). Which is why we believe so strongly that VGN’s current market capitalization of only $15 million substantially undervalues its assets and growth potential. We do believe that’s about to change, however, as the company continues to progress and more investors become aware of this exceptional value play. There are many other companies on the TSX Venture Exchange with higher market caps and much less going for them than Greencastle - no cash flow, more shares outstanding, consistent share dilution, average or even lousy management, and inferior exploration projects. Not only are we excited about Greencastle’s short-term prospects, but one has to love the long-term value that’s very apparent here which is why I have no hesitation acquiring VGN for my RRSP (some “professional” money managers would gasp at that, putting a “penny” stock in your RRSP, but those were the same managers pushing those “safe” banks in recent years).
Investors’ appetites for anything to do with coal or shale gas in Quebec were certainly key factors in driving the VGN share price to a record high of 63 cents in the month of June. What possible “triggers” (or combination of triggers) could make the latest Recognia price target ($1.50 to $1.70) become a reality? There are a number of possibilities:
- VGN announces a “barnburner” new project (we know they’re aggressively pursuing new opportunities);
- A major Venture Exchange rally ensues (which now appears quite possible);
- The coal play and/or the shale gas play heat up again, and Greencastle becomes even more involved;
- Greencastle’s promising Nevada/South African gold properties stir up excitement (Nevada is what we’re most interested in);
- A major discovery occurs at Primate or Greencastle’s Manitou Oil Project, also in Saskatchewan, and/or the price of oil moves significantly higher than forecast;
- A Greencastle investment skyrockets.
All things are possible. 2008 has already been a very good year for Greencastle, and it could get much better still. We should not underestimate the potential of this profitable little company to develop into something much more substantial. It has every opportunity to do so.
As with all investments, we recommend you do your own due diligence, invest only with money you can afford to lose, and never put all your “eggs” in one basket. Invest wisely, and we suggest taking at least half your profits off the table on a “double”. Also, please read our disclaimer near the top of our web site.
