Over the course of the past six years that I’ve been more actively involved in the stockmarket, there has only been a few stand out gold exploration stories on the ASX – Cardinal Resources (CDV) was certainly one of them. Here I will walk you through my trade in CDV last year – but before I do, its worth reflecting on the mining life cycle and the reason why the exploration phase can be so exciting for investors. Most traders will be familiar with some version of this mining life cycle chart shown below, this one comes courtesy of Brent Cook’s Exploration Insights.

The exploration and discovery phase of the cycle can be extremely exciting, particularly in the gold space where we have seen a huge drop off in major discoveries over the past 10 years. Once an exploration company starts a drilling program and begins to report significant gold grades with nice long intercepts, you can anticipate a period of strong newsflow as the company ramps up the infill drilling in order to delineate and define mineralisation and build toward an initial resource release.

The CDV story was first brought to my attention in February 2016 by Michael, a gold bug mate of mine who has a fairly good grasp of mining fundamentals. Michael has a youtube channel which is worthwhile checking out here when you get a spare moment. Anyway, Cardinal Resources had begun drilling at their Namdini Project in November 2015. Over the following few months, the company made several announcements with excellent drill results, confirming good mineralisation with wide intercepts from surface. Despite the great results, the market showed very little interest in the stock because this period coincided with fresh 5 year lows in the gold price. This turned out to be the very bottom in the gold market with prices trading down around $1045 per ounce.

The Trade

On the 29th February, the company entered a trading halt for a capital raising. Hartleys were lead manager, raising $5.4mill at 12c. Three CDV directors were taking up stock on the same terms which was obviously a good sign. I bid into the placement through another broker and was scaled back significantly with a tiny allocation of 80k units – another good sign. The stock resumed trading on 2nd March and closed on its highs at 14c versus the 12c placement price, trading on high volume. The ducks were beginning to line up, but at this stage I hadn’t began to buy on market. I was waiting to see how the stock traded after the Appendix 3B announcement, with placement flippers likely to sell their stock for a quick buck. The 3B was released on the 8th March. Some placement stock came out onto market but it was being absorbed and the stock was well supported. From memory, I was bid at 13c and never got filled, so I began paying up to get set at 14.5c and 15c in the last few weeks of March.

Cornerstone Investor

Often times brokers will preference institutional investors with larger placement allocations, welcoming new institutions onto the register who can provide additional support for the stock on market post the raising. I had a fair idea that this had been the case in CDV, but there was no mention of the new institutional holder or any sign of a substantial shareholder notice confirming a cornerstone investor in the placement. Under ASIC guidelines RG 5.298, Substantial Holding notices (Form 603) must be given within two business days of the investor becoming a substantial holder (5% ownership). With disregard for this rule, 1832 Asset Management (Robert Cohen’s Dynamic Precious Metals Fund) seem to have delayed their Form 603 so as not to show their hand while they were attempting to build a bigger position with on market purchases. The Form 603 was lodged late, on 24th March confirming a 5.16% stake as a result of cornerstoning the placement.  The Notice of Change of Interests of Substantial Holder (Form 604) was also lodged late, on the 7th April which revealed they had bought a another 5.5mill units on market, moving them up to a 7.73% holding. This additional stake must have been accumulated over a period of weeks throughout the month of March, not in one single day on the 31st March as is disclosed in the 604 Form – a bit dodgy in my opinion. None the less, this was the signal to start buying with your ears pinned back. I added to my position the following day on 8th April, but not nearly as many as I should have.

Breakout on Volume

The stock had been flat lining at 15c for a whole month while placement stock was being slowly mopped up on market. The real signal to add more size to my position in hindsight was a break of the 16c level which happened on volume on 19th April. Unfortunately I didn’t act upon this signal, but by reviewing and writing about this kind of thing, it helps to reinforce best practice for the future. Regardless, I was still happy with the way the trade was playing out. The stock traded up to highs of 24.5c in May before pulling in to 20c and running up again to close at new highs of 30c at the end of June. Throughout this 10 week period where the stock had doubled in price, there were 7 separate announcements concerning drill results. This really highlights the power of newsflow during the discovery phase of the mining life cycle.

Another Placement

On the 7th July, the company entered a trading halt for another capital raising. Hartleys were lead manager again, raising $2.2mill at 29c. Two new institutions cornerstoned the placement – a Swiss fund called Precious Capital & local fundie Colonial First State. The offer was heavily oversubscribed again. I bid $80k into the book indirectly through another broker and received a 100k unit allocation. Credit to Hartley’s for looking after me as an existing shareholder, since I am not a Hartleys client. The majority of the placement stock was issued on 19th July accompanied by the Appendix 3B announcement, and we saw the exact same situation again with buyers attempting to scoop up loose placement stock on market. This was extremely bullish price action, had I been knocked back by Hartleys I could have added to the position again on 3B day.

Over the following few months, the stock continued to trend higher. By late August, the froth came out of gold stocks right across the board and CDV wasn’t spared, selling off from highs of 57c to a low of 42c on what was considerably light volume. It wasn’t exactly aggressive selling, more a case of buyers being absent which resulted in a significant pullback. My broader views on the gold market hadn’t changed at this point, so I took the opportunity to add to my position again, buying another 84k units at 44.5c which turned out to be a short term bottom. On the 7th September, 1832 Asset Management (Dynamic Funds) submitted another Form 604 confirming they had been accumulating again, moving up to 9.07% ownership. In the video below, Robert Cohen discusses his focus on quality when investing in smaller cap development companies.

At this point in time, CDV Management were doing a wonderful job on the marketing front, stirring up interest from North American investors at the Precious Metals Summit, Beaver Creek Colorado held on 14-16th September and again the following month at the Hong Kong 121 Mining Conference on 19-20th October. I presume this is the reason the stock continued to break new highs in September and October while the rest of the sector had topped out months ago and was now trending lower. The stock was so tightly held, that anyone looking to accumulate a decent position would end up running the stock up on market.

Taking Profits

By the end of October, I was taking some heat in the rest of my Gold Portfolio and had given back a decent chunk of my profits in open positions. The CDV’s maiden JORC resource was due to be announced any day now, and I was getting a bit nervous since I knew that expectations were high. My position was 526,000 units / circa $400k, so I decided to take some risk off the table prior to the announcement, selling 140k units on 24th October at an average of 74.8c. The stock went into a Trading Halt on the 2nd November pending the release of the maiden JORC. Instead of resuming within two days time, the company requested a voluntary suspension – I was immediately concerned. Good news is rarely delayed like this. In addition to this, Voluntary Suspension also results in orders being purged from the exchange. The stock was illiquid enough as is, so clearing out all the stale bids in the book below was only going to make things worse should the company miss expectations and get sold on the news.

Given these concerns, I was strongly biased toward protecting my profits before the announcement was even released. At 9:59am on 7th November the announcement hit the exchange with the stock to be reinstated and resumed trading at 10:20am. It was a 28 page document, the headline ‘4 Million Ounce Maiden Resource at Namdini’ seemed to exceed expectations of a 3Moz resource. I stuck to my plan to lighten up my position given the delay in the announcement and the lack of liquidity as a result of the order purge. Punters marked up the stock +11% from last on the back of the headline number, I sold around 90k units in the match at 70c which was about 60% of the volume. After waiting 30 seconds, I noticed a total absence of buyers and the book was very skinny below, so I hit a few bids at 64 -64.5c. Buyers were still nowhere to be seen – this wasn’t good. In fact it was time to implement my SFAQL Rule (as outlined in my previous post), so I began to liquidate the rest of my position. All told, I sold my remaining 386k units that day for an average of 58c. The fills are attached below.

As it turns out, I was extremely lucky with the timing of the maiden JORC announcement. Releasing the news right on market open and resuming trade only 20 minutes later ensured that nobody had time to digest the announcement. Had the news been released after market on the previous day, North American holders (and the rest of the market for that matter) would have had the chance to digest the news prior to the resumption of trade and the stock would probably have matched down to open at 40c or lower. Buried on page 9 was a summary of metallurgical test work, upon which mining analyst Warwick Grigor made the following comments:

“news that there is a refractory component has scared the living daylights out of the market, bringing back memories of how Ampella fell from grace when its multi-million ounce project in Burkina Faso was kiboshed due to a similar metallurgical issue. What has annoyed the market in this case is that the sample size for making the metallurgical announcement was very small, being one hole over a 1km long deposit. Shareholders would have preferred to have seen a more representative sample”

Talk about dodging bullets! This just reinforces the importance of trading the price action as opposed to trading your opinions. My implementation of the SFAQL Rule had paid off nicely, resulting in a total profit of $212,000 on the trade.