Anyone who pays attention to the junior stock sector knows that penny mining companies have been transforming themselves into Internet and technology plays at a furious rate over the past year. What started as a trickle about a year ago soon became a flood, and it shows no signs of stopping, with new entrants in the Internet gold rush every day. The conventional wisdom is that this is some kind of dangerous, mass hysteria. But is it?
Arguably the first to start down this dot-com Yellow Brick Road was American Gem Corp., which used to be a sapphire mining venture listed on the Vancouver Stock Exchange. Last spring, it announced it was getting into the Internet business. It said it would sell sapphires on-line, and also planned to buy a brokerage firm and start an on-line stock-trading operation. The company recently changed its name to Digital Gem Corp.
After making its initial announcement, shares of American Gem soared from a low of about 4 cents to more than a dollar in less than a month — and all across the country, you could almost hear the sound of mouths dropping open, as chief executives of other junior miners sat in their offices watching in shock and disbelief. Soon, other companies joined the fray.
Sikaman Gold bought an on-line shopping mall called NorstarMall.ca and the stock has climbed as high as $1 from 20 cents; LatinGold became an Internet travel network called Travelbyus.com and the stock has gone as high as $5.50 from 6 cents; Sheffield Resources became Globalstore.com Inc. and saw its stock go as high as $2 from 22 cents; Gleneagles Petroleum turned into ClickHouse.com and its shares went to $1.60 from 12 cents; Goanna Resources changed its name to Intelliworx International and the stock went to $15 (U.S.) from $5 on the U.S. over-the-counter market; and the list goes on.
This isn’t only a Canadian phenomenon, either: The penny stock sector in Australia has seen the same flight to the Internet. Last year, Golden Hills Mining became Davnet, a data communications company; Mogul Mining became an Internet-based wine distributor; Ramsgate Resources got into Website design; Walhalla Mining turned into a company called Kidz.net; and Western Minerals became an on-line sex toys retailer called Adultshop.com.
The process continues: Vengold Resources of Vancouver recently became an Internet “incubator” called Itemus, and the stock has rocketed skyward; Rocca Resources says it is going to sell Internet privacy software in Asia; and William Resources has traded more than 10 million shares a day for a week, just for saying it is thinking about an Internet investment. But the best example is probably Victory Ventures, previously known as the defunct mining company Bagagem Diamonds and Slumbermatic Bed Co. It now owns a site called investment.com, where people can read about the latest hot stock.
The rationale for this lemming-like behaviour is obvious: American Gem’s stock climbed by 2,400 per cent after it moved into on-line stock trading; shares of LatinGold, now Travelbyus.com, have gone up by about 9,000 per cent in the past year; in Australia, shares of Adultshop.com climbed by more than 7,000 per cent last year to $1.72 Australian ($1.56 Canadian) from just 2.4 cents (Australian) after it moved into the on-line sex toy business. Junior mining stocks haven’t seen that kind of movement since Bre-X torpedoed the entire sector two years ago.
Legendary Vancouver mining promoter Murray Pezim put his finger on this phenomenon when he reportedly said: “If people want red hats, you sell them red hats. If you have blue hats, then you paint them red.” Capital flows like water: It finds its own level, and it seeks the easiest route between two points — and right now, the easiest route is the Internet. The CEO of a defunct mining company wouldn’t be doing his fiduciary duty if he kept digging for shiny rocks instead of getting on the Internet.
Market watchers who get steamed up about about this shift are missing the point. Sure, it’s senseless to think some tiny little company whose CEO used to sell insurance could suddenly produce wealth just because he puts a “dot-com” at the end of its name. But is it any sillier to think that a group of yobbos in an industrial park could produce wealth by digging a bunch of holes in the ground in Central America? Investors in junior mining stocks are used to risks that make Internet stocks look like T-bills.
Thousands of companies have raised money from gullible widows and German pension funds and Swedish millionaires, and then blown every cent and more hauling drill rigs to Russia or sifting through dirt somewhere in the Amazon. How is trying to set up an Internet travel network any riskier than that? And even if it is, if that’s where investors want to put their gambling money right now, who are we to tell them they shouldn’t?