Pacton Gold Inc (CVE:PAC) (OTCMKTS:PACXF) (FRA:2NKN) crashed ↓45.88% today on the heels of neighbor Novo Resources Corp (CVE:NVO) (OTCMKTS:NSRPF) (FRA:1NO) newly-released bulk samples. The junior mining darling, which had gained ↑378%, trough-to-peak in May—and ↑1700% since November 2017—has fallen out of orbit. We explore the backstory behind the chaos.
For those not following the Pacton Gold story, it’s been an incredible ride for investors who’ve staked an early position. Despite a junior mining sector (and gold price) which have gone nowhere, Pacton has overachieved in spades. Boosted by the acquisition of large tracts of gold-bearing property in Australia, Pacton has become the third largest land holder in Australia’s Pilbara Gold Rush.
Adding kerosene to the fire were a series of private placements pitting Sprott Capital Partners (SPC) as the lead agent. On May 1st, Pacton Gold announced they authorized a proposed private placement offering size from $4,002,000 to $5,550,500 in gross proceeds. Each unit consisted of one full common share purchase warrant which could be exercised for three years from the date of issue at a price of $0.35. With the stock price having quadrupled in just a few months—and with the exercise threshold just a few pennies away—investors were granted a fortuitous opportunity.
Furthermore, it was revealed just a couple weeks later that Mr. Gold himself, Eric Sprott, became a significant shareholder himself. Mr. Sprott purchased approximately 10.1% of the outstanding common shares of Pacton and would control approximately 18.4% of the Company, on a partially diluted basis assuming the exercise of warrants. This solidified company ties to the Sprott empire, which has previously obtained Sprott Capital Partners as advisors to assist the company.
Between all the acquisitions to major historical gold reserve proximity and leading participating authorities, investors went all-in. Stocks don’t appreciate ↑1700% on 7-digit ADV on insider purchases alone. Pacton Gold became the toast of the Canadian small cap junior gold mining scene, and was able to maintain that momentum for lengthy amount of time.
Unfortunately, the wheels came off today, and it was totally out of Pacton Gold’s control.
Novo Resources Releases Bulk Sample Results
This morning, Novo Resources provided two bulk samples from Comet Well, part of the company’s greater Karratha Gold Project located in the Pilbara region of Western Australia. Given Pacton Gold’s close proximity just a few kilometer away, the poor response provided the catalyst needed for investors to panic sell.
On the top line, Novo’s results don’t seem that disappointing. Sample KX157, a 7.143 tonne bulk sample previously reported to contain numerous gold nuggets returned an grade of 10.4 grams per tonne gold. However, Sample KX158, a 6.853 tonne bulk sample encompassing conglomerate and footwall dolerite, returned a less sanguine 1.5 grams per tonne gold—perhaps not meeting expectations built-in by the doubling of the share price since February.
Novo Resources Chairman and President Dr. Quinton Hennigh talks to James about the ancient Pilbara region in Northern Australia where the company’s gold interest are located
Although both companies sold off on the news (Novo Resources has significantly pared losses, closing down ↓29.26%), Pacton Gold received the brunt of investor ire. Fairly or not, the company’s momentum-laden performance was ripe for destruction on the whiff of any disappointing news. With no earnings (or prospects for earnings in the near term), Pacton Gold was mainly trading on grandiose dreams of what could be. Quite unintentionally, Novo Resources threw cold water on the trance-laden Pacton investor.
The result was not pretty.
In my experience, microcaps driven predominantly by momentum have an exceedingly difficult time recovering when the balloon pops. Momo money generally take their ball elsewhere, leaving the host barren of fresh buying. Investors who bought-in at higher prices look to sell on every conceivable leg up. In essence, it becomes impossible to recreate the conditions which lead to the euphoria. That simply how penny stock ‘investing’ works.
None of this changes the prospects of Pacton Gold going forward. If you loved the stock’s fundamentals yesterday, nothing much changes—or should change—from Novo Resources results. But realize price action will be dictated more by internal accomplishments than by technical buying. Many will not be patient enough to survive the significant grind which follows.
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