Short Report: Is there hope for Golden Hope?

Stockhouse bullboards were buzzing this week as posters reacted to the tumbling value of Golden Hope Mines Ltd. (TSX: T.GNH, Stock Forum) shares, a move that is tied to exploration results at its Bellechasse-Timmins gold project in southeastern Quebec.

After reaching a high of 98 cents on September 21, the stock was down 46 % to trade at 53 cents on Thursday, leaving the junior with a market cap of $53 million, based on the 100 million shares outstanding (fully diluted), and $2.5 million in cash.

The selloff began on September 22, when the company announced the latest exploration results from Bellechasse, where drill rigs have been active since mid April.

Golden Hope said exploration has significantly expanded a series of mineralized structures, which are mainly located in an area known as the Bellechasse-Timmins deposit. Drilling highlights included 34 metres of 3.68 grams per tonne gold.

But some investors were clearly disappointed.

“To some extent, I guess the market was hoping for a better grade from the drilling,’’ said Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon Ltd. in Toronto.

The company said assay results from the holes reported so far confirm widespread mineralization, which has been followed for 825 metres along strike and 650 metres across strike. Since April 14, crews have completed 10,500 metres of drilling in 40 holes.

But the drill results cannot be taken as reliable estimators of grade, due to the demonstrated inadequacy of core samples for grade estimation purposes. This is due to the nature of the primary distribution of gold from which treatment of small samples produces the so-called nugget effect, the company said.

The nugget effect refers to the tendency of small samples to understate the concentration of metals that occur in discreet particles, according to the Canadian & American Mines Handbook. Generally, it means that small samples, such as drill core, may frequently miss gold grains, just based on probability.

This means Golden Hope will need to continue extracting large bulk samples of rock, either from surface, or underground in order to make accurate grade forecasts.

Meanwhile, the company has not yet done enough exploration work to define a resource estimate that would meet Canadian National Instrument 43-101 standards of disclosure for mineral projects.

As a result, Golden Hope remains a risky investment, particularly for people who bought in at close to $1.

In a telephone interview, Golden Hope President Frank Candido said much of the recent trading volume was driven by participants in two recent private placements that raised $2.9 million from the sale of units priced at 18 cents.

The units were comprised of shares and warrants that become freely tradable on September 7.

“When that stock became free, especially trading in the 90 cent range, it must have been difficult for people to resist taking money off the table,’’ Candido said.

“ So for that reason, I think it was natural that we were going to pull back, based on the fact that we had $3 million worth of 18 cent stock that hit the market in the last two weeks.’’

Major shareholders in Golden Hope include Senvest Capital Inc. (TSX: T.SEC, Stock Forum), which owns about 11 million shares, or around 10 per cent of the company.

Candido said he has been an investor for about 10 years. He and his family now own about six million shares.

Based in Montreal, he became vice-president in late 2006. At that time, the company had no board, no management, and no money in the bank.

At the age of 45, the Golden Hope ceo brings experience in corporate finance, having founded Optimus Asset Management Inc. (1994) a company that specializes in financing and consulting to early stage micro cap companies both private and publicly held.

Candido said the junior is currently burning through its cash at a rate of about $300,000 per month. The aim, he said, is to outline a resource of about 100 million tonnes.

Investors can only hope that he delivers on that promise.