I read this through and think that these excerpts provide some insight into AUM's present share price predicament while giving us some hope that AUM has the potential to survive and prosper because it is well funded and has a proven operating resource. One can only hope....

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JK: The current setup makes it possible for traders to strip out money flowing into the system without contributing any offsetting value. The rationale for accommodating algo and human prop trading is that this creates liquidity. Perversely, some of these trading systems even pay for these day trading orders while penalizing real investors putting on longer-term positions based on fundamentals. The trouble for the resource juniors is that the day traders are not interested in project fundamentals; they are focused only on volatility and capital flows. By being able to sell short stock without tagging it as such they can intercept money moving into the stock from fundamental investors. Obviously to profit they need to unwind the short position. This is just a matter of waiting for the inflow of new money to end, and then pounding the bid side of the order books with further short sale orders until the failed rally triggers a cascade of selling by despairing long shareholders, which allows the day trader's short positions to be covered the same day.

When fundamental speculators, that is, people who are betting on the fundamental outcome of whatever the company is trying to do, have to compete against such traders, the fundamental speculators disappear. This makes it difficult for the resource juniors to establish a higher trading price in response to positive fundamental developments and fund further work at those higher prices. Include the regulatory efforts to curtail the flow of private placement funding in the name of protecting investors, and you end up with the junior stuck on a dilution treadmill, issuing more stock to a shrinking pool of "accredited investors" at the same or lower prices despite making fundamental progress. Because ongoing equity financing is the key to delivering a definitive fundamental success in the form of a deposit that can be turned into a profitable mine, this "structural inefficiency" further skews the playing field in favor of traders. Allowing these supposed liquidity creators into the system has actually caused liquidity to evaporate.

The end game for this situation is that eventually fundamentals-oriented investors will withdraw entirely from the junior resource sector, leaving only the algo and human prop traders to battle each other. That may create the appearance of a thriving market for a while, but none of the capital in play flows into corporate treasuries. If the companies cannot produce fundamental successes, there is no reason for investors seeking winning bets on fundamental outcomes to pay attention to the junior resource sector. Furthermore, these day traders have become pretty good at recognizing when they are battling each other. Once it becomes apparent that they are cannibalizing each other rather than preying on real investors, they flee. Then there will be only very large spreads with little stock on either the bid or offer side, in effect a dead market. This is the institutional failure of the Canadian junior resource market that I fear.

TGR: You have been talking about this being "an ideal time for a bottom fisher." If 500 companies are likely to go out of business this year, how do you determine which ones will survive?

JK: One criterion to look for is companies that still have lots of money. Filter on working capital and verify that the company will not have to finance at today's low prices. The search engine at Kaiser Research Online does this and a lot more.

First, look for projects that have interesting potential and experienced management teams. This is a good time to look for companies that are roadkill as a result of the general bear-market conditions. I look for companies with interesting stories that are down and out.

Second, look for projects that already have PEA-level or higher disclosure. I think we are through the worst of the cost escalation. If perceptions shift to where everybody expects metal prices to do nothing worse than stay flat, with the trend bias to the upside, a lot of advanced projects will rebound as the perspective shifts from glass-half-empty to glass-half-full.

Finally, with regard to the exploration juniors, discovery exploration will be the game for the next couple of years. Although I hope for it, I doubt we will see significant metal price gains in the near term. If that is the case, money will want to go into discoveries where investors are not certain of the valuation limit, where the sky is the limit until the drill ceases intersecting ore grade mineralization. Of course, a discovery only counts as such if the grade will work very well at current metal prices and can handle a 25% decline.

TGR: Could one big discovery make a big difference in the stock prices of a lot of these junior companies?

JK: Yes. It would be ideal if the windfall came in one of these companies with a lot of people owning the stock, one that starts off from near dead, only to rise into a monster success story for all the right reasons. The companies I mentioned are all examples of juniors that I regard as having the potential to deliver a home run that switches the market's glass back to half full.

Question: I wonder if AUM is on his list of companies having "home run" potential.