Poor management, monetary waste, opportunistic deal making

BaffinLand Iron Mines (TSX: T.BIM, Stock Forum; 20 cents)
www.baffinland.com

It’s hard to imagine this situation could surface so quickly, but we literally went from thinking BIM was a significant opportunity in the mid 30-cent range to now dumping coverage of this company (all within a couple weeks) because they have burned through so much cash in a matter of months it’s beyond a joke - and now with the help of a director and CIBC, Baffin management and directors are throwing their smaller investors the concrete life preserver by doing a large financing at the lowest possible level and worst possible time.

If you want to witness the classic case of how NOT to run a public company and destroy shareholder value, simply follow the short life of Baffinland. This is textbook poor management and unbelievable waste. It is the perfect example of how very poor management can destroy a company and wipe out more than $150 million dollars even without the assistance of a terrible market.

Long story short, the company raises $193 million in March 2008 (at $3.65), burns through almost all of their cash inside of six months, and then announces a $25 million financing at the worst possible time at the worst possible price, so that massive amounts of new paper can be placed at 19 cents a share into the hands of a preferred few. Under normal conditions you would fire the people running this company as the way they burned through cash in such a short period of time is unbelievable. The only reason I could imagine these people are left running this company is because they helped put together this foolish financing.

Maybe enough of the same group benefiting helped finance the $3.65 paper, but if not, I would expect to see a lynch mob forming "somewhere." If it’s allowed to go through, it simply means the smaller investor is burned once again. They sat helplessly by as their $3.65 investment eroded to 19 cents because management burned through the cash like it was firewood for the Inquisition.

As previously mentioned, we are tracking over 50 TSX listed companies with large cash positions but I sure hope no others are as foolish as Baffin. When you compare their financials from the quarter ending June 30, to the recently filed Sept. 30, you'll see where it seemed impossible to burn through so much money in only three months - and during a period when they knew serious problems existed with the credit markets. And now to witness this financing at 19 cents?? The burn rate I thought was hard to swallow, but to now see them structure such massive dilution. Who is running this company, the former CFO of Enron?

It really does give a poor image of TSX-listed resource stocks. I just find it shocking to think funds, brokerages, and retail investors did the due diligence on this company that allowed them to raise almost $200 million only to have 95% of that value destroyed in such a short period of time. Typically you could blame the October market disaster on this one but they destroyed shareholder value months before that.

Now it’s a matter of principal to think a small group of investors is able to take control of this company for next to nothing. They raised capital by telling people they were sitting on one of the largest iron ore deposits in the world and how wonderful things have been for months. But now they tell people that their survival is in jeopardy if they don't raise this money near 19 cents. The stock is already trading near its cash value. Unless, of course, they have also managed to burn through $20 million + in the month of October.

Existing shareholders would be far better off firing the whole works running this company, putting the properties under care and maintenance to preserve cash, and spending the next year (or more if necessary) to find a buyer for the property. After all, they've wasted over $100 million in less than a year to prove up "something" so someone, somewhere must be prepared to offer them more than the pathetic 19 cents a share they are now raising with a select few who will benefit in a year or two while everyone else is left holding nothing but massive tax losses.

Like I said, let’s hope the other 50 plus cash rich companies we're following are a lot smarter and have taken classes in ethics.

Side Note: For those who took losses on BIM, consider stocks like T.PHC near 14 cents and V.FOS near 25 cents - they should fair much better for Q1/09 than what we're witnessing with BIM (assuming cash burn rates remain under control). Both PHC and FOS have strong fundamental value to compliment significant cash positions.

www.phxcoal.com

www.phoscan.ca

Disclosure – Danny Deadlock owns 50,000 shares of BaffinLand Iron Mines (TSX: T.BIM).