Zenyatta: A Risky Highflier, A Damaged Pilot ... Another Spectacular Crash?

by Melissa Davis - 9/12/2013 10:38:06 AM

Chances are, Zenyatta Ventures (TSXV: ZEN.V; OTC: ZENFY) CEO Aubrey Eveleigh learned a thing or two during the six years that he served as a senior executive at a doomed junior miner that – with a notorious Canadian promoter at the helm – managed to transform itself from an obscure penny stock into a popular highflier before his current company magically burst out of nowhere to pull off a similar miracle of its own.

After all, by the time that Eveleigh left his longtime post as second-in-command to MetalCorp President Donald Sheldon – a serial corporate executive long favored to steer overhyped losers backed by a suspected crook with a reputation for blatant stock manipulation -- the future Zenyatta chief had spent a decent chunk of his career working directly alongside a true master of an incredibly lucrative game.

Just ask the real authority on Canadian stock fraud about Eveleigh’s former boss and the legendary multimillionaire – reportedly caught on tape agreeing to launder drug money through his penny-stock companies – so often connected to the ill-fated junior miners that Sheldon ran. As a fearless investigative reporter who dedicated his impressive career at The Vancouver Sun to exposing pump-and-dump schemes on the Canadian stock exchange -- and will soon collect a rare "lifetime achievement award" in honor of his tireless, one-man crusade -- David Baines wound up scrutinizing a number of temporary highfliers led by Sheldon over the years and often found the infamous Jack Purdy, “a promoter of high-volume, go-nowhere junior stocks," linked to quite a few of them.

A constant presence beside Eveleigh from the time that MetalCorp went public through the reverse-merger process (a vehicle routinely embraced by shady microcap companies) until the pair finally parted ways after presiding over the junior miner for years as the dominant officers in its executive suite, Sheldon maintained such a close relationship with Purdy that – when the authorities finally cracked down -- he reportedly stepped forward, after locating millions that he could afford to spare, as the dutiful savior who hurried straight to the rescue.

“Vancouver stock promoter Jack Purdy was arrested in JFK airport ... and charged with money-laundering offences,” Baines reported in a disturbing article now largely forgotten since it first appeared in The Vancouver Sun a full decade ago. “Helping Purdy meet his ($5 million) bail obligation was fellow stock promoter Don Sheldon, who not only pledged his half-interest in an office building … which he jointly owns with Purdy, but also provided a letter attesting to Purdy’s good character” as well.

Literally weeks after Baines published that jarring article, MetalCorp completed its reverse merger and – with Sheldon and Eveleigh joining forces to steer the young junior miner – quietly surfaced on the TSX Venture Exchange as a brand-new public company. Within a year of ending his lengthy tenure at MetalCorp, supplying the junior miner with cheap stakes on some gold-mining assets that it would later try (but fail) to dump into a new public company along the way, Eveleigh secured minority rights to some discarded claims in a remote Canadian swamp and then supplied that property to Zenyatta in a move that effectively allowed him to launch his own company instead.

By the time that Zenyatta completed its first year of trading as a Canadian junior miner, listed on the same exchange that hosted MetalCorp when that stock recorded its own amazing (if fleeting) gains, the company had already managed to stumble upon a major discovery that would soon provide its CEO with a powerful story that – while clearly effective – now strikes some rather notable experts as far too good to be true.

Take a look at the blunt review provided by the leader of the most advanced, and arguably the most respected, graphite miner in the entire space. While Zenyatta has basically trumpeted its big discovery as the most valuable graphite deposit in the entire world – and trades at a staggering premium to his own company, despite its big head-start, as a direct result – Northern Graphite (TSXV: NGC.V; OTC: NGPHF) CEO Gregory Bowes has yet to see any evidence that would make that deposit even seem special and actually questions whether it will prove economically viable at all.

“The only public, independent information (drill holes) indicates this is a 4% amorphous graphite deposit and therefore not economic,” Bowes declared in a recent email praising the initial report that TheStreetSweeper issued on the wildly expensive mining company. “Vein graphite comes out of the ground 95%C+, so this is not vein. It has to be drilled, blasted, hauled, crushed, ground, floated, etc., just like any other deposit to get to 90%+ purity, and we don’t know the costs of doing so. It may or may not then have an advantage in being upgraded to 99.95%C purity. Any deposit can do this, but most cannot do it economically.

“The valuation seems to relate to comments that they are going to compete in the $11 billion synthetic market and get $10,000/ton-plus for their concentrates. Over 90% of the synthetic market is electrodes (which are machined and shaped) and fiber for composite materials. Natural flake or powder graphite does not have the physical characteristics to be used in these markets regardless of purity.

“There are smaller specialty markets where natural can compete with synthetic,” he concluded, “but prices are nowhere that high.”

Turbo-Charged Hype?

As the CEO of a graphite miner widely embraced by Canadian analysts as the best pick in that crowded space, Bowes simply ranked as the most prominent corporate executive in the industry to come forward after TheStreetSweeper released its original report on Zenyatta and express serious doubts about the glaring outlier in their group.

Nevertheless, with Zenyatta taking a sizable hit on that revealing story – and rumors quickly surfacing that hinted at a likely promotion to follow within days as a direct response – the wounded stock quickly staged a miraculous comeback that allowed the shares to recover a big chunk of the gains that it had previously lost. After management rushed to defend the company but initially failed to rescue the stock or even prevent it from extending the losses that it had suffered when TheStreetSweeper released its original report the previous day, Zenyatta somehow managed to regain enough momentum throughout the rest of that session – and generate so much buying pressure in the session that followed – that it seemed to magically emerge from the damage in fairly good shape all on its own.

Pounded below the $3 mark on the pressing questions raised by the first installment in this three-part series, Zenyatta stormed all the way back above $3.50 a share – recording a 20% gain in just two short days – by the time that TheStreetSweeper even got a chance to finalize this extensive update by including new material that it had obtained and share its findings with the public.

If history serves as any guide, however, Zenyatta better treasure its swollen valuation while it still can. After all, by sticking with its popular script throughout the urgent rally that boosted its stock price ahead of this troubling report, Zenyatta continued to sell a sensational story that – already met with clear suspicion by some noteworthy experts in the field – sounds just familiar enough to set off a few blaring alarms all by itself. Just examine the pitches delivered by Eveleigh for MetalCorp and Zenyatta, a task made relatively easy by the helpful publicity that resulted in both cases, and look for any similarities between news coverage of the two.

MetalCorp Story: “We were trying to advance an old copper deposit identified by Noranda (a previous employer) back in the ‘60s,” Eveleigh told The Toronto Star a couple of years before he left the broke junior miner behind with its stock beyond repair. “I said, ‘This looks like a rock that should have platinum in it.’ And lo and behold, it was there … It’s a humbling business. You think you know it all, and then you get surprises … It’s unusual for North America to have such high-grade platinum. It’s usually in South Africa. We didn’t go there looking to get into it, but it’s certainly got us more focused on platinum now … It was pretty nice. When you hit something like that, it’s pretty hard to ignore. And it’s getting everyone’s attention” as a result.

Zenyatta Story: “The Zenyatta team discovered the graphite deposit by accident while surveying for copper and nickel,” Reuters noted earlier this year. “At first, the company wasn’t sure what it had found. ‘We thought it was massive sulfides – copper, nickel. We drilled into it, pulled out the core, and I didn’t know what it was,’ said Eveleigh. ‘I’ve been in the business for 30 years, and I’d never seen anything like it. (Since then), we’ve been approached by many end-users globally – out of Europe, out of Asia, out of the U.S.,’ said Eveleigh. ‘These things could materialize into a strategic partner or buyout. If not, there’s enough value here (that) I don’t think we’ll have any issues raising money to put it into production.’”

Zenyatta stopped well short of simply banking on that cash to materialize, however. With a mountain of warrants set to expire a few months later under an extended deadline that had already preserved their value once, Zenyatta soon followed up by announcing that it had retained a professional investor relations firm to orchestrate an “aggressive” publicity campaign for the company and revealing that it had thrown in 100,000 stock options (on top of sizable cash payments) as a reward for those valuable services.

The day before Zenyatta released that news, its corporate filings show, the company issued the exact same number of stock options to an unnamed “consultant” – setting the strike price 30% above the price fetched on the open market and more than double the price tag on its outstanding warrants – and then scheduled all of those options to vest (at three-month intervals) over the span of a single year. In other words, absent some bizarre coincidence, Zenyatta effectively provided its new I.R. firm with the chance to make a tidy fortune on any outsized gains that it managed to deliver – starting the very month that all of those outstanding warrants would expire – whether the company ever sold an ounce of its celebrated graphite or not.

Now that Zenyatta has collected millions for those warrants and since blasted to a series of new record-breaking highs, the junior miner sure looks like a company that – with the former sidekick to an infamous promoter calling the shots – knew what it was doing whenever it inked that compelling deal. After all, when TheStreetSweeper tried to discuss Zenyatta with the president of that I.R. firm in an attempt to simply nail down its long-term goals, he struggled to discuss any plans that extended a few months beyond the exercise date of the final block of options that – worth more than a quarter-million dollars (after his out-of-pocket expenses) at their recent peak – stood to leave him with such a healthy bank account.

“We’re not giving anything outside of the PEA,” he said, referring to the preliminary economic assessment that Zenyatta hopes to deliver (right as his final chunk of options vest) during the first quarter of next year. “There is no target date for actual production …

“We have not given any product to end-users at this point,” either, he further allowed. But “if this deposit is what the world thinks it is, somebody might want to joint-venture or buy the company outright …

“The next evolution of the company will come by the end of the year. It will be a lot of fun to watch!” he assured.

Turbulence Warning

Since Zenyatta has yet to supply any of the documented studies that experts need to objectively measure its value, leaving the company in charge of the script and the public in the dark until it complies, TheStreetSweeper felt compelled to at least share a useful review of its own telling discoveries to help balance the scales and fill that dangerous vacuum. With Zenyatta painting a rosy picture that often clashes sharply with the views expressed by some noteworthy experts – and even contradicts its own story at times – TheStreetSweeper has decided to let both the company and its skeptics speak for themselves, as showcased in the revealing comments gathered below, in an effort to at least begin setting the record straight.

Zenyatta: “Anybody that goes around the world to look at mining projects would find that the infrastructure that’s around us is probably some of the best you can find.” – CEO Aubrey Eveleigh (Interview with Graphite Investing News, June 2013)

Industry Expert: “They claim great infrastructure. (But) they’re at least 30 kilometers from a highway, 30 kilometers from a gas pipeline, 30 kilometers from power and 70 kilometers from a railway. I do not consider that great infrastructure.” – The “Mercenary Geologist” Mickey Fulp (Interview with Graphite Investing News, June 2013)

Zenyatta: “The claims are located in a remote area where weather, terrain and the lack of infrastructure make it difficult and costly to operate … Current access is by float and ski-equipped charter aircraft from Hearst, Ontario (86 kilometers away). Helicopters are required for local transport because of extensive wet swamp … There are numerous rivers running through the survey area connecting various lakes and wetlands, (and) there are limited signs of culture throughout the block, such as roads, trails and mining areas …The current lack of infrastructure increases the risk that the corporation may be unable to further explore, develop or operate efficiently.” – Official Prospectus (December 2010)



Zenyatta: “We’ve talked to many analysts, (but) a lot of these companies are looking for the 43-101 resource (report), and they’re waiting for that. We should be able to deliver that in September or October. So a lot of people are waiting for that next catalyst, which is a very important step. People look at it now and say, ‘Yes, you can come up with the purity, and the quality looks good. You still have to do some steps there, but how big is this thing?’ That’s what everybody is asking right now.” – CEO Aubrey Eveleigh (Interview with Graphite Investing News, June 2013)

Industry Expert: “Big is not really better … You need to be a niche producer. Experts who have been in the business for more than 100 years have told me that they think 100,000 tons of flake graphite in the Western world will supply all needs … You’ll put yourself out of business if (you) flood the market with graphite. The price will drop, (and) you can’t sell enough tonnage to justify the cap ex.” – The Mercenary Geologist Mickey Fulp (Interview with Graphite Investing News, June 2013)

Industry Expert: “I very much agree that bigger does not necessarily mean better. If one company brings on 50,000 tons in one year, then the flake graphite market will be completely disrupted. But serious companies are quite responsible, so they’re not really thinking about that.” – Industrial Minerals Data Manager Simon Moores (Interview with Graphite Investing News, June 2013)

Zenyatta (Media Coverage): “Zenyatta expects to be able to produce around 100,000 tons of high-purity graphite a year from its Albany project … That is well above Sri Lanka’s annual output of some 4,000 tons a year. To be sure, Zenyatta is still in the early days of development work, with its first resource estimate expected in September and a prefeasibility study due in early 2014 … Having proven its process on the bench scale, the next step is to ramp up to a pilot plant study and provide potential customers with sample material.” – Reuters (March 2013)

Industry Expert: “The company is choosing not to give out many samples for testing to the industry. Once sample tests have been done by third parties, the industry will know if Zenyatta’s graphite can replace synthetic in a range of end markets. (Meanwhile) Zenyatta has been measured with what data they have put to the market … Questions still remain, however.” – Industrial Minerals Data Manager Simon Moores (Interview with Graphite Investing News, June 2013)

Industry Expert (Analyst Coverage of Rival Northern Graphite): “Worthy to note is that Northern Graphite is investigating its potential to sell a battery-grade product (high-purity graphite) at a substantial premium to concentrate. (Meanwhile), the company is currently delivering a half-ton sample to a potential suitor, who requires this for testing of the graphite material in its end-use products … Due to the quality of the Bissett Creek project and its abundance of rare, high-purity, jumbo-flake graphite, we continue to believe Northern Graphite will evolve as the leading graphite producer within the safe, mining-friendly jurisdiction of Ontario” where Zenyatta itself operates as well. – Union Securities (July 2012)

Industry Expert: “Zenyatta has done an overbidding job to present its material as unique. That doesn’t mean that it’s sellable. They make it sound like it can be used in high-value applications, but they haven’t proven to anybody that their material has even been tested in these applications … Then you have to know how to market that product. That’s going to require all kinds of technical data that shows its consistency … They’re also quoting prices that people are paying for synthetic graphite (instead of) natural flake, coated graphite – which is a lot cheaper than the numbers that Zenyatta has been throwing out. (But) since the company has no documents, it’s very hard to evaluate.” – Asbury Carbons CEO Stephen Riddle (Interview with TheStreetSweeper, August 2013)



Zenyatta: “When you drill and you test for the grade, it comes out at 5%. (But) the key is not the grade on the front end; it’s the purity on the back end … We put in the 5% grade. We grind, and we do a flotation and a caustic bake (with) sodium hydroxide. It’s not an acid, as some people are suggesting … We don’t use acid; it’s a base. (Then) after you go through that process, it comes out at 99.99% (pure). What I’ve been told is that we’re the only company globally that can use caustic bake to get to 99.99%. I’m getting it third-hand from a good source – and we haven’t confirmed that – but I’ve been told that.” – CEO Aubrey Eveleigh (Interview with Graphite Investing News, June 2013)

Zenyatta: “Metallurgical test work of the Albany graphite material at SGS Lakefield has identified a simple, (one-step) concentration process, and ongoing work is focused on preparing a high-purity (greater than 99.0% C) graphite product through acid leaching. Process and product development efforts under Don Haines will focus on producing micronized, ultra-high purity products to compete in the $13 billion synthetic graphite market.” – Corporate Press Release (September 2012)

Industry Expert: “They have made claims that their deposit is equivalent to Sri Lanka, (but) Sri Lanka graphite comes out of the mine at 90%-plus purity. It is course-crushed and hand-sorted for a very small niche market … The other thing they’re claiming is that they have an ultra-high purity deposit, (but) they have 5% to 6% graphite drilled. Compare that to the 90% in the actual vein of Sri Lanka. They are saying that they can purify it to ultra-high purity with acid leaching. Well, anybody in the world can purify their graphite to 99.95% -- or most companies can do that – with acid leaching. Northern Graphite has already done that; other people have done that. (So) that claim just absolutely does not hold up.” – The Mercenary Geologist Mickey Fulp (Interview with Graphite Investing News, June 2013)

Zenyatta: “When a flake graphite deposit talks about leaching, they’re usually using hydrofluoric acid. Now, we don’t use that. Hydrofluoric acid is a pretty dangerous material, and it’s very expensive … In our case, we’re using sodium hydroxide. It’s safer. It’s a base, not an acid. (Plus), it’s much cheaper. And obviously, we’ve gotten extremely high grades from it, and with good recoveries.” CEO Aubrey Eveleigh (Interview with Graphite Investing News, June 2013)

Industry Expert: “Caustic bake is a very similar process (to acid leaching), as far as I’m concerned. The first thing to look at is, what will be the purity through normal flotation? Typically, few deposits get up to 98%. More will get you to 94% or 95% … To make it battery-grade, you can use any natural flake graphite in the 94% to 96% range. That’s actually the most economical purity range. If you use higher carbon, it costs you more. If you use lower carbon, it costs you less. The lower processing costs don’t save you anything. (Then) you purify that to 99.95%, currently through acid leaching. It’s not expensive in China. The Chinese use an acid purification that’s very low cost. (Indeed), Chinese manufacturers are the most cost-effective – by far – because of the methods they use … That’s why 95% of all material is made in China right now.” – Asbury Carbons CEO Stephen Riddle (Interview with TheStreetSweeper, August 2013)

Industry Expert (Analyst Coverage of Rival Northern Graphite): “In September 2011, Northern Graphite announced that the metallurgical testing on samples from the Bissett Creek project had indicated that approximately 50% of the graphite concentrate produced could be jumbo-sized … flake with a high carbon content averaging 98%. These results were achieved using flotation alone, without the use of thermal or chemical treatment.” – MGI Securities (February 2012)

Industry Expert (Analyst Coverage of Rival Northern Graphite): “NGC is currently conducting engineering and investigative work on the construction of a plant that would produce anode material for the lithium-ion battery market … A high purity of the graphite, as measured by the carbon content of 94% to 97%, is a key contributor to the strength of the flake. (Moreover), the graphite (can be) purified to 99.5% C. This will allow the company to realize a higher selling price of approximately $5,000 to $7,000 per ton. (Meanwhile), samples of Bissett Creek’s flake graphite have been sent to Asian battery manufacturers for purity tests, and positive news relating to these tests could be an important catalyst … The current spherical graphite demand from the lithium-ion battery market is approximately 25,000 to 30,000 tons per year. As the demand for electric vehicles increases, this number should grow significantly, (however). Our research indicates that natural graphite – as opposed to synthetic graphite – is a better option to fill this niche … A lot of energy is required to make vein graphite 99.99% pure. As a result, large flake graphite is preferred over vein graphite” as well. – Mackie Research, a firm that has joined a number of other Canadian research houses by presenting Northern Graphite as its favorite pick in the group, while completely ignoring Zenyatta itself even though the vice chairman of its mining division actually serves on the company’s board (August 2011)

Industry Expert: “The whole industry got overinflated with hoopla when graphite prices went up. The first thing that went on is that the publicists and the junior mining companies themselves promoted graphite as a growing market. But demand has actually dropped – it hasn’t increased – in the past year. (Still), Zenyatta has done such an overkill job of publicizing their material that they’ve really suckered people … Personally, I think that they’re going to put a big black eye on the entire industry.” – Asbury Carbons CEO Stephen Riddle (Interview with TheStreetSweeper, August 2013)



* Important Disclosure: The owners of TheStreetSweeper established a short position in Zenyatta (ZEN.V), and they stand to profit on any future declines in the price of its stock. They also purchased stock in three Zenyatta competitors -- Alabama Graphite, Big North Graphite and Northern Graphite -- and stand to profit if those companies record any gains.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking any financial positions in the stocks of the companies that they cover. To reach Melissa Davis, the editor of this website and the author of this report, please send an email to editor@thestreetsweeper.org.