Monday, August 23, 2010

Analyzing Great Basin's Golden Long-Term Prospects

Great Basin Gold (GBG) has moved higher on significant volume after their August 11th, 2010 report on the 2nd quarter. The stock price has surpassed the previous 52 week high of $2.09 on Wednesday, August 18th. The operative phrase for this author is in their presentation for the 2nd quarter:

Positive cash flow from operations expected with both projects generating revenue.

The author has holdings of Great Basin and revisits his previous article and analyzes the existing price movements for evaluation of the strategy going forward.

Moving Higher After Breaking Out From the Wedge Pattern

The chart below is a follow up of the price movement of GBG after breakout from the indecisive wedge pattern. The catalyst for the breakout as noted in the earlier article was the expectation of a great 2nd quarter report due on August 11th, 2010. Note that the stock price had a large move upwards on August 9th, 2 days prior to the quarterly release. The market is forward looking and leads. It was only on August 11th itself, that the price broke through the wedge line. The volume was light and suspect as commented by a reader on Seeking Alpha.

Figure 1 - Great Basin Gold's Narrowing Wedge and Breakout

The large volume did not appear until Monday August 16th, in the following week. GBG has now enjoyed movements upwards with volumes of 7 million plus shares on two days with indications of a third occurring today. Note that GBG trades on three stock exchanges, Johannesburg, South Africa, Toronto, Canada and the Amex in the United States. As GBG volumes are the greatest on the TSX in Toronto, this article is focusing on the stock play there. The other indicators of Price Oscillator, Moving Averages and Chaikin Money Flows are all positive for GBG. The author is pondering upon price movements for the future.

Analysis of Breakout

From looking the longer term chart for Great Basin below, the reader can see that the stock price was held in a trading range since their large private placement in March 2009 of 115 million shares and 57.5 million warrants.

Figure 2 - Great Basin Gold 3-Year History

The author has long wondered about the GBG share price movement and is beginning to conclude that it is not the share overhang but the warrants overhang, that was preventing the stock from moving upwards earlier. The rationale is that the warrants exercise at the price of $1.60 Canadian. The warrants when exercised puts a further 57.5 million shares into diluting the capitalization. The warrants would add another 17% more shares to the existing 338 million shares that were outstanding then. Therefore, in order for the stock price to move higher permanently, there was this 17% more value capping that had to be overcome, before the stock price could have traction.

The market needed a catalyst that there was definitely strong value in the stock to come prior to moving. This catalyst was the 2nd quarter report that states positive cash flow is coming with two operating projects. Therefore the GBG stock price cycled up and down within a trading range and in the tightening wedge pattern from March 2009 until now, there was this positive news propelling the stock out of the stuck trading range.

With the breakout of Great Basin’s stock price on good volume, this is indicating that the market now views positively the prospects for Great Basin in adding value to support the stock price. GBG stock is now not hindered by the thought of the dilution impact of the warrants exercising. The plus to this is that the warrants when exercised in October will be adding $90 million Canadian to GBG’s coffers. This cash boost should help fund further initiatives such as exploration and improvements that will further boost the stock price.

Moving Higher Relative to the Pack

In trying to understand the breakout that Great Basin has performed, the author ran the performance chart following.

Figure 3 - Great Basin Gold vs. the Pack for 10 days

I compared GBG’s recent price performance to the Market Vectors’s Gold Miners GDX, the Market Vector’s Gold Junior Miners GDXJ, Gold Corp GG and the gold ETF GLD. Great Basin, in green leads the pack with an over 10% movement higher within the last ten days. The chart confirms that Great Basin Gold is now moving higher on its own prospects, distancing itself from other gold miners and price movements of gold itself. This is definitely good news, as this indicates the market is valuing the prospects of Great Basin becoming a gold producer that will generate positive cash flow.

Moving Up on a Gold Down Day, August 18, 2010

As I am writing today, August 18th, it is shaping up to be a minor down day for gold with the price losing 0.5%. Great Basin’s stock price never let up and showed green from the bell, and is now up 3%. Volume was also indicating a large volume day. This again bodes well for Great Basin in confirming that the stock price is moving up on its own story. The market participants are accumulating in the anticipation of the positive cash flow.

GBG's Focus for 3rd Quarter

The following chart was presented at the quarterly results conference:

Figure 4 - Great Basin Gold's Focus for 3rd Quarter

The information in the chart indicates that we may expect two new resource updates coming for both their Burnstone and Hollister mines, among their many other operation improvement efforts. Good news on increasing reserves and resources will help to support a rising stock price for Great Basin.

Looking Forward for Great Basin

Fellow Seeking Alpha contributor, “HardRock,” has blogged an interesting prediction for Great Basin’s stock price going forward here. The chart in his posting is so inimitable, that I am posting it following:

Figure 5 - HardRock's Remarkable Forecast for Great Basin Gold

Examine the remarkable tail in the chart above. HardRock calls for a double of GBG’s stock price in four months. HardRock’s forecast is:

The forecast calls for breaking $2.00 Cdn in Aug, 2010 and $3,00 in Oct, 2010

Well, the first part of his prediction has come to fruition, breaking $2.00 Canadian two days ago. It remains for the market to determine what will happen come October, 2010.

Strategy Going Forward

The author has held for so long now, as documented here, and he is finally seeing some fruits of his holding. In short, going forward, the author intends to see through the eventual reward that comes to a company entering production and the ensuing profitability.

Disclosure: Author long GBG

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