Wits Gold, a strange stock for strange times (Source: Mineweb)

INVESTMENT INSIGHTS
Wits Gold, a strange stock for strange times

Never mind record gold prices, Wits Gold directors have just sold off R47m worth of shares in “a long term option on gold”.
Author: Barry Sergeant (Mineweb)
Posted: Tuesday , 15 Jan 2008

JOHANNESBURG -

Never mind the bullion price moving to one record after another over the past few weeks, directors of Wits Gold (WGR SJ, R132 a share) have recently sold off R47m worth of their personal shares in the stock.

The moves are doubly inexplicable, given the stock's motto of being "a long term option on gold".

The stock has a short and controversial history. Around the time of its Johannesburg listing in April 2006, Wits Gold CEO Marcus Watchorn said "we've categorised our resources into two different levels effectively. There are shallow resources at less than 2,500 metres - in other words, those are accessible from a single-drop shaft, using conventional mining techniques. And then there's a deeper sequence of resources that go down to 5,000 metres, which is quite substantial. But the shallower resources are of the order of 40% of the total resource."

A piece of "independent" research was made available on the Wits Gold website, penned by Johannesburg-based Imara S.P. Reid. According to the Wits Gold prospectus published on 18 April 2006, Adam Fleming, the Wits Gold chairman, was a director of Imara Holdings, and had been from 2003. He may still be one. He was chairman of Imara Holdings from 2003 to 2005.

The "independent" Imara investment report compared Wits Gold with the likes of Axmin (AXM CN, C$0.92, active in Central African Republic, Mali, Sierra Leone and Burkina Faso), Orezone Resources (OZN CN, C$1.58, Burkina Faso) and Banro (BAA CN, C$12.00, Democratic Republic of Congo). These exploration and development companies hold properties which host open cut deposits, starting literally a few meters below the surface, unlike the monstrously deep - kilometers down - stories listed by Wits Gold.

In comparing Wits Gold with actual market valuations derived from selected listed gold entities, Imara advised that Wits Gold "is almost off the graph". Sadly, Imara was referring not to Wits Gold as such, but to the demonstrably "low" (according to Imara) valuation of its gold ounces.

All ground held by Wits Gold - all in South Africa - has been discarded, after decades of drilling and analysis, by Tier 1 producers - AngloGold Ashanti (AU US, $50.07), Gold Fields (GFI US, $17.55), and Harmony (HMY, $12.86). According to its 2007 annual report, Wits Gold owns "inferred resources" of 159.7m ounces of gold, and 136.3m pounds of uranium oxide "in the world's premier gold province". Given that a 1m ounce discovery is generally regarded as world class, the Wits Gold numbers can only be described as astonishing.

With the prospect of relocating its head office to the aurora borealis, Wits Gold launched an over-the-counter (OTC) level 1 American Depository Receipt (ADR) program in August 2006. This has been a flop. Wits Gold then planned a secondary listing on the US 's NASDAQ, but is now considering a listing on the Toronto Stock Exchange instead. The reason for this, in the words of an analyst, goes to the "onerous requirements" of the NASDAQ.

U.S. regulators don't like loosely defined categories like "inferred"; they want far more rigorously defined "reserves" and "resources". Wits Gold adopts a different line in communications with investors; in the 2007 annual report, Fleming states that "our resource is massive - right up there with giants like Newmont and Gold Fields and independently audited too".

As of 31 December 2006, Gold Fields listed 251.7m ounces of gold and equivalent resources, and 93.8m ounces of gold and equivalent reserves - reserves being the firmest category of mineral definition. Wits Gold does not list a single ounce of gold in the reserves category, but happily compares itself with giants like Gold Fields and Newmont (NEM US, $56.22).

Fleming holds 10% of Wits Gold, apparently through one, or perhaps two, Liechtenstein-registered companies, East Accrington and Rhodora. Wits Gold agreed that Fleming Family & Partners Advisory Limited (FF&P) and JPMorgan Equities would act as corporate advisors to the listing of Wits Gold. Fleming had been listed as a director, from 2004, of FF&P Private Equity. He may still be one.

Then there was a research report on Wits Gold from Cazenove, complicated by the 2005 pooling by JPMorgan and Cazenove of their UK investment banking outfits into a joint venture. Despite the independence of its research team, Cazenove research makes disclosures concerning JPMorgan clients, due to the UK JV affiliation. But something fell through the cracks. Sadly, as a lady at JPMorgan Cazenove put it, the Cazenove research note on Wits Gold did not include the relevant disclosures, "which was a one-off and regrettable error". Just in case anyone is wondering, it was a very bullish piece of research.

The Wits Gold prospectus stated that "Adam Fleming has a track record of creating shareholder value in the South African gold mining industry". Fleming was a director of Randgold & Exploration in 1996 and 1997, where he was outmaneuvered, like most of the other directors, by the late Brett Kebble. Fleming was appointed chairman of Randgold & Exploration escapee, Harmony, in October 1999, until he resigned in September 2003 "and initiated the formation of Wits Gold".

In the past few weeks, Watchorn has sold R22.3m of his own Wits Gold stock. Three other directors have also been selling down: Taole Mokoena (R7.5m worth); Humphrey Mathe (R4.5m), and Adam Fleming (R12.5m). Wits Gold has never disclosed how, when, or why, these directors acquired stock in the company.

Similarly, for months Watchorn has refused to provide a see-through list of Wits Gold shareholders. He has also declined to answer the question of how Chancellor House, an entity that may be owned by the African National Congress, may or may not be linked with Wits Gold.