Editorial War Eagle woes

The story of War Eagle Mining is not over yet, but the behaviour of the company’s stock price over the past few weeks bears commenting on.

The fate of the company’s property in southwestern Idaho has yet to be determined, and it would not be proper to speculate at this point what the results of the company’s exploration program will be. It would also be premature to comment on the company’s role in the recent performance of its stock price. But even with those reservations, there are some interesting aspects to the War Eagle story.

War Eagle, for those who may not be familiar with the name, is a mineral exploration company incorporated in 1984 under a British Columbia charter which trades on the Vancouver Stock Exchange. In late October, results from drilling on its Idaho property caused considerable interest on the market. With heavy trading, the price of its stock rose from $1.60 Oct 26 to $8 on Nov 11. At that point the stock exchange halted trading in the stock while further drill results were released. Trading resumed Nov 15 and the stock price immediately fell sharply, closing that day at $3.75. Further declines followed.

There’s no doubt that many people will be severely hurt by such trading activity. It would be tough to buy the stock at $8 on a Friday only to see the next trade in the stock at half that, wiping out half your investment in a matter of days.

And it might be easy to point a finger at the much-maligned Vancouver Stock Exchange blaming it for not keeping a better eye on things. After all, it’s difficult to describe the trading activity in War Eagle as an orderly market with the company’s stock accounting for more than 10% of total VSE trading volume and the price increasing five-fold over 10 trading days.

The bottom line, however, is that greed drove this market, not lax regulations. It is the market players who have themselves to blame for any discomfort they might feel today. After all, they are all over 21. And remember that there are a lot of winners from the War Eagle debacle, too.

Vancouver stockbrokers have suffered more than their associates in other cities since the market crash of Oct 19, 1987. Vancouver stock trading volumes have simply evaporated and, with relatively little corporate underwriting done (at least in dollar value), brokers on the VSE rely much more on retail trade — the simple buying and selling of shares. So when so me good drill results come out, it’s not surprising to see a lot of interest. Drill results have always been able to move a market. In the case of War Eagle, however, the move was magnified by traders’ understandable desire to generate some solid commissions on what appeared to be a significant discovery. After a year of declining volumes in a bear market, it’s not hard to imagine traders twiddling their thumbs, watching “the tape” anxiously for any signs of life, then seeing War Eagle take off and wanting to get in on the action.

But by the same token, those brokers who called clients and urged them into War Eagle as it reached its peak — and there were plenty of buyers, it seems — shouldn’t be too surprised if those clients don’t settle. There are bound to be many who can’t or simply won’t pay $8 for a share that three trading days later was worth less than half that.

And when margin calls fail to be honored, it could have far-reaching effects on those Vancouver brokerage firms that are already suffering. This could be the last straw for some.

There are bound to be further autopsies on War Eagle, but essentially the story is a familiar one: a stock that soared on good news and fell to earth when investors reconsidered. But whether it’s Hemlo or a less successful exploration play, one hole does not make a mine. If War Eagle proves to be somewhat less successful than Hemlo’s International Corona, it shouldn’t stampede the Vancouver Stock Exchange or any other regulator into hasty reforms that may detract from the VSE’s unique appeal. The next play that comes along could be for real.

When all is said and done, as long as basic requirements necessary to treat all investors equally, the rule on the VSE as on any stock exchange should remain caveat emptor.