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Durban Deep Withstands the Turmoil...What's Next?

By: Clif Droke | Friday, August 12, 2005

Remember the days when news announcement with even the slightest negative implication could have a profound affect on Durban Deep/DRDGOLD's stock price? And remember when the Internet message boards would light up with commentary whenever seemingly bad news came out involving Durban?

There was a time in the not-too-distant past when the series of news announcements - such as the ones coming out recently containing Durban Deep's name - would have had a nearly catastrophic impact on the company's stock price, not to mention eliciting widespread verbal abuse of "DROOY the dog."

Those times are in the past, as a flood of negative news involving the company has hit the news wires of late...most of them without comment from the gold bug community!

In the past several weeks Durban Deep/DRDGOLD has been bombarded by a plethora of class action lawsuits (I've counted at least eight) from several law firms, most of which you've probably never heard of before.

The lawsuits are all pretty much similar. To take one for an example, on August 11, the law firm of Schiffrin & Barroway, LLP announced a class action lawsuit filed in the U.S. District Court for the Southern District of New York on behalf of DRDGOLD stock owners between October 23, 2003 and February 25, 2005. The complaint charges DRDGOLD CEO Mark Wellesley-Wood and Ian Louis Murray with violation of the Securities Exchange Act of 1934. More specifically, the complaint alleges that the company failed to disclose and misrepresented "material adverse facts which were known to defendants or recklessly regarded by them." The list of complaints is as follows:

1. That DRD's North West Operations were underperforming due to production problems;

2. That the South African Rand was negatively impacting the company's operations;

3. That due to (1.) and (2.) DRD "materially overstated its net worth by failing to take timely writedowns";

4. That the company lacked the cash to adequately cover future commitments and continue as a going concern;

5. That defendants' statements about the company's growth and progress were lacking in "any reasonable basis when made."

My purpose here is not to comment on the merit or lack of merit of these various lawsuits and their respective complaints against Durban Deep/DRDGOLD. Nor is it to expound on each of the list of complaints against the company. What should be obvious to even a casual observer of Durban Deep/DRDGOLD's - and most important from a trader/investor standpoint - is the reaction of Durban's stock price to the litany of lawsuits that have come out since July. DROOY has shrugged off each and every one of them.

What's more, on Thursday (Aug. 11) when the most recent lawsuit was announced, DROOY shot upward by over 18% on high volume - completely oblivious to the growing line of complaints that the company's detractors have been hurling against it. From a technical/psychological standpoint, this is a good sign that the company is finally emerging from deep-seeded fundamental woes that have plagued it in recent years. (It also suggests that the lawsuits likely won't have a negative impact on the company and may be thrown out.) The shellacking the stock took earlier this year was clearly a major internal low, especially when you consider the extremely negative news and commentary that accompanied the spills the stock price previously took.

New York barrister Franklin C. Keyes delivered a classic lecture in 1904 entitled "Wall Street Speculation: It's Tricks and It's Tragedies." Having been a lawyer on Wall Street, Mr. Keyes had seen just about every trick Wall Street had to offer, and he shares much of the accumulated wisdom he acquired within the printed pages of his lecture.

Explaining the behavior of stocks undergoing major lows he observes, "At long intervals...occasions arise, when the public are really given a little rest. On the bottom of a 'bear market,' the public are so thoroughly cleaned out and scared out that only a few remain, holding on to their stocks; the 'lambs' are about all dead now, and those who survive are likely to soon pass away.

"As the insiders and investors hold nearly all the stocks, picked up at panic prices, they have nothing else to do but to turn and eat each other, and a battle of the giants is sometimes inaugurated. Certain large and powerful interests wish to dislodge large blocks of stock held on margin by other large speculative interests. Jealousy exists among the big men on Wall Street the same as elsewhere in the world of strife.

"Since the market is about to ready to be advanced...one large interest cannot bear to see another get the benefit of the advance; each wishes to gobble up the other's stock, if possible - or perhaps some corporation desires to acquire control of a certain property at rock bottom figures. So they go to work to run prices down still further, clear below the bottom, and depress the market to such an extent that holders of these large blocks of stock will be forced out of them through exhausted margins.

"This is called 'gunning' for stocks, and is accomplished in various ways; for instance, by 'selling the market,' curtailing the money supply, calling loans, and by the large interest putting in orders to buy on a scale down when there are scarcely any other buying orders in the market. These are dangerous times for the small fellows, in case there should be any of them left carrying stocks; for if they get in the way when the 'battle royal' is on, they are sure to be hurt.

"Did you ever see two big bull dogs fighting furiously over a bone? Well, they remind me of the insiders fighting, or 'gunning,' for one another's stocks. The bull dogs growl and snarl and snap and bite at each other, and perhaps some little poodle becoming mixed in the fray gets snapped clear in two, and the big dogs in their ferocity never know it at all. They, of course, are after the bone, but it is the last of the little poodle just the same."

Is it possible that the explanation of the quick, sharp, downward activity in the stock of Durban Deep earlier this year (most notably in April) was a result of such a "battle of the giants" among various interests (those familiar with the S.A. mining scene can probably guess the names involved)? Was this shake-out we witnessed not long ago a classic case of the insiders "gunning" for control of some aspect of the company or its stock? And why hardly anyone commented on Durban recently in light of the spate of news? Could it be that a large number of "poodles" were "snapped clear in two" by the previous decline and no longer have investment interests in DROOY?

In the first part of 2005 there were numerous suggestions in analysts' research reports that DRDGold would shut down all its South African operations and many rumors circulated to the effect that the S.A. gold mining industry was in a "terminal long-term decline." This kind of talk is typical at longer-term bottoming processes where everyone becomes myopic from focusing too much on the current depressed prices and lack the foresight to see the road ahead.

The exceedingly bearish news and investor sentiment that came out against Durban Deep and the South African gold mining stocks in earlier 2005 was something not seen in probably at least 10-15 years or more and it is this type of negative sentiment that lays the foundation for a strong, healthy "wall of worry" to begin being erected. This in turn will enable our favorite South African gold stocks (including DROOY) to climb it at some point in the not-too-distant future.

Author: Clif Droke

Clif Droke
ClifDroke.com

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment. He is also the author of numerous books, including most recently "The Stock Market Cycles." For more information visit www.clifdroke.com

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