Scandal in the works? Southwestern Resources (SWG.TO)

A scandal seems to be unfolding at Southwestern Resources--a junior gold miner from Canada. Here is a Globe & Mail article on the unfolding story. The stock was down as much as 80% yesterday but has recovered some of the losses today. It is still down more than 50% from a few days ago. I'm neutral on the gold sector right now and would be careful given the rally in gold in the last few months but this stock looks attractive from a book value point of view.

The stock is trading close to book value (C$2.38 based on 3/31/07 balance sheet) right now, and it was below book value yesterday. No debt and around $50m cash on the books. Investors had a great opportunity to pick up the stock way below book value yesterday. There is risk but if one can get it at a low price, it isn't so bad. The big risks now are (i) management cannot be trusted (they took months to disclose the discrepancies) so who knows if the accounting statements are cooked, and (ii) there may be lawsuits that may cost tens of millions (wiping out the cash on the books that makes this company attractive). There is also the risk that gold prices may decline and cause the market to negatively re-price this stock.

If this stock trades way below book value in the future (it may depending on what actually happened over in China with their exploration), it is worth investing IMO.

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