Dilution Risks Draw Promoted L&L Energy, Inc. (NASDAQ:LLEN) Back

A paid promotion for L&L Energy, Inc. (NASDAQ:LLEN) failed to sustain investor interest yesterday, as both price and volume decreased again. A number of press releases also tried to support the stock of the coal mining company, though the downtrend continues on expected dilution.

A slight decline of $0.56 to $8.89 and a volume drop by nearly two and a half times were the undesirable results from the fourth paid promotion for the company in this month. The usual compensation of 30,000 free trading shares of L&L Energy stock is not surprising, as the stock has broken its previous support levels over the last two weeks, but has given a bullish signal by bouncing off the lower price band for the second time last Thursday.

Along with the promotion yesterday, press releases reaffirmed the company’s commitment to mining safety practices in China and announced an expected 66% net income increase and doubled revenues on China’s growing coal demand a week before that.

The PR campaign may be giving some support for the stock, but despite the favorable earnings release in the middle of March, the market is still unwilling to pay for L&L Energy higher than the usual industry premium over their sales and assets. A reason for that can be the high dilution risks, that reversed the uptrend from the post-earnings release period.

In the end of April the resale by security holders of 3.7 million shares, issued in conjunction with a private placement activities was announced. The latest 10-Q had already revealed 5.3 million outstanding warrants with the low average exercise price of $3.30, meaning that significant dilution is to be expected, having together with L&L Energy’s previous practice to issue common stock for services, adverse impact on their stock.

The company’s fundamentals have shown considerable improvements in the three months ended January 2010. Due to recent strategic acquisitions, there has been significant increases in sales, gross profit and operating cash flows. Assets more than doubled, but partially because of more cash and inventories. That stronger cash position could however have some negative impact on potential investors, if it signals the management has run out of investing opportunities and the growth rates will be much lower in the future.

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