Author Archives: Mohamed Eliwah

Risk and opportunity: Q&A with Strategic Metals CEO Doug Eaton

By James Kwantes
Resource Opportunities

Strategic Metals is one of three Resource Opportunities sponsor companies.

Strategic Metals CEO Doug Eaton has faced a few grizzly bears in his decades of stomping around the Yukon as an Archer Cathro geologist. And he’s been an exec in the junior exploration business long enough to ride out several bear markets. The key to both experiences: don’t get gored.

The Archer Cathro principal has also seen the other side of the coin, though — the one some junior resource speculators fear may never return. In the summer of 2011, ATAC discovered high-grade gold at Osiris, sending ATAC shares above $10 and Strategic shares above $4. Strategic continues to hold a large ATAC stake, currently 6.9%. Those moves occurred as the gold price approached highs of US$1,900 an ounce.

Current share price levels tell the tale of this bear market, and of the long slide down. Strategic shares trade at 41 cents and ATAC shares are stuck in the 52-cent range, near 52-week lows. ATAC recently announced a maiden resource estimate at Osiris, scene of that 2011 discovery hole, of 1.685 million ounces (Inferred) at 4.23 g/t Au, including a pit-constrained resource of more than 1 million ounces.

Eaton is philosophical about the continuing bear market as Strategic advances its properties (121 wholly owned) and looks for optioners. Lately the company has been doing deals on its cobalt and vanadium projects, as battery metal prices continue to rise amid surging demand and limited supply. And he is very bullish on Rockhaven Resources (RK-V), which recently published a resource update at its Klaza project. Eaton has been adding to his personal Rockhaven stake (currently 9.1% of outstanding shares) and Strategic Metals has also been bulking up, taking their stake to 40.23%.

The number of global ounces at Klaza actually dropped in the resource update, but Rockhaven converted 686,000 ounces from the Inferred to Indicated categories. There was also a significant upgrade in pit-constrained tonnes and grade, including 232,000 ounces of gold (Indicated) at grades of 9.5 g/t in the Western BRX zone. Rockhaven is looking at several processing changes, Eaton noted, including a pre-crushing circuit that would both increase ore grades and reduce processing costs.

I recently caught up with Eaton to talk battery metals, bear markets, and why there isn’t more M&A in this beaten-down sector.

Q: Do mining stocks deserve their poor reputation?

As an industry, we have executed quite badly. We have a tendency to disappoint more frequently than exceed expectations. In exploration, because of the nature of the business, that’s a given. In mining, it shouldn’t be.

Meanwhile, the U.S. markets continue to rise. It’s like stepping onto an escalator, it just keeps going up and up (Facebook shares were recently hit hard, post-interview, after the company missed earnings projections). But it takes such a tiny, tiny reallocation of assets back into resources and it’s going to be like a tsunami force.

Q: What catalysts besides a rising gold price could revive the junior exploration market?

We need buyouts of juniors and for people to redeploy money into the juniors. We’re starting to see it with South32 buying Arizona Mining and Orion Mine Finance buying Dalradian. But the retail market is gone and the big banks won’t touch the sector.

Q: Does Strategic Metals have exposure to the battery metals?

We are working on vanadium and cobalt deals. We went through the digital geochem database looking for cobalt showings. We found 20 properties in total and four with cobalt clusters. We did the same with vanadium and were expecting the same kind of result, but we came up with three strong vanadium properties.

Q: Why are you personally, and why is Strategic Metals, loading up on Rockhaven shares, given the size of your existing stakes? (Amount insiders have spent buying Rockhaven shares in the past 3 months: Eaton $50,000 at 13-15 cents, Strategic Metals $72,000 at 13-15 cents, CEO Matt Turner $19,000 at 13 cents.)

The only other time in my career that I’ve seen such low-hanging fruit was in 2008 when we were buying ATAC shares at 10 cents and the stock went to 10 bucks. Rockhaven now has an immediacy that ATAC doesn’t. And there is huge exploration potential that gets no credit. It’s not hard to see Klaza reaching 3-4-5 million ounces if you go up-dip and down-dip from deep, really good hits. I think there’s at least 5 million ounces there.

Come on guys, the writing is on the wall. We effectively told you we have a mine here. At the Western BRX we’ve got a pit with a quarter million ounces at above 9 grams per tonne. Do the math. What the hell is the matter here?

Q: Well, why aren’t majors capitalizing more on low valuations in this sector?

The majors have a habit of overpaying at the top of the market. They are running so fast that their tongues are hanging out, trying to keep up production levels. The majors are high-grading their deposits and not replacing the reserves.

On some of the recent major investments into juniors, they are predatory and smart, quite frankly. But most are not even thinking about new acquisitions, despite the fact they’re depleting their reserves. As a rule, mining companies are run by bean counters and engineers. Mining engineers are the least imaginative people I’ve ever met when it comes to deal making.

If I’m a major or mid-tier mining company, and looking for an economic deposit, I would look for an established resource that has lots of blue sky. Klaza fits the bill.

Q: What approach is Strategic Metals taking in tough market conditions?

We are keeping our powder dry and doing smart deals. It’s a bit of a holding pattern but sometimes the best deal is the one you don’t do. Timing is key.

Disclosure: James Kwantes owns shares of Rockhaven Resources, ATAC Resources and Strategic Metals. Strategic Metals is one of three Resource Opportunities sponsor companies. This article is for informational purposes only and may contain forward-looking statements. All investors need to do their own due diligence.

Diamonds Q&A: North Arrow Minerals CEO Ken Armstrong

By James Kwantes
Resource Opportunities

North Arrow Minerals is 1 of 3 Resource Opportunities sponsor companies.

Vancouver-based North Arrow Minerals is one of the more active diamond exploration companies globally, with a portfolio of projects focused on Canada. Its most advanced-stage project is the large Naujaat deposit in Nunavut, which has a resource and hosts a population of valuable fancy orange yellow diamonds.

But this season’s focus is on exploration drilling at the Mel and Loki projects in Nunavut and the Northwest Territories, respectively. Mel was a grassroots diamond discovery that North Arrow announced late last year. The company traced kimberlite indicator mineral (KIM) trains up-ice and made a prospecting discovery of kimberlite, from which 23 microdiamonds were recovered from a 62.1-kg sample. The first drilling program on the property is planned for this summer.

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The Loki project is in the Lac de Gras diamond field that hosts the Diavik and Ekati mines. The focus there is EG05, a kimberlite that Rio Tinto discovered, and 465, a kimberlite discovered by North Arrow in the spring. The latter was the first kimberlite discovery in Lac de Gras in the past 5 years. It’s familiar terrain for the North Arrow team, including chairman Gren Thomas whose Aber Resources discovered the Diavik diamond mine.

North Arrow CEO Ken Armstrong

Rough diamond prices are now at a 52-week high and demand for polished diamonds is strong in China, India and the U.S., according to New York-based diamond analyst Paul Zimnisky. On the production side, pending mine closures including Argyle and Victor will put pressure on supply, with few new operations coming online.

The improving picture follows a choppy 2017 that saw high inventory levels at De Beers and Alrosa and flat rough diamond prices. North Arrow shares have been under pressure along with shares of new Canadian producers Stornoway Diamonds and Mountain Province Diamonds, which declined 41% and 18% respectively over the past year as startup problems weighed.

On Monday North Arrow announced a $3-million private placement consisting of flow-through shares at 20 cents and non-flow-through units (one share, one 2-year 30-cent warrant) at 17 cents. We caught up with CEO Ken Armstrong, who was in Calgary for the TakeStock! investor forum, to find out more about plans and how the money will be used.

Q: What is the breakdown on how the $3-million financing will be spent?

A: We’ve allocated $2 million for Mel drilling – testing the 2017 kimberlite discovery and new targets. That number includes microdiamond processing costs. We will also complete microdiamond processing of the EG05 and 465 kimberlites at the Loki project that were drilled in March, as well as some final microdiamond processing from the 2017 drilling of Naujaat. That’ll be a couple hundred grand. We are also looking at getting a remaining top target drilled at Loki, target 853. Ideally we’d tie that onto ongoing drilling at our LDG JV property, which is operated and funded by partner Dominion Diamond. We’d retain a half million or so for G&A.

Q: Any big names buying into the financing? How much will insiders and management participate for?

A: Insiders are committed to taking at least $1.5 million, so half, with most of that being directors/management. Gren Thomas, our chairman, and Eira Thomas, a North Arrow advisor, will both participate. I will also participate.

Q: How did you determine the pricing of the financing?

A: We tried to price it to make the non flow-through unit and flow-through share components equally attractive. On the Unit we put a fairly quick threshold on the accelerator, at 40 cents, however we felt it was justified by pricing it a discount to market with a full warrant, rather than a half-warrant. The flow through is essentially priced at market with the intent to fill the orderbook efficiently. We are looking at immediate use of funds with Mel drilling in July, Loki drilling in July or August and with more diamond results from Loki, Naujaat, and in September or October, from Mel. This is all news flow that will occur before the four-month hold comes off the financing shares which is, we think, a positive feature of the placement. We have been the most active Canadian junior in terms of new kimberlite discoveries in Canada and are poised for more discovery, potentially on up to three projects, over the four months.

The esker location at Mel where North Arrow’s drill camp is being set up.

Q: Which of the three active projects that you’re raising money for is the most likely catalyst — Loki, Mel or Naujaat?

A: All three have potential catalysts. Folks seem to be most interested in new discoveries and Mel certainly fits that bill — it’s a brand new kimberlite discovery made by prospecting last fall. The kimberlite contains some very coarse mantle minerals and we see hints of that coarseness in the initial diamond results, which is positive. Having already found kimberlite and diamonds actually de-risks the initial drilling significantly. We know we will hit kimberlite with diamonds, it’s more a question of how many and how big they are.

Based on the spread of indicator minerals there are certainly multiple sources with some nice, sizable magnetic targets. This is a brand new kimberlite field and the first kimberlite discovered is significantly diamondiferous. It doesn’t happen too often, so we are keen to get drilling. We’re currently mobilizing a camp and drill to the property now with drilling planned for July.

At Loki we also have a new discovery and are waiting on microdiamond results. In early April we announced the discovery of the 465 kimberlite – the first kimberlite discovery made in the Lac de Gras area in over 5 years. There are also pending microdiamond results from the EG05 kimberlite which was also drilled during the spring 2018 program. We also have a number of targets that we’d like to drill test, including target 853, which we’d like to see drilled this summer.

Q: It’s been almost three years since the disappointing Naujaat diamond valuation. Does Naujaat remain North Arrow’s flagship project and what is happening with the project?

A: Naujaat remains North Arrow’s most advanced project. We’re still interested because it’s a significant diamond inventory in a large tonnage deposit (as far as Canadian diamond deposits go) sitting on tidewater near a community. Our work on the Q1-4 diamonds has clearly shown the deposit contains high-value fancy orange yellow diamonds and, overall, is under evaluated. Last summer we completed more drilling to confirm the size potential of the kimberlite down to 300 metres below surface and we had three different holes extend over 100 metres beyond the geological model, with two of those holes ending in kimberlite. It’s a big body. We also collected a 210-tonne sample that confirmed the presence of the coloured diamond population in the A88 phase of the kimberlite. This is a totally different unit than was sampled in 2014 – the 2017 sample pit was over 400 metres away for the 2014 pits – and the proportion of coloured stones is very similar to the 2014 result. The work we’ve done with the diamonds themselves has shown that the coloured stones are a distinct population from the non-coloured stones. The two populations are completely different ages and the yellow population has a markedly coarser distribution than the non coloured stones.

The photos of the diamonds we had polished and certified at the GIA show how beautiful this colour is and highlight the potential value upside in these diamonds. But it is actually the potential for a coarse size distribution that may be even more important in terms of potential upside to the value contribution of the coloured diamonds. And the only way to confirm or disprove the potential value upside is a larger bulk sample.

A cut-and-polished fancy intense orangey yellow diamond from North Arrow’s Naujaat project.

To that end we have hired consultants and been working closely with the community of Naujaat to look at developing a road to the deposit. We’ve also started looking at processing options for a larger sample and how that might look, all with an eye to better pinning down the budget options for collecting a sample of sufficient size to get that answer. Being so close to the community really presents opportunities for reduced costs – we’ve seen that with our exploration programs and we need to make sure we take full advantage of all potential cost savings.

Of course all this takes time, but that is why we have North Arrow evaluating a number of quality projects, not just one. It allows the team to focus on well-informed, cost-effective exploration even if that might mean slower news flow from a particular project. There will be steady news flow from other projects as each cycles through the process.

Q: Along the lines of quiet projects, what is the status of the Lac de Gras joint venture with operator Dominion Diamond Corp.?

A: The LDG JV is having an active year. It has definitely been one of our quieter projects as our partner Dominion spent a lot of effort defining targets through a series of overburden drilling and geophysics programs. Late last year, Dominion also went through a well-documented takeover by the Washington Group of Companies, with the resulting transitions that often accompany such changes. However, a very positive outcome for the LDG joint venture has been Dominion’s renewed commitment to exploration, and, as I understand it, the 2018 LDG JV budget was one of the first budgets approved by the new ownership. The focus of the 2018 program is exploration and discovery-type drilling and we expect that work to pick up again during the summer. North Arrow elected not to finance its share of the current program so we could focus our resources drilling our 100% owned projects at Mel and Loki. However, although we are taking dilution of our joint venture interest, if a Lac de Gras-type discovery is made North Arrow will still maintain a significant interest, north of 25%, in the joint venture.

Q: With Eira recently taking over as CEO of Lucara Diamond Corp., how involved does she remain with North Arrow?

A: Eira’s involvement with North Arrow has been key since we began our focus on the Canadian diamond space. She remains an important advisor and sounding board for management – and the board – as we strategize on how best to move the project portfolio forward.

Disclosure: North Arrow Minerals is one of three Resource Opportunities sponsor companies and James Kwantes owns North Arrow shares. Readers are advised that this article is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. The information is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data.

Copyright​: This publication may not be reproduced in whole or in part, in any form, without the express permission of the publisher. Permission is given to extract parts of the report for inclusion or review in other publications only if credit is given, including the name and address of the publisher.

Klondike Gold narrows down search in Yukon goldfields

By James Kwantes
Resource Opportunities

It’s early afternoon on an overcast Yukon day and CEO Peter Tallman is in show and tell mode at Lone Star, one of Klondike Gold’s properties in the heart of the historic Klondike goldfields. The geologist is dressed in old jeans, a flannel shirt, muddy gumboots and a baseball cap. The trip to the rugged property outside of Dawson City had Tallman’s pickup truck bouncing and bucking like an ornery bull with a rider on its back. It’s 3,000 kilometres and a world away from Vancouver’s Howe Street, a global centre for mining exploration finance.

The Lone Star mine was one of only a handful of bedrock gold mines in the Yukon, albeit a small-scale operation. The mine produced a small amount of gold at average grades of about 5.2 g/t Au between 1911 and 1914. Exhibit A is a faded wooden two-storey building, constructed in 1908 and visibly leaning. The building was abandoned circa World War 1, although it was reinforced and has been used since for various purposes. Nearby are high-grade surface and underground vein workings.

As Tallman walks through high grass toward the sun-burnt structure, he spots something and stops to pick it up. Exhibit B: a dilapidated shoe, several rusted metal tacks keeping the sole on. Tallman marvels at the resilience of the oldtimers, as he outlines his own plans to develop an economic gold deposit on the property.

“Imagine you’re working in minus 30 and wearing these on your feet,” he says, shaking his head.

Inside the dilapidated building are glimpses of the lengths to which fortune seekers would go – and the distances they would travel – in search of gold. After catching up on the news, the miners would line the walls with their newspapers – makeshift insulation in a land where winter temperatures routinely drop below -20 Celsius (-4 Fahrenheit). Posted alongside English-language newspapers from Winnipeg, Toronto and Montreal are broadsheets in Swedish and German.

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In the Yukon, these bedrock miners were an anomaly. The Yukon Geological Society estimates that 20 million ounces of gold have been pulled from Klondike-area creeks and gravel beds since 1896. Virtually all of it, of course, has been alluvial gold. The lack of bedrock sources for the gold is one of the enduring riddles of the Yukon, where placer gold mining remains one of the largest industries. Several stores in Dawson City still accept gold nuggets as currency.

Tallman’s goal is to systematically explore the property and identify an open-pittable gold deposit of more than 1 million ounces, for starters. He joined Klondike Gold in December 2013. But before he got to the geology, Tallman spent most of the first year and a half cleaning up the corporate structure and rebuilding relationships in the Yukon. Predecessor companies had raised a lot of money, dug a trench that could be seen from space, and constructed some Cadillac core shacks. But little was spent on systematic property-wide exploration, and not much accomplished.

Diamond drilling is underway on this year’s 5,000- to 7,000-metre program. The 2018 exploration budget is $2.5 million, Klondike Gold’s largest yet, and work will include soil sampling and ground magnetics. The plan builds on last year’s exploration program ($2 million spent) and the Lone Star discovery of 2016, when Klondike spent $750,000 on exploration.

There is high-grade gold on the Lone Star property, as drill intercepts from both 2016 and 2017 have shown. They included:

– 2.4 g/t Au over 41 metres (Lone Star, 2017)
– 2.4 g/t Au over 37 m (Lone Star, 2017)
– 5.1 g/t Au over 14.3m (Nugget zone, 2016)
– 3.3 g/t Au over 11.93m (Nugget zone, 2016)

But key to a new geological interpretation is the presence of disseminated lower-grade gold, which builds ounces even though it doesn’t generate sexy headlines. The new interpretation was the focus of a PhD thesis from Leeds geology student Matt Grimshaw, who will be back this summer helping SRK Consulting map the entire property. Tallman thinks as much as 90% of the gold in the Klondike could be disseminated.

Tallman has also brought on a VP Exploration to help him solve the geological riddles of the goldfields: Ian Perry. The geologist has more than 35 years of experience managing advanced exploration and development projects in Canada and internationally.

Tallman has identified four faults that control gold mineralization at Lone Star: the Bonanza, Nugget, Eldorado and Irish faults. The gold was forced up through the faults and formed veins or was disseminated. Tallman’s theory is that those faults, in turn, are controlled by the Rabbit Creek Thrust, which he believes could run the entire length of Klondike’s 55-km claims holdings.

“Do we know that these gold-bearing structures, that we’ve proven are at Lone Star, do they extend across the entire 55-kilometre structure?” Tallman says. Determining the answer to that question is the goal of the 2018 exploration program, which will include drilling at Gold Run at the southern end of Klondike’s property.

Klondike Gold has a dominant land position in a district where the mining of gold is already a multi-million-dollar business. A few numbers give a sense of just how large Klondike Gold’s property package is. The company owns 2,780 quartz claims, which make up 553 square kilometres to form a district that is 55 kilometres long. Road access is excellent – an important feature in a territory where planes and helicopters are common but expensive tools of modern gold exploration.

And the infrastructure is about to get better. The $360-million “Roads to Resources” plan announced last year by the Canadian and Yukon governments includes reconstruction of two roads that run through Klondike’s claims. The road connecting Goldcorp’s Coffee to Dawson City also goes through Klondike Gold claims. Goldcorp bought Kaminak Gold and its Coffee deposit — 120 kilometres south of Klondike’s claims — for $520 million in 2016. The takeover was part of a flood of Yukon investments from gold producers including Barrick and Newmont.

Tallman wants to build long-term shareholder value at Klondike Gold, so it’s a play that requires patience. On that front, it helps having deep-pocketed shareholders who take a long-term view of their mining exploration investments. Among them are billionaires Frank Giustra (14%), Eric Sprott (13%) and Francesco Aquilini, whose family owns the Vancouver Canucks hockey team. About 56% of Klondike’s shares are held by the top 20 shareholders.

A series of financings has the company fully funded for both this year and next. Klondike Gold has $6.5 million in the treasury and about $7.4 million worth of warrants.

Since bottoming in the fall of 2016, Klondike shares have been making higher highs and higher lows. Tallman has been buying stock in the open market this year, at prices ranging from 22-24 cents. The purchases take his stake in the company to about 2.7 million shares, or 2.8% of outstanding shares.

Klondike Gold (KG-V, KDKGF-OTC)
Price: 0.235
Shares outstanding: 96.8 million (120M f-d)
Market cap: $22.8 million

Disclosure: Klondike Gold is one of three Resource Opportunities sponsor companies and James Kwantes, editor and publisher of Resource Opportunities, owns Klondike Gold shares. Readers are advised that this article is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. The information is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data.

Copyright​: This publication may not be reproduced in whole or in part, in any form, without the express permission of the publisher. Permission is given to extract parts of the report for inclusion or review in other publications only if credit is given, including the name and address of the publisher.

Hunting for rough in a storied diamond field

By James Kwantes
Resource Opportunities

North Arrow Minerals is one of three Resource Opportunities sponsors and Lucara Diamond and North Arrow are portfolio companies.

Canada punches above its weight in the world of diamonds – way above. Consider: the country is home to about 36 million people, or less than half of one percent of the world’s population. Yet in 2017, Canada produced 14% of the world’s diamonds by value, behind only Russia and Botswana.

The epicenter of Canadian diamond production lies in the frozen tundra of Canada’s North – the “Barren Lands,” in author Kevin Krajick’s words. Specifically, the Lac de Gras region, 300 kilometres northeast of Yellowknife, the Northwest Territories’ capital city. That’s where prospectors Chuck Fipke and Stu Blusson discovered the kimberlite indicator minerals that let to Dia Met’s 1991 diamond discovery. When Ekati went into production in 1998, it marked the birth of what has become an important northern industry.

The discovery of the Diavik diamond mine by Gren Thomas’s Aber Resources in 1994 established that the Ekati find was no fluke. Diavik went into production in 2003 and quickly became one of the world’s richest diamond mines. The discovery of diamonds in this inhospitable corner of the world, surrounded by only frozen lakes and tundra, is a testament to the ingenuity and perseverance of Canada’s diamond pioneers.

Two decades later, the Ekati and Diavik diamond mines are still churning out carats – and cash. More than $20 billion worth of diamonds has been mined at the two operations. The prized profit centers didn’t escape the notice of the Washington Group, a private conglomerate founded by US billionaire Dennis Washington. Last year the Washington Group paid about US$1.2 billion to snap up Dominion Diamond Corp., owner of a controlling 90% interest in Ekati and a 40% stake in Diavik (operator Rio Tinto owns 60%).

Aerial photo of the Diavik diamond mine, 60% owned by operator Rio Tinto and 40% owned by Dominion Diamonds.

CANADA’S GROUND ZERO FOR DIAMONDS

And the Lac de Gras region remains a hub of activity for diamond production and exploration, well beyond Ekati and Diavik. The newest mine is Gahcho Kue, which began commercial production in March 2017 and is 51% owned by De Beers and 49% by Mountain Province Diamonds (MPV-T).

North Arrow Minerals (NAR-V), Canada’s most active diamond exploreco, is also zeroing in on Lac de Gras. The company has two projects in the region and both of them will see drilling this spring. The Loki project covers 8,600 hectares and is close to both Ekati (33 km away) and Diavik (24 km). North Arrow will drill about 1,000 metres on up to six targets in March.

Loki is a good example of a junior company benefiting from millions of dollars spent by a major while big money flowed into exploration. One of the six Loki targets is EG05, a diamondiferous kimberlite that Rio Tinto (Kennecott) discovered but never followed up on. The other targets were identified through airborne geophysics and electromagnetic surveys. At each target, pyrope garnets and other kimberlite indicator minerals have been recovered, but no source has been found.

At Dominion’s Lac de Gras (LDG) joint venture with North Arrow, operator Dominion is ramping up for 2018 exploration, including spring drilling. Dominion has an approximate 67% interest in LDG, with North Arrow retaining 33%. The LDG JV covers a vast 125,000-hectare property to the south of the Ekati and Diavik mines and immediately east of Loki.

The “privatization” of Dominion Diamond Corp. translates into fewer eyes on the company, particularly its exploration initiatives. But Patrick Evans, Dominion’s CEO – appointed after the takeover – is well-known in the diamond world. Evans is the former president and CEO of both producer Mountain Province Diamonds (MPV-T) and explorer Kennady Diamonds (which was recently taken over by Mountain Province for $176 million).

DRIVE FOR DISCOVERY

Evans’ exploration background – and his assertion that new diamond discoveries are critical to the viability of the Canadian diamond industry – will likely ensure that exploration remains a key focus for Dominion. In a 2016 talk at the annual Roundup Mineral Exploration conference in Vancouver, Evans lamented the “paltry” amount being spent on diamond exploration in Canada. The dearth of exploration threatens Canada’s No. 3 position as a world diamond player, Evans said at the time.

Loki and the LDG joint venture represent North Arrow’s most imminent potential catalysts. But North Arrow continues to advance its flagship Naujaat coloured diamond project in Nunavut, which has a population of rare, valuable fancy yellow diamonds.

On Wednesday the company announced it had recovered 64.25 carats from a 209.8-tonne mini bulk sample collected last year from three phases of the large Q1-4 kimberlite. The proportion of the more valuable yellow diamonds was consistent with an earlier bulk sample – 10.7% of the total by stone count and 21.2% by carat weight.

“It’s encouraging, because it confirms the yellow diamond population exists in different phases of the kimberlite,” said North Arrow CEO Ken Armstrong, noting that the results merit further work. “The size of the prize is large.”

The next step, Armstrong says, is a large bulk sample at Naujaat – perhaps as large as 5,000 to 10,000 tonnes. A sample of that size would answer remaining questions about the value of the diamonds and size-frequency distribution of the yellow stones, he said. It would also carry a large price tag: perhaps between $20 million and $30 million. Securing a joint venture partner would allow North Arrow to undertake the bulk sample without blowing out the share structure, Armstrong pointed out.

Fancy yellows and orangey-yellow diamonds from an earlier sample at North Arrow’s Naujaat.

The diamond sector has faced some ups and downs in recent years, but mostly downs. One of the main issues has been large inventories held by industry heavyweights Alrosa and De Beers, which has suppressed rough diamond prices. There have been some high-profile scandals in the sector, too – Indian diamond magnate Nirav Modi fled India earlier this year and is currently being investigated for alleged bank fraud and money laundering.

However, the macro picture is improving, according to New York diamond analyst Paul Zimnisky. Inventory levels for both De Beers and Alrosa are at estimated three-year lows and demand remains healthy, according to Zimnisky’s latest State of the Diamond Market report. On the supply side, no new mines are coming onstream in 2018 and Alrosa’s production is forecast to decrease this year.

For a sector that has struggled – and been bypassed by many retail investors – there’s a lot going on. The takeover of Dominion Diamond by a private group was a surprise to many; less so the purchase of Kennady Diamonds by Mountain Province, which had earlier spun out the exploreco. There are new and rejuvenated exploration plays, including Bruce Counts’s newly listed Lithoquest Diamonds (LDI-V) with its North Kimberley project in Australia. In the Northwest Territories, GGL Resources (GGL-V) has revamped with the appointment of 25-year diamond veteran David Kelsch as CEO and an injection of capital from project generator Strategic Metals.

ENTER EIRA

But for diamond sector investors, perhaps the most interesting moves were made by Lucara Diamond Corp. (LUC-T) on February 25. Diamond veteran Eira Thomas was named Lucara’s CEO and the Vancouver-based company announced a blockchain initiative that could improve transparency and efficiencies in the sale of diamonds in the one to 15-carat range, and eventually for smaller stones as well. Blockchain will not be used to sell the larger diamonds that have established Lucara’s reputation and bolstered its treasury – stones such as the 1,109-carat Lesedi La Rona and 813-carat Constellation.

Eira’s most recent CEO gig was with Kaminak Gold, which was sold for $520 million to Goldcorp in 2016. Before that, Eira – the daughter of North Arrow chairman Gren Thomas – cofounded Stornoway Diamond Corp. (SWY-T) and Lucara. Her partner on both initiatives was Catherine McLeod-Seltzer, who is joining Lucara’s board of directors. The appointments mark a kind of reunion for Lucara’s three co-founders – Thomas, McLeod-Seltzer and Lukas Lundin.

Lucara Diamond CEO and North Arrow advisor Eira Thomas

But before Stornoway, Lucara or Kaminak was Aber Resources. Hired as an Aber field geologist straight out of university, Eira was thrust into a lead role when a senior geologist left for another company. In the spring of 1994, the geologist and her exploration team raced the spring melt and drilled one final hole from a floating ice platform. The core had a 2-carat diamond embedded in it, and the rest is history. She later became VP Exploration for Aber, Dominion Diamond’s predecessor company.

Eira’s appointment as Lucara CEO strengthens already solid connections between Lucara and North Arrow. She remains a North Arrow advisor and large shareholder, and was critical in landing $2-million investments from both Ross Beaty and the Electrum Strategic Opportunities Fund L.P., which is funding North Arrow’s current programs. There’s a brother connection between the two companies, too – North Arrow CEO Ken Armstrong’s brother John is Lucara’s vice-president, mineral resources. His specialty is the assessment and analysis of diamond size and value distribution as well as deposit modelling. John Armstrong’s partner Allison Rippin Armstrong, a corporate social responsibility specialist, is an advisor to North Arrow.

As for Eira, her association to North Arrow’s flagship Naujaat project runs deep. It was Thomas who secured the Naujaat project (formerly called Qilalugaq) from Stornoway Diamonds and brought it to North Arrow, after stepping down as Stornoway’s executive chairman. The Naujaat, Pikoo and Timiskaming projects were optioned from Stornoway on a JV basis, with North Arrow subsequently buying out Stornoway’s stakes to secure 100% interests in Naujaat and Pikoo.

Collecting the mini-bulk sample at North Arrow’s Naujaat project in Nunavut.

Assays are pending for 2,440 metres of kimberlite core drilled at Naujaat last fall. Further drilling later this spring will conclude the program at the 12.5-hectare kimberlite, the largest in the Eastern Arctic. Naujaat has an Inferred mineral resource of 26.1 million carats from 48.8 million tonnes grading 53.6 carats per hundred tonnes, from surface to 205 metres depth. Fall drilling established that Q1-4 remains open at depth and has a surface area of at least five hectares 305 metres below surface.

Further north, there are also drill plans at Mel, North Arrow’s second grassroots discovery of a diamondiferous kimberlite field in Canada (Pikoo was the first). In October, North Arrow announced the recovery of 23 diamonds larger than the .106-mm sieve size from a 62.1-kilogram sample at the ML-8 kimberlite. The diamond body was discovered through the systematic tracking of a kimberlite indicator mineral (KIM) train to its up-ice termination. North Arrow has subsequently increased its Mel land position to 56,000 hectares through staking. Driling will focus on ML-8 as well as other targets at the heads of three well-defined KIM trains.

Disclosure: North Arrow Minerals is one of three company sponsors of Resource Opportunities and James Kwantes owns North Arrow and Lucara shares, which makes him biased. Readers are advised that this article is solely for information purposes. Readers are encouraged to always conduct their own research and due diligence, and/or obtain professional investment advice. Dollar and $ refer to Canadian dollars, unless otherwise stated.

Strategic Metals: Building long-term value in a cash-burning sector

By James Kwantes
Resource Opportunities

Every junior resource speculator, whether consciously or not, balances risk and reward. The potential for lucrative gains lures investors into this small and notoriously volatile corner of the investment world – the promise of 10-baggers and more. But risk is the admission price for entry. And it comes at a cost, even if the stock is cheap.

Unfortunately, the drill plays that offer the greatest upside potential also carry the most risk. Take too many foolish or reckless risks along the way and you won’t have money left to invest. And today’s high flyer can quickly turn into tomorrow’s pooch. That makes capital preservation a key consideration for junior resource speculators – even though the emphasis is usually on the reward side of the equation. Describing it as the lottery ticket approach to investing is not much of an exaggeration.

Enter project generators, which can allow investors to manage risk while keeping upside exposure in a sector with often binary outcomes. Project generators build value by optioning out properties – and risk – to exploration companies, typically in exchange for cash and shares. The downside is protected by cash, land and proprietary databases, while the shares of optionee companies offer upside. The business method also allows the company to dodge share dilution – a fatal bullet for many juniors.

The business model has been successfully demonstrated by Strategic Metals (SMD-V) in the Yukon. Strategic refocused to adopt the generative model in December 2005, starting out with working capital (cash + shares) of 7 cents and the stock at 21 cents. As of Feb. 14, SMD had working capital of 36 cents per share (now 37 cents) and a share price of 48 cents (now 45 cents). There have also been distributions/spinouts of 24 cents a share along the way, including Silver Range Resources (SNG-V) and most recently, Trifecta Gold (TG-V).

That works out to a compound annual growth rate of 7.6% for the stock, assuming dividends are reinvested. The growth in working capital per share – from 7 cents to 36 cents – has been even more impressive. Strategic has a volatile 10-year stock chart, but the spikes offer shareholders higher exit points. During the severe dips, Strategic buys back its own shares. Want explosive upside potential? Strategic has been no slouch, as demonstrated by 2010 and 2011 share price action. High-grade gold discoveries at ATAC’s Rackla property – along with gold’s run to US$1,900 an ounce – lifted Strategic shares above $3 for several months in 2011 (ATAC shares hit $9 that year).

Strategic Metals: working capital vs. market capitalization

 

With gold approaching 2016 and 2017 highs, Strategic is well-positioned to capitalize. The company’s dominant position in the Yukon positioned it ahead of the herd, allowing it to secure key land positions around all the projects that subsequently saw investment by majors including Barrick, Newmont and Agnico Eagle. In a sector where companies burn through capital, think of Strategic as a business that steadily grows shareholder value with a long-term outlook. As Strategic Metals CEO Doug Eaton puts it, “we don’t have the purity of the exploration plays, but we have leverage to all of them.”

Strategic CEO Doug Eaton checks out samples at Trifecta’s Triple Crown property.

The company’s main edge is the vast geological database of storied Yukon consultancy Archer Cathro, run by Strategic CEO Eaton and his team of geologists and project managers. Strategic’s brain trust has been involved in many of Yukon’s top discoveries and deposits, including Western Copper and Gold’s Casino, Rockhaven’s Klaza and ATAC’s Osiris and Tiger projects. Eaton’s knowledge of the Yukon is encyclopedic and his decades operating in the Northern territory help him snap up neglected and forgotten claims.

Strategic is known as a kind of Yukon-focused investment fund, with extensive shareholdings and a treasury currently at about $13.4 million. But a good argument could be made that the company’s true value is its property portfolio. Strategic has more than 100 fully owned projects available for option, many of them permitted for large-scale drill programs. Among them:

  • Hopper, a large porphyry-style target where Strategic assayed 0.52% copper over 45.7 metres in a trench. Geochemical surveys outlined strong copper, gold and moly soil anomalies covering a 3,600-metre by 2,500-metre area. Similar age as Western’s Casino deposit 190 km to the north-northwest.
  • Meloy, another large porphyry target in the belt that includes Casino. Chip samples graded up to 8.7% copper, 560 g/t silver, 1.06 g/t gold, 1.47% moly and 3.51% tungsten.

Strategic owns a 39.7% stake in Rockhaven Resources (RK-V) and has a 7.3% stake in ATAC Resources (ATC-V), among other shareholdings. After a busy drill season, Rockhaven is prepping a resource update and looking at processing changes at Klaza, the Yukon’s highest-grade gold deposit of more than 1 million ounces. Last year Coeur Mining bought a 9.9% stake. ATAC is advancing its Carlin-type gold deposits at the Rackla property and last year attracted a $63.3-million investment from Barrick, which is earning a 70% interest in the Orion project. There are also significant stakes in exploreco Precipitate Gold (PRG-V) and project generator Silver Range Resources, among many others.

The latest Strategic spinout was Trifecta, which is exploring properties in Yukon’s White Gold country and B.C.’s Golden Triangle. Trifecta shares flew out of the gate after listing at 10 cents, briefly trading above 30 cents. But the stock has since settled back down to the 10-cent level after disappointing drill results at the Squid claims at its Trident property. Speaking about Squid, Trifecta CEO Dylan Wallinger had pledged to “prove it or kill it” – the company has subsequently dropped those claims, optioned from Metals Creek Resources.

In addition to developments at portfolio companies Rockhaven and ATAC, there are new potential catalysts in 2018. One of the more interesting new positions will be a 19.9% stake in Territory Metals, a private company expected to IPO on the TSX Venture later this year. Territory purchased six high-grade gold and silver prospects from Strategic, which retains a 2% royalty on all the properties – and a 10% NSR on any small-scale high-grade production.

The six properties, in central Yukon’s Tombstone belt, are Mt. Hinton, Plata, Lance/Lois, News, Naws and Nels. At least a couple of them could provide fireworks. Placer miners have been pulling out multi-ounce rounded gold nuggets – believed to be near source – from Granite Creek, which drains the Mt. Hinton property. Mt. Hinton is located near Alexco’s ground in the Keno Hill district.

Plata, subject to Strategic’s high-grade NSR, also offers intriguing potential. The ore mined at Plata, which is atop a mountain, was very rich. In the 1980s, miners hand-mined and transported it down by helicopter to an air strip at the bottom of the mountain. The ore was then flown to Ross River and trucked all the way down to smelter at Trail, B.C., 2,600 kilometres away. Helicopters, airplanes and truck transport – yet the mining was still profitable.

Strategic has also made a foray into Canadian diamond exploration through a $1-million financing that gave Strategic a 45% stake in diamond exploreco GGL Resources (GGL-V). GGL has property holdings in the Lac de Gras diamond field in the Northwest Territories and a diamond database with more than $30 million worth of exploration data. In November GGL brought in David Kelsch as president and chief operating officer. Kelsch is a Canadian diamond exploration veteran who worked for Rio Tinto and was involved in the discovery of the Diavik diamond mine.

Diamonds have been generating some buzz of late. Dominion Diamond Corp., owner of Ekati and 40% owner of Rio’s Diavik mine, was recently bought for US$1.2 billion and taken private by the Washington Group. Mountain Province Diamonds, meanwhile, purchased Kennady Diamonds – a former spinco – and its Kelvin and Faraday diamond projects in the Northwest Territories for $176 million. GGL Resources has two royalties on Kennady claims, on trend with the Gahcho Kue diamond mine and Kennady’s Kelvin-Faraday corridor.

Strategic Metals (SMD-V)
Price: 0.45
Cash: $13.4 million
Working capital: $33.3 million (37 cents a share)
Shares outstanding: 89.44 million (96.8 fully diluted)
Market cap: $40.2 million

Disclosure: Strategic Metals is one of three company sponsors of Resource Opportunities and Resource Opportunities editor James Kwantes owns SMD shares, which makes me biased. Readers are advised that the material contained herein is solely for information purposes. Readers are encouraged to always conduct their own research and due diligence, and/or obtain professional advice. Dollar and $ refer to Canadian dollars, unless stated otherwise.

Site visit: Sabina unlocks a high-grade gold vault at Back River

Site visit: Sabina Gold & Silver (SBB-T)
Oct. 4, 2017
By James Kwantes
Resource Opportunities

Canada’s North is a mysterious and forbidding land. There are stories of European explorers disappearing without a trace and place names such as Deadman’s Island. Native legends from the original occupants – not to mention strangely colourful lights that often dance across the night sky – add to the intrigue. I saw the Northern Lights for the first time during the site visit. The scientific explanation does little to diminish their mystique.

Sabina’s Goose camp, Back River, Nunavut

Flying over the barren lands of Northwest Territories and Nunavut gave me a renewed respect for Chuck Fipke and all the other Northern pioneers who identified mineral deposits there. Between Yellowknife and Sabina Gold & Silver’s Goose camp, the plane travelled over hundreds of kilometres of waterlogged tundra with nary an interruption. Then, rather suddenly, an open-pit diamond mine – a mineralized pin prick in a pin cushion measuring millions of square kilometres. The diamond mine was Diavik; Ekati is nearby.

This is about as far from “civilization” as it’s possible to get. For perspective, driving from Billings, Montana to Edmonton, Alberta, a major Canadian northern outpost, takes about 11 hours – roughly akin to driving from Durango, Mexico, to Los Angeles. It takes another 15 hours to drive from Edmonton to Yellowknife — the equivalent of travelling from Los Angeles to Portland. Sabina’s Back River project is a further 520 kilometres beyond Yellowknife, to the northeast.

As for Sabina, the main mystery on the company’s vast Back River property may be just how many high-grade ounces are buried under the Arctic tundra. It’s a puzzle this summer’s drill program should go some way to solving. A single early result from the 10,000-metre summer exploration program was promising. The first drill hole, 17GSE516B – released the morning I flew into Yellowknife en route to the site visit – intercepted 9.48 g/t gold over 38.55 metres in a down-plunge extension of the Llama deposit. Not bad for a 460-metre step-out hole. The focus is on adding high-quality ounces — after all, Back River already hosts 7.2 million ounces Au in all categories.

FIRST IMPRESSIONS
Our plane of analysts landed at the Goose camp on a high-quality air strip made from gravel produced on-site. The camp gets its name from adjacent Goose Lake, which serves as the winter landing strip for 737s that come in laden with fuel. The well-run camp felt more like a mining operation than an exploration camp.

Inside, we were briefed on the objectives of the summer drill program and the path forward by CEO Bruce McLeod, VP Exploration Angus Campbell and Exploration Manager Jamex Maxwell. The broad outlines of the mine were established by the initial project 3,000-tonnes-per-day Feasibility Study (3KFS) McLeod commissioned when he took over in February 2015. At US$1,150/oz gold, C0.80 exchange and a 5% discount rate, the FS showed:
– 240,000 oz annually for first 8 years, about 200,000 oz for 12-year life of mine;
– $415 million initial capex, $185M sustaining capex;
– 6.3 g/t Au average head grade, 93% recovery;
– life-of-mine, all-in cash costs of US$763/oz (incl initial & sustaining capex & closure costs)

VP Ex Campbell spoke about uber-high-grade exploration upside (more on that later), while derisking was the major theme for McLeod: “We can’t afford to make mistakes in this part of the world.” Sabina has spent about $5.5 million on basic engineering since the completion of the Feasibility Study, he said, and is now into detailed engineering.

The CEO describes the Back River project as a straightforward mine in a complex environment. From a geotechnical perspective, McLeod says Back River is probably the simplest project he’s been involved with. His assertion was confirmed by a visit to the nearby mill site, the helicopters landing on flat bedrock terrain. One of the benefits of a vast property is the ability to choose exactly where the mill will be. Standing on the flat terrain of scrub and bedrock, with a 360-degree panorama view, it was easy to visualize a mine taking shape.

Author at the site of proposed Goose plant

I found an analogy McLeod used in his recent presentation at the Beaver Creek precious metals summit useful: “To a layperson, a feasibility is a concept, basic engineering is a plan and detailed engineering is a blueprint.” As Sabina constructs the blueprint, the focus is on investing upfront to avoid problems down the road. During the site visit, McLeod talked about his love for technology and some of the high-tech toys at his house, which he said “has lots of gizmos and bells and whistles and shit that breaks down all the time. It won’t happen here.”

It’s not typical CEO bluster: McLeod has already built a mine in Canada’s North. That was Capstone’s Minto copper mine in the Yukon, built by Sherwood Copper and the first hard-rock mine constructed in the territory in a decade. Sherwood was founded and run by McLeod and later bought by Capstone for $244 million. Minto was built on time and under budget – no small feat in Canada’s North.

Sabina CEO Bruce McLeod talks nuts and bolts of a mining operation at Back River.

Recent problems experienced by Nunavut neighbour TMAC Resources (TMR-T) at its recently opened Hope Bay gold mine illustrate the importance of “doing it right the first time.” TMAC recently slashed its annual guidance in half – from 100,000 to 120,000 ounces of gold to 50,000 to 60,000 ounces – due to processing issues and recovery problems. Sabina is paying close attention to metallurgy and a potential processing change from whole ore leach to flotation is one of the optimizations Sabina is studying.

BACK TO THE FUTURE
Some background on Back River: Sabina Silver became Sabina Gold & Silver with its 2009 purchase of the high-grade gold project from Dundee Precious Metals (DPM-T). Prior to that, the flagship was the silver-rich Hackett River VMS deposit 45 kilometres to the west, which Sabina sold to Xstrata (now Glencore) in 2011 for $50 million cash and a significant silver royalty. That transaction put Sabina into the rare category of well-funded junior, where it remains. More on the silver royalty later.

Sabina has since added about 5 million ounces, bringing the Back River resource to 7.2 million ounces in all categories. Most of the added ounces were drilled in the first two years, followed by a lull in drilling during the 2011-16 bear market. The most recent drill program has taken the number of metres drilled above 500,000.

The scale of the core-cutting facility at Goose is an indication of the size of previous programs. It can comfortably handle 85,000 metres in a single season, so is not stretched at 10,000 metres, McLeod noted. It may seem like a minor detail, but is another box ticked for any major that buys the district-scale project (Goldcorp, for example, is carrying out an aggressive exploration drill program at Coffee).

The Back River project is a banded iron formation project that consists of 10 high-grade gold deposits on Sabina’s 53,000-hectare properties. It’s an 80-kilometre district. Llama is one of four deposits at the main Goose project area, the focus of the 3KFS that McLeod commissioned. (An earlier FS modelled a 6,000tpd operation producing 350,000 oz over a 10-year mine life.) Three of the four Goose deposits are part of the 3KFS: Goose main pit, Umwelt open pit and underground and the Llama open pit. The Llama underground, including hole 17GSE516B, is not.

ECONOMICS OF EXPLORATION
One of the objectives of Sabina’s drilling is to determine if there are enough high-grade ounces underground to define a “treasure box” that could be mined up front. If the company is successful, that would involve shifting sustaining capex into the front end of the mine plan. But it could significantly improve already strong project economics, especially at the front end of the mine life. An increase of just 500 tonnes per day – to 3,500tpd – could vault Sabina into 300,000 oz/year territory.

Angus Campbell, Sabina’s VP Exploration, shed some light on how rich some of the exploration potential is on Sabina’s ground. Being the guy in charge of running exploration programs in a gold-rich 80-kilometre belt must have a kid-in-a-candy-store feel to it. But with McLeod in charge of the candy allocation, Campbell’s targets must be chosen wisely and justified. Despite 500 kilometres of drilling, there remain multiple opportunities for resource expansion, both at existing deposits and at deposits not included in either Feasibility Study.

Consider Sabina’s George deposits, about 50 kilometres away from Goose. George hosts about 2.1 million gold ounces included in the 6KFS but NOT in the 3KFS. Drilling there in the 1980s, outside the resource envelope, also hit several wide, shallow intersections of 6 and 7 g/t Au, McLeod said – rich ore by any standard. Sabina geologists were puzzled why these near-surface intercepts were not followed up at the time.

The answer, from people directly involved in the drill programs: the predecessor company was looking for higher Lupin-like grades of 9 and 10 g/t material. The nearby Lupin mine produced about 3.35 million ounces of gold between 1982 and 2004 at an average head grade of 9.27 g/t.

Under the 6,000tpd plan, George ore was slated to be trucked to the mill at Goose. But McLeod believes George is destined to become a second standalone mine once Goose is put into production. It’s a strategy both Agnico Eagle (Amaruq) and TMAC Resources (Boston) are following with their multi-deposit Nunavut gold districts.

EXPLORING A VAULT
The greatest upside potential, however, is probably where Sabina is drilling now – at the Llama extension and the Umwelt Vault zone. Particularly the latter. Vault assays are outstanding from the summer drill program, which included about 4,000 metres of Vault drilling. A spring hole there hinted at the richness, returning 16.86 g/t gold over 13.5 metres, including 27.11 g/t over 7.95 metres.

Oblique longitudinal section of the Llama/Umwelt trend target areas.

The Vault targeting is follow-up from rich 2011-12 intercepts, including 17 metres of 49.24 g/t Au. For perspective, that grade is roughly equal to GT Gold’s (GTT-V) recent intercept that helped send that Golden Triangle-focused play to a $200-million market cap briefly (Sabina’s market cap is $515 million). Except Sabina’s 2012 hole was 17 metres, compared to 6.95 metres for GTT. I asked VP Ex Angus Campbell why the rich hits weren’t followed up on at the time – he said the focus then was on building open-pit ounces.

On the infrastructure and development front, Sabina plans to truck supplies to the mine via a 157-km winter road built every year at a cost of $8 million. The CEO described it as a “fairly simple” road, logistically. Sabina will have about 45 days to truck supplies from the marine laydown area, in southern Bathurst Inlet, to the Goose camp.

Sabina is not banking on it, but a Northern road plan that has been decades in the making could also intervene to lower costs for the project. That’s the Grays Bay port and road initiative, a plan for an all-season 230-km road from a deep-water Arctic port that connects to the Yellowknife winter road. With the buy-in of the Kitikmeot Inuit Association, which also strongly supports Back River, this iteration of the plan looks closer to reality than it has for some time. The road would be closer to the George deposit than Goose, but could result in significant savings.

THE PATH FORWARD
Resource Opportunities initiated coverage on Sabina Gold & Silver on May 18, 2015, during the bear market. The catalyst for coverage was McLeod’s hiring. When I met him and Sabina’s VP Communications Nicole Hoeller in a Vancouver coffee shop, McLeod gave me a taste of his tenacity: “My philosophy is like the Italian rule of driving: you rip the rear-view mirror off, put your foot on the gas and it doesn’t really matter what’s behind you but you’re moving forward … You’re not going to let your foot off the gas.” The line implies recklessness, but it’s more about a single-minded focus on advancing projects.

McLeod could not have foreseen the dark days of summer 2016, but the philosophy served him well during that period. That’s when the Nunavut Impact Review Board (NIRB) recommended to the federal government the rejection of the Back River project as currently constituted, despite widespread Inuit and community support. The reasons given were concern over caribou and climate change implications. Ottawa flipped the tables, rejecting the NIRB’s conclusions and ordering the regulatory agency to re-examine its findings. That resulted in a positive recommendation. A final ruling from the federal government is expected before year-end.

The number of high-quality gold discoveries in recent years has dropped along with the exploration budgets of the majors. Ore grades have steadily fallen and the miners are more reliant than ever on junior exploration companies to fill the supply gap. There are precious few district-scale, high-grade gold projects in safe jurisdictions. Sabina’s Back River fits the bill and has no fatal flaws. I expect Sabina to be acquired by a large gold mining company, at prices well above the current levels. In a rising gold price environment – not a given, a bidding war could well be the outcome.

CONCLUSIONS
I have described Sabina previously in the newsletter as a kind of triple leverage play, and it still holds true. The shares were at bear market levels of 39 cents when I initiated coverage, and Sabina had 194 million shares outstanding. Importantly, the share count has risen only 30 million since then as the stock has increased sixfold.

That’s in the rear-view mirror, of course, and the key question is what kind of upside exists from current levels. Gold is showing weakness again, following an increase through US$1,300/oz and rapid rise to $1,350. But I expect the precious metal to resume its rise in an easy-money world, and Sabina’s 7.2 million ounces make the company’s shares an ideal vehicle for exposure to gold. I have added to my position at levels above the current share price. The following factors give Sabina multibagger potential from these levels, and tremendous leverage:

  1. Exploration – Drill plays have been getting much of the love in recent months. GT Gold Corp and other plays focused on British Columbia’s Golden Triangle plays have been leading the charge, but there have been others. The junior market’s enthusiasm for drill plays and ambivalence towards development plays reminds me of the Benjamin Graham quote: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” Sabina’s recent drill results compare favourably with many drill plays that have added tens of millions of dollars of market cap on favourable assays. In Sabina’s case, the assays are overlain on a very high-grade, FS-stage gold project and potentially have a direct favourable impact on project economics. Votes come and go but the weight remains.
  2. Takeover premium. Recent takeover premiums in the gold space have been at healthy premiums (see below). In Sabina’s case, the strength of the project means the premium should at least match the highest-ranking, Integra at about 50%. That offer came from a major (Eldorado Gold) that already owned about 13% of Integra shares. Sabina has no such partner, one of the reasons a bidding war is quite possible. Dundee Precious Metals and Sun Valley Gold are the largest shareholders, each with just above 10%. Here are the takeover premiums a few of the more recent takeovers. The premium to the last close is first, followed by the premium to the 20-day volume-weighted average share price:
  • Eldorado – Integra Gold ($590 million): 46%, 52% (gold at US$1,233/oz)
    Kirkland Lake Gold – Newmarket Gold ($1 billion): 9.4%, 23% (US$1,318/oz)
    Goldcorp – Kaminak Gold ($520 million): 33%, 40% (US$1,279/oz).

3. Silver royalty: Sabina retained a valuable royalty when it sold the prior flagship project, the Hackett River polymetallic deposit, to Xstrata (now Glencore). It’s a 22.5% royalty on the first 190 million ounces of silver produced, and 12.5% on the remainder. Hackett River is one of the world’s largest undeveloped VMS deposits and the main price is zinc. Zinc has soared from below US70 cents/lb in January 2016 to about $1.40 today. The royalty was previously assigned a value of $300 million by analysts, and McLeod contends it would trade at a valuation of $300-$400 million in the portfolio of a larger royalty company such as Wheaton Precious Metals or Royal Gold. The silver royalty gets little to no value in Sabina’s portfolio.

Suitors? It’s a long list. Goldcorp has telegraphed its intention to only acquire district-scale projects, and Back River fits the bill. The project is superior on almost every level – grade, size, scalability – to Kaminak’s Coffee project and Goldcorp spent $520 million to purchase that operation. This is pure speculation, but I bet B2Gold CEO Clive Johnson would also love to open a high-grade gold mine in Canada to go with operations in more exciting jurisdictions that include Mali, the Philippines and Burkina Faso.

Management is the single most important ingredient in the junior mining sector, and Sabina’s is impressive. When he took over as CEO, McLeod refocused the company, trimming some fat and beefing up insider skin in the game. Under his stewardship, Sabina has smartly increased the quality of the gold ounces while controlling the share structure. I was impressed during the site visit by both VP Ex Angus Campbell and Exploration Manager James Maxwell.

Finally, a small detail. Sometimes, they tell a tale. There was no swag on the site visit – company shirts, ball caps, pens, etc – and clearly cost considerations were front and centre for Sabina. I’ve seen lots of swag from plenty of lesser projects in my travels. As a shareholder, seeing that kind of focus on the lesser details reassured me that Sabina will pay close attention on the big details, too – such as a fair takeout price.

Sabina Gold & Silver (SBB-T)
Price: $2.30
Shares outstanding: 224 million (243M f-d)
Treasury: $36.6 million (as of June 30, not including financing proceeds)
Market cap: $515.2 million

Disclosure: I own shares of Sabina Gold & Silver and the company paid for costs associated with the site visit. Readers are advised that the material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions. They may from time to time have a position in the securities of the companies mentioned herein, and may change their positions without notice. (Any positions will be disclosed explicitly.)

5 Reasons IDM Mining is Worth a Look at This Valuation

by James Kwantes
Resource Opportunities

IDM Mining is a Resource Opportunities sponsor company.

In the summer of 2016 I visited IDM Mining’s Red Mountain high-grade gold project in northwestern British Columbia for the first time, and most of the underground workings were still flooded with water. The conditions were a testament to the project’s mothballed status before IDM took over. To the weather, as well: the mountains outside of Stewart get plenty of precipitation in the form of both rain and snow. Some fell during that mid-summer visit.

When I returned recently, most of the water in the two kilometres of underground workings had been pumped out. Our group of analysts and investment bankers was able to hike deep inside the mountain. We crossed the portal and CEO Rob McLeod walked us through a damp, dark world, past several crosscuts accessing mineralized zones as well as sites where the underground drill was turning.

The gold grades have to be rich to make a mine economic in such an environment, and Red Mountain ore is. IDM’s latest intercepts, announced Sept. 5, are the highest-grade ever recorded at Red Mountain: 4.9 metres of 149.2 g/t gold and 59 g/t silver in the Marc Zone, the first mineralized area to be mined. The hit included 0.5 metres of 1,400 g/t Au and 437 g/t Ag. Average grades of reserves at Red Mountain are 7.53 g/t Au and 21.86 g/t Ag – multiples of global grades being mined.

Underground drilling

Majors including Lac Minerals and Royal Oak Mines spent several million dollars blasting out the portal and underground decline before abandoning the project, which IDM CEO Rob McLeod had worked on as a junior geologist. IDM optioned the 17,125-hectare project in 2014 and has systematically advanced it to the permitting stage. A recently published Feasibility Study shows an after-tax NPV of $104 million with an IRR of 32% and a 1.9-year payback, at a 5% discount. That’s based on US$1,250/oz gold and a 76-cent Canadian dollar. Average life-of-mine head grades are 7.53 g/t Au and 21.86 g/t Ag. By comparison, the average gold grade of producing mines, globally, is about 1 g/t Au.

Red Mountain is located in a beautiful corner of the world populated by snowy mountain peaks, glaciers and scenic vistas. We hiked to the top of a ridge as CEO McLeod gave us a tour that was equal parts geology and history. The bird’s-eye view included Bromley Humps, the area that will host the mill and the tailings area (we later visited by helicopter).

IDM Mining CEO Rob McLeod points toward the mill/tailings facility location in the Bitter Creek Valley.

The Golden Triangle’s history of high-grade gold mining points to its potential. Pretium’s Brucejack is just the latest in a region with a long list of past producing high-grade mines, including Snip, Eskay Creek, Premier and Granduc. And IDM’s development is part of a Golden Triangle revival that is driving some incredible share price gains among area drill plays. The most notable is GT Gold Corp., whose shares started 2017 at 25 cents and have rocketed above $2.50 on drill results. The stellar initial intercepts included 6.95 metres grading 51.53 g/t gold and 117.38 g/t silver. The stock surge has vaulted GT Gold to a market capitalization of almost $200 million. That compares to about $50 million for IDM, whose Red Mountain is an FS-stage advanced development project with a defined deposit and lots of upside.

Proven and probable reserves at Red Mountain contain 1.953 million tonnes at an average grade of 7.53 g/t Au, for 473,000 gold ounces, and 21.86 g/t Ag, for 1.373 million silver ounces. Most of the ore is found in three mineralized zones: the Marc, AV and JW Zones. Underground step-out drill results released by IDM this summer hint at the upside potential at Red Mountain. Intercepts have included:

  • 4.9 metres of 149.2 g/t Au & 59.9 g/t Ag, incl. 1,400 g/t over 0.5m (U17-1289, Marc Zone)
  • 8 metres of 12.28 g/t Au & 27.07 g/t Ag (U17-1274, SF Zone step-out)
  • 14 metres of 10.65 g/t Au & 17.37 g/t Ag (U17-1262, JW Zone step-out)
  • 8.6 metres of 12.33 g/t Au & 70.9 g/t Ag (U17-1245, JW Zone step-out).

 

Other high-grade Canadian gold plays are being picked off by majors, one by one. Recent projects that have been purchased include Lake Shore Gold ($945 million by Tahoe), Kaminak ($520 million by Goldcorp) and Integra ($590 million by Eldorado). The latest to be snapped up was Richmont Mines, a high-grade underground producer recently acquired by Alamos Gold for $933 million. Richmont produces gold at two underground mines in Ontario and Quebec.

In USD terms, the price of gold has increased about 15% this year, from $1,150 to the current $1,325. Yet IDM shares have remained at the 14-cent range, after hitting 21 cents about a year ago. Here are five reasons IDM shares are worth a closer look at these levels:

1. GRADE

The global gold mining industry is facing a supply crunch. Demand remains strong, driven primarily by the Asian appetite, ETF inflows and central bank buying. But on the supply side, gold mining companies are struggling to keep pace. It’s primarily due to a lack of new discoveries, a trend that is forcing miners to process lower-grade ore as they deplete existing ore bodies. The average grade at producing gold mines, globally, is about 1 g/t Au. It’s a worrying industry trend since grade remains king, as well as being a key determinant of the profitability of gold mining companies. That puts a target on IDM Mining’s Red Mountain, which has gold grades multiples of the global average. Cash costs net of silver credits for the Red Mountain project would be US$492/oz, according to IDM’s recent Feasibility Study.

2. INFRASTRUCTURE

Smart management teams purchase unloved, unwanted assets for pennies on the dollar during bear markets, then turn them into viable economic projects in time for the commodity upcycle. That’s the playbook for IDM and the timing looks good, especially with gold’s push above $1,300/oz. IDM leveraged millions of dollars of prior development, including almost 2,000 metres of underground tunnels. The infrastructure advantage extends to road access from Stewart, as well as plentiful and cheap power. British Columbia has some of the least-expensive industrial power rates of any jurisdiction in the world.

3. TEAM

Stewart is Rob McLeod’s hometown and he has deep family roots there, which makes construction of a mine at Red Mountain personal. The town of Stewart used to be a thriving mining hub but is heavily exposed to the cyclicality of the sector. For example, Stewart’s 1910 population of 10,000 dropped as low as 17 people less than a decade later, during the First World War years. Rob’s father Ian McLeod and his uncle Don (after whom IDM is named) prospected mountains in the region for gold – including the property that now hosts Pretium’s high-grade Brucejack mine. Stewart boomed again with the opening of the Premier mine, which operated from the 1920s to 1952 and was North America’s largest gold mine.

How deep are the CEO’s ties to Stewart? Rob’s father was born in Stewart in 1927 and served as mayor for 15 years. He also owned the King Edward Hotel in Stewart from 1952 to 2001. IDM’s Executive Chairman is Mike McPhie, a mining veteran who was CEO of Curis Resources (bought by Taseko Mines) and a director of Silver Quest Resources (bought by New Gold). Another third-generation miner, engineer Ryan Weymark, joined IDM Mining in the spring. His father and grandfather were also mining engineers and spent their careers at Teck Cominco.

4. RESOURCE UPSIDE

IDM’s high-grade stepout hits at Red Mountain mean the 5.4-year mine life outlined by the Feasibility Study is likely to be extended, perhaps considerably. Infrastructure costs for a mine would be fixed, so finding additional ounces is highly accretive to mine economics. And the upside goes beyond defining additional ounces at Red Mountain. Glacial melt has uncovered areas of mineralization that have never been drilled or explored, such as Lost Valley. A resource update is expected in the first quarter of 2018.

 

Lost Valley gold mineralization

5. STRIKEPOINT GOLD STAKE

A deal IDM announced in late 2016 has given the company a call option on a promising portfolio in the Yukon, one of the world’s hottest exploration jurisdictions. The company sold its Yukon projects (formerly owned by Ryan Gold) to Strikepoint Gold (SKP-V) for $4 million, most of it in StrikePoint shares. As a result IDM holds 18% of StrikePoint’s outstanding shares, joining other major shareholder Eric Sprott, who owns a 12% stake. StrikePoint’s VP Exploration is Yukon veteran Andy Randall, who was chief geologist for Ryan Gold when that Shawn Ryan vehicle spent $25 million to advance the Yukon projects. StrikePoint is spending $2.5 million this year to explore three properties: Mahtin, Pluto and Golden-Oly. The fledgling company, helmed by Shawn Khunkhun, has about $8 million in the treasury and is fully funded through 2018. IDM’s stake is worth about $2.9 million at StrikePoint’s current share price.

Disclosure: IDM Mining is a Resource Opportunities sponsor and the author is long IDM Mining shares, which makes him biased. This article is for informational purposes only. All investors are responsible for their own trades and need to do their own research and due diligence.