A new Yukon gold play

Initiating coverage on Trifecta Gold (TG-V)
Share price: .29
Shares outstanding: 23.15 million
Market cap: $6.7 million

The Yukon is now one of the hottest jurisdictions globally for gold exploration. Goldcorp kicked things off in the spring of 2016 with its $520-million purchase of Kaminak Gold and the 5-million-ounce Coffee project. Since then Barrick, Newmont and Agnico Eagle have also entered through investments in Yukon projects.

As the Yukon’s largest claims holder, Strategic Metals is poised to capitalize on the upsurge in interest. But the company wasn’t getting much value in the market for some prime projects in the highly prospective Dawson Range gold belt.

It is now.

Strategic packaged four of the properties — Eureka, Trident, Triple Crown and Treble — into a new company called Trifecta Gold, which began trading on the TSX Venture last Thursday with the symbol TG. The new exploration play has just 23.15 million shares outstanding and Strategic retains a 9.19 stake. The rest of the shares were distributed to Strategic shareholders, on the basis of 1 Trifecta share for every 4.5 Strategic shares.

Trifecta stock is trading at 29 cents, giving the company a market capitalization of about $6.7 million. That’s almost a triple already on the deemed value of 10 cents a share at spinout. It’s a great example of shareholder value creation in a sector where the opposite is too often the rule. But I believe there is considerably more upside and have added to my position since Trifecta shares began trading.

Trifecta plans to initially drill 800 to 1,000 metres at each of Eureka and Trident, and conduct earlier-stage exploration at Treble and Triple Crown. Follow-up drilling later in the season is also possible, as merited, at any of the four properties. Eureka, Treble and Triple Crown are Strategic claims, while Trident includes ground Strategic staked as well as two optioned claims packages.

Eureka is an orogenic gold project located in the south of the storied Klondike Goldfields, along the proposed road route between Goldcorp’s Coffee and Dawson City. The lack of a significant bedrock gold source is one of the Klondike’s great mysteries. More than 20 million ounces of placer gold have been pulled from Klondike waterways since the great Gold Rush. But finding the bedrock source of all that gold has been an illusive quest.

Eureka straddles the headwaters of Eureka and Black Hills creeks, which together have produced at least 200,000 ounces of placer gold since 1978. The characteristics of the gold suggest a nearby source. The property has a 6-km by 2.5-km zone of gold-in-soil geochemical anomalies that has not seen much trenching or drilling.

But it’s the Trident project that may hold the most promise. Trident is located near the Yukon-Alaska border about 75 kilometres northwest of Goldcorp’s Coffee. The project includes claims staked by Strategic, as well as claim blocks optioned from a prospector (CH) and Metals Creek Resources (Squid). It’s road-accessible and has a gravel airstrip but has also seen limited trenching and drilling.

Drilling in 2013 by another operator during the bear market hints at the possibilities. Intercepts included 21 metres of 1.55 g/t gold and 114 g/t silver and 12 metres of 1.7 g/t Au and 81.78 g/t Ag. An overlying trench turned up 22 metres of 1.96 g/t Au and 160.6 g/t Ag.

Trifecta’s CEO is Dylan Wallinger (right), a former Archer Cathro project manager who resigned as a partner to take the helm of the new White Gold-focused company.

He said the idea at Trident is to aggressively explore the optioned ground and “prove it or kill it.” Trifecta plans a $3-million financing soon to top up the $500,000 currently in the treasury.

Wallinger got a taste of Yukon gold discovery while working at ATAC’s Rau property in the summer of 2010 as part of an Archer Cathro field crew. He split the core that turned out to be the Osiris discovery hole, which returned 9.26 g/t gold over 31.13 metres.

That discovery and subsequent high-grade gold hits that helped identify several deposits propelled ATAC shares to the $9 level in 2011 — and Strategic shares above $4.

In addition to being young and hungry — he’s 30 — Wallinger has a family history steeped in the mining industry, on both sides of the family. His path to Trifecta leads through storied Canadian mining districts such as Timmins, Ontario, and Faro, Yukon and companies including Cominco.

Wallinger’s great great grandfather, Noel Wallinger, was British Columbia’s gold commissioner from 1914 to 1922 and a former Conservative Member of B.C.’s Legislative Assembly. Both of Dylan’s grandfathers and several other relatives worked at the Yukon’s Faro mine, once the world’s largest open-pit zinc-lead operation.

Dylan Wallinger’s father, Neil Arnold-Wallinger, is third from left at top. Myra Falls mine, B.C.

Wallinger’s parents met in high school at Faro and both subsequently worked at the mine, as well. More recently, his father worked at Nyrstar’s Myra Falls polymetallic mine on Vancouver Island.

As for Trifecta, the new company’s other two properties — Triple Crown and Treble — are located between Coffee and Rockhaven’s Klaza deposit. They are earlier-stage, but prospecting has turned up some promising sniffs. One rock sample from Triple Crown assayed 6,680 g/t silver. Trenching returned 570 g/t silver, 2.76% lead, 0.08 g/t gold over 6.4 metres and 106 g/t silver, 0.84% lead and 0.03 g/t gold over 9.6 metres.

It is said that the best place to find a new mine is in the shadow of an existing head frame. That “closeology” thesis holds equally true in exploration. And Strategic has exposure — through prime land positions or equity stakes — to all of Yukon’s most exciting discoveries. That includes a significant equity stake in Arcus Development Group (ADG-V), exploring Dan Man on Coffee’s doorstep, and extensive land holdings bordering ATAC’s Rackla property, where Barrick Gold recently invested.

Yet Strategic’s share price has barely moved, creating a significant discrepancy between the share price and the energy that has been building in the Yukon. One of the knocks on project generators is the “holding company discount” and a structure that dilutes the tremendous shareholder value that can be created from discovery. It’s one of the reasons Strategic decided to spin out Trifecta Gold, crystallizing the value in four promising projects in one of the world’s hottest mineral belts.

Strategic CEO Doug Eaton has seen it before. The Archer Cathro principal has decades of experience on the ground and personal involvement in many of the Yukon’s best mineral discoveries. Archer Cathro is a storied Yukon geological consultancy with a proprietary database that Strategic has full access to (Strategic and Archer Cathro share offices).

“There is so much unlocked value in Strategic, we could do this 8 or 10 times with other properties,” Eaton comments.

Trifecta is the third company that Strategic Metals has spun out to shareholders. The second was Silver Range Resources (SNG-V), which has a market cap of about $16 million and is focused on high-grade gold prospects in Nunavut, Northwest Territories and Nevada. The first spinout was an ill-fated zinc spinout that launched just before the 2008 financial crisis hit.

The timing for Trifecta Gold’s emergence, however, could not be better. Yukon-focused exploration companies are deploying hundreds of millions of dollars in the hunt for bedrock gold, their treasuries fortified by some of the world’s biggest gold miners. Strategic itself has exposure to tens of thousands of metres of drilling this season through its equity stakes in ATAC (7.3%, worth about $6.2M) and Rockhaven (42.5%, worth $9.4M) alone.

The value of those two stakes alone plus Strategic’s $16-million cash position is $31.6 million, compared to a market cap of about $49 million.

The Trifecta spinoff is a classic “making the pie bigger” move. The timing could be exquisite. Owning Strategic Metals, the Yukon’s largest claims owner and most experienced operator, gives investors broad-based exposure to one of the hottest gold exploration jurisdictions, globally. The Trifecta listing positions speculators to experience the type of explosive share price appreciation that can accompany discovery.

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Disclosure: James Kwantes owns shares of Trifecta Gold, Strategic Metals, ATAC Resources, Arcus Development Group and Rockhaven Resources. Strategic Metals is one of three Resource Opportunities sponsor companies. Readers should always conduct their own research, do thorough due diligence and/or obtain professional advice. This article is solely for information purposes. 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.

Lucara site visit: Big stones and a gem of a mine

A version of this site visit report was sent to paid Resource Opportunities subscribers on May 11.

May 25, 2017
By James Kwantes
Editor, Resource Opportunities

Their unique combination of portability and value make diamonds a favoured target of thieves, both on the big screen and in real life.

In The Pink Panther, a distinctive pink diamond was fodder for several movies worth of escapades between bumbling Inspector Clouseau and the elusive jewel thief.

Away from the screen, one of the biggest thefts was the Antwerp diamond heist of 2003. Thieves planned it for years, including posing as diamond merchants and renting office space in the Antwerp Diamond Center. They then made off with more than US$100 million in diamonds and jewelry from a heavily fortified safe. The bad guys were arrested; the gems were never found.

However, the greatest diamond heist of all time didn’t involve masked men, gunpoint or intricate plans concocted over several years. In fact, it didn’t involve coercion at all.

It went down rather quietly in the fall of 2009 when upstart Lucara Diamond Corp. bought a controlling interest in AK06, a De Beers diamond project in Botswana, for US$49 million. De Beers’ discovery of the nearby AK1 kimberlite — now Orapa, the world’s largest diamond mine — had launched a diamond district in Botswana’s Kalahari desert. But the diamond giant was now shedding assets and William Lamb, then Lucara’s only employee and now its CEO, was looking.

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Lamb had been hired the previous year by Lukas Lundin, the Swedish tycoon whose international mining empire is based in Vancouver. The idea of a diamond company called Lucara was hatched earlier during a Lundin lunch with Catherine McLeod-Seltzer and Eira Thomas (who contributed the “ca” and “ra,” respectively, for the company name). Lamb spent more than a year scouring the globe for prospective diamond projects and plotted them on a spreadsheet, he told me during an interview in Botswana. AK06 made his short list.

He ironed out the purchase price for a 70% stake in AK06 during a 5-minute phone conversation with an executive at De Beers, where Lamb had worked for several years. Lucara later bought out JV partner African Diamonds — who couldn’t afford to fund their share of mine construction costs — to take control of 100% of the project. AK06, of course, became the Karowe mine, the source of many of the world’s largest and most valuable rough diamonds. Lucara has now sold 145 diamonds for more than US$1 million each, generating US$528 million.

Lucara sells its largest stones through Exceptional Stone Tenders, where buyers submit sealed bids over a number of days. On May 11 Lucara announced sales proceeds of US$54.8 million from its latest tender, the largest yet. The sale featured 15 diamonds for a total of 1,765 carats, including a 374-carat Type IIA diamond, below, that fetched US$17.54 million. The 374-carat stone broke off the 1,109-carat Lesedi La Rona, the world’s most famous diamond. It was purchased by Graff Diamonds, whose owner Laurence Graff is arguably the most powerful player in the global diamond trade. I suspect he desires the larger companion piece.

Graff Diamonds paid US$17.54 million for this 374-carat stone.

The “Lesedi La Rona” — “Our Light” in the local Tswana tongue — was unearthed in November 2015. It is the largest gem-quality diamond recovered in a century and the second largest ever. The stone was named last year in a contest open only to Botswana residents. Last year Lucara put the Lesedi up for live auction at Sotheby’s in London. But the diamond failed to sell because bids didn’t hit the reserve price. More on that later.

Lucara sold the 813-carat Constellation diamond, recovered at about the same time, for US$63 million — a record for a rough diamond — as well as a share of the profit generated from the cut stone. Notably, the price tag for the Constellation exceeded what Lucara had paid just seven years earlier for a controlling interest in the mine that produced it.

I travelled to Botswana recently to visit Lucara’s operations and learn more about both where the company has been and where it’s going. Also on the tour was the Africa correspondent for a Swedish daily newspaper and an analyst for Nordea, a large Swedish bank. There are plenty of reasons to be bullish Lucara and I have purchased more shares in the company since I returned.

“Big” and “beautiful” were recurring themes of the trip. After the site visit, I went on a two-day safari at a lodge on the Boteti — the only river that runs through the Kalahari Desert. Watching elephants, hippos, lions, giraffes and zebras in their natural habitat was an amazing experience. Fun fact: a group of zebras is called a “dazzle.”

BOTSWANA, DIAMOND POWERHOUSE
I flew into Gaborone, Botswana’s capital, through Frankfurt and Johannesburg. “Gabs,” as the city is known colloquially, has become a global diamond centre as Botswana has risen among the ranks of producers. The African nation is now the second largest producing nation by value, unearthing 22% of global supply, as outlined by New York-based diamond analyst Paul Zimnisky (Russia is first, Canada third). Most of the Botswana stones come from the Jwaneng and Orapa mines, located in the same neighbourhood as Karowe.

In 2013, De Beers moved its sorting and sales operations to Gaborone, an exclamation mark on Botswana’s emergence as a diamond power. Botswana owns the other 15% of De Beers not owned by Anglo American, as well as 50% of Debswana, a De Beers JV. Diamonds generate up to 50% of government revenues, funding universal health care and education (including post-secondary). Botswana is one of Africa’s fastest-growing economies and has a higher GDP per capita than South Africa.

One of the first stops for our small group was the gated Diamond Technology Park (DTP) on the outskirts of Gaborone. The compound is the headquarters for Lucara and other Botswana diamond miners. Down the street is the De Beers sorting centre. A helipad atop that building attests to former De Beers boss Nicky Oppenheimer’s fondness for helicopter transportation.

The DTP is ground zero for the billionaires, royalty and other high-net-worth investors who fly in from around the world to view Lucara’s finest merchandise: large rough stones that sell for millions — sometimes tens of millions — of dollars. The company picks up clients at the airport and whisks them in limousines to Lucara showrooms. Some spend hours with a single stone — investigating the clarity, evaluating the colour, envisioning the cut possibilities. The 1,109-carat Lesedi La Rona was not part of the latest Exceptional Stone Tender. But presumably some of the clients who flew in to view the diamonds on offer also viewed the Lesedi.

Security measures were extensive. My fingers were printed and retinas scanned. Later, on the way in to Lucara showrooms, I was searched in a secure room. On the way out, I was asked to remove a candy from my mouth to show that it wasn’t something much more valuable.

Steve Lincoln, Lucara’s sales manager, is a former De Beers man — like many in the sector. He led us into a room that shimmered with diamonds grouped by weight, colour and quality. Here, a group of 5- to 10-carat stones. There, a selection of the diamonds being sold in the Exceptional Stone Tender. Most were white and clear. Among them was the beautiful 374-carat Type IIA stone that went for almost US$18 million.

LESEDI LA RONA
Our final stop was at the icy elephant in the room. Sitting by itself on a white table under a row of lamps was the Lesedi. I picked up the rock, muscles adjusting to its heft as I cradled it in my fingers. Looking into the diamond through a loupe, what struck me was the stone’s architecture. Beyond the clear, smooth plane where the 374-carat diamond cleaved off were ridges, soft pools of light, jagged edges, rippled valleys. Close up, it’s easy to get lost in the stone’s landscape. The diamond occupies its own world.

And in the diamond world, news of its arrival landed like a lightning bolt. Once cut and polished, the Lesedi could be among the world’s largest clear diamonds. The largest, the 530-carat Great Star of Africa (or Cullinan), was cut from the 3,106-carat Cullinan diamond — the only larger diamond ever found. The Great Star is set into the British Crown Jewels. But not only did the Lesedi break, it broke the mould. The diamond’s size makes it difficult to determine how many stones could be cut from it, or how they might look. The rock doesn’t fit into the largest scanners made for diamonds.

The diamond’s incredible narrative was derailed by the unsuccessful auction. Following a global road show and marketing campaign, the Lesedi La Rona failed to hit the (undisclosed) reserve price at a glitzy live auction in London on the evening of June 29, 2016. The top bid was US$61 million, less than the Constellation had fetched and far below projections of a potential US$100-million sale price. The Constellation’s per-carat price, US$77,500, implied an US$86-million value for the Lesedi — plus a large premium given the stone’s provenance.

The fate of Lesedi La Rona remains the million-dollar question — perhaps, the $100-million question. Interest remains high — Lamb fields calls about the diamond most days (two on the day of the interview). Cash offers are rejected out of hand. A few members of the cast of characters drawn out by the giant diamond have been particularly interesting, Lamb said with a smile. He didn’t elaborate.

As author Matthew Hart documented in an Aug. 5, 2016 feature in Vanity Fair, it wasn’t for lack of interest that the auction fizzled. Moments after the hammer fell, Laurence Graff’s son rushed up to the CEO to express interest in the stone.

DIAMANTAIRES AND DISRUPTION
In the diamond business, diamantaires are the middlemen. They privately purchase rough stones from producers, cut them and take their cut of the value created. It’s a traditional, secretive system that goes back centuries. Lucara was the upstart that shook the foundations of that established order by auctioning the world’s most desirable stones.

“Diamantaires felt that we were trying to sell the stone to their end client,” CEO Lamb, right, states matter-of-factly. “The diamantaires hate the public process. … they will pay you more for that exclusivity.”

It goes some way to explaining why the second largest gem-quality diamond ever recovered, a stone with historical significance, failed to sell at the live auction.

Lamb reasons that Lucara is actually helping other producers — especially the handful of other producers that recover very large diamonds — by controlling the supply of such stones through orderly tenders. The company could easily swamp the market for large diamonds, he points out.

As for the auction, the company did not get to the pinnacle of the large-diamond world by shying away from calculated risks, the CEO noted. The live Sotheby’s auction, he acknowledges, was an experiment. The exercise, driven by the significance of Lucara’s find as Lamb tells it, didn’t ultimately pay off — at least monetarily.

“We wanted to maximize shareholder value and let the world know that we had recovered the only 1,000-carat stone that anybody on the planet had ever seen.” (The Cullinan was unearthed in 1905.)

Lamb continues: “It’s not because we just love the risk and we sort of don’t pack our parachute and jump out of the plane. We’re packing the parachute very meticulously. We’re going to the edge of the cliff and we’re jumping, knowing that we’ve actually done our homework.”

As “failures” go, the Lesedi La Rona marketing blitz and auction was rather successful. The company estimates about 1.8 billion people — a quarter of the world’s population — have either seen, read about or heard about the diamond. But only about 100 people have held the stone, and the list of potential buyers is shorter yet. The diamond’s fate has weighed on company shares, which have drifted down from the $4 level pre-sale to below $3.00.

Eighteen months after its discovery, Lamb still becomes animated when talking about the Lesedi. The diamond, forged deep within the Earth over billions of years, is likely as old as the Earth itself, the CEO enthuses. “That stone was growing as the Earth cooled down … the Earth was just gas clouds collecting. While that gas cloud is collecting, those carbon atoms were already trying to find each other. The stone was starting to grow that far back.”

Tall and trim, Lamb is a former elite athlete who has represented South Africa at the world track and field championships (he once placed fifth in the duathlon). Running remains a passion — a recent excursion with a friend and his son saw Lamb start at one edge of the Grand Canyon, run down and through it, and up the other side (it took him 4.5 hours). I got the sense that blazing a trail through the traditional diamond industry — not to mention proving naysayers and skeptics wrong — brings out his competitive juices.

That said, other extraordinarily large diamonds the company finds will likely not be sold at live auction. “We learn from our mistakes. We wouldn’t go back to auction.” Lucara is investigating various options for selling the Lesedi, Lamb said, including partnership and/or retaining a financial interest in the polished product.

A humorous moment in the showroom, which had an empty diamond scale sitting on the table when we walked in. When the Lesedi La Rona was placed on the platform, the reading that came up was 1,106 carats — prompting a few laughs as well as nervous glances between company officials. As it turned out, the scale had not been calibrated after it had been moved into the room. The stone does, in fact, weigh 1,109 carats.

TWO SUITCASES, $1 BILLION IN STONES
After viewing some of the most valuable stones pulled out of Karowe, we flew to the mine for a tour of the operation. It started in the open pit, which measures 820 metres across at its widest point and is about 80 or 90 metres deep. Weekly dynamite blasts loosen up the ore, which is transported out by 100-tonne dump trucks. The strip ratio is in the range of 5 or 6:1 for the next couple of years, then drops to below 2 due to the shape of the kimberlite. Lucara will then shift focus from accessing the treasure to mining it. The bottom of the pit will get about three times as deep by the end of the current mine life, in 2026.

Lucara recently brought in a new mining contractor at Karowe, a move prompted by consistent over-billing by the previous contractor for volume of ore processed, Lamb said. Open-pit mining was shut down for two months during the transition but operations were not affected — Lucara mined from stockpiles. It has worked out alright, Lamb says — the new contractor is cheaper and has more capacity.

Your author in the open pit. The Lesedi was mined behind and below where I’m standing.

About 40 million cubic metres of rock have been processed since Karowe opened. The diamonds recovered could fit in two suitcases. They have generated a billion dollars in revenue, and counting.

Lucara is working on economic studies — due out later this year — on an underground expansion that would extend the Karowe mine life well beyond 2026. And it’s the expansion that could really drive profitability if Lucara can continue to pull large stones out of the south lobe. That’s the largest kimberlite, from which the Lesedi and Constellation were unearthed. Lucara completed a deep drilling program at Karowe in February that included a 758-metre drill hole. An updated resource estimate is expected in Q4.

Lucara is also building a Mega Diamond Recovery unit (MDR) at Karowe. A particular challenge of diamond mining, especially for Lucara, is avoiding breakage during a process that consists of crushing and grinding rock into progressively smaller pieces. The MDR, at a cost of between $15 million and $18 million, will divert the largest stones at the front end of the mining process. The unit will be able to recover stones as large as 45-50mm. Lamb refers to the recovery of large stones as “mining money” and the MDR will help Lucara recover the largest, most valuable stones intact. The company is also installing four new XRT (X-ray transmission) diamond recovery units.

Viewed from the primary crusher — the first point of entry for the ore and one of the highest points of the mine — the operation resembles a kind of amusement park. The ball mill is the Ferris wheel, the conveyors the roller-coasters that deposit sometimes precious cargo at the next stop. In this Darwinian adventure park, only the most valuable cargo survives a series of crushing and shaking exercises.

Karowe has a been a phenomenal success, by many metrics. The mine was built in just 18 months and had a 9-month payback. In December 2016, just four years and eight months after the very first diamonds were produced, Lucara passed $1 billion in sales. The company implemented a dividend in 2014 and has now paid out more dividend dollars than it has raised in equity. The dividend policy also broke new ground as the first company in the Lundin empire to pay one. It took six months to convince Lundin, Lucara’s chairman, to go with a dividend, Lamb recalls with a smile.

Karowe mine staff also reaped the benefits of the recovery of the 813-carat and 1,109-carat stones. Each employee received a 20-30% large stone bonus. Jobs in the Botswana diamond industry — which is large enough to ensure salaries remain competitive — are typically coveted positions.

At a $2.95 share price, Lucara’s market capitalization is about $1.13 billion. Last year the company paid out dividends totalling 51 cents a share — 6 cents in quarterly payments plus a special dividend of 45 cents in the months following the failed Lesedi sale. This year Lucara hiked the full-year dividend to 10 cents — a 60% increase — for a current yield of about 3.4%. The list of mining companies paying that generous a dividend is very short.

Lamb is open to adding assets through acquisition, but only if they are accretive — a tall order given Karowe’s profitability. Late last year Lucara purchased a 9.9% stake in Tsodilo Resources (TSD-V), an illiquid diamond exploreco that is currently drilling its BK16 diamondiferous kimberlite. BK16 is six hectares at surface, located in the same Orapa kimberlite field as Karowe, and hosts a population of rare Type IIa diamonds. The project is another De Beers discard and the company is run by Mike de Wit, De Beers’ former VP of exploration for Africa.

ROUGH START, EXCEPTIONAL OPERATION
The company’s value can be expressed in a single sentence: Karowe produces less than .5% of global diamonds by weight, but more than 50% of the world’s “specials” (10.8 carats plus). And those large stones command exponentially higher prices. A 100-carat diamond is much more valuable than ten 10-carat diamonds. A 1,109-carat diamond? Its price has yet to be determined. But the stone remains in Lucara’s inventory, as under the radar as a world-famous diamond can be. I will be surprised if it doesn’t sell this year.

Karowe was no overnight success, Lamb recalled during an interview after the mine tour, in nearby Letlhakane. Lucara’s first sale was underwhelming, with average carat prices coming in at US$215 (2016 revenue was US$824 per carat). It was a “disappointing” outcome, below projections, and the stock plunged from the $1.25 level to below 50 cents, Lamb recalled.

“We’re now panicking. We’re thinking, ‘We bought this dud from De Beers.’ What’s happening?”

Then in April 2013, Lucara recovered a 239-carat stone. It turned out to be a sign of things to come, and the company took immediate steps to modify the plant, decreasing the risks of breaking large stones. Ever since, a steady stream of beautiful, unusually large stones — and the high prices fetched for them — have made Karowe one of the world’s most profitable diamond mines on a per-carat basis. Debswana’s nearby Orapa mine, the world’s largest diamond operation, mines more carats in two weeks than Lucara does at Karowe in a year. But size matters — Lucara has now sold 145 diamonds for more than $1 million each, generating revenues of more than US$528 million.

The company’s greatest success came in November 2015, when Lucara unearthed the three largest diamonds it has ever recovered in the space of a week. In addition to Lesedi La Rona and Constellation — the sixth largest gem-quality diamond ever recovered — there was the 374-carat stone that sold in the latest tender.

Lucara’s large-stone focus also insulates the company from two of the primary threats facing the global diamond industry: synthetic stones and changing relationship patterns among millenials. With its iconic “Diamonds are forever” narrative, De Beers inextricably linked love, commitment and diamonds for generations of couples.

However, lower marriage rates among millenials means fewer diamond engagement rings. The diamond industry is countering the trend through its “Real is Rare” campaign, which emphasizes authenticity and is aimed at people who didn’t grow up with “Diamonds are forever.”

Prospective husbands are not really the target audience for the large stones that generate most of Lucara’s revenues, anyway. The buyers for these diamonds travel by private jet and sometimes rule countries. Similarly, synthetic stones are much more of a threat to companies producing smaller stones. And synthetics take an enormous amount of heat and electricity to create, tarnishing their green credibility.

The “blood diamonds” legacy is another headwind in Africa. Blood Diamond, the 2006 thriller starring Leonardo DiCaprio as a diamond smuggler, helped stamp the narrative on the public imagination. To an extent, Lamb is resigned to it: “Diamonds will always have a tarnished image, no matter how much marketing you do.”

But when talk turns to DiCaprio, who is also backing a California-based synthetic diamond producer, frustration crosses Lamb’s face and his voice develops a bit of an exasperated edge. He links the 50% of government revenues that come from the diamond industry with Botswana’s emergence as a stable nation with a high GDP and low corruption. Botswana provides universal health care and free education, including post-secondary. Taxes are based on profitability and Lucara paid US$103 million in taxes in 2016 (full-year revenue was US$295.5 million).

Oscar-winning actress Charlize Theron, right, also provided a sort of counterpoint to the blood diamond narrative at the 2017 Academy Awards in February. The actress created a buzz with a pair of stunning diamond earrings cut from the Queen of Kalahari, a clear 342-carat diamond recovered at Karowe in 2015. The diamond sold for US$20.55 million and was cut by jeweller Chopard into a diamond collection dubbed the Gardens of Kalahari. Theron, who is South African, wore a 26-carat heart-shaped stone and a 25-carat pear-shaped diamond.

For me, a very brief foray into South Africa during a transfer — and in-flight conversations with a few South Africans — highlighted the geopolitical contrasts between the neighbouring countries. At the Johannesburg airport, the TV headlines were “No-confidence vote against Zuma considered.” In conversation, a few of the prevailing themes were presidential corruption on a massive scale, ANC infighting, racial tensions and the country’s downward slide.

In Botswana, by contrast, the current (elected) president — Ian Khama — is the son of a black father and a white mother. His father is Botswana’s founding president, Seretse Khama, a tribal leader who studied in England and fell in love with and married a white English woman. The union rocked South Africa — where apartheid was just getting started — as well as the rest of southern Africa. Fifty-some years later, the young country ranks high on living standards and low on corruption compared to African peers. Especially given what’s happening to the south, Botswana is a veritable oasis of stability.

There was, however, a bit of excitement during the Botswana visit. I was sitting across from Lucara CEO Lamb during dinner at a Brazilian restaurant in Gaborone when the table began to shake. “This is an earthquake,” he declared. The epicenter of the 6.5-magnitude quake was not very far away and the shaking lasted longer than any quake I’ve experienced in the seismically active Vancouver area. The quake did not cause any damage or deaths — only jokes that it was triggered by the falling rand.

‘RAINING MONEY’
In the diamond world, Lucara is the upstart that has quickly climbed to the top thanks to its high-quality, exceptionally large stones. Just four years into the mine life, Karowe is a dividend-paying profit machine. The company actually lost money in Q1 because revenues came in below projections, but that had more to do with timing of tenders than company performance. Globally, there is a looming supply shortfall for smaller diamonds. Few new mines are coming online; two Canadian mines, Stornoway’s Renard and De Beers/ Mountain Province’s Gahcho Kue, are among the exceptions. Demand for Lucara’s large stones remains strong.

And as countries go, Botswana is a young one at just 50. The Kalahari Desert covers most of the nation, and it was greener than usual this year because of above-average rainfall. Botswana’s Tswana language reflects the country’s desert reality — the currency is called the “pula.” The word has many meanings: it’s also the Tswana term for rain, as well as the declaration when you raise a toast.

It’s an apt metaphor for Lucara, because the consistent haul of large, high-quality diamonds from Karowe ensures the company will likely continue to “rain money.” The likelihood of underground expansion would extend the mine life beyond 2026 as Lucara focuses on the south lobe — the kimberlite pipe that produces the most valuable stones. The strong dividend, including further potential hikes, and share price growth makes Lucara a compelling investment under $3.00.

Lucara Diamond Corp. (LUC-T)
Price: $2.95
Shares outstanding: 382.5 million
Market capitalization: $1.13 billion

Disclosure: The author owns shares of Lucara Diamond Corp. and Tsodilo Resources but has no business relationship with either company. Lucara paid for flights to the Karowe mine site and associated costs, but not safari costs. Readers should always conduct their own research, do thorough due diligence and/or obtain professional advice. This article is solely for information purposes. 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.

An UnderValued Mining Play in a Storied Gold District

Strategic Metals (SMD-V) is spinning out Trifecta Gold, with 4 projects in Yukon’s hot White Gold district

First-mover philosophy helps Strategic beat the majors into Yukon’s best area plays

By James Kwantes

Fortunes are made, and sometimes lost, in the great mining rushes that drive people, prospectors and dollars on the heels of exciting discoveries. One of the greatest was the Klondike Gold Rush of 1896-1899, kicked off by the August 1896 discovery of gold at Bonanza Creek by Skookum Jim, Dawson Charlie, George Carmack and Kate Carmack.

Almost a year after the discovery, the SS Portland steamship arrived in Seattle. Among its passengers were several of the most successful Yukon prospectors. Its cargo included more than one tonne of gold. Two days earlier, another gold-laden ship had landed in San Francisco. In Seattle, a crowd of thousands greeted the Portland. The Seattle Post-Intelligencer newspaper screamed “Gold! Gold! Gold! Gold!” in a banner headline. The race was on.

Treasure hunters came by the tens of thousands. But they soon discovered that the prime land around gold-rich creeks had already been staked by prospectors in the Yukon. For some who got in early, it was a ticket to riches.

Fast-forward 120 years and another gold rush is taking shape in the mineral-rich Yukon. This one is being led by major gold mining companies, who are systematically buying up stakes in exploration companies in a jurisdiction the Fraser Institute describes as one of the best in the world. Goldcorp (G-T) kicked off the new gold rush in May 2016 with its $520-million purchase of Kaminak Gold and the multi-million-ounce Coffee deposit in the hot Dawson Range gold belt.

In the original Gold Rush, those who arrived early — before the crowd — were most likely to secure their fortunes. It’s no less true today. In the hunt for geological riches, “location, location, location” is key for majors in search of the next big gold district. Public companies that can secure valuable land positions — and investors who get in early — will be the biggest winners.

ENTER BARRICK
The latest major to enter the Yukon is Barrick Gold (ABX-T), the world’s largest gold miner. In an option deal announced April 10, Barrick will invest up to a total of $63.3 million in ATAC Resources (ATC-V) for a staged buy-in that will give the miner up to a 70% interest in ATAC’s Orion project. The deal includes a flow-through private placement financing of $8.3 million that takes Barrick’s stake in ATAC to 19.9%. It’s a good deal made even better because the Orion project does not include ATAC’s major discoveries — Tiger, Conrad and Osiris.

Given Barrick’s history, the partnership with ATAC is a natural. In 1986, Barrick acquired the small Goldstrike mine in Nevada’s Carlin trend. Barrick soon hit a rich discovery and Goldstrike turned into a company maker, delivering enormous profits and 50 million ounces of gold production (and counting) to Barrick. ATAC has North America’s only known Carlin-type gold mineralization outside Nevada at its vast Rackla project in Yukon. And it was ATAC’s 2011 discovery of Carlin-type gold at Rackla that sent the company’s stock above $9 that year.

PRIME POSITIONING
As the largest claims holder in the Yukon, no company is better poised to benefit from the majors’ renewed Yukon interest than project generator Strategic Metals (SMD-V). Strategic holds valuable land positions in each of Yukon’s major mineral belts, assembled over decades using the proprietary database of storied geological consultancy Archer, Cathro & Associates. Archer Cathro has had a hand in most of the Yukon’s major mineral discoveries and deposits.

In each of the recent investments by majors, Strategic had already staked claims and was positioned in the neighbourhood. The growing list of majors that have stepped up to secure their Yukon stakes is a who’s who of gold miners. Their investments validate Strategic’s early-mover philosophy.

The Barrick-ATAC deal was just the latest example. Strategic owns more than 10.1 million shares of ATAC Resources, an 8.3% stake that has increased in value more than 50% since the JV deal was announced. Strategic also has several claims and large land positions adjacent to much of ATAC’s Rackla project in Yukon’s Nadaleen Trend.

Of any of the investments by majors, Newmont’s deal with Yukon junior Goldstrike Resources (GSR-V) may have been the most surprising. The agreement, announced March 6, includes a private placement and could see Newmont invest up to $53 million for a majority stake in Goldstrike’s Plateau gold project in the east-central Yukon. It was another case of Strategic beating the majors to a potential district — the project generator had already staked ground in the prospective area. And on April 6 Strategic announced that it had added to its land position near Plateau through staking.

Goldcorp and Coffee — yes, Strategic was already there. It was Strategic CEO Doug Eaton who staked the Dan Man property, which borders Coffee’s northern boundary and is owned by Arcus Development Group (ADG-V). The Coffee gold mineralization extends right to the Dan Man property boundary and Goldcorp followed up its purchase of Coffee by buying a 19.9% stake in Arcus. Strategic owns 3,333,333 Arcus shares, a 4.5% stake in the company. Arcus is planning a 2017 drill program at Dan Man, with technical help from Goldcorp.

A NEW WHITE GOLD PLAY, FOR ‘FREE’
But the Strategic Metals holding with potentially the most upside remains under the radar, its worth yet to be determined by the market. The company is Trifecta Gold, a new precious metals exploration company that will come out of the gate with four projects in the Yukon’s hot White Gold district. Pending shareholder approval — the vote is this Friday — Trifecta shares will be spun out of Strategic Metals early next month. Strategic shareholders will receive one Trifecta common share for each 4.5 Strategic shares held. Trifecta shares will trade as “TG” on the TSX Venture Exchange.

For Trifecta, the last gold play to go public in the prolific district offers a glimpse at the possibilities. It was White Gold Corp (WGO-V), which holds a large land package after purchasing Yukon prospector Shawn Ryan’s White Gold claims. Ryan, of course, helped put the district on the map with discoveries that culminated in buyouts from Kinross (Golden Saddle in 2010) and Goldcorp (Coffee in 2016). He’s also chief technical advisor for the new exploration play. In late 2016, Agnico Eagle paid $14.5 million for a 19.9% stake in the company, valuing White Gold Corp. at $72.5 million. The market capitalization has since surged past $130 million.

White Gold’s trajectory is evidence that the Dawson Range belt has become one of the hottest gold exploration districts globally. With gold approaching US$1,300 an ounce and risk capital tentatively returning to the exploration sector, the timing couldn’t be better.

The renewal of action and interest bodes well for Trifecta Gold stock, which is expected to begin trading in early May. The share distribution record date is set for April 27. Investors who own Strategic shares before that date are staking their claim to a promising, tightly held exploration play before the stock hits the public market. Strategic will retain about 9.8% of Trifecta shares and distribute the rest to its shareholders.

Trifecta’s properties in the Dawson Range gold belt are:
Eureka — Eureka is a 70-sq-km orogenic gold project at the southern end of the Klondike Goldfields. The Eureka claims straddle the headwaters of two of the most productive placer creeks — Eureka and Black Hills — in the southern Klondike. The creeks have spit out a reported 200,000 ounces of placer gold between 1978 and 2016, and the gold’s attributes suggest that it’s near source. Eureka is drill-permitted and exploration will focus on a handful of showings identified by soil geochemistry, trenching and drilling. Eureka is along the proposed haulage route to Goldcorp’s Coffee project and could progress quickly from exploration to development.

Triple Crown and Treble — The properties are located halfway between Coffee and Rockhaven’s (RK-V) Klaza, a polymetallic gold deposit. Initial prospecting at Triple Crown yielded a rock sample assaying 6,680 g/t silver, 30.22% lead and 0.80 g/t gold. A follow-up trench there returned 570 g/t silver, 2.76% lead, 0.08 g/t gold over 6.4 metres and 106 g/t silver, 0.84% lead and 0.03 g/t gold over 9.6 metres. There are several geochemical anomalies at Treble; 2011 prospecting at one of them revealed a 100m by 120m zone of brecciated hydrothermal quartz and gold mineralization in rock samples.

Trident — The road-accessible Trident property consists of 525 claims, 195 wholly owned by Strategic and 330 optioned from two other companies. At the Squid project, optioned from Metals Creek Resources, limited drilling returned results including 21.0 metres of 1.55 g/t gold and 114 g/t silver and 12.0 metres of 1.7 g/t gold and 81.78 g/t silver.

Trifecta’s CEO, Dylan Wallinger, witnessed firsthand the type of shareholder value that discovery can create during the summer of 2010. Working out of Archer Cathro’s Whitehorse office, Wallinger was part of a small field crew at ATAC’s Rau property, where his duties included everything from prospecting to splitting core. The project was not yet a major focus for ATAC. But that changed quickly when assays were returned from one of the cores Wallinger split. It turned out to be the Osiris discovery hole announced on Sept. 1, 2010, which returned 9.26 g/t gold over 31.13 metres within a larger interval averaging 4.65 g/t over 65.20 metres.

That discovery, as gold surged toward an eventual peak of US$1,900/oz the following year, was one of the catalysts that fuelled ATAC’s rocket ride in 2010 and 2011. The stock climbed above $8 in 2010 and cracked $9 the following year on excitement about the discovery of a new Carlin-type gold district outside of Nevada.

TRIFECTA CEO: ‘PROVE IT OR KILL IT’
As president and CEO of Trifecta, Wallinger will have the chance to play a more central role in creating shareholder value. The former Archer Cathro project manager has stepped down as a partner with the geological consultancy to focus on Trifecta. Strategic is seeding Trifecta with about $750,000. Depending on the work program, Wallinger knows he’ll have to raise more money. The CEO wants to finance at higher prices than where Trifecta shares start trading.

Trident may be Trifecta’s most intriguing project. The road-accessible property hosts an air strip and several roads, as well as gently sloping terrain amenable to a mining operation. There are drill permits in place but Trifecta has applied for more extensive permits. Trident has resource-sharing possibilities — there’s a producing placer mine on the property — but also spending obligations. On the Squid option, Trifecta must spend a minimum of $500,000 in the first year ($2.25 million over three years and issue 6.5 million TG shares) as part of a staged 60% earn-in.

Wallinger says Trifecta won’t spend any more than necessary to either prove mineralization at the optioned claims or walk away. If results are positive, the company plans to mobilize more drills, heavy equipment and fuel by road and continue to work into late fall. “The idea is to go in and explore aggressively, and prove it or kill it,” Wallinger says.

Strategic has more than 100 wholly owned projects in Yukon available for option, many of which are drill-ready and fully permitted for advanced exploration.The company also has an investment fund with dozens of junior exploration investments at various stages of development. Strategic owns major stakes in:

Rockhaven Resources (RK-V) — Strategic owns a 45.2% stake in Rockhaven, which is expanding and advancing the high-grade, polymetallic Klaza deposit towards production;
Precipitate Gold (PRG-V) — Strategic owns 31.2% of Precipitate, which is advancing the flagship Juan de Herrera project located within the emerging Tireo Gold Camp in the Dominican Republic;
Silver Range Resources (SNG-V) — Strategic owns 15.3% of Silver Range, which owns four zinc-lead-silver projects in Yukon and high-grade gold projects in NWT, Nunavut and Nevada.

For some mining-focused investors, one of the knocks on project generators is a structure that prevents them from capturing the full shareholder value driven by discovery. But with the spinout of Trifecta Gold, Strategic is changing the game by surfacing value unrecognized by the market. Shareholders will have exposure to both discovery upside in one of the world’s hottest exploration districts AND the diversification of Strategic’s valuable shareholdings and Yukon claims. The price tag is low — Strategic’s working capital amounts to almost $40 million currently and its market cap is just $50 million.

Price: 0.58
Shares outstanding: 89.1 million
Market cap: $51.7 million
Working capital: $39 million

The Yukon is a major focus for Resource Opportunities and subscribers have enjoyed several wins as the best Yukon companies get rerated. Get high-potential junior resource stories first by subscribing to the premium Resource Opportunities newsletter today: Resource Opportunities. The cost is just $299 a year or $449 for two years, well below the price of a single profitable trade.

Disclosure: The author owns shares of Strategic Metals, Rockhaven Resources, Silver Range Resources and Arcus Development Group. Strategic Metals is one of three Resource Opportunities sponsors, who help support the subscriber-funded newsletter by keeping subscription prices low. The work included in this article is based on SEDAR filings, current events, interviews, and corporate press releases. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value, so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.

A Catalyst-Rich Gold Play for Under a Dollar

Drilling at Montagne d’Or in French Guiana

On March 20, Columbus Gold (CGT-T) released a bankable Feasibility Study on its Montagne d’Or gold deposit in French Guiana. The study was funded by major Nordgold, which earned into a total 55.01% interest in the project by completing it on an accelerated three-year timeline. The FS showed a net present value of US$370 million ($500 million Cdn) at a 5% discount rate and an after-tax Internal Rate of Return of 18.7%, at US$1,250/oz gold. Average annual gold production for the first 10 years (12-year mine life) would be 237,000 ounces at an average grade of 1.73 g/t, based on proven and probable reserves of 2.745 million ounces of gold.

The economic study vaulted Columbus Gold into a small group of companies globally with advanced-stage, FS-level projects capable of producing more than 200,000 ounces a year at above-average gold grades. However, investors focused on the lower-than-expected 18.7% after-tax IRR (a 2015 PEA with higher production showed an after-tax IRR of 23%). The following day Columbus shares fell 12% (from 99 cents to 87 cents). The stock has since recovered to 93 cents for a market capitalization of $142.1 million.

2017 is shaping up to be a catalyst-rich year for Columbus, so those who sold the stock may be missing out on value. Consider these factors:

  1. Economics. With some modest investments in infill drilling and optimization, the after-tax IRR on Montagne d’Or is likely to move to 20% or even higher. And the major mining companies now taking a hard look at the 5-million-ounce Montagne d’Or deposit are interested even below 20%. With the FS in the bank, Nordgold now has 90 days to make a construction decision. If Nordgold goes ahead, Columbus can elect to fund its portion by diluting its interest in the project. The dilution formula was pegged to the number of reserve ounces outlined in the FS, giving Nordgold a disincentive to improving project economics. The deposit has 3.9 million Measured and Indicated ounces but only 2.75 million of those made it into proven and probable reserves. Now that Montagne d’Or is owned 55% Nordgold/45% Columbus, the JV partners are on the same page — making the economics robust and/or getting top dollar for the deposit.

  2. Size. Size matters to majors, which wring out profits through economies of scale. The majors are increasingly only interested in mineral deposits they can turn into districts. Replenishing ounces has never been more critical in an industry where assets decline by the day. The large and growing (see #3) Montagne d’Or deposit fits the bill.

  3. Drilling. The FS is an important milestone but not the finish line. Columbus is cashed-up and drilling at Montagne d’Or, for both resource expansion and discovery. The program consists of 36 core holes and 5,520 metres testing four target areas. One long 750-metre hole tested the depth extension of gold mineralization under the deposit envelope. Other holes will test the west extension of the deposit, a geochemical anomaly 750 metres east of the deposit, and mesothermal quartz/gold vein systems. Montagne d’Or is already a large deposit — hitting on this drill program will make it even more valuable.

  4. Eastside in Nevada. Once Montagne d’Or is sold or developed, Eastside likely becomes Columbus Gold’s flagship project. Last year Columbus released a maiden resource estimate on Eastside showing an Inferred, pit-constrained resource of 721,000 ounces gold-equivalent, at an overall grade of 0.63 g/t. That resource is confined to just one square kilometre on the 58-square-km project. In January, Columbus added another 272,153 gold ounces (historical estimate) by purchasing claims adjoining Eastside’s southern boundary. Columbus has been quietly adding to its Nevada land package and systematically zeroing in on top targets. A 12-hole, 3,700-metre drill program is underway on a target that is geologically identical to the Original Target, which hosts the 721,000-ounce resource.

  5. Andy Wallace. The geologist is the principal of Cordex Exploration and runs Columbus Gold’s Nevada operations. Cordex was founded by the late John Livermore, who became the father of Nevada gold mining when he discovered the Carlin gold mine and a new type of mineralization known as Carlin-type. Wallace joined Cordex in 1974 at the height of the Nevada gold rush and has worked there ever since. Cordex is credited with multiple major discoveries in Nevada, several of them under his management. Wallace’s experience and expertise gives Columbus an important edge in one of the best gold mining jurisdictions on the planet.

Columbus Gold (CGT-T)
Price: 0.93
Shares outstanding: 152.77 million
Market capitalization: $142 million

Disclosure: Author is long Columbus Gold shares and the company is a Resource Opportunities sponsor. This article is presented for informational purposes only and should not be considered investment advice. Junior mining investments are speculative and not suitable for many investors. Always do your own due diligence. 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.

Special Report: Bargain-hunting in the Yukon

This special report on Yukon mining plays was sent to Resource Opportunities subscribers on January 5. Share prices have been updated but market capitalizations reflect the timing of the dispatch. The last Resource Opportunities special offer was very well-received, so I’m offering a January special for those who missed out. New subscribers can get a 1-year discounted subscription for just $99 — a savings of $200 off the regular price — by entering coupon code JANUARY at this link. The year is young, but early portfolio company gains show why savvy speculators are choosing Resource Opportunities. Erdene Resource Development (ERD-T), a Resource Opportunities pick at 37.5 cents on Sept. 30, has surged to 86 cents on drilling success at the company’s high-grade, near-surface gold discoveries in Mongolia. NexGen Energy (NXE-T), a Resource Opportunities pick at 30 cents, is approaching 10-bagger territory as excitement builds ahead of a resource update at its uber-high-grade Arrow uranium deposit in northern Saskatchewan. Join Resource Opportunities today and prosper!

January 5, 2017
By James Kwantes

Good morning and Happy New Year subscribers,
I trust you enjoyed the holidays. In the (SW) corner of Canada where I live, we experienced the novelty of a white Christmas — something most Canadians live through annually. Snow or not, the pace of life slows at this time of year, and so do the markets. While many junior mining stocks have rallied of late, it’s a quiet time in the markets and volume is typically low.

It’s also a quiet period in the Yukon, the focus of this dispatch. At the time of writing it was -19 Celsius (-2 Fahrenheit) in Whitehorse, the Yukon’s capital, and even colder in the northern mining hub of Dawson: -22. The days are dark, and needless to say, mining projects in the Territory are buried under snow. News flow is frozen too.

Quite a contrast from July, when I toured several exploration and development projects that were buzzing with activity. Drills were turning, gold was riding high and M&A talk was in the air. One of our stops was Goldcorp’s Coffee project, acquired from Kaminak Gold just two months earlier for $520 million. Agnico Eagle — one of the companies that was interested in Coffee — is the latest major to enter the Yukon, paying $14.5 million to acquire 19.9% of White Gold Corp. White Gold has the option to acquire more than 12,000 claims staked by legendary Yukon prospector Shawn Ryan, who will be a major shareholder of the new company.

So it’s frozen, but signs of life are stirring beneath the snow cover. And parkas are required clothing for Yukon winters, but you don’t buy one now. The best time to get bargain pricing on a winter coat is when you don’t need it, after winter is over. Better yet, when the sun is blasting every day and the grass has died.

And the best time to pick up high-quality junior mining stocks with Northern projects for low prices is right now. This year the bargains are even better because of gold’s decline from summer highs of US$1,365/oz to the current (still rather chilly) $1,1164/oz.

In alphabetical order, here are summaries of several Yukon plays whose share prices are likely to warm up along with the weather, as exploration and drilling programs get underway and results come in. The Yukon has long been recognized as one of the world’s most prospective mineral jurisdictions — a contention validated by investments from Kinross (Underworld’s White Gold project), Goldcorp and Agnico Eagle.

Things are buzzing again in the Yukon after a period of relative stagnation. Several of the Yukon plays have moved hard last week with gold’s rise, but this isn’t the big move. Just remember to take some profits when it’s shorts and T-shirt weather, because all these stocks are cyclical. Please see important disclosures at the bottom. Good luck with your bargain hunting!

Arcus Development Group (ADG-V)
danmanArcus remains under the radar, but its properties are among the best in the prolific White Gold district. Chief among them is Dan Man north of Goldcorp’s Coffee project, between Coffee and the Yukon River. Significantly, many of the 5 million ounces of gold at Coffee are located along north-south trending hydrothermal structures on the northern boundary, very near Dan Man. In October, Goldcorp took a 19.9% stake in Arcus after securing a similar foothold in Independence Gold, and Goldcorp will help design Arcus’s 2017 exploration program. Arcus is run by Ian Talbot, a lawyer and exploration geologist who was in-house counsel for BHP Billiton in Vancouver. Presumably he knows a thing or two about dealing with majors. Talbot is also chief operating officer of Strategic Metals. With any kind of exploration success by Arcus at Dan Man, snapping up the rest of the company would be a no-brainer for Goldcorp. Agnico’s recent investment in White Gold Corp. values the latter company at more than $70 million, many multiples of Arcus’s market capitalization. The stock hasn’t moved much, despite a likely drill program this year. For more on the company, see the special alert sent to Resource Opportunities subscribers on Oct. 24.

Price: 0.10
Shares outstanding: 72.8 million (88.5M fully diluted)
Market capitalization: $7.3 million
Current price: 0.115

Alexco Resource Corp. (AXR-T)
Alexco’s latest assays from the high-grade Bermingham discovery can be measured in kilograms, not grams. The best intercepts (true width) included 7.16 metres of 4,375 g/t silver and 3.98 metres grading 6,477 g/t. On Tuesday Alexco updated its silver resource at Bermingham — indicated ounces grew from 5.2 to 17.3 million, inferred from 700,000 to 5.5 million ounces. Bermingham is one of two new deposits being explored by Alexco, which shut down operations at its Bellekeno mine in 2013 because of low silver prices. The other deposit is Flame & Moth, located near a processing plant that is ready to go at the flick of a switch — when silver prices cooperate. Indicated ounces in the entire Keno Hill district now sit at 67.5 million, up 22% from the previous tally. There are two major headwinds for Alexco: the silver price and a 25% silver stream that Silver Wheaton has on Alexco’s entire district. The stream was the price Alexco paid to finance in October 2008 during the height of the financial crisis. The terms have been amended but are still very punitive, and renegotiating the stream is a top priority. Perspective: Alexco shares are not trading much higher now than they were when the company announced the Silver Wheaton financing. Alexco stock, which also trades on the NYSE MKT as AXU, offers tremendous leverage to the price of silver, currently US$16.50/oz.

Price: $1.97
Shares outstanding: 92.9 million (105M f-d)
Market capitalization: $183 million
Current price: $2.27

ATAC Resources (ATC-V)
ATAC is developing the Rackla project, Canada’s only Carlin-type gold district in the mountains of the Yukon. The rocks are comparable in lithology, mineralization and age to the Nevada trend that has produced more than 50 million ounces of gold. Rackla is a vast 1,700-square-kilometre property but the 30-kilometre Nadaleen Trend in the east is where much of the high-grade gold has been found in recent years. The latest intercepts included 61.29 metres of 2.75 g/t Au in the Orion zone at Nadaleen. ATAC also has the PEA-stage Tiger deposit in the Rau trend on the western part of the property. ATAC has consistently returned intercepts that are off-the-charts rich for the Yukon, including 38.8 metres of 17.11 g/t Au (2010) and 30.79 metres of 9.5 g/t (2014). The gold is rich but the exploration is expensive — some of the sites with the most gold are on mountaintops and require helicopters to visit and drill. ATAC shares have powerful leverage to gold and reached $10 a share in the summer of 2011 — a fact that puts the 26% move since Dec. 21 into perspective. Also in 2016, ATAC released an updated PEA for Tiger with better economics, including significant boosts in NPV, recovered gold and mine life. The stock has made a round trip from 30 cents at the start of the year, to almost a dollar at the end of July, to the current 43.5 cents. The Yukon’s White Gold district gets much of the attention these days. But Strategic Metals CEO Doug Eaton (Strategic owns 8.3% of ATC shares) reckons that in 100 years, the Nadaleen trend where ATAC has a dominant land position will have produced more gold than the Klondike trend that hosts the White Gold district. And Eaton probably knows as much about Yukon geology as anybody.

Price: 0.435
Shares outstanding: 122.8 million (131.35M f-d)
Market capitalization: $53.4 million
Current price: 0.40

Banyan Gold (BYN-V)
Banyan is a relatively new play in the southeastern corner of the Yukon that is exploring the Hyland project. The company has an almost 400,000-oz gold-equivalent resource at a grade of about a gram per tonne AuEq, with a goal of adding ounces. Banyan had some drilling success in the fall, announcing assays including 30.7 metres of 1.3 g/t Au and 8.0 g/t Ag. The company says its Hyland project has similar Carlin-type mineralization to ATAC’s Rackla. There are also strong ties to Victoria Gold (VIT-V) — Victoria owns 8% of Banyan’s stock and the company’s chairman is Mark Ayranto, Victoria’s executive vice-president. In August geological engineer Tara Christie was appointed Banyan’s president — she comes from a powerful Yukon placer mining family and is married to Victoria Gold CEO John McConnell. Christie and Ayranto together own more than 8% of outstanding shares and the tight share structure ensures the stock will move on drilling success. I recently purchased some as a speculation.

Price: 0.05
Shares outstanding: 46.9 million (63M f-d)
Market capitalization: $2.4 million
Current price: 0.055

Golden Predator (GPY-V)
During my visit to Golden Predator’s Three Aces project in July, I chipped rocks beside CEO Bill Sherriff as several of us searched for elusive visible gold (VG) at the site of a bulk sample. And we found some — it was Greg Hayes, then CFO and now a director, who identified some VG. Three Aces is Golden Predator’s exploration project north of Watson Lake in southeastern Yukon and home to two of the highest-grade surface outcrops ever discovered in the Yukon. Assays from a 4,300-metre 2016 drill program that went late are expected to be released in early 2017, which could be a catalyst for the stock. This year the company plans to drill up to 25,000 metres, so plenty of news flow is likely. Golden Predator also owns the Brewery Creek mine, a past-producing heap-leach operation located east of Dawson. Golden Predator is well-funded, with backers including Eric Sprott, McEwen Mining and Pat DiCapo. CEO Sherriff is a savvy operator with a promising exploration project near infrastructure and a development project that is economic at a higher gold price.

Price: 0.75
Shares outstanding: 76.7 million (123.1M f-d)
Market capitalization: $57.5 million
Current price: 0.72

Independence Gold (IGO-V)
Independence Gold is exploring for high-grade gold on the property adjacent to Coffee’s western boundary. Independence CEO Randy Turner is a closeology expert whose exploration chops have been honed by both skill and luck. Turner sold his Winspear Diamonds and its Snap Lake diamond project to De Beers for $305 million in 2000 and followed that up by selling Silver Quest and its 25% of the Blackwater gold project to New Gold (NGD-T) for $131 million in 2011. Luck: Turner happened to be holidaying in the Yukon with his wife when Kaminak announced its discovery hole at Coffee. He quickly staked virtually all the property on Coffee’s western boundary and has been running small exploration programs ever since. Intercepts have included 7.23 g/t gold over 12.2 metres (Sunrise) and 4.56 g/t over 10 metres at Denali, the latter from surface. Goldcorp acquired 19.9% of Independence in June. IGO surged to 50 cents in the summer but is now trading at about the same valuation as when Goldcorp bought in. Unique to Independence is the bulging treasury: IGO has more than $6 million in the kitty and a market capitalization of just under $11 million. The stock was a Resource Opportunities pick at 8 cents (August 2015) and has risen 30% since Dec. 21. But there’s plenty more upside here.

Price: 0.195
Shares outstanding: 55.5 million (59.3M f-d)
Market capitalization: $10.8 million
Current price: 0.185

Klondike Gold (KG-V)
2016 was a disappointing year for Klondike Gold shareholders. The stock ran from 11 cents to highs of 45 cents before plunging in August when the company announced several dusters at Violet Ridge, one of its Dawson-area projects. However, Klondike also consolidated an already dominant land position and announced some very good assays, particularly in the Nugget Zone and at Lone Star. 2017 has the possibility of starting out with a bang, too — Klondike has yet to release assays from its final holes at Lone Star, which were delayed by lab problems. With the larger land package, CEO Peter Tallman plans property-wide surveying to narrow down the best targets. Klondike’s drilling costs are among the cheapest in the Yukon and Tallman is playing the long game. Major shareholders include billionaire financier Frank Giustra and Roberto Aquilini of the Vancouver-based billionaire family that owns a vast array of assets, including the Vancouver Canucks hockey team. Tallman is searching for the motherlode that has deposited 20 million ounces of gold into area creeks over the past 120 years. But the discovery of an economic deposit would make Klondike’s stock worth many multiples of the current price. The journey between here and there will likely be bumpy but this is a low valuation considering the upside speculative potential.

Price: 0.195
Shares outstanding: 54 million (80M f-d)
Market capitalization: $10.5 million
Current price: 0.185

Rockhaven Resource Corp. (RK-V)
Rockhaven’s Klaza is a high-grade polymetallic gold project with excellent infrastructure — you can drive a Honda Civic to the property, as CEO Matt Turner will tell you. But it also has a size problem: the deposit needs more ounces to improve economics. A PEA announced in March outlined a 14-year mine life that would start with an open pit and move underground, utilizing three (expensive) declines. Life-of-mine, the operation would produce 630,000 oz gold, 11.364 million oz silver, 51.2 million lbs lead, and 52.5 million lbs zinc. But total capex was $358 million and payback was 7 years, for a project with a pre-tax NPV (5% discount) of $150 million and IRR of 20% and after-tax NPV of $86 million and IRR of 14%. I published a sell recommendation in April at these levels, although still have exposure to Rockhaven through Strategic Metals, which owns 46.5% of Rockhaven shares (on Tuesday, Rockhaven announced it was settling a $2-million debt by issuing Strategic another 11,346,712 shares). Market reaction to the PEA last spring was tepid and Rockhaven shifted to drilling out and expanding the deposit. 2016 was a success on that front — drilling targeted near-surface veins that are close to the open pit but not included in the existing resource. In September, for example, Rockhaven hit 17.01 g/t gold over 4.32 metres in a stepout hole.

Price: 0.20
Shares outstanding: 118.4 million
Market capitalization: $23.7 million
Current price: 0.19

Strategic Metals (SMD-V)
Strategic Metals is a project generator with the largest claims position in the Yukon and a long list of assets, as well as a very healthy cash position. Strategic had dipped below 40 cents and was trading at working capital levels before bouncing in the last couple of weeks. The company has been busy recently with these moves aimed at creating shareholder value:
– spinning out Trifecta Gold, a new exploreco that will list on the TSXV and hold the Eureka, Triple Crown (formerly called OOO) and Treble (LLL) properties. The properties are located in the prolific White Gold district, which is heating up again. Most of the Trifecta shares will be distributed to SMD shareholders, with Strategic also retaining a stake;
– optioning the Keno Summit and Gram properties in the Yukon’s Keno Hill silver district to Metallic Minerals (MMG-V), a new exploreco helmed by former Wellgreen Platinum CEO Greg Johnson;
– spinning out wholly owned subsidiary Terra CO2 Technologies. Terra CO2 is a green-tech company working on a technology that treats acid rock drainage by reacting it with discharged CO2 to produce a stable metal carbonate compound and saleable sulphur byproducts. Terra CO2 has reached the semifinals of the international Carbon XPRIZE competition, where first prize is US$7.5 million.
Strategic has almost half of its market cap ($20 million) in cash and stakes in dozens of explorecos, including:
– 8.3% of ATAC shares
– 46.5% of Rockhaven shares
– 32.5% of Precipitate Gold (PRG-V) shares
– 16.5% of Silver Range (SNG-V) shares
Perspective: Metallic Minerals, the new company that acquired Strategic’s two Keno Hill properties, has a market cap of $14 million. That’s about a third of the market cap of Strategic, which has a host of valuable assets, significant stakes in several explorecos and a large cash pile.

Price: 0.475
Shares outstanding: 89.1 million (93.5M f-d)
Market capitalization: $42.3 million
Current price: 0.53

Victoria Gold (VIT-V)
Victoria’s Eagle gold project is shovel-ready, with all permits in hand and an agreement with the local First Nations. Victoria has a mineral reserve of 2.7 million ounces and the potential to produce 200,000 ounces annually at low costs. It’s a lower-grade operation (.73 g/t Au), but a low strip ratio and the addition of richer satellite deposits sweeten the economics. At a US$1,250/oz gold price and a 78-cent dollar, Eagle has a post-tax NPV of $508 million and IRR of 29.5%. Last year, speculation that Victoria Gold could be the next company to sell to a major took shares above 75 cents. The stock drifted down to the low-.40s last month and has since rebounded.

Price: 0.57
Shares outstanding: 503 million
Market cap: $286.7 million
Current price: 0.54

Western Copper and Gold (WRN-T)
There are vast stores of gold and copper at Western’s Casino project, located near Goldcorp’s Coffee deposit. Casino’s proven and probable reserves measure 8.9 million ounces of gold and 4.5 billion pounds of copper, with a further 9 million gold ounces and 5.4 billion pounds of copper in the Inferred category. It would be the biggest mine in Yukon history and a major economic driver, with a 22-year mine life and capex of almost $2.5 billion. An LNG plant would power the whole operation. But Casino is also a dice roll because the project has been stuck in the laborious permitting process. That’s in large part due to a massive tailings dam, which was the subject of an independent review panel that suggested a few design changes. One of the changes will result in significantly less water — 80% less — than the prior iteration. Memories of the August 2014 tailings dam failure at Imperial Metals’ Mount Polley mine in British Columbia and the more serious Samarco disaster, which killed 19 people, loom in the background here. Western has an airstrip and currently transports materials by barge to the site, but a 120-kilometre unpaved road is planned. Because of the project’s size and footprint, Western is dealing with three separate First Nations. Permitting progress is never too headline-grabbing. But the stock has moved hard from the 30-cent level less than a year ago and Western is taking steps to derisk the project as it moves through permitting.

Price: $1.87
Shares outstanding: 94.5 million (100.5M f-d)
Market capitalization: $176.7 million
Current price: $1.85

Disclosure: I own shares of Arcus Development Group, Alexco Resource Corp., Banyan Gold, Independence Gold, Klondike Gold and Strategic Metals. Strategic Metals is a Resource Opportunities sponsor.

Contact: Email james.kwantes@gmail.com with any comments, questions or concerns, and info@resourceopportunities.com for subscription-related inquiries. www.ResourceOpportunities.com

Editorial Policy: Companies are selected for presentation in this publication strictly on their merits, and Resource Opportunities sponsors are selected on their merits as well. No fee is charged to companies for inclusion, and a small number of sponsor companies help financially support the subscriber-funded newsletter by keeping subscription prices low. Dollar and $ refer to Canadian dollars, unless stated otherwise or obvious from the context (for example, a share price on a Canadian exchange).

Disclaimer: 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.)

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A tax-loss-selling opportunity and undervalued gold

by James Kwantes
Editor, Resource Opportunities

Gold in Nevada.

It’s been a company maker for several of the world’s most successful mining companies, notably Barrick Gold (ABX-T) and Franco-Nevada (FNV-T). Barrick’s purchase of Goldstrike and subsequent discoveries turned the property into a 50-million-ounce monster and Barrick into the world’s No. 1 gold miner. Franco-Nevada’s 4% royalty on Goldstrike laid the foundation for what has become a $13-billion market cap royalty juggernaut.

Key to the Nevada gold story is Cordex, the exploration firm founded by legendary geologist John Livermore. Livermore found the Carlin mine and discovered a new type of gold mineralization known as Carlin-type. Under the leadership of Livermore and later Andy Wallace, Cordex is credited with 9 significant gold discoveries in Nevada, including the multi-million-ounce Carlin and Marigold mines.

In the space of 50 years, Nevada has become the world’s best gold mining jurisdiction. The state’s largest export partner is Switzerland, a testament to the amount of gold that starts under the Nevada desert and ends up in bank vaults in the wealthy European banking centre.

Nevada gold is also, increasingly, the focus of Columbus Gold (CGT-T), which earlier this week released a maiden resource estimate for its Eastside gold deposit in the state. At a .15 g/t cutoff and US$1,300/oz gold, Eastside hosts an Inferred resource of 654,000 ounces of gold at average grades of .57 g/t and 3.999 million ounces of silver at grades of 3.5 g/t. It works out to 721,000 ounces of gold equivalent.

The first pass at a resource estimate is literally scratching the surface at Eastside, notes Columbus Gold Chairman and CEO Robert Giustra. Only about 50% of mineralized material was included in the pit-constrained resource estimate, and the deposit is open at depth and to the south and west. Metallurgy tests have demonstrated the gold and silver is amenable to cyanide leaching, whether oxide or sulfide.

“Considering that only about one square kilometer of the large 58-square-kilometer property has been drilled so far, and only 136 holes drilled, a maiden resource of 721,000 ounces constrained in a pit, is an excellent start,” Giustra said.

And Columbus is busy planning its next steps, most recently consolidating its land package and planning the next drill campaign. The architect of value creation in Nevada is none other than geologist Andy Wallace of Cordex, Columbus’s exclusive exploration partner in Nevada. In a nutshell, Columbus has a Nevada discovery pioneer running their exploration programs in one of the world’s best gold mining jurisdictions. It bodes well as 2017 comes into focus.

cgtandywallace

Andy Wallace, President – Columbus Gold Nevada

While the maiden resource estimate was being prepared, Columbus turned its attention to grassroots exploration. Company geologists used mapping and geochemical sampling — including 3,400 surface samples — to identify 41 rhyolite domes. The domes are important geological features associated with gold mineralization at the Original Target, where most of the resource drilling at Eastside took place.

The domes range in diameter from 100 to 1,000 metres and are located along dozens of faults on Columbus’s claim block, mostly trending north or northeast. At one of its highest-priority targets, Target 5 (eight kilometres south of the Original Target), Columbus recently received a permit to construct a road and drill pads and drill 12 holes.

The company also recently concluded two deals at its 100% owned Bolo gold property, northeast of Eastside, that expanded the land package and eliminated a royalty. Bolo is a secondary Nevada exploration property, but Columbus is considering a small drill program after the land consolidation. Mineralization is Carlin-type and occurs in pods along two parallel faults, each of them more than 2.2 kilometres along strike. That makes it higher-risk exploration.

However, several of the 2013 holes hit impressive high-grade, near-surface intercepts at the South Zone of the Mine Fault, including:

  • 133 meters of 1.28 g/t gold from surface (including 30.5 m of 3.24 g/t gold) in BL-38;
    89.9 meters of 1.0 g/t gold (including 40.9 m of 2.05 g/t gold) from surface in BL-39; and
    51.8 meters of 1.27 g/t gold from surface in BL-41.

As for the land agreements, they’re a testament to the benefit and cost savings that can be achieved by having an experienced hand on the ground in Nevada. In the first, Columbus opportunistically picked up the “Uncle Sam” patented claim after the claim holder stopped paying taxes on the land. Columbus petitioned the county to secure the claims, then patiently and quietly went through a multi-step legal process that ended with them securing the land. Uncle Sam is a key claim on the southern end of the South Mine Fault Zone — near some of the best drill holes — and it was picked up for a relative song, CEO Giustra says. Surface sampling at Uncle Sam is underway.

cgtbolo

In the other deal, Columbus eliminated an underlying 1-3% NSR royalty on Bolo by swapping its Weepah property to the royalty holder. Weepah was a non-core property located south of Eastside.

2017 is also shaping up to be a big year at Montagne d’Or, Columbus’s multi-million-ounce gold deposit in French Guiana. Montagne d’Or hosts an in-pit gold resource of 3.9 million ounces Indicated at average grades of 1.45 g/t and an additional 1.1 million Inferred ounces at a grade of 1.55 g/t, at a 0.4 g/t cut-off.

A bankable feasibility study for Montagne d’Or is expected to land in the first quarter. Gold miner Nordgold can secure a 55.01% interest in the project by funding a minimum of US$30 million in exploration expenditures and completing the FS. Montagne d’Or has excellent infrastructure and would be one of the highest-grade open pit gold projects in the Americas. At a US$1,200 gold price, a PEA for Montagne d’Or modelled an NPV of US$450 million (5% discount rate), after-tax IRR of 23% and annual gold production of 273,000 ounces in the first 10 years at all-in sustaining costs of US$711/oz. Capex would be US$366 million, with a 3-year payback.

JV partner Nordgold is the natural acquirer for Columbus’s 44.99% stake in Montagne d’Or. Nordgold is a fast-growing and acquisitive Russian-based producer listed on the London Stock Exchange. The company operates 9 mines in Russia, Kazakhstan, Burkina Faso and Guinea and produced 950,000 ounces of gold in 2015. Its newest operation is the Bouly gold mine in Burkina Faso, which went into production in September after a 13-month build that came in under budget.

Nordgold’s latest financials paint a picture of a thriving mining company generating healthy cash flow. In the third quarter of 2016, Nordgold generated EBITDA of US$131.8 million and operating cash flow of US$109 million on revenue of US$278 million.. The company’s Gross mine in Russia is expected to go into production in the first quarter of 2018, after which Montagne d’Or will be the only major gold deposit in Nordgold’s pipeline.

But rather than sit back and wait for a takeover offer, Columbus is working to add value to an already strong project. The company is mobilizing for a 41-hole, 6,750-metre drill program testing targets both within and outside the deposit envelope. Columbus will test the west and east extensions of Montagne d’Or, including a geochemical anomaly 750 metres east of the deposit where a historical hole hit 31.94 g/t gold over 3.5 metres. In addition, two holes will test the depth of mineralization — little drilling has been done below 250 metres at Montagne d’Or. Drill permits are in hand and Columbus is building roads and drill pads and mobilizing drills this month. Columbus is fully financing the exploration program.

cgtmontagneexpl

Columbus shares have outperformed the S&P/TSX Venture Composite Index this year. But the stock has drifted down along with the entire junior sector since the summer, when gold peaked at US$1,350 an ounce. After hitting a 52-week high of 93 cents in August, Columbus shares have fallen to 54 cents on the Toronto Stock Exchange, giving the company a market capitalization of about $77.2 million.

But in intensifying the downward pressure on Columbus shares, tax-loss selling creates opportunity for investors. Columbus is a catalyst-rich gold play with active drill programs at both the Montagne d’Or development project in French Guiana and the Eastside exploration project in Nevada.

In Nordgold, Columbus is partnering with an acquisitive, world-class gold producer to develop a five-million-ounce gold deposit in the Americas. In Nevada, one of the world’s best gold mining jurisdictions, Columbus is advancing exploration both at and beyond its Eastside project. A follow-up drill program is being planned at Eastside, where a just-published maiden resource estimate shows an Inferred resource of 721,000 ounces of gold equivalent at .63 g/t AuEq at a cut-off grade of 0.15 g/t and a gold price of US$1,300/oz.

Columbus Gold (CGT-T)
Price: .54
Shares outstanding: 142.9 million
Market capitalization: $77.2 million
Treasury: $5.2 million (as of Aug. 31)

Disclosure: Author is long Columbus Gold shares and the company is a Resource Opportunities sponsor. This article is presented for informational purposes only and should not be considered investment advice. Junior mining investments are speculative and not suitable for many investors. Always do your own due diligence. 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.

Building a miner in the Golden Triangle

Originally published Sept. 16 for Resource Opportunities subscribers. Join us as we uncover the best investment ideas in the junior mining universe! Only $299 for 1 year and $449 for 2 years.

IDM Mining (IDM-V) site visit
By James Kwantes

Editor, Resource Opportunities

Getting to IDM Mining’s Red Mountain gold project in northwestern British Columbia wasn’t quite “planes, trains and automobiles,” but it was close. First I flew from Vancouver into Smithers. There’s some family history in the neighbourhood — down the road is Houston, where my grandfather settled with his family after emigrating from the Netherlands. There’s some family history for IDM CEO Rob McLeod, as well.

From Smithers it was into a rental car for the 330-kilometre trek to Stewart, nestled beside the Alaska panhandle. Jagged mountain peaks and tall waterfalls make the final approach beautiful.

A helicopter picked me up for the last leg to Red Mountain, 15 kilometres northeast of Stewart. It was a cloudy day, so the pilot had to take the “long way,” threading his machine through the Bitter Creek Valley to the site. It’s the same route the road will take from Stewart — in the helicopter, it was still only about 10 minutes.

The Bitter Creek Valley

Red Mountain mine workers would have an easier commute — a 45-minute trip by road to the mine site. IDM is working on a feasibility study as it plans a small, scalable high-grade gold mine at Red Mountain. Previous owners have sunk more than $45 million into the project, including construction of a portal and ramp into the mountain to access mineralized zones.

IDM Mining is named for Rob’s father Ian and his uncle Don McLeod, underground miners who explored and mined some of the most well-known deposits in northwestern British Columbia and beyond — including Pretium’s Brucejack. Stewart, Rob’s hometown, was a mining hub for much of the 1900s. Now, its decline is reflected in abandoned storefronts and empty houses.

But “the times, they are a-changin.” IDM’s Red Mountain is part of a mining revival backed by the pro-mining provincial government. One of the visible indicators of the shift is the 287-kilovolt Northwest Transmission Line, parts of which hug Highway 37 as it snakes its way north.

The $500-million power line was built by the B.C. government to open up the remote northwest of the province to mining and industrial development. The first operation to tap into it is Imperial Metals’ Red Chris open-pit copper mine, which began mining in early 2015. IDM’s operation won’t tie directly into the line. But the implications of the power boost are far-reaching for all of the juniors and development companies operating in the heavily mineralized region.

And if you pay attention on the drive to Stewart, there are also signposts — literally — highlighting IDM Mining’s advantage. Those are the signs advertising the King Edward Hotel in Stewart, which Rob’s father Ian owned and operated for many years. The family sold the hotel a few years back, but it speaks to McLeod family roots in Stewart.

For McLeod, Red Mountain is personal. As he put it to me in a conversation some time ago, “This is our turf.” An operating mine near Stewart would mean work close to home for friends in the industry who have been navigating the bear market by flying wherever there is work. It’s an intangible that doesn’t factor into financial or economic models, but I believe it’s significant.

It takes a team to build a mine, and another key component is IDM’s executive chairman, Michael McPhie. He’s a veteran operator who has served as CEO of the Mining Association of B.C. and chairman of industry group AME BC. He’s currently managing director of JDS Gold. They say a photo is worth 1,000 words. The one on IDM Mining’s home page features McLeod, McPhie and Jeff Stibbard, who runs JDS Energy & Mining (currently working on IDM’s Red Mountain FS).

As I approached Stewart in the rental truck, the bugs arrived, and their pitter-patter on the window almost sounded like drizzle. Soon enough the rains came, and then the mountains — towering giants casting off waterfalls and glaciers. Just outside the port of Stewart, another sign of changing times. The highway closed temporarily to northbound travellers to allow through a convoy of trucks transporting giant wind turbine parts to a large wind farm project outside of Tumbler Ridge, in northeastern B.C.

It was near nightfall when the helicopter pilot and I arrived at the Red Mountain camp. I stayed in one of the comfortable pods, complete with heater.

 

My visit wasn’t long but we covered a lot of ground, after a geological briefing at the camp’s nerve centre. The first foray was up the mountain (in a helicopter) and underground, into the access ramp. Haul trucks will transport ore between the underground workings and the mill, located below the camp in an area called Bromley Humps.

The tunnel was in good shape, with little evidence of rock fall, despite being largely abandoned for most of the 20 years since it was blasted out by LAC Minerals. In addition to the portal and underground workings, IDM inherited mining equipment including some of the haul trucks that will go underground.

During the visit, IDM was dewatering in the two kilometres of existing underground workings. The company was also drilling underground — a step-out from the Marc Zone that was outside the resource envelope. The geo in charge of that hole was so enthusiastic about the rocks she stayed up the mountain late that night to collect more core. Subsequent assays, reported Sept. 6, backed up her optimism.

Hole U16-1185 intercepted 14.19 metres (true width) of 5.78 g/t gold and 24.15 g/t silver. Another Marc Zone step-out hit 13.77 metres (true width) of 5.72 g/t Au and 34.89 g/t Ag. There was also a discovery hole of 6 metres grading 7.43 g/t Au and 12.51 g/t Ag. The latter was a step-out hole below the Marc Zone and 70 metres outside the resource as currently defined. The area has been dubbed the NK Zone (after assistant project manager Natalie King).

Underground drilling at Red Mountain

It was gusty and raining atop Red Mountain before we descended into the darkness of the access ramp, offering a glimpse at what winter must look like when the white stuff is blowing. It’s why IDM plans to mine for 8 months and shut down during the worst 4 months of the year, stockpiling the rest of the ore at a mill further down the mountain that will operate year-round (The initial plan called for the entire operation to be shut down for 4 months). The mill is several kilometres closer to Stewart than the main ore body.

In July IDM released an updated PEA with better economics than the 2014 iteration as well as a new tailings location. IDM now plans to process 1,000 tonnes per day year-round based on underground mining rate of 1,500 tpd for 8 months annually. That change increases the amount of gold produced over the 5-year mine life — from 277,000 Au oz to 348,000 oz and 852,000 Ag oz to 965,000 oz.

But it also increases capital costs both at the mill and the underground workings, where the company will be accessing more remote mineable resources. Pre-production capex is pegged at C$111.2 million, compared to $76.1 million in the previous study. After-tax IRR remains above 30%, helped in part by the weaker Canadian dollar (80-cent exchange rate, compared to 95 cents in 2014).

The past five years have been a grim time for mining companies, which may allow IDM to further reduce capex through the purchase of mothballed equipment. Victoria Gold (VIT-V) in the Yukon illustrated the potential earlier this year when it purchased a 100-person all-season mining camp for $275,000, saving millions of dollars. Victoria’s feasibility study was completed by JDS, the same company doing IDM’s (the FS is slated to land in the first quarter of 2017).

Lost and Found

Glacial retreat left boulders atop cliffs at Lost Valley

Glacial retreat is an important part of the IDM story. And a helicopter trip into nearby Lost Valley, IDM’s recent high-grade discovery, shed some light on why McLeod believes the 5-year mine life could be just the start for Red Mountain, a 17,000-hectare property.

IDM had announced the new Lost Valley discovery a few days before my visit. Through surface mapping and sampling, geologists discovered a zone of veining and shearing hosting high-grade gold-silver-molybdenum mineralization. Of 66 samples, 22 assayed above 3 g/t gold, averaging 30.45 g/t Au. High grades of silver and molybdenum were also assayed, as well as rhenium.

Mineralization in Lost Valley has been exposed by the rapid melt of the Cambria icefield, which left behind boulders atop cliffs and strewn across the valley bed when it retreated. The glacier covered the area just 20 years ago when McLeod was a junior geologist on the project. It’s about 4 kilometres southwest of the main Red Mountain mineralization and 800 metres lower.

The pilot dropped off the two of us and McLeod’s Vizsla companion, Petal, on the rugged terrain and we hiked up to some outcrops. The mineralization was impressive, with the dull shine of pyrite (“fool’s gold”) and the blue hues of molybdenite hinting at the geological potential (there’s a major moly deposit, Kitsault, 55 kilometres to the south).

News has flowed fast and furious since my site visit, for both Lost Valley and the main Red Mountain ore body.

Aug. 24 – IDM released assays from surface trenching at Lost Valley that revealed a high-grade structure, confirming earlier grab sample results. The new high-grade zone was dubbed Anda’adala’a Lo’op zone, Nisga’a for “money rock.” Seven channel samples taken along a 33-metre trench averaged 18.7 g/t gold and 61.2 g/t silver over an average width of 0.84 metres. Mineralization in Lost Valley has been traced over a 1-kilometre by 1.2-kilometre area.

Sept. 6 – Assays from 13 Red Mountain underground core holes mentioned above, including 14.19 metres of 5.78 g/t Au and 24.15 g/t Ag.

Pyrite and molybdenite mineralization at Lost Valley

Sept. 12 – IDM announced the discovery of another zone 100 metres south of the Anda’adala’a Lo’op zone. This one was dubbed the Randell Zone after geologist Andy Randell, who had just arrived to prospect at Lost Valley as I was leaving. A 9.35-metre channel sample returned an average of 22.2 g/t Au and 81.3 g/t Ag, including .85 metres of 133.25 g/t Au and 378 g/t Ag. Very impressive grades, even after removing the .85-metre intercept.

Sept. 29 – On the regulatory front, the public consultation period for environmental assessment of the Red Mountain underground project will run from Oct. 5 to Nov. 4. IDM plans to file a project application report with both the B.C. Environmental Assessment Office and the Canadian Environmental Assessment Agency in early 2017. Feasibility-level engineering work is also underway at the site, led by JDS Energy and Mining Ltd.

Oct. 4 – IDM closes an upsized private-placement financing for $8,994,707, consisting of 17-cent hard-dollar units and 21-cent flow-through shares. Proceeds will be used for additional resource expansion drilling, exploration and permitting at Red Mountain, including feasibility study work.

Drilling, dewatering, development, permitting and a feasibility study expected in the first quarter of 2017 — it all requires money, and that means more dilution. IDM has shown there is demand for their shares — the recent private placement started at “up to $5 million” and finished at almost $9 million. Those shares take IDM’s already high share count to about 270 million. But crucially, the financing also allows IDM to pay for permitting and development as well as exploration at Lost Valley.

In its latest NR, IDM announced that drills will be turning at Lost Valley within the month. If the company can drill high-grade there in a rising gold price environment, the share price should take care of itself despite the amount of paper out. Longer-term, Lost Valley is shaping up to be a potentially significant source of ounces for a mine at Red Mountain. A final investment decision is slated for the end of 2017, with commercial production targeted for the end of 2018.

The next key step is the feasibility study, and a producing gold mine is the goal. If IDM can execute on exploration while navigating the development path to a gold mine, the company will capture the two sweet spots of the “Lassonde curve” — the life cycle of a junior mining share (pictured). Shareholders make the most money during discovery and, beyond the development stage, production.

IDM currently trades at a market capitalization just over $50 million. Despite recent gold price weakness, we’re into the kind of market where those types of valuations are being assigned to promising drill plays. Red Mountain is delivering both with the drill bit and on the development front. I like the company’s odds of delivering a small, high-grade gold mining operation with a five-year mine life that is extended as more ounces are discovered elsewhere on the property.

McLeod and McPhie launched the company during the depths of the bear market and the upturn has given them the leverage to build a near-term production story. There aren’t many of those in the gold sector. At these levels, the stock is an attractive call option on IDM growing a gold business and making additional discoveries.

Price: .19
Shares outstanding: 270 million (380M fully diluted)
Market cap: $51.3 million
Treasury: $15 million

IDM Mining CEO Rob McLeod will speak more about plans for Red Mountain and Lost Valley at the free Subscriber Investment Summit today at the Pan Pacific Hotel in Vancouver. If you’re attending, stop by and say hello!

Disclosure: Author is long IDM Mining shares and the company became a Resource Opportunities sponsor subsequent to this site visit. This article is presented for informational purposes only and should not be considered investment advice. Junior mining investments are speculative and not suitable for many investors. Always do your own due diligence. 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.

Executing on gold development, exploration in the Americas

Columbus Gold advances Montagne d’Or towards bankable feasibility study

Fall resource estimate planned at Eastside gold project in Nevada

By James Kwantes
Resource Opportunities
As befits its location about 500 kilometres north of the equator, French Guiana is hot and humid, with average temperatures of 25-30 Celsius year-round. The namesake Cayenne pepper, named for the capital city, spices up cuisine and hints at the Creole roots of the territory, a region of France.

But it’s the heat being generated by a rising gold price that could help revitalize the economy of French Guiana. It’s a prosperous corner of South America, but GDP remains heavily reliant on the Guiana Space Centre. Selected in 1964 to be France’s space centre, the facility expanded to become Europe’s Spaceport in 1975 and is used by other countries launching satellites into space, including Russia.

The Guiana Space Centre. Photo: www.satellitetoday.com

The Guiana Space Centre. Photo: www.satellitetoday.com

Once you step off the space centre, however, incomes fall back to earth. French Guiana is heavily reliant on mainland France for subsidies, trade and goods. Traditionally, the region’s main industries have been fishing, logging and small-scale gold mining.

It’s gold that Vancouver entrepreneur Robert Giustra is eyeing. Specifically, the mountain of gold — Montagne d’Or — contained in the deposit that his Columbus Gold is advancing in the jungle 180 kilometres west of the capital city Cayenne. Gold miner Nordgold is earning in to a 50.01% interest in the project by spending at least US$30-million on exploration and delivering a bankable feasibility study by March 2017. In January Columbus sold an additional 5% interest in the project to Nordgold, so their interest would be 55.01% upon completion of the earn-in.

A mine like the one Columbus Gold is proposing would employ about 1,000 people during construction, 800 full-time during operations, and produce an average 270,000 ounces a year. With average mined grades of about 2 g/t in the first 10 years, it would be among the highest grade open-pit gold mines in the Americas.

A WIN FOR FRENCH GOVERNMENT, CGT SHAREHOLDERS

For French Guiana, a large-scale commercial mine would be a game changer, diversifying the economy and boosting the French government’s tax take. It could even help the long-running battle against illegal gold miners in French Guiana. The mostly Brazilian “garimpeiros” use mercury to process the gold and cut a toxic path through the jungle, devastating the environment. The miners then vacate the country with their heavy equipment and the gold, leaving France to clean up the mess.

It’s a problem French authorities have grappled with for a long time, through regular sweeps and arrests. But the illegal miners have the edge through strength of numbers and an intimate knowledge of the jungle. All too often, crackdowns resemble a law enforcement version of arcade game Whac-A-Mole.

The path towards a gold mine at Montagne d’Or could well be a road to riches for shareholders of Columbus Gold, which is also drilling the Eastside gold exploration project in Nevada. Columbus has aggressively developed Montagne d’Or since picking up the project in 2011 when it had a 1.9-million-ounce resource (Inferred). Columbus has delineated 3.9 million ounces in the Indicated category and another 1.1 million ounces Inferred at grades well above global averages.

Last year the company published a preliminary economic assessment for Montagne d’Or showing positive economics at a gold price of US$1,200/oz:
– After-tax NPV of US$324 million (8% discount rate)
– After-tax IRR of 23%
– Initial capex of US$366 million, including US$44 million contingency
– All-in sustaining costs of US$711/oz
– Average annual production of 273,000 ounces at average grades of 2 g/t in Years 1-10

Gold’s rise of more than 27% in 2016 should further improve economics in the Feasibility Study, and it’s not the only factor that will help. The PEA envisioned diesel power being generated on-site at a cost of about US.20/kWh. Columbus is now looking at connecting to the French Guiana grid, which would lower costs to .11-.12/kWh. It’s a substantial savings, since power is one of the mine’s largest operating costs.

In addition to improving economics at the flagship project, gold’s ascent to US$1,350 an ounce has increased the interest level in Columbus Gold shares. The company uplisted from the TSX Venture to the Toronto Stock Exchange on January 26, an accomplishment achieved by only one other company in the previous two years, and shares recently hit 93 cents, a 52-week high.

Robert Giustra, Columbus Gold Chairman & CEO

Robert Giustra, Columbus Gold Chairman & CEO

Sentiment has shifted dramatically from the bear market that took gold down from US$1,900 an ounce to below $1,100/oz, notes Giustra, Columbus’s Chairman and CEO. The resulting flight of capital over the past four years led to liquidity drying up, wreaking havoc on the ability of junior mining firms to raise money and depressing share prices — even for companies with fundamental value. In order to initiate a position, funds would have to sell an existing holding, and there was nobody to sell to. It had the effect of putting the brakes on shares of all mining sector companies, including Columbus Gold. “People would love the story, but couldn’t buy the stock,” Giustra commented.

Capital and interest has returned to the sector, he says, and Columbus Gold shares should continue to benefit. The company has about $4 million in the treasury and two major catalysts on the horizon:
– The bankable feasibility study at Montagne d’Or;
– A planned maiden resource estimate at Eastside, the Nevada project.

EXPLORATION UPSIDE AT MONTAGNE D’OR

Exploration upside around the defined deposit has the potential of turning Montagne d’Or into something even bigger. The aggressive three-year timeline that Nordgold agreed to when it took on the project in March 2014 means little exploration work has been done. That’s despite indications the mineralization at Montagne d’Or remains open along strike to both the east and west, in parallel zones and untested nearby surface anomalies, as well as at depth.

The most recent exploration permits, granted in July by the French Minister of Economy, cover gold-soil anomalies two kilometres to the west and 2.7 kilometres to the east of the deposit. Only two holes have ever been drilled in these areas. One of them, punched in 750 metres east of the deposit, intercepted 31.94 g/t gold over 3.5 metres. Montagne d’Or is also open at depth below the 250 metres modelled by the pit.

Exploration permits on strike of the east and west extensions of Montagne d'Or

Exploration permits on strike of the east and west extensions of Montagne d’Or

The Phase 1 exploration program kicks off this month with prospecting and soil sampling west of Montagne d’Or. For the second phase, Columbus may fly IP (induced polarization) to enhance drill targets. In the 1990s, such geophysical surveying helped trace the gold-sulphide mineralized horizons at Montagne d’Or.

The French geological survey identified the initial gold anomaly that defines Montagne d’Or in the 1990s. But the agency was subsequently privatized and began selling assets including Montagne d’Or, which saw very limited drilling in the late 1990s. Columbus Gold built the resource with drilling campaigns, but the aggressive three-year path to a bankable FS agreed to by Nordgold in March 2014 effectively put a cap on exploration drilling.

As a result, the highly prospective properties that surround Montagne d’Or are virtually virgin territory.

“French Guiana is extremely under-explored, particularly compared to its geological twin in the West African Birimian Shield,” Giustra explains. “That gold region has seen over a century of exploration.”

Geological continuity between Guiana Shield and Birimian Shield

Geological continuity between Guiana Shield and Birimian Shield

Having a deep-pocketed major pay the bills on flagship development project Montagne d’Or also helped Columbus Gold weather the bear market storms. Nordgold is the world’s 15th largest gold miner and operates 9 mines in 4 countries. In 2015, the Russia-based producer mined about 950,000 ounces at all-in sustaining costs of US$793 an ounce, making it one of the world’s lowest-cost producers. At 270,000 ounces a year, Montagne d’Or would be the largest mine Nordgold has an interest in.

Nordgold also has a reputation as an efficient and smart operator. The Russia-based miner built its newest mine, the 200,000-oz/yr Bissa gold mine in Burkina Faso, in just 15 months, Giustra points out. The company is also familiar with the geological neighbourhood because it operates three mines in the West African Birimian Shield — two in Burkina Faso, one in Guinea.

Nordgold was founded in 2007 as a division of Russian steel giant Severstal and went public on the London Stock Exchange in January 2012. The company is among the world’s fastest-growing gold miners, a feat accomplished mostly through acquisitions.

“People have said to me ‘Watch out for the Russians,’ ” Giustra says, “but they’ve been great partners. We come to agreements on a handshake and they follow through.”

DRILLING SUCCESS AT EASTSIDE IN NEVADA

Columbus Gold also has a growing Nevada exploration project to go with its Montagne d’Or development project in French Guiana. And the company’s foundation for growth lies under the desert sand at its Eastside project.

Nevada’s gold endowment is well-documented. The state produces about three-quarters of U.S. gold production and more than 6% of the world’s gold. Gold mines in the “Silver State” have been company makers for the world’s largest gold producers, including Barrick Gold and Newmont Mining — not to mention royalty giant Franco-Nevada.

Much of that production has come out of the Carlin Trend, one of the world’s richest gold endowments and home to Barrick and Newmont’s most prolific mines. The Carlin was discovered by legendary geologist John Livermore, who sparked a modern-day gold rush when he discovered a new kind of “invisible gold” mineralization in the early 1960s while working for Newmont. He founded Cordex Exploration in 1970 and went on to discover several Nevada gold mines. Livermore died in 2013.

Geologist Andy Wallace, Livermore’s longtime business partner, is now principal of Cordex Exploration as well as president of Columbus Gold Nevada. Wallace joined Cordex in 1974 at the height of the Nevada gold rush and became Cordex’s Manager of Exploration in 1985. He also has a few mine finds under his belt — under his leadership, Cordex discovered the 5-million-ounce Marigold deposit and the 12-million-ounce Stonehouse/Lone Tree deposits. Silver Standard purchased Marigold from Goldcorp and Barrick in 2014 and Lone Tree is still being mined by Newmont.

Columbus Gold Nevada President Andy Wallace is credited with discovering Marigold, now a Silver Standard mine.

Columbus Gold Nevada President Andy Wallace is credited with discovering Marigold, now a Silver Standard mine.

Nevada is elephant country for gold. In Cordex, Columbus has an elephant hunter on its team. Columbus has an exclusive exploration arrangement with Cordex, giving the company one of the largest databases in Nevada. Cordex also runs Columbus’s exploration programs in Nevada.

Exploration is now focused on the Eastside project, composed of 725 mining claims making up 57.7 square kilometres about 32 kilometres west of Tonopah, Nevada. The nearby Round Mountain gold mine, which has produced more than 12 million ounces and is now 100% owned by Kinross, is about 32 km away. It’s the world’s largest heap-leach operation.

Columbus recently wrapped up its 2016 drill program at Eastside, completing 17,500 metres of drilling– 12,663 metres of reverse circulation and 4,837 metres of diamond drilling. The company has now drilled more than 37,000 metres at Eastside, mostly confined to a one-square-km parcel dubbed the “Original Target.” Columbus is aiming to complete a maiden resource estimate this fall. Results year-to-date have been positive, with recent intercepts of 97.5 metres of 0.68 g/t gold and 13 metres of 1.12 g/t. Previous hits included 35.1 metres of 4.1 g/t and 152.4 metres of 0.71 g/t.

Gold and silver mineralization at the Original Target occurs in two broad, northerly trending zones called the East Zone and West Zone. The zones coincide with rhyolite flow dome complexes that host the bulk of the mineralization. Drilling to date has determined that strike extends at least 450 metres on the East Zone and 850 metres on the West Zone. Both zones are open at depth and to the south, and the West Zone is open to the north as well.

Initial metallurgical tests determined that gold at Eastside is highly amenable to processing using cyanide. Columbus is now doing further metallurgical tests on samples of varying grades and ore types to evaluate potential heap leaching and whether crushing will be required and if so, the optimum crush size.

Eastside is located in an infrastructure sweet spot. It’s adjacent to Highway US95, the main road route between Las Vegas and Reno, and is connected by a county-maintained gravel road. A major transmission line runs through the Eastside property and there is available water from shallow aquifers in the area, Giustra says. Year-round drilling is possible at the property.

Infrastructure is excellent at Eastside, located about 32 km west of Tonopah, Nevada

Infrastructure is excellent at Eastside, located about 32 km west of Tonopah, Nevada

If Columbus Gold can connect the dots and mineralization at Eastside, the Nevada gold property could become an impressive flagship project. In Cordex, Eastside has an experienced minefinding partner. The project’s good metallurgy, superior road infrastructure, power and water access lower the threshold to develop a mine in America’s most important gold-producing state.

Price: 0.76
Shares outstanding: 142.9 million
Market capitalization: $108.6 million
Treasury: $4 million

Disclosure: The author owns shares of Columbus Gold and the company is one of a small number of Resource Opportunities sponsors, who help support the subscriber-funded newsletter. The work included in this article is based on SEDAR filings, current events, interviews, and corporate press releases. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value, so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.

Kitchen-table deal launched a Nevada gold royalty play

Goldstrike1

Gold standard: Barrick’s Goldstrike mine was a company maker for both Barrick and Franco-Nevada.

By James Kwantes

“Royalty” — the primary definition refers to kings, queens and others of royal blood. And that usage hints at the strength of the mining industry variety — a defined share of revenues from a mining operation.

Mining royalties can be a fabulous business model, as demonstrated by royalty and streaming giant Franco-Nevada. The company has become a $15-billion powerhouse with claims on assets ranging from gold and base metals mines to oil and gas operations.

It all started in 1985 when cofounders Seymour Schulich and Pierre Lassonde purchased a 4% royalty on a small Nevada gold mine called Goldstrike. The $2 million they paid was no small bet — it represented the majority of cash on the budding company’s balance sheet. But the titans reasoned they were buying both a cut of production and exploration upside on the surrounding properties.

It turned out to be the bet of a lifetime. Barrick Gold purchased Goldstrike and soon hit a rich discovery on the way to a 50-million-ounce gold deposit. As Goldstrike grew to become Barrick’s flagship mine, it became a golden goose for Franco-Nevada.

Investors have taken note — Franco-Nevada shares have returned more than 140% in the past five years as commodity prices cratered and mining shares descended.

Others have followed in Franco-Nevada’s footsteps. One of the largest is Royal Gold, which also expanded rapidly by deploying cash flow from its flagship royalty on Barrick’s massive Cortez mine complex. More recently, Silver Wheaton, Osisko Gold Royalties and Sandstorm Gold have entered the scene, as well as smaller plays including AuRico Metals, Eurasian Minerals and Abitibi Royalties.

Mining exploration is a notoriously difficult, Darwinian business that weeds out the weak. Few junior exploration companies will find a mine and those that do face multiple headwinds that include regulatory, operating and financial risks. In short, it’s a tough business.

Royalty companies bypass most of these pitfalls. Royalties represent a perpetual, iron-clad claim on revenues, usually for life-of-mine. Royalty companies get paid whether the mine makes money or not. They get upside exposure to exploration and expansions, while being insulated from operating risks. Shares of royalty companies typically outperform mining company equities.

It’s no surprise the royalty structure is popular among mining investors who appreciate the upside exposure to attractive deposits minus the operational risks. But the key to profiting is not so different from hockey superstar Wayne Gretzky’s approach on the ice — skate to where the puck is going, not where it has been.

There’s a new royalty company on the scene and like young Franco-Nevada, its flagship asset is an attractive royalty on a Nevada gold deposit — Waterton’s Spring Valley. The company, Terraco Gold, recently closed a deal that sees it exercise options on the Spring Valley royalties and add another royalty on an adjoining property in Pershing County, Nevada.

Terraco exercised its option to buy the royalties through a US$19-million agreement with Waterton, the mining-focused private equity group that acquired Spring Valley last year from Barrick Gold (70%) and Midway Gold (30%). The deal sees Waterton pick up Terraco’s Moonlight property adjoining Spring Valley on the north by paying Terraco US$7 million in cash and subscribing to a US$12-million convertible debenture. The five-year debenture bears interest at .05% annually (more or less zero coupon) and is convertible to shares of Terraco at an exercise price of 18 cents or convertible into 45% of a Terraco subsidiary.

Terraco used US$16 million of the debenture and cash proceeds to exercise options to acquire and directly own a 3% royalty on most of the Spring Valley gold deposit, as well as royalties of up to 1% on contiguous properties that cover additional gold ounces. Terraco also retains a 2% NSR on the large 35-square-km Moonlight property adjoining Spring Valley to the north, which Waterton picked up as part of the deal.

TENroyalties

Terraco Gold is run by Todd Hilditch, not Lassonde and Schulich. The company’s royalties are on a deposit that is not yet producing. And the deal just closed on June 17. Terraco Gold is a minnow, Franco-Nevada a whale.

But Hilditch doesn’t have to duplicate Franco-Nevada’s success to make Terraco shareholders a lot of money. The stock trades at 14.5 cents, giving the royalty upstart a market capitalization of just $20.8 million, including more than $3 million in the treasury. Terraco also owns the Almaden-Nutmeg Mountain gold deposit in western Idaho, which has a NI 43-101 compliant resource of 864,000 ounces Measured and Indicated (near-surface) and 84,000 Inferred.

The debenture deal with Waterton, subject to a conversion into equity at 18 cents, hints at the value embedded in Terraco’s shares. Put differently, the group that is developing Spring Valley (and knows the most about it) has assigned a value to Terraco stock 25% higher than current levels.

Do the math on Terraco’s enterprise value and the picture gets even more interesting. A share price of 14.5 cents means a market capitalization of about $20.8 million. Add in debt of US$12 million ($15.6 million Canadian) and subtract Terraco’s cash — about $3.3 million — and the enterprise value comes to $33.1 million.

That works out to about 23 cents a share. And it doesn’t factor in rising gold or any blue-sky potential, including Hilditch’s plan to use the cash and/or stock to bolt on more royalties. He thinks Terraco stock is undervalued and has been accumulating in the public market. He’s purchased more than 1.6 million shares in the past year (between $0.07 and $0.13 a share), including spending more than $15,000 on shares in the past month at 13 cents. Hilditch owns more than 7.5 million shares, a 5.25% stake.

“Some people call me crazy, but I’ve never sold a Terraco share and I’ve added plenty,” he says of the company he co-founded 20 years ago as an oil and gas play. “This is my first-born.”

Terraco’s portfolio now includes:

  • 3% NSR on the majority of current resources of Spring Valley (the “Schmidt claims”);
  • 1% NSR on an additional portion of Spring Valley;
  • a right of first refusal relating to a 1% NSR on certain lands within one-half mile of the Schmidt claims;
  • 2% NSR on the Moonlight Project;
  • the Almaden-Nutmeg Mountain Gold Project located in Western Idaho;
  • about $3.3 million Canadian in cash.

According to a 2014 resource estimate, Spring Valley hosts 4.37 million ounces of gold Measured and Indicated at average grades of .55 g/t, as well as 1.07 million ounces Inferred at a grade of .47 g/t. The deposit is located north of and along trend with Coeur Mining’s Rochester silver-gold mine, which has produced 1.47 million ounces of gold and 134 million ounces of silver.

Hilditch’s plan is to build a royalty company with the Spring Valley gold royalties as the flagship. And while the Vancouver mining executive keeps a low profile, his track record shows he’s no rookie when it comes to creating shareholder value in the mining space.

A lithium score

Hilditch’s biggest score was in the lithium space, well before lithium plays became the TSXV’s hottest commodity. The financial crisis had taken the wind out of gold’s sails, and Hilditch was looking around for other opportunities. He co-founded and became president and CEO of Salares Lithium, which structured a deal on 7 lithium brine salars in Chile. Salares IPOed at 16 cents (included a concurrent 2 for 1 rollback from 8 cents) and was taken over by private lithium giant Talison Lithium just 17 months later, in 2010, for $1.25 a share.

ToddHilditch

Terraco Gold CEO Todd Hilditch

For Salares shareholders, the gains didn’t end there. Talison, which produced hard-rock lithium in Australia, used the Salares listing to go public. In 2012 Talison sold for $850 million ($7.50 a share) to Chengdu Tianqi, a Chinese company that outbid Rockwood Lithium (which itself later sold to Albemarle).

“Salares helped pay the bills while Terraco was on the back burner during a tough market time from 2008,” Hilditch says. But gold — specifically, royalties in Nevada — beckoned.

A passion for hockey is a thread woven through Hilditch’s life — he was drafted in 1988 by the Washington Capitals and later played pro in Europe. He now coaches his own kids. And it was through hockey that he got into the gold mining business.

Hilditch grew up in Vancouver and co-founded Terraco (with a junior hockey teammate and good friend) as an oil and gas play after studying business and economics at Rensselaer Polytechnic Institute (RPI) in New York. He also played defence at RPI, a NCAA Division 1 university whose most famous mining graduate is probably Western Copper and Gold chairman Dale Corman.

One of Hilditch’s grandfathers was a miner who worked at Bralorne and Britannia, two legendary British Columbia mines. Bralorne was a storied underground gold mine that was a rare employment bright spot during the Great Depression and Britannia, now a mining museum, used to be the largest copper mine in the British Empire.

But it was an encounter at a hockey tournament in the early 2000s that got Hilditch started in gold. He was relaxing poolside one evening playing cribbage with a teammate who ran a gold company with Nevada projects. The CEO’s phone was buzzing non-stop. Conversation turned to business and Hilditch’s oil and gas play, which was struggling with its Saskatchewan properties.

Hilditch pivoted to gold and optioned two Nevada gold projects, including one from a mining veteran named Paul Schmidt. Schmidt had also optioned the Spring Valley gold project to Midway Gold. Hilditch broke his pick on the two Terraco projects, but impressive drill results from Spring Valley began to capture his attention. Terraco picked up the Moonlight property, adjoining Spring Valley on the north, in 2006. And he kept in touch with Schmidt, who had retained valuable royalties on the Spring Valley properties.

In 2010 Terraco picked up the Almaden-Nutmeg Mountain gold project in Idaho through a takeover of Western Standard Metals. Hilditch built a strong team at the operational and board levels. One of Terraco’s directors is William Lamb, the Lucara CEO whose company is preparing for Wednesday’s live auction of its historic 1,109-carat Lesedi La Rona diamond. Lamb was a Salares Lithium director at the time of the Talison Lithium takeover.

Securing the Spring Valley royalties

In 2011, Hilditch was reminded of Schmidt’s Spring Valley royalties while watching the ounces build at Spring Valley through Barrick’s joint venture program with Midway Gold. He went to visit the veteran geologist at his Colorado home in the fall of 2011 to see if Schmidt would part with the NSR royalties he owned. Schmidt was skeptical.

“I said to him, Paul, I’m interested in doing a deal here,” recalled Hilditch, who had come to the meeting prepared. “He said, well, I’ve got somebody coming to see me tomorrow and besides Todd, you and Terraco can’t afford these royalties!”

“I don’t think he expected me to drop a $20-million term sheet on his kitchen table.”

On the way back to the Denver airport, Hilditch broke into a sweat wondering how he was going to pay for the royalty options. Schmidt had given him a 45-day term to come up with the cash, which he managed to secure and got the deal done. For Hilditch, the June 17, 2016 royalty financing agreement with Waterton represented the conclusion of a journey that began in Schmidt’s kitchen in Evergreen, Colorado five years ago.

Securing the option to exercise NSRs on Spring Valley over the past five years gave Terraco a toehold in a royalty space occupied by much larger players. The market, on the other hand, provided a few hurdles to full valuation for the company. Firstly, the NSR royalties were under an option and not full ownership yet.

“The market clearly gave us a discount for ‘leasing the car’ … not owning it,” Hilditch said. The junior bear market didn’t help, especially for companies with several different asset types, including royalties, advanced-stage and exploration projects. What was Terraco going to be when it grew up?

“Terraco went into stealth mode to ride out uncertainty in the junior mining space, we were very quiet,” Hilditch explained. “The Spring Valley project itself was garnering a lot of attention based on its results, so we felt that riding the quiet period out until we could exercise the royalty options was priority #1 — and it worked.”

The intercepts at Spring Valley, by now a Barrick-Midway Gold joint venture, had become even more eye-catching. In June 2013, for example, Barrick drilled 361 metres of 1.47 g/t gold. Through their option deal with Midway Gold, Barrick upped their interest in Spring Valley to 70% by spending US$38 million as of February 2014. Including earlier private placements, Barrick spent more than $70 million at Spring Valley. The pre-feasibility-stage project was one of four flagship Nevada development projects (pre-feasibility) for Barrick.

And that’s where things stood when Barrick’s JV partner, Midway Gold, went bankrupt last year. It had nothing to do with Spring Valley — the problems were at Midway’s Pan project, also in Nevada. Barrick was grappling with a few problems of its own — most significantly, a crippling debt load of more than $10 billion.

That’s when Waterton Global Resource Management swooped in. The Toronto-based private equity giant paid US$25 million for Midway’s 30% stake in Spring Valley (through bankruptcy court) and another US$110 million to purchase two projects from Barrick — 70% of Spring Valley and the Ruby Hill gold mine.

Gold in Nevada — it’s been a company maker for Franco-Nevada and Barrick Gold and it’s a major focus for Waterton as well. Several of their deals have been for Nevada assets, with the Spring Valley transactions among the most significant. As other mining companies struggled through the bear market, Waterton has put a strong technical team (many of them ex-Barrick employees) to work with money raised from sovereign wealth funds, university endowments and foundations.

And the private equity giant isn’t done yet. After raising $1 billion in 2014, Waterton just announced another US$725-million fund for mining investments in stable jurisdictions.

That gives Waterton an estimated US$2-billion-plus under management — and ensures Terraco Gold shareholders have a serious, deep-pocketed mining group advancing Spring Valley.

There are few small- to medium-sized players in the royalty space with high-quality, safe-jurisdiction assets that don’t become targets of the majors. Mid-tier royalty companies like Sandstorm Gold and Osisko Gold Royalties need to acquire or expand organically in order to maintain and grow their stature. So do the biggest players in the space, including Franco-Nevada and Royal Gold.

Terraco’s new royalty platform, starting with the 3% NSR on a multi-million-ounce Nevada gold deposit, gives the company a solid base for growth. It could also put a target on Terraco’s back before long.

Terraco Gold
Price: 14.5 cents
Shares outstanding: 143.6 million
Market cap: $20.8 million
Cash: $3.3 million

Disclosure: Author owns shares of Terraco Gold and the company is one of a small number of Resource Opportunities sponsors, who help support the subscriber-funded newsletter. The work included in this article is based on SEDAR filings, current events, interviews, and corporate press releases. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value, so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.