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Gold discoveries, garimpeiros and a gringo bar

By James Kwantes
Resource Opportunities

Fremont Gold is a Resource Opportunities sponsor company.

“Hello, you’ve reached Rock Bottom.”

It was the greeting for those calling Mongo’s Rock Bottom Cafe, the popular expat bar opened by exploration geologist Dennis “Mongo” Moore and a partner in La Paz, Bolivia. That was in the early 1990s, before Bolivia became a rather unfriendly place to explore for mineral deposits. At the time, the country was a thriving centre for mineral exploration. And Mongo’s, in Bolivia’s capital city, was a gathering place for geologists and drillers from around the world.

It’s a curious name for a bar in a city situated 3,600 metres above sea level. But it may make perfect sense given the description of geology as “liquor and guessing” — immortalized in a Dilbert comic strip — combined with a sector in which gloomy lows are the companion to occasional euphoric highs.

These days, Moore is president of Fremont Gold (FRE-V), a Nevada-focused exploration company focused on new discoveries and drilling for gold on the doorstep of McEwen Mining’s (MUX-T) Gold Bar mine in the Battle Mountain-Eureka-Cortez trend of northern Nevada.

Fremont is on the eve of a 1,000-metre drill program at Gold Canyon, one of the satellite pits to  the original Gold Bar mine. The other satellite pits are owned by McEwen Mining, which comprise McEwen’s Gold Bar mine — expected to begin production this quarter. Fremont recently cut short a drill program at the original Gold Bar after the first three holes failed to intersect significant mineralization.

The company will also undertake a discovery drill program this summer at its North Carlin project at the northern end of the Carlin trend. Drilling will target a gold and mercury soil anomaly that is coincident with a magnetic high. At least 1,000 metres of drilling is planned.

LOCKING UP LAND IN A TOP JURISDICTION

Last September, Fremont announced it had acquired the Roberts Creek claim block about a kilometre south of McEwen’s Gold Bar mine, taking its holdings in the neighbourhood to 5,348 hectares. Recently concluded magnetic and soil surveys revealed geophysical and geochemical anomalies at Roberts Creek that coincide with multiple faults, according to a Feb. 22 Fremont news release.

The company is more than a McEwen “closeology” play. Moore really likes the company’s North Carlin property, a package of three claim blocks directly on the northern end of the Carlin trend (about two km north of the Rossi mine). Fremont optioned one claim block from Ely Gold Royalties and staked the rest.

Moore is an Aussie-American who landed in Vancouver from the jungles of the Amazon and now makes his home in Lisbon, Portugal. He’s assembled a strong team at Fremont. Clay Newton, the VP Exploration, is a PhD structural geologist with decades of experience in Nevada and California. Last year, Fremont brought in Blaine Monaghan as CEO and director. Monaghan has raised more than $100 million for mining projects around the world and was most recently the VP Corporate Development for Allegiant Gold (AUAU-V), the Nevada-focused spinout of Columbus Gold (CGT-T).

As for Moore (right), the geologist has hit a few bottoms himself and bounced back — both before and after the Bolivian bar venture. He got a BSc in geology/earth sciences at the University of Oregon, where his love of exploration included mountaineering. Moore moved to Australia in 1981 and eventually joined the gold rush that was sweeping through the southwest Pacific (Australia was where he picked up the “Mongo” moniker). Working as a contract geologist based out of Australia, Moore got his first taste of jungle exploration in Papua New Guinea. Those were early days for mineral exploration in PNG. On one expedition, Moore encountered a group of local children who fled in fear because they had never seen a white man with blue eyes. Moore got malaria twice.

His Australia stint coincided with one of mining’s cyclical slowdowns, and Moore obtained a master of environmental engineering from the University of Sydney. What followed was an unsatisfactory foray into environmental engineering — and commuting through heavy Sydney traffic to an office job. That experience and a divorce left Moore itching to return to his first love: exploration. Opportunity knocked when Moore was contacted by David O’Connor, Ross Beaty’s Latin American business partner, who was looking for Spanish-speaking exploration geologists in Bolivia. Moore knew O’Connor from a one-year stint in Fiji, and the geologist was soon en route to Latin America.

FRIENDS IN LOW PLACES ON A LONELY PLANET

Moore landed in La Paz in October 1993 and quickly connected with the large expat geo community, usually over drinks. With only one decent bar in downtown La Paz, a French cafe, “We said, why don’t we open up our own geo-expat bar,” Moore recalled. He and a partner did, and the following year, Mongo’s opened (with the heavy lifting done by Moore’s new girlfriend Sherene, now his wife of 25 years). The bar soon became a centre for both gringo and Bolivian geologists and later, tourists.

Moore’s new home rekindled his interest in mountain climbing; he and friends used to tackle 6,500-metre mountains in multi-day treks. One of the mountains they climbed was Ancohuma (near Illampu), a 6,427-metre peak north of La Paz. After descending Ancohuma, Moore met Sherene at a hotel in the little town of Sorata. She was drinking tea with a female companion, and Moore — exhausted and sunburned after a fantastic but draining experience — was eager to return to La Paz for a celebratory dinner with his climbing companions.

Moore, Mike Schuler and David O’Connor on the afternoon before summiting Ancohuma.

“I said to Sherene, ‘come on, let’s head back to La Paz,’ Moore recalled.

“She said, ‘I’m drinking tea here, can’t we hang out for a bit.’ I said, ‘No, I want to get back before it gets too dark.’ ”

“The other woman looked at me like I was a cretin, and I kind of gave her a dirty look as well.”

“My wife reluctantly came along and she didn’t say a word until we were about 20 minutes down the road. She says, “Do you know who that was?”

I said, “No, and I don’t really give a shit.”

She says: “That’s the woman who writes the Lonely Planet guide for Bolivia,” Moore said with a laugh.

“When she finally came to visit the bar, I told her she had nice eyes, but of course she saw right through me.”

On the geological front, Moore went to work for Altoro Gold, a Ross Beaty company that was exploring for gold but later pivoted to platinum-palladium projects in Brazil. And it was in Brazil where Moore made his first big discovery, in 1996-97.

Northern Brazil was home to one of the world’s largest gold rushes in the 1980s and 90s, with more than 1 million people flocking to the region. The easy gold was largely gone by the time Moore arrived in late 1996, although he immediately heard about golden riches being unearthed in the “wild west of the Amazonian jungle.” One of the main centres of Amazonian gold production is the Tapajos river system, a major tributary of the Amazon in Para state. The system has produced an estimated 25 to 50 million ounces of gold over the past 50 years, making it the third-largest alluvial field in the world. At the time there was not a single industrial-scale gold mine in the region (even now there is only Serabi Gold’s 40,000-oz/yr Palito mine).

THE DAY THAT CHANGED MOORE’S LIFE

In mid-1997 Moore spent five weeks flying around in 30-year-old Cessnas visiting the major “garimpos” (artisanal mines) in the jungles of northern Brazil. He visited, sampled and photographed over 30 garimpos and ranked the 20 best prospects.

Moore’s No. 1 prospect was Tocantinzinho, a small hill with two pits on either side being worked by over 1,000 garimpeiros. It was one of his last stops. “As soon as I saw it, I thought holy shit, this looks good.” He took several channel samples on Aug. 23, 1997, an auspicious date — it was his daughter’s 10th birthday. The characteristics that stood out included the width of the stockwork veining in the saprolite and the number of garimpeiros working it.

“I was very excited about it and David (O’Connor) said, well let’s see how the numbers come up.” The two Tocantinzinho channel samples ran 36 metres at 2.68 g/t gold and 21 metres at 2.01 g/t.

“David came into my office and said, ‘I think you may have found a mine here.’ He was right, basically, and that changed my life.”

Altoro and the JV partner did a deal with the garimpeiros to secure the land package. The company used soil sampling to define a 400-m by 1-km gold-in-soil anomaly and did some auger drilling. However, the Bre-X scandal was in full bloom; in early 1998 Beaty fired virtually the entire Altoro gold exploration team (including Moore), eventually pulled the plug on Tocantinzinho and pivoted to platinum/palladium. Solitario later bought Altoro for the platinum/palladium project. Tocantinzinho was deemed expendable.

After a short solo motorcycle trip to southern Chile, Moore landed contract work in Peru with Barrick and later with Newmont before the work dried up completely. Moore relocated to New Jersey with his wife and again, tried a more conventional job in the environmental field. But he quickly tired of commuting two hours every day to a windowless brick building in a New Jersey industrial park and dealing with large corporate clients. One Sunday his wife was reading the New York Times and commented to Moore about an article on the rising gold price. The piece mentioned Minefinders, which was run by Mark Bailey — whom Moore had worked with in Bolivia. Moore reached out and was soon en route to Mexico. He went to work for Minefinders in the Sierra Madre of Mexico on a 9-month contract.

Over the years, Moore saw how the real money was made — he watched a friend strike out on his own, vend a copper project in northern Peru, and prosper. Inspired by the successful venture, Moore headed to Vancouver to try his luck and visited Alan Carter, who had been with RTZ in Bolivia and was at that time on the management path with BHP. They formed a partnership; Moore put out some feelers and discovered that Tocantinzinho was available from the original garimpeiro owners, whom he knew.

RE-SECURING TOCANTINZINHO

In early 2003, working from an Internet cafe in San Miguel de Allende, Moore negotiated a deal to option Tocantinzinho for $15,000 on signing. Three months later, he and Carter signed with a TSX-V junior for cash, shares and a hefty NSR. Moore sourced a drill and they began drilling 7 months later. The primary discovery hole was hole #4, which ran 170 metres at 1.72 g/t gold.

Exciting moments like this did not come along often. More often, it was small-town life in the jungle away from loved ones, not to mention missing the music, sports and culture of home. A celebration was in order — Moore and the day driller got drunk for three consecutive nights.

Retaining a valuable sliding-scale royalty was a sharp move for the business partners. In 2010, Eldorado Gold paid about $122 million to purchase Brazauro and the Tocantinzinho deposit, which now hosts about 2 million ounces at 1.42 g/t Au. Moore recently sold his share of the royalty for a tidy sum.

After 18 months managing Tocantinzinho, Moore and Carter formed Magellan Minerals and acquired the Cuiu Cuiu district 20 km northwest of Tocantinzinho. Cuiu Cuiu was arguably the largest garimpo in the Tapajos. Moore and a Brazilian partner had staked the area, which had produced more than 2 million ounces just from alluvials.

Moore spent the next 10 years living and working at Cuiu Cuiu and Itaituba, the nearest town which services the Tapajos region. Over the years he discovered about 1.5 million ounces of gold in three separate deposits. Cuiu Cuiu is now being advanced by Carter’s Cabral Gold (CBR-V), which has been finding higher-grade mineralization at the project. On February 28, Cabral announced an intercept of 3.4 metres grading 36.9 g/t gold. Moore is a Cabral director and a large shareholder; Carter is Fremont’s chairman and a large shareholder.

In the 1980s, Cuiu Cuiu was a Wild West boom town with no roads, a short airstrip, about 5,000 residents, a police force, more than 40 brothels, and killings every week. The Itaituba airport was one of the world’s busiest during that decade, with 300 takeoffs and landings daily and more than 1,100 flights on the single busiest day. Companies trying to acquire stakes in the area included majors such as Rio Tinto and Phelps Dodge and personalities including Eike Batista.

Moore and Carter secured the claims to Cuiu Cuiu by convincing the garimpeiros to come together in a coop, then negotiating a deal with them. It was a lengthy process that took most of 2005-2006 and had a successful outcome: “The powerful female garimpeira, Amerita, was the last holdout — I basically had to get down on my knees and beg her!” Moore recalled.

The first Cuiu Cuiu drill program in 2006 — while Moore and Carter’s company, Magellan Minerals, was still private — hit 131 metres of about 1 g/t gold. Magellan went public in early 2008 as the company drilled one of its best holes: 220 metres at 2.2 g/t Au. The share price jumped from a dollar to $2.20 on the news. Moore and Carter managed to keep Cuiu Cuiu when they sold Magellan in 2016 to Ross Beaty’s Anfield Nickel, which was more interested in Magellan’s Coringa gold deposit in the Alta Floresta district of Brazil. (Anfield subsequently sold the Coringa deposit to Serabi Gold; Anfield is now part of Beaty’s Equinox Gold.)

September 2018 site visit to Gold Canyon, Nevada

Back in Nevada, Moore sees Fremont Gold as a kind of double-barrelled play on gold exploration in one of the world’s most prolific districts. A small drill program at Gold Canyon (above) in the summer of 2018 saw Fremont hit 16.8 metres of 1.9 g/t Au and 18.3 metres of 1.1 g/t Au. The company hopes to build on that success in identifying further mineralization on McEwen Mining’s doorstep.

Moore is even more excited by the North Carlin properties that Fremont staked — and by the prospect of new discoveries in the western hemisphere’s most prolific gold belt: the Carlin trend. In a bear market that is disproportionately rewarding new discoveries and discovery plays, identifying a gold discovery in such a rich district would capture the market’s attention. Fremont is also on the lookout for a more advanced project, Moore said.

As for Mongo’s, the watering hole eventually made it into Lonely Planet and other popular travel guides. The bar was sold to Vancouverite Colin Little in 1997 but the popular establishment finally “hit rock-bottom” just last year when it closed its doors.

Fremont Gold (FRE-V)
Price: 0.11
Shares outstanding: 53 million (67.2 million fully diluted)
Market cap: $5.8 million

Disclosure: Fremont Gold is a Resource Opportunities sponsor company and James Kwantes owns Fremont Gold shares. This is not financial advice and all investors need to complete their own due diligence.

 

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Genesis builds ounces, recruits top talent

New resource estimate shows 423,000 Au oz Indicated at 1.22 g/t Au and 303,000 Au oz Inferred (1.27 g/t) at Chevrier

Genesis Metals joins Discovery Group; John Robins, Jim Paterson come on as strategic advisors

By James Kwantes
Editor, Resource Opportunities

Genesis Metals is a Resource Opportunities sponsor company.

Chibougamau is Cree for “gathering place” and the First Nations hamlet in northern Quebec served as one long before French explorers and traders travelled the area in the 1600s.

Gold was discovered in 1903 and mining companies followed. Fast-forward 116 years and Chibougamau is now an important hub for the Quebec government’s Plan Nord, an economic development plan designed to open up the vast north of the province to new opportunities, particularly in mining. The initiative has elevated a jurisdiction that was already recognized as among the most mining-friendly in the world.

Genesis Metals’ Chevrier gold project is about 35 kilometres southwest of Chibougamau at the western end of the prolific Abitibi Greenstone Belt, a structure that has produced more than 180 million ounces of gold. Mining operations in the region include Stornoway Diamond Corp.’s Renard mine and the Monster Lake high-grade gold project, a JV between Toma Gold and IAMGOLD.

And Genesis continues to gather ounces at Chevrier, in the Abitibi’s Fancamp Deformation Corridor. An updated resource estimate published February 4 shows 423,000 ounces Indicated at 1.22 g/t gold and another 303,000 ounces Inferred at 1.27 g/t gold at the Main Zone and East Zone at Chevrier. Average grades have decreased because Genesis moved to a lower cut-off grade (0.3 g/t in-pit, 0.95 g/t u-g) for the resource update.

The resource update establishes Chevrier as a growing open-pittable deposit with higher-grade underground and discovery possibilities, says Genesis chairman and CEO Brian Groves.

“This resource is a significant milestone in the history of Chevrier. We have developed a robust model for gold mineralization in the Main Zone with multiple new targets elsewhere on the property,” Groves said. “With our recently strengthened technical team, we will now explore the potential for expansion of the mineralized envelopes as well as other targets on the 130-square-km property.”

Jim Paterson: key contacts

Joining John Robins’ Discovery Group should help Genesis tap into talent and open doors. Robins and Discovery Group principal Jim Paterson have joined Genesis as strategic advisors. The group, founded by Robins in 2005, has an impressive record of creating shareholder value in a dismal market, including:

  • the $520-million sale of Kaminak to Goldcorp in 2016;
  • the 2018 sale of Northern Empire Resources to Coeur Mining for $117 million;
  • Great Bear Resources has been a junior mining standout, with a 1-year return of more than 600% on bonanza-grade gold discoveries at its Dixie project in Ontario’s Red Lake district.

Paterson has already been key to helping Sundar build out the Genesis team. Paterson tapped into his extensive network to attract three experienced operators for the Genesis technical team: geologists Rob Carpenter and Garrett Ainsworth and engineer/financier Andrew Ramcharan. The trio joined the advisory board in November. Each should help unlock further value at Chevrier, including potential new discoveries.

Rob Carpenter, co-founder of Kaminak Gold, checks out Chevrier core. Carpenter is a strategic advisor to Genesis.

Carpenter and Ainsworth are familiar names to Canadian mining investors. Carpenter was a co-founder and the former CEO of Kaminak Gold and key to identifying the 5-million-ounce Coffee gold deposit purchased by Goldcorp. Among other ventures he is a director of White Gold, where he is helping legendary Yukon prospector Shawn Ryan explore the White Gold district between Coffee and the Klondike goldfields.

As for Ainsworth, the exploration geologist’s greatest accomplishments have been in the western Athabasca Basin. As VP Exploration for Alpha Minerals, Ainsworth discovered the Patterson Lake South uranium deposit now being advanced by Fission Uranium (which bought Alpha). Ainsworth then spent four years at NexGen Energy as VP Exploration and Development, a period that saw NexGen’s shares soar from 30 cents to above $4.00 as it expanded the ultra-high-grade Arrow uranium deposit in Saskatchewan.

Andrew Ramcharan, an engineer and graduate of the Colorado School of Mines, was Managing Director of Project Evaluation for debt and equity financings at Sprott Inc. He also worked with IAMGOLD on M&A. Stephen Williams, a metallurgical engineer who is Vice-President of Corporate Development and Investor Relations for Bluestone Resources, has also joined the Genesis board of directors. He previously worked for Canaccord Genuity as a director of the metals and mining investment banking team.

Quebec has earned a reputation as one of the world’s best mining jurisdictions. Now, the province’s Plan Nord has opened up Quebec’s vast north, providing linkages to already exceptional infrastructure in Chevrier’s immediate neighbourhood (the Abitibi’s Fancamp Deformation Corridor). The Genesis gold project is near major highways and a rail line, and has a regional road running through it, as well as an airport nearby. The solid infrastructure in a safe jurisdiction tick off two of the main boxes for both investors and potential suitors.

Jeff Sundar, the president of Genesis, is younger than most mining execs. But he has been working in the sector long enough to see cycles come and go. Sundar has also experienced M&A success, in both 2010 and 2018. He was a director of Underworld Resources, which was acquired by Kinross for $138 million in July 2010 for its White Gold deposit in west-central Yukon (now owned by White Gold Corp). More recently, Northern Empire Resources — where Sundar was on the board — and its Sterling gold project was acquired by Coeur Mining for $117 million.

But the years between those takeovers were mostly punishing, for Genesis and the whole sector. Genesis completed a successful 10,000-metre drill program in 2017 that firmed up the resource at the Main Zone and identified new target areas. But the company received little recognition for it in the market, even though most intercepts were within 150 metres of surface. The final assays, announced Jan. 22, 2018, included some of the best mineralization yet:

  • 21.35 metres of 8.73 g/t gold including 3 metres of 37.97 g/t;
  • 22.6 metres of 3.59 g/t Au;
  • 19.4 metres of 4.26 g/t Au including 7.8 metres of 8.99 g/t.

The program helped Genesis develop a new geological model that laid the foundation for the resource update. Company geologists followed up this past summer with a surface prospecting and mapping program that defined extensions to Main Zone mineralization and identified new target areas. The work was funded by Quebec investment funds that provide assistance to active junior exploration companies in the province.

As for the price of gold, Sundar believes the timing could be right. Gold equities have seldom been cheaper relative to the price of gold, he pointed out.

XAU (the gold miners index) to gold ratio, 1984-present

“Generalist interest is returning to the space,” Sundar said. “People are starting to look at gold and gold equities again. With new team members providing a fresh look at our Chevrier deposit, including the potential for new discoveries, Genesis is well-positioned to capitalize.”

Genesis shares sank as low as 6 cents during tax-loss selling season in December. The stock has since rebounded to the 8-cent level, giving Genesis a market capitalization of about $8.15 million.

Genesis Metals (GIS-V)
Price: 0.08
Shares outstanding: 101.8 million (137.7 million fully diluted)
Market cap: $8.15 million

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

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Avino: Silver mining in Mexico, gold exploration in B.C.

Long before Hollywood directors made it a favoured setting for westerns … before Pancho Villa rose from the poverty of a hacienda there to become an important Revolutionary general … the Mexican state of Durango was a major center for global silver production.

Understanding silver’s role in Mexico – formerly part of “New Spain” – requires stepping back about 500 years. The precious metal has been mined in Durango since the time of the Spanish conquest, more or less continuously. Silver enriched the Spanish king and bolstered the treasury, helping fund wars against European rivals. It also funded a magnificent cathedral that still stands in the state capital, also named Durango. And coins minted from Mexican silver soon became a global currency.

One of the sources of that mineral wealth was Avino, the “mountain of silver” on the eastern flank of the Sierra Madre mountains outside of the city of Durango. It’s an ore body now being mined by Vancouver-based Avino Silver & Gold Mines (ASM-T). Avino produces silver, as well as gold and copper, from two underground mines: the main Avino deposit and San Gonzalo, a small higher-grade deposit about two kilometres away.

The metal remains a major export for Mexico, and Avino’s silver still makes its way around the world. But these days, it’s purchased by a division of Samsung. Samsung C&T purchases all of Avino’s production at spot prices and ships it to smelters in Asia.

Avino was founded by current CEO David Wolfin’s father Lou Wolfin (right), who in 1968 bought a 49% stake in the mothballed Mexican mine — which had closed in 1912 due to the Mexican Revolution. The joint venture put the mine back into production, and Avino later purchased the remaining stake from the Mexican family that owned it. Avino’s 50-year history is one of the features that sets the company apart in a junior mining sector where longevity is typically measured in years, not decades.

CEO David Wolfin’s roots at Avino run deep, too — as a teenager, he worked in the underground mine. Lou Wolfin, who died on March 3, 2017 at age 85, was an entrepreneur and inventor who showed a willingness to invest where others feared to tread. And although the company founder’s path to silver mining in Durango started on Howe Street, it began with a detour through Beverly Hills.

That’s where the elder Wolfin met Mexican entrepreneur Fernando Ysita at a party in the late 1960s. The chance Hollywood encounter led to forays into Mexico and eventually, a major investment. Avino purchased a 49-per-cent stake (the maximum allowed) in 1968 when Mexico re-opened to foreign investment. The company later bought the rest of the mine from the Ysita family.

Lou Wolfin was a contemporary of Murray Pezim and a bit of a legend in Vancouver business circles. A former stockbroker, Wolfin bought a seat on the Vancouver Stock Exchange in 1960 and later opened a Vancouver brokerage house. His entrepreneurial instincts extended far beyond mining – he owned the patent on holograms and developed a keyless door-lock entry system decades before those became common.

But it’s in mining that the elder Wolfin’s legacy is felt most acutely. He wasn’t there to see it, but Avino celebrated its 50-year milestone at the Vancouver Resource and Investment Conference in January. Among those at the party were employees who had been there from the beginning, as well as a contingent from Samsung headquarters in Seoul, South Korea.

The Avino mine on the “mountain of silver.” Durango, Mexico

 

I toured the Avino mines — which also produce gold and copper concentrates — on a site visit to Durango late last year. After flying into the state capital of Durango via Mexico City, we shuttled to the Hotel Gobernador, a hacienda that was formerly a state prison (complete with bullet holes on one of the outer walls). Our group, mostly German investors and analysts, was hosted by Avino CEO David Wolfin, COO Carlos Rodrigues and investor relations manager Jennifer North.

The mine is about an hour-and-a-half drive through towns and a countryside that looks familiar thanks to westerns such as How The West Was Won and Butch Cassidy and the Sundance Kid. The city of Durango has its own walk of fame featuring Hollywood stars on the sidewalk and several bronze statues including John Wayne — The Duke totes a rifle missing its barrel. (John Candy died of a heart attack in the city in 1994 during a break from filming Wagons East.)

At the mine, silver, gold and copper concentrates are processed using a flotation circuit from ore mined at Avino and San Gonzalo. For the last three years, production has held steady at or above the 2.7 million ounces silver-equivalent produced in 2017 (2.68M AgEq oz in 2016, 3M AgEq oz in 2015).

But a project under construction when I visited and now largely complete should hike that total significantly: the fourth mill circuit. That circuit — with a ball mill purchased from a Quebec mine — is now complete and set to process ore in the first quarter of 2019. The circuit is projected to boost capacity by about 70%, to 2,500 tonnes per day. Once the fourth circuit is commissioned, it will process ore from the San Luis (expansion) area of the Avino mine.

The 4th circuit at Avino’s mill, under construction when I visited, is now complete.

 

Avino announced Q3 2018 production on Oct. 15 and the company’s silver-equivalent production dropped by 7% year-over-year, to 704,429 ounces AgEq. Avino produced 342,151 ounces of silver (down 7% YOY), 2,204 ounces of gold (down 18% YOY) and 992,271 pounds of copper (down 10% YOY). The lower production and declining grades are partly because San Gonzalo is reaching the end of its mine life as Avino transitions to San Luis ore.

About 90 per cent of Avino’s workers live in villages a short drive away from the mine. The local workers have been a constant for the last five centuries – the jobs pay well and are highly coveted. It’s quite a contrast to the fly-in, fly-out contract mining methods at many modern mines. That helps on the community relations front, in addition to Avino’s decades-long presence there.

The Sinaloa cartel operates in Durango but our group travelled without guards or security, and neither is there a visible security presence at the mine. There are signs of a cartel presence if you pay attention, however, in and around Durango. The police station outside the city is built high on a hill and resembles a fortress. A prison we passed also looked seriously secure.

At the mine site, our group of analysts, investors and newsletter writers donned waterproof protective and safety gear and descended into both mines, the temperature rising with each lower level. It was vaguely reminiscent of the silver price, which has fallen more or less consistently and is now stuck at US$14 after running to almost $50 an ounce in April 2011.

 

That’s made it tough for silver producers to make money, and Avino is no exception. The company is also in expansion mode; there are exploration drilling projects at both the Avino mine and at the company’s Bralorne project in British Columbia. Avino is also investigating the economics of processing oxide tailings at Avino. It all costs money, and Avino recently raised US$4.6 million through the sale of 65-cent (US) units.

Each unit consisted of one 65-cent share and a full five-year warrant exercisable at 80 cents. But the financing was announced with shares at 79 cents US, and the below-market pricing prompted a selloff in the stock. In conjunction with Q3 production numbers, released October 15, Avino announced cost-reduction initiatives (capital, operating and administrative) at its operations in Mexico and British Columbia.

There are other examples in Avino’s neighbourhood of how silver’s struggles have hit other producers. Nearby is Coeur Mining’s mothballed Preciosa silver deposit, purchased for $382 million from Orko Silver in 2013. That deal was done with silver at about US$30 an ounce.

Growing production from the fourth circuit gives Avino good leverage to rising silver prices. When that occurs is anybody’s guess, but the silver price has a track record of bouncing hard when it reverses. One measure suggestive of a silver bull market is the gold-silver ratio, which is above 80 and near a historical record. Silver has made outsized returns each time it has reached these levels.

Avino also has leverage to gold at Bralorne, its under-the-radar Canadian project. Bralorne is nestled amid rugged mountains in British Columbia’s South Chilcotin range. It was the epicenter of a major gold mining camp that produced 4.2 million ounces of gold between 1928 and 1971. The three adjacent mines — Bralorne, Pioneer and King — produced extremely high-grade ore. Average head grades were above 0.5 ounces per tonne, or 14 g/t gold — multiples of global mined grades that are now below 1 g/t Au.

Avino’s Bralorne project site: July 2018.

 

Bralorne, where Avino is in the middle of a fully funded 28,000-metre drill program, has the potential to become the flagship and a company maker, if things work out. The project already hosts a state-of-the-art water treatment system and dozens of kilometres of underground workings as well as brand-new mining equipment. The latter equipment — including two scoop trams and a jumbo drill — was purchased as part of a prior plan to start small and ramp up production. The company now plans to focus on expanding the historical resource before starting up a larger mine.

As with Avino, Lou Wolfin played a key role in securing the property, including the historical mine workings. Wolfin bought the Bralorne-Pioneer Mines from Homestake and brought it into Avino in 1990. He got Bralorne running at 100 tonnes per day (in a separate company) but the mine shut down due to low silver prices. Bralorne was brought back into Avino in 2014.

Avino funded the drill program through a $6-million flow-through financing priced at $2.00 (Cdn) per share. The drill program is the most extensive in the project’s history, and includes both exploration and resource drilling. The company is using two drill rigs; assay results should start landing in the first quarter of 2019.

The existing Bralorne resource, announced on Oct. 21, 2016, is 91,528 ounces Measured and Indicated at average grades of 0.33 oz/t gold (9.36 g/t) and 83,900 ounces Inferred at 0.22 oz/t gold (6.2 g/t).

Independent geoscientist Garth Kirkham of Kirkham Geosystems completed the NI 43-101 resource model and also played a major role in designing the current drill program. Kirkham is an award-winning geoscientist known for his resource estimation and 3D modelling work. He has worked extensively with John Robins’ Discovery Group companies, including Kaminak Gold (acquired by Goldcorp) and Bluestone Resources (BSR-V). The drilling follows structural modelling and geological mapping as well as airborne and ground geophysics.

Avino’s investment proposition is that of a stable silver producer with growing, lower-grade deposits and a call option on high-grade gold at Bralorne, where drill assays could provide catalysts for the share price.

Avino Silver and Gold Mines (ASM-T)
Price
: 0.75
Shares outstanding: 63.3 million (75.5 million fully diluted)
Market cap: $47.5 million

Disclosure: James Kwantes has been compensated by Avino Silver & Gold Mines to produce this article and Avino paid for costs of the site visit to Mexico. Avino Silver & Gold Mines is not a Resource Opportunities portfolio company. This article is for informational purposes and does not constitute investment advice. All investors need to do their own due diligence.

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Interview: Gren Thomas, the man with the golden hand

by James Kwantes
Editor, Resource Opportunities

October 26, 2018
It’s 1:15 p.m. on a sunny Friday afternoon in Vancouver and I arrive a little early for a downtown meeting with Westhaven Ventures (WHN-V) chairman Gren Thomas. A short elevator ride at Granville and West Hastings takes me to Westhaven’s modest offices on the 10th floor, where I let myself in and drop by CFO Shaun Pollard’s office.

Inside, Pollard and veteran geologist Ed Balon — Westhaven’s technical director — are talking rocks and stocks. Westhaven shares rose 36% on the day to an all-time high close of 94 cents. Teamwork: Balon was key to identifying the Spences Bridge epithermal gold belt, which hosts Shovelnose, outside of Merritt, and Westhaven’s other projects: Prospect Valley, Skoonka and Skoonka North. Pollard runs a tight treasury ship in a sector with its share of (adrift) lifestyle companies.

And it’s at Shovelnose where a high-grade intercept of 17.77 metres of 24.50 g/t gold in hole 14 sent Westhaven shares — which traded between one and three nickels for years until this spring — rocketing from 37 cents to 81 cents on Oct. 16. This is a junior mining market where momentum flows to companies that can hit rich intercepts of high-grade gold. Westhaven has become one of them.

Visible gold in hole 14, from the South Zone at Westhaven’s Shovelnose project

Gren arrives at the office. The soft-spoken mine finder made his reputation and fortune when his Aber Resources discovered Diavik, Canada’s second diamond mine. But these days, it’s mostly gold on his mind.

He comments with a chuckle that he’d had a nap earlier in the day and been surprised when he awoke to see the large stock increase. Making a few million dollars while he slumbers … that’s the new normal for Thomas, who owns (directly and indirectly) almost 30% of Westhaven’s shares. But it’s not like he’s sitting around counting his winnings — the veteran prospector was uncertain and low-balled his stake in the company when asked about it.

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The Westhaven surge is a reversal of fortune for Thomas, who got his share position by bankrolling the company, keeping it afloat through years of struggle and shoestring budgets. Thomas is Westhaven’s chairman and his son Gareth runs the company as president and CEO. Gareth, who was out of the office for interviews, owns 3.3 million shares, a 4.2% stake.

“What are we going to do with all this paper, paper the walls?” Gren says, recalling earlier days of backstopping the operation.

He fills me in on the small, persistent band of believers who were convinced there was high-grade gold at Shovelnose. Central to early-stage exploration was Balon, who discovered Skoonka and found a boulder at Shovelnose in the mid-2000s that ran 100 g/t gold. That was while both projects were still in Strongbow Exploration (SBW-V), where Thomas is also chairman. A 50-metre intercept of 0.5 g/t gold provided further encouragement.

Shaun Pollard, Westhaven CFO (left to right), technical director Ed Balon and CEO Gareth Thomas, atop Shovelnose.

“There were a lot of small programs, but frustrating. We would go back every year thinking we would find more the next year. But we were basically prospecting with a drill. There is lots of cover there, right.”

“We were talking to major companies and they were not remotely interested.”

Westhaven chairman Gren Thomas

The majors are interested now, and so are plenty of others. Gren’s cellphone rings in the pocket of his jacket, which is draped over a chair. He apologizes for pausing the interview and walks over to take the call. It’s Peter Brown, the Canaccord cofounder and Howe Street legend — and Westhaven shareholder. Brown, too, is eager to know when assays for hole 15 will arrive (anytime) and when the next drilling starts (early November).

Hole 14 was the intercept that lit a fire under Westhaven shares. Hole 15, 100 metres southeast of 14, hit a 20-metre quartz vein and contains visible gold. Assays are pending and could land at any time. The core for hole 14 contains ginguro bands, a distinctive black sulphide that is sprinkled with visible gold. The latest core looks very similar to the mineralization at Hishikari (Sumitomo), a Japanese gold mine with some of the world’s highest grades, at 40 g/t gold. Exploration manager Peter Fischl also sees parallels to Kupol (Kinross), a large high-grade mine in Russia’s Far East. Both Hishikari and Kupol are world-class epithermal gold deposits. Shovelnose is a speculative, earlier-stage project, but the potential is tantalizing.

A turning point, Gren relates, was when exploration manager Peter Fischl — attempting to zero in on the “heat zone” — targeted a valley with a creek that hosted heavy clay alteration. Hole SN17-06 intersected 85 metres of 0.52 g/t Au. Higher-grade intercepts followed earlier this year, including 17.7 metres of 3.9 g/t Au.

“We still couldn’t get any interest. We’ve got the boulders, we’ve got the showings, we’ve got these intersections — there’s a lot of gold here.”

“One company even went so far as to say, ‘There are no mines here. Why are there no mines?’ ”

“Well, because nobody has found one yet,” Gren says with a laugh.

Westhaven Ventures (WHN-V)
Price: 0.94
Shares outstanding: 85 million (92 fully diluted)
Market cap: $80 million

There are also new developments in the other two companies where Gren is chairman: Strongbow Exploration (SBW-V) and North Arrow Minerals (NAR-V). He is preparing to fly to the U.K. with Strongbow CEO Richard Williams to work on fundraising and an AIM listing for Strongbow, which is developing the high-grade South Crofty tin project in Cornwall. An Oct. 17 deal with Orion Mine Finance should help on that front — the well-known mining group agreed to finance Strongbow to the tune of US$3 million in conjunction with the AIM listing, which is expected before the end of the year. Thomas owns 5.133 million Strongbow shares, a nearly 6% stake.

There are large pools of capital in London for U.K. mining projects, which Williams and Thomas plan to tap into. There is also renewed interest in Cornwall and tin mining thanks to a popular British television series called Poldark. One participant in a recent tourist walking tour of Cornwall turned out to be a fund manager who was interested in Strongbow and South Crofty.

Strongbow is the “mother ship” of Gren’s three companies: diamond play North Arrow Minerals was spun out of Strongbow in 2007 and Westhaven optioned its Spences Bridge gold belt properties from the company. The deals for Shovelnose and Skoonka have left Strongbow with a 2% royalty on Shovelnose as well as 3.1 million Westhaven shares. Those shares are now worth almost $3 million — a not-insignificant total for a company with a market capitalization of about $14 million. “It’s funny how things morph,” Thomas remarks of Strongbow’s pivot from gold to tin.

Strongbow has a mining permit that is valid until 2017 and the company is currently building a dewatering plant to treat water from the old mine workings. The project was financed by the $7.17-million sale of a 1.5% NSR to major shareholder Osisko Gold Royalties, which owns a 27.5% stake.

Strongbow Exploration (SBW-V)
Price: 0.16
Shares outstanding: 86.6 million (127.4M fully diluted)
Market cap: $13.9 million

As for North Arrow Minerals, the diamond play is awaiting microdiamond and till sample results from Mel in Nunavut, where it discovered the diamondiferous ML-8 kimberlite last year. This season North Arrow drilled a new kimberlite (ML345), expanded on ML-8 and collected 224 kg of kimberlite for microdiamond analysis.

Cut and polished fancy yellow-orangey diamond from Naujaat.

One of the main focuses of North Arrow CEO Ken Armstrong is getting a road permitted from the town of Naujaat to the Q1-4 kimberlite, which hosts a population of valuable yellow-orangey diamonds.

Completion of a road would dramatically cut the costs of collecting a large bulk sample to get a better sense of diamond values at the 12.5-hectare kimberlite, which is near tidewater. A road to the community, which is very supportive of the idea, would also potentially allow the construction of a small test mill in Naujaat.

“A major should take this on, because they take a longer-term view of it,” Gren says of Naujaat. “It’s the perfect place for a mine, near the coast.” He owns more than 10.5 million North Arrow shares, an 11.5% stake.

North Arrow Minerals (NAR-V)
Price: 0.14
Shares outstanding: 92.8 million (128.9M fully diluted)
Market cap: $13 million

“We’re quite confident that we’re doing the right things,” Thomas says of progress at Strongbow and North Arrow. “We just wish the markets would show more interest.”

That’s no longer a problem at Westhaven, with shares sitting just shy of a dollar as investors anticipate assays for hole 15. Warrant exercises have topped up the treasury, which sits north of $1.5 million. That’s enough for the next drill program, which is imminent, and it removes the need to finance under a dollar — something Gren is loathe to do.

While Westhaven’s fortunes have changed, its corporate culture will not, Gren pledges. “Gareth and I were talking about it, and I told him – ‘We under-promise and over-deliver.’ So no bullshit. It’s funner and you get a lot fewer phone calls from angry shareholders.”

There aren’t many of those these days, and Westhaven’s share structure all but ensures higher prices IF the company can keep hitting high-grade gold. Management own about 40% of shares, the Plethora Precious Metals Fund owns 16% and friends and family (including Gren’s daughter Eira Thomas) own another 10-15%. Those high ownership levels keep the supply of shares low during a period of rising demand for the stock.

Related reading: West Vancouver diamond pioneer Gren Thomas still in hunt for gems, Vancouver Sun

Disclosure: James Kwantes owns shares of Westhaven Ventures, Strongbow Exploration and North Arrow Minerals and covers each company in his newsletter, Resource Opportunities. North Arrow is a sponsor of the newsletter. This article is for informational purposes only and should not be considered financial advice. All investors need to do their own due diligence.

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Investor Ian Cassel on strategies & the gold miner that got away

“Investing is hard.”

It was a theme microcap investor Ian Cassel returned to again and again during his October 18 talk at the Small-cap Discoveries conference in Vancouver, run by Vancouver-based newsletter writer Paul Andreola.

Successful investing is counterintuitive to human nature, Cassel told the group of about 75 investors, most of them subscribers to Smallcap Discoveries, the investment newsletter run by Andreola and his business partner Brandon Mackie. “Retraining your brain is a lifelong process.”

Ian Cassel, full-time microcap investor

One common mistake investors make is to sell more of their winners and buy more of their losers. Cutting losses quickly and averaging up when management executes is a more rewarding strategy, Cassel said.

Another interesting point for investors: in baseball terms, slugging percentage is more important than batting average. It’s those extra-base hits that really start to grow wealth over time, as opposed to the singles.

Cassel has been a full-time microcap investor for 10 years and is the co-author of two books about Intelligent Fanatics, the great corporate leaders who build sustainable businesses. In 2011, he founded MicroCapClub, a community where experienced microcap investors share ideas and discuss trading.

Cassel said his strategy on position sizing has changed. He used to immediately take on a large position in a company that passed his investment litmus test — as well as the risks associated with going “all-in.”

Now, he takes a one-third position size after extensive due diligence and talking to management. Cassel takes his second third when he has travelled to and met management at their head office, and gotten a sense of company culture and other details. The final third is purchased when management executes on their promises and vision.

Most management teams over-promise and under-deliver, Cassel noted — a reality familiar to junior mining speculators. A key to successful investing is finding management teams that under-promise and over-deliver, he said. An investor’s willingness to perform deep-dive due diligence will give him or her a significant edge over the majority of investors, who do their research with bums planted to a chair, eyes glued to a computer.

________________________________________

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Cassel illustrated the “investing is hard” mantra with some real-life examples, featuring both sad and happy endings.

The story of Apple (AAPL) cofounder Ronald Wayne is relatively well-known, but that doesn’t make it any less dramatic: Wayne sold his 10% stake in Apple for $800 in 1976. A 10% stake in Apple at the current valuation is worth about $100 billion.

When asked about it decades later, Wayne said he had made the “best decision with the information that was available to me at the time.”

“Investing is hard, even when you’re close to a story,” Cassel said.

The narrative of SoftBank founder Masayoshi Son has a happier ending, albeit after more ups and downs than the wooden roller-coaster at the PNE.

Son was a child when his Korean parents moved to Japan, and he grew up poor. He began building up and selling businesses while at university in the U.S., netting millions. He invested early in Internet companies and built a dynamo with SoftBank, which at the peak of the Internet bubble owned an estimated 10-12% of the value of all Internet companies. When the bubble burst, Son lost 99% of his net worth.

However, one of the companies SoftBank bought a stake in was a fledgling Chinese Internet play called Alibaba. That investment worked out nicely and Son is now Japan’s wealthiest man, and SoftBank back on top.

Later in the day, I chatted with Cassel about investing and the resource market. Not only was he aware of the ferocity of the bear market, he had some direct experience with a gold company early in his investing career.

Before he was a full-time microcap investor, Cassel used to do some investor relations work for public companies that he liked and whose shares he owned. One of those was Gold Resource Corp. (GORO). Gold Resource had a gold mine in Mexico and was one of those rare producers that actually made money, with a management team dedicated to creating shareholder value and paying dividends. Cassel got in early, with a cost basis of just over a dollar a share, and rode the stock up before exiting north of $6 a share.

Gold Resource Corp. soon began paying dividends, and Cassel watched from the sidelines as the company built its annual dividend, paid monthly, to $1 a share on its way to a $30 stock price (GORO now trades for just under US$6/share). Painful, to be sure, but a rather charmed “miss” in a sector known to devour shareholder capital.

Follow Ian Cassel on Twitter for more investing insights: @IanCassel

I had my own “investing is hard” moment recently, involving Westhaven Ventures (TSXV-WHN). I initiated coverage on the stock back in April 2016 at 14 cents, describing it as a “speculation on a neglected gold district and a management team with a track record of discovery.” A visit to site with Gareth Thomas, now the CEO, and CFO Shaun Pollard demonstrated Shovelnose’s prospectivity, proximity to Vancouver, and exceptional infrastructure.

But I gave up and sold most of my shares a year later, frustrated with small drill programs and only sniffs of lower-grade mineralization. Westhaven was hunting for the high-grade feeder system and having difficulty finding it. It was a lack of patience, not a fatal flaw, that led me to drop coverage.

Fast-forward to Westhaven’s recent intercept of 17.77 metres of 24.5 g/t gold at Shovelnose, which sent the stock to 81 cents — up 118% on the day. It was an exceptional hit and Westhaven is still awaiting assays from a further three drill holes. The company is already planning a fully funded follow-up drill program, and can drill year-round at the property.

I sent out a Flash Alert to subscribers on the evening of that stellar intercept, resuming coverage on Westhaven and touching on Strongbow Exploration (SBW-V), which owns 3.1 million WHN shares and a royalty on Shovelnose. The next morning I added to my Westhaven position at the open. A visit to Westhaven’s office later that day confirmed my bullishness. It’s not my style to chase stocks, but I believe Westhaven could be onto a large gold system at Shovelnose. The company has a large land position and other highly prospective projects within the belt, as well. A very tight share structure should help propel this stock if subsequent results impress.

Westhaven shares traded above 90 cents on news of the intercept but have since dipped down to the 70-cent range.

Disclosure: James Kwantes is editor and publisher of Resource Opportunities, a subscriber-supported newsletter dedicated to finding under-the-radar resource stocks with high upside potential. He owns shares of Westhaven Ventures and Strongbow Exploration. This is not investment advice and all investors need to do their own due diligence. Use coupon code “CEO” at ResourceOpportunities.com to save US$100 off regular subscription prices of US$299 for one year or US$449 for two years.

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

By James Kwantes
Resource Opportunities

Strategic Metals is one of three Resource Opportunities sponsor companies.

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

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

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

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

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

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

Q: Do mining stocks deserve their poor reputation?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Diamonds Q&A: North Arrow Minerals CEO Ken Armstrong

By James Kwantes
Resource Opportunities

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

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

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

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

North Arrow CEO Ken Armstrong

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Klondike Gold narrows down search in Yukon goldfields

By James Kwantes
Resource Opportunities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Hunting for rough in a storied diamond field

By James Kwantes
Resource Opportunities

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

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

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

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

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

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

CANADA’S GROUND ZERO FOR DIAMONDS

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

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

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

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

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

DRIVE FOR DISCOVERY

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

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

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

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

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

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

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

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

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

ENTER EIRA

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

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

Lucara Diamond CEO and North Arrow advisor Eira Thomas

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

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

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

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

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

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

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

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

By James Kwantes
Resource Opportunities

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

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

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

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

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

Strategic Metals: working capital vs. market capitalization

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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