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).
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.”
The company’s main edge is the vast geological database of storied Yukon consultancy Archer Cathro, run by Strategic CEO Eaton and his team of geologists and project managers. Strategic’s brain trust has been involved in many of Yukon’s top discoveries and deposits, including Western Copper and Gold’s Casino, Rockhaven’s Klaza and ATAC’s Osiris and Tiger projects. Eaton’s knowledge of the Yukon is encyclopedic and his decades operating in the Northern territory help him snap up neglected and forgotten claims.
Strategic is known as a kind of Yukon-focused investment fund, with extensive shareholdings and a treasury currently at about $13.4 million. But a good argument could be made that the company’s true value is its property portfolio. Strategic has more than 100 fully owned projects available for option, many of them permitted for large-scale drill programs. Among them:
Hopper, a large porphyry-style target where Strategic assayed 0.52% copper over 45.7 metres in a trench. Geochemical surveys outlined strong copper, gold and moly soil anomalies covering a 3,600-metre by 2,500-metre area. Similar age as Western’s Casino deposit 190 km to the north-northwest.
Meloy, another large porphyry target in the belt that includes Casino. Chip samples graded up to 8.7% copper, 560 g/t silver, 1.06 g/t gold, 1.47% moly and 3.51% tungsten.
Strategic owns a 39.7% stake in Rockhaven Resources (RK-V) and has a 7.3% stake in ATAC Resources (ATC-V), among other shareholdings. After a busy drill season, Rockhaven is prepping a resource update and looking at processing changes at Klaza, the Yukon’s highest-grade gold deposit of more than 1 million ounces. Last year Coeur Mining bought a 9.9% stake. ATAC is advancing its Carlin-type gold deposits at the Rackla property and last year attracted a $63.3-million investment from Barrick, which is earning a 70% interest in the Orion project. There are also significant stakes in exploreco Precipitate Gold (PRG-V) and project generator Silver Range Resources, among many others.
The latest Strategic spinout was Trifecta, which is exploring properties in Yukon’s White Gold country and B.C.’s Golden Triangle. Trifecta shares flew out of the gate after listing at 10 cents, briefly trading above 30 cents. But the stock has since settled back down to the 10-cent level after disappointing drill results at the Squid claims at its Trident property. Speaking about Squid, Trifecta CEO Dylan Wallinger had pledged to “prove it or kill it” – the company has subsequently dropped those claims, optioned from Metals Creek Resources.
In addition to developments at portfolio companies Rockhaven and ATAC, there are new potential catalysts in 2018. One of the more interesting new positions will be a 19.9% stake in Territory Metals, a private company expected to IPO on the TSX Venture later this year. Territory purchased six high-grade gold and silver prospects from Strategic, which retains a 2% royalty on all the properties – and a 10% NSR on any small-scale high-grade production.
The six properties, in central Yukon’s Tombstone belt, are Mt. Hinton, Plata, Lance/Lois, News, Naws and Nels. At least a couple of them could provide fireworks. Placer miners have been pulling out multi-ounce rounded gold nuggets – believed to be near source – from Granite Creek, which drains the Mt. Hinton property. Mt. Hinton is located near Alexco’s ground in the Keno Hill district.
Plata, subject to Strategic’s high-grade NSR, also offers intriguing potential. The ore mined at Plata, which is atop a mountain, was very rich. In the 1980s, miners hand-mined and transported it down by helicopter to an air strip at the bottom of the mountain. The ore was then flown to Ross River and trucked all the way down to smelter at Trail, B.C., 2,600 kilometres away. Helicopters, airplanes and truck transport – yet the mining was still profitable.
Strategic has also made a foray into Canadian diamond exploration through a $1-million financing that gave Strategic a 45% stake in diamond exploreco GGL Resources (GGL-V). GGL has property holdings in the Lac de Gras diamond field in the Northwest Territories and a diamond database with more than $30 million worth of exploration data. In November GGL brought in David Kelsch as president and chief operating officer. Kelsch is a Canadian diamond exploration veteran who worked for Rio Tinto and was involved in the discovery of the Diavik diamond mine.
Diamonds have been generating some buzz of late. Dominion Diamond Corp., owner of Ekati and 40% owner of Rio’s Diavik mine, was recently bought for US$1.2 billion and taken private by the Washington Group. Mountain Province Diamonds, meanwhile, purchased Kennady Diamonds – a former spinco – and its Kelvin and Faraday diamond projects in the Northwest Territories for $176 million. GGL Resources has two royalties on Kennady claims, on trend with the Gahcho Kue diamond mine and Kennady’s Kelvin-Faraday corridor.
Strategic Metals (SMD-V) Price: 0.45 Cash: $13.4 million Working capital: $33.3 million (37 cents a share) Shares outstanding: 89.44 million (96.8 fully diluted) Market cap: $40.2 million
Disclosure: Strategic Metals is one of three company sponsors of Resource Opportunities and Resource Opportunities editor James Kwantes owns SMD shares, which makes me biased. Readers are advised that the material contained herein is solely for information purposes. Readers are encouraged to always conduct their own research and due diligence, and/or obtain professional advice. Dollar and $ refer to Canadian dollars, unless stated otherwise.
Site visit: Sabina Gold & Silver (SBB-T)
Oct. 4, 2017
By James Kwantes
Canada’s North is a mysterious and forbidding land. There are stories of European explorers disappearing without a trace and place names such as Deadman’s Island. Native legends from the original occupants – not to mention strangely colourful lights that often dance across the night sky – add to the intrigue. I saw the Northern Lights for the first time during the site visit. The scientific explanation does little to diminish their mystique.
Flying over the barren lands of Northwest Territories and Nunavut gave me a renewed respect for Chuck Fipke and all the other Northern pioneers who identified mineral deposits there. Between Yellowknife and Sabina Gold & Silver’s Goose camp, the plane travelled over hundreds of kilometres of waterlogged tundra with nary an interruption. Then, rather suddenly, an open-pit diamond mine – a mineralized pin prick in a pin cushion measuring millions of square kilometres. The diamond mine was Diavik; Ekati is nearby.
This is about as far from “civilization” as it’s possible to get. For perspective, driving from Billings, Montana to Edmonton, Alberta, a major Canadian northern outpost, takes about 11 hours – roughly akin to driving from Durango, Mexico, to Los Angeles. It takes another 15 hours to drive from Edmonton to Yellowknife — the equivalent of travelling from Los Angeles to Portland. Sabina’s Back River project is a further 520 kilometres beyond Yellowknife, to the northeast.
As for Sabina, the main mystery on the company’s vast Back River property may be just how many high-grade ounces are buried under the Arctic tundra. It’s a puzzle this summer’s drill program should go some way to solving. A single early result from the 10,000-metre summer exploration program was promising. The first drill hole, 17GSE516B – released the morning I flew into Yellowknife en route to the site visit – intercepted 9.48 g/t gold over 38.55 metres in a down-plunge extension of the Llama deposit. Not bad for a 460-metre step-out hole. The focus is on adding high-quality ounces — after all, Back River already hosts 7.2 million ounces Au in all categories.
Our plane of analysts landed at the Goose camp on a high-quality air strip made from gravel produced on-site. The camp gets its name from adjacent Goose Lake, which serves as the winter landing strip for 737s that come in laden with fuel. The well-run camp felt more like a mining operation than an exploration camp.
Inside, we were briefed on the objectives of the summer drill program and the path forward by CEO Bruce McLeod, VP Exploration Angus Campbell and Exploration Manager Jamex Maxwell. The broad outlines of the mine were established by the initial project 3,000-tonnes-per-day Feasibility Study (3KFS) McLeod commissioned when he took over in February 2015. At US$1,150/oz gold, C0.80 exchange and a 5% discount rate, the FS showed:
– 240,000 oz annually for first 8 years, about 200,000 oz for 12-year life of mine;
– $415 million initial capex, $185M sustaining capex;
– 6.3 g/t Au average head grade, 93% recovery;
– life-of-mine, all-in cash costs of US$763/oz (incl initial & sustaining capex & closure costs)
VP Ex Campbell spoke about uber-high-grade exploration upside (more on that later), while derisking was the major theme for McLeod: “We can’t afford to make mistakes in this part of the world.” Sabina has spent about $5.5 million on basic engineering since the completion of the Feasibility Study, he said, and is now into detailed engineering.
The CEO describes the Back River project as a straightforward mine in a complex environment. From a geotechnical perspective, McLeod says Back River is probably the simplest project he’s been involved with. His assertion was confirmed by a visit to the nearby mill site, the helicopters landing on flat bedrock terrain. One of the benefits of a vast property is the ability to choose exactly where the mill will be. Standing on the flat terrain of scrub and bedrock, with a 360-degree panorama view, it was easy to visualize a mine taking shape.
I found an analogy McLeod used in his recent presentation at the Beaver Creek precious metals summit useful: “To a layperson, a feasibility is a concept, basic engineering is a plan and detailed engineering is a blueprint.” As Sabina constructs the blueprint, the focus is on investing upfront to avoid problems down the road. During the site visit, McLeod talked about his love for technology and some of the high-tech toys at his house, which he said “has lots of gizmos and bells and whistles and shit that breaks down all the time. It won’t happen here.”
It’s not typical CEO bluster: McLeod has already built a mine in Canada’s North. That was Capstone’s Minto copper mine in the Yukon, built by Sherwood Copper and the first hard-rock mine constructed in the territory in a decade. Sherwood was founded and run by McLeod and later bought by Capstone for $244 million. Minto was built on time and under budget – no small feat in Canada’s North.
Recent problems experienced by Nunavut neighbour TMAC Resources (TMR-T) at its recently opened Hope Bay gold mine illustrate the importance of “doing it right the first time.” TMAC recently slashed its annual guidance in half – from 100,000 to 120,000 ounces of gold to 50,000 to 60,000 ounces – due to processing issues and recovery problems. Sabina is paying close attention to metallurgy and a potential processing change from whole ore leach to flotation is one of the optimizations Sabina is studying.
BACK TO THE FUTURE
Some background on Back River: Sabina Silver became Sabina Gold & Silver with its 2009 purchase of the high-grade gold project from Dundee Precious Metals (DPM-T). Prior to that, the flagship was the silver-rich Hackett River VMS deposit 45 kilometres to the west, which Sabina sold to Xstrata (now Glencore) in 2011 for $50 million cash and a significant silver royalty. That transaction put Sabina into the rare category of well-funded junior, where it remains. More on the silver royalty later.
Sabina has since added about 5 million ounces, bringing the Back River resource to 7.2 million ounces in all categories. Most of the added ounces were drilled in the first two years, followed by a lull in drilling during the 2011-16 bear market. The most recent drill program has taken the number of metres drilled above 500,000.
The scale of the core-cutting facility at Goose is an indication of the size of previous programs. It can comfortably handle 85,000 metres in a single season, so is not stretched at 10,000 metres, McLeod noted. It may seem like a minor detail, but is another box ticked for any major that buys the district-scale project (Goldcorp, for example, is carrying out an aggressive exploration drill program at Coffee).
The Back River project is a banded iron formation project that consists of 10 high-grade gold deposits on Sabina’s 53,000-hectare properties. It’s an 80-kilometre district. Llama is one of four deposits at the main Goose project area, the focus of the 3KFS that McLeod commissioned. (An earlier FS modelled a 6,000tpd operation producing 350,000 oz over a 10-year mine life.) Three of the four Goose deposits are part of the 3KFS: Goose main pit, Umwelt open pit and underground and the Llama open pit. The Llama underground, including hole 17GSE516B, is not.
ECONOMICS OF EXPLORATION
One of the objectives of Sabina’s drilling is to determine if there are enough high-grade ounces underground to define a “treasure box” that could be mined up front. If the company is successful, that would involve shifting sustaining capex into the front end of the mine plan. But it could significantly improve already strong project economics, especially at the front end of the mine life. An increase of just 500 tonnes per day – to 3,500tpd – could vault Sabina into 300,000 oz/year territory.
Angus Campbell, Sabina’s VP Exploration, shed some light on how rich some of the exploration potential is on Sabina’s ground. Being the guy in charge of running exploration programs in a gold-rich 80-kilometre belt must have a kid-in-a-candy-store feel to it. But with McLeod in charge of the candy allocation, Campbell’s targets must be chosen wisely and justified. Despite 500 kilometres of drilling, there remain multiple opportunities for resource expansion, both at existing deposits and at deposits not included in either Feasibility Study.
Consider Sabina’s George deposits, about 50 kilometres away from Goose. George hosts about 2.1 million gold ounces included in the 6KFS but NOT in the 3KFS. Drilling there in the 1980s, outside the resource envelope, also hit several wide, shallow intersections of 6 and 7 g/t Au, McLeod said – rich ore by any standard. Sabina geologists were puzzled why these near-surface intercepts were not followed up at the time.
The answer, from people directly involved in the drill programs: the predecessor company was looking for higher Lupin-like grades of 9 and 10 g/t material. The nearby Lupin mine produced about 3.35 million ounces of gold between 1982 and 2004 at an average head grade of 9.27 g/t.
Under the 6,000tpd plan, George ore was slated to be trucked to the mill at Goose. But McLeod believes George is destined to become a second standalone mine once Goose is put into production. It’s a strategy both Agnico Eagle (Amaruq) and TMAC Resources (Boston) are following with their multi-deposit Nunavut gold districts.
EXPLORING A VAULT
The greatest upside potential, however, is probably where Sabina is drilling now – at the Llama extension and the Umwelt Vault zone. Particularly the latter. Vault assays are outstanding from the summer drill program, which included about 4,000 metres of Vault drilling. A spring hole there hinted at the richness, returning 16.86 g/t gold over 13.5 metres, including 27.11 g/t over 7.95 metres.
The Vault targeting is follow-up from rich 2011-12 intercepts, including 17 metres of 49.24 g/t Au. For perspective, that grade is roughly equal to GT Gold’s (GTT-V) recent intercept that helped send that Golden Triangle-focused play to a $200-million market cap briefly (Sabina’s market cap is $515 million). Except Sabina’s 2012 hole was 17 metres, compared to 6.95 metres for GTT. I asked VP Ex Angus Campbell why the rich hits weren’t followed up on at the time – he said the focus then was on building open-pit ounces.
On the infrastructure and development front, Sabina plans to truck supplies to the mine via a 157-km winter road built every year at a cost of $8 million. The CEO described it as a “fairly simple” road, logistically. Sabina will have about 45 days to truck supplies from the marine laydown area, in southern Bathurst Inlet, to the Goose camp.
Sabina is not banking on it, but a Northern road plan that has been decades in the making could also intervene to lower costs for the project. That’s the Grays Bay port and road initiative, a plan for an all-season 230-km road from a deep-water Arctic port that connects to the Yellowknife winter road. With the buy-in of the Kitikmeot Inuit Association, which also strongly supports Back River, this iteration of the plan looks closer to reality than it has for some time. The road would be closer to the George deposit than Goose, but could result in significant savings.
THE PATH FORWARD
Resource Opportunities initiated coverage on Sabina Gold & Silver on May 18, 2015, during the bear market. The catalyst for coverage was McLeod’s hiring. When I met him and Sabina’s VP Communications Nicole Hoeller in a Vancouver coffee shop, McLeod gave me a taste of his tenacity: “My philosophy is like the Italian rule of driving: you rip the rear-view mirror off, put your foot on the gas and it doesn’t really matter what’s behind you but you’re moving forward … You’re not going to let your foot off the gas.” The line implies recklessness, but it’s more about a single-minded focus on advancing projects.
McLeod could not have foreseen the dark days of summer 2016, but the philosophy served him well during that period. That’s when the Nunavut Impact Review Board (NIRB) recommended to the federal government the rejection of the Back River project as currently constituted, despite widespread Inuit and community support. The reasons given were concern over caribou and climate change implications. Ottawa flipped the tables, rejecting the NIRB’s conclusions and ordering the regulatory agency to re-examine its findings. That resulted in a positive recommendation. A final ruling from the federal government is expected before year-end.
The number of high-quality gold discoveries in recent years has dropped along with the exploration budgets of the majors. Ore grades have steadily fallen and the miners are more reliant than ever on junior exploration companies to fill the supply gap. There are precious few district-scale, high-grade gold projects in safe jurisdictions. Sabina’s Back River fits the bill and has no fatal flaws. I expect Sabina to be acquired by a large gold mining company, at prices well above the current levels. In a rising gold price environment – not a given, a bidding war could well be the outcome.
I have described Sabina previously in the newsletter as a kind of triple leverage play, and it still holds true. The shares were at bear market levels of 39 cents when I initiated coverage, and Sabina had 194 million shares outstanding. Importantly, the share count has risen only 30 million since then as the stock has increased sixfold.
That’s in the rear-view mirror, of course, and the key question is what kind of upside exists from current levels. Gold is showing weakness again, following an increase through US$1,300/oz and rapid rise to $1,350. But I expect the precious metal to resume its rise in an easy-money world, and Sabina’s 7.2 million ounces make the company’s shares an ideal vehicle for exposure to gold. I have added to my position at levels above the current share price. The following factors give Sabina multibagger potential from these levels, and tremendous leverage:
Exploration – Drill plays have been getting much of the love in recent months. GT Gold Corp and other plays focused on British Columbia’s Golden Triangle plays have been leading the charge, but there have been others. The junior market’s enthusiasm for drill plays and ambivalence towards development plays reminds me of the Benjamin Graham quote: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” Sabina’s recent drill results compare favourably with many drill plays that have added tens of millions of dollars of market cap on favourable assays. In Sabina’s case, the assays are overlain on a very high-grade, FS-stage gold project and potentially have a direct favourable impact on project economics. Votes come and go but the weight remains.
Takeover premium. Recent takeover premiums in the gold space have been at healthy premiums (see below). In Sabina’s case, the strength of the project means the premium should at least match the highest-ranking, Integra at about 50%. That offer came from a major (Eldorado Gold) that already owned about 13% of Integra shares. Sabina has no such partner, one of the reasons a bidding war is quite possible. Dundee Precious Metals and Sun Valley Gold are the largest shareholders, each with just above 10%. Here are the takeover premiums a few of the more recent takeovers. The premium to the last close is first, followed by the premium to the 20-day volume-weighted average share price:
3. Silver royalty: Sabina retained a valuable royalty when it sold the prior flagship project, the Hackett River polymetallic deposit, to Xstrata (now Glencore). It’s a 22.5% royalty on the first 190 million ounces of silver produced, and 12.5% on the remainder. Hackett River is one of the world’s largest undeveloped VMS deposits and the main price is zinc. Zinc has soared from below US70 cents/lb in January 2016 to about $1.40 today. The royalty was previously assigned a value of $300 million by analysts, and McLeod contends it would trade at a valuation of $300-$400 million in the portfolio of a larger royalty company such as Wheaton Precious Metals or Royal Gold. The silver royalty gets little to no value in Sabina’s portfolio.
Suitors? It’s a long list. Goldcorp has telegraphed its intention to only acquire district-scale projects, and Back River fits the bill. The project is superior on almost every level – grade, size, scalability – to Kaminak’s Coffee project and Goldcorp spent $520 million to purchase that operation. This is pure speculation, but I bet B2Gold CEO Clive Johnson would also love to open a high-grade gold mine in Canada to go with operations in more exciting jurisdictions that include Mali, the Philippines and Burkina Faso.
Management is the single most important ingredient in the junior mining sector, and Sabina’s is impressive. When he took over as CEO, McLeod refocused the company, trimming some fat and beefing up insider skin in the game. Under his stewardship, Sabina has smartly increased the quality of the gold ounces while controlling the share structure. I was impressed during the site visit by both VP Ex Angus Campbell and Exploration Manager James Maxwell.
Finally, a small detail. Sometimes, they tell a tale. There was no swag on the site visit – company shirts, ball caps, pens, etc – and clearly cost considerations were front and centre for Sabina. I’ve seen lots of swag from plenty of lesser projects in my travels. As a shareholder, seeing that kind of focus on the lesser details reassured me that Sabina will pay close attention on the big details, too – such as a fair takeout price.
Sabina Gold & Silver (SBB-T) Price: $2.30 Shares outstanding: 224 million (243M f-d) Treasury: $36.6 million (as of June 30, not including financing proceeds) Market cap: $515.2 million
Disclosure: I own shares of Sabina Gold & Silver and the company paid for costs associated with the site visit. Readers are advised that the material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions. They may from time to time have a position in the securities of the companies mentioned herein, and may change their positions without notice. (Any positions will be disclosed explicitly.)
IDM Mining is a Resource Opportunities sponsor company.
In the summer of 2016 I visited IDM Mining’s Red Mountain high-grade gold project in northwestern British Columbia for the first time, and most of the underground workings were still flooded with water. The conditions were a testament to the project’s mothballed status before IDM took over. To the weather, as well: the mountains outside of Stewart get plenty of precipitation in the form of both rain and snow. Some fell during that mid-summer visit.
When I returned recently, most of the water in the two kilometres of underground workings had been pumped out. Our group of analysts and investment bankers was able to hike deep inside the mountain. We crossed the portal and CEO Rob McLeod walked us through a damp, dark world, past several crosscuts accessing mineralized zones as well as sites where the underground drill was turning.
The gold grades have to be rich to make a mine economic in such an environment, and Red Mountain ore is. IDM’s latest intercepts, announced Sept. 5, are the highest-grade ever recorded at Red Mountain: 4.9 metres of 149.2 g/t gold and 59 g/t silver in the Marc Zone, the first mineralized area to be mined. The hit included 0.5 metres of 1,400 g/t Au and 437 g/t Ag. Average grades of reserves at Red Mountain are 7.53 g/t Au and 21.86 g/t Ag – multiples of global grades being mined.
Majors including Lac Minerals and Royal Oak Mines spent several million dollars blasting out the portal and underground decline before abandoning the project, which IDM CEO Rob McLeod had worked on as a junior geologist. IDM optioned the 17,125-hectare project in 2014 and has systematically advanced it to the permitting stage. A recently published Feasibility Study shows an after-tax NPV of $104 million with an IRR of 32% and a 1.9-year payback, at a 5% discount. That’s based on US$1,250/oz gold and a 76-cent Canadian dollar. Average life-of-mine head grades are 7.53 g/t Au and 21.86 g/t Ag. By comparison, the average gold grade of producing mines, globally, is about 1 g/t Au.
Red Mountain is located in a beautiful corner of the world populated by snowy mountain peaks, glaciers and scenic vistas. We hiked to the top of a ridge as CEO McLeod gave us a tour that was equal parts geology and history. The bird’s-eye view included Bromley Humps, the area that will host the mill and the tailings area (we later visited by helicopter).
IDM Mining CEO Rob McLeod points toward the mill/tailings facility location in the Bitter Creek Valley.
The Golden Triangle’s history of high-grade gold mining points to its potential. Pretium’s Brucejack is just the latest in a region with a long list of past producing high-grade mines, including Snip, Eskay Creek, Premier and Granduc. And IDM’s development is part of a Golden Triangle revival that is driving some incredible share price gains among area drill plays. The most notable is GT Gold Corp., whose shares started 2017 at 25 cents and have rocketed above $2.50 on drill results. The stellar initial intercepts included 6.95 metres grading 51.53 g/t gold and 117.38 g/t silver. The stock surge has vaulted GT Gold to a market capitalization of almost $200 million. That compares to about $50 million for IDM, whose Red Mountain is an FS-stage advanced development project with a defined deposit and lots of upside.
Proven and probable reserves at Red Mountain contain 1.953 million tonnes at an average grade of 7.53 g/t Au, for 473,000 gold ounces, and 21.86 g/t Ag, for 1.373 million silver ounces. Most of the ore is found in three mineralized zones: the Marc, AV and JW Zones. Underground step-out drill results released by IDM this summer hint at the upside potential at Red Mountain. Intercepts have included:
4.9 metres of 149.2 g/t Au & 59.9 g/t Ag, incl. 1,400 g/t over 0.5m (U17-1289, Marc Zone)
8 metres of 12.28 g/t Au & 27.07 g/t Ag (U17-1274, SF Zone step-out)
14 metres of 10.65 g/t Au & 17.37 g/t Ag (U17-1262, JW Zone step-out)
8.6 metres of 12.33 g/t Au & 70.9 g/t Ag (U17-1245, JW Zone step-out).
Other high-grade Canadian gold plays are being picked off by majors, one by one. Recent projects that have been purchased include Lake Shore Gold ($945 million by Tahoe), Kaminak ($520 million by Goldcorp) and Integra ($590 million by Eldorado). The latest to be snapped up was Richmont Mines, a high-grade underground producer recently acquired by Alamos Gold for $933 million. Richmont produces gold at two underground mines in Ontario and Quebec.
In USD terms, the price of gold has increased about 15% this year, from $1,150 to the current $1,325. Yet IDM shares have remained at the 14-cent range, after hitting 21 cents about a year ago. Here are five reasons IDM shares are worth a closer look at these levels:
The global gold mining industry is facing a supply crunch. Demand remains strong, driven primarily by the Asian appetite, ETF inflows and central bank buying. But on the supply side, gold mining companies are struggling to keep pace. It’s primarily due to a lack of new discoveries, a trend that is forcing miners to process lower-grade ore as they deplete existing ore bodies. The average grade at producing gold mines, globally, is about 1 g/t Au. It’s a worrying industry trend since grade remains king, as well as being a key determinant of the profitability of gold mining companies. That puts a target on IDM Mining’s Red Mountain, which has gold grades multiples of the global average. Cash costs net of silver credits for the Red Mountain project would be US$492/oz, according to IDM’s recent Feasibility Study.
Smart management teams purchase unloved, unwanted assets for pennies on the dollar during bear markets, then turn them into viable economic projects in time for the commodity upcycle. That’s the playbook for IDM and the timing looks good, especially with gold’s push above $1,300/oz. IDM leveraged millions of dollars of prior development, including almost 2,000 metres of underground tunnels. The infrastructure advantage extends to road access from Stewart, as well as plentiful and cheap power. British Columbia has some of the least-expensive industrial power rates of any jurisdiction in the world.
Stewart is Rob McLeod’s hometown and he has deep family roots there, which makes construction of a mine at Red Mountain personal. The town of Stewart used to be a thriving mining hub but is heavily exposed to the cyclicality of the sector. For example, Stewart’s 1910 population of 10,000 dropped as low as 17 people less than a decade later, during the First World War years. Rob’s father Ian McLeod and his uncle Don (after whom IDM is named) prospected mountains in the region for gold – including the property that now hosts Pretium’s high-grade Brucejack mine. Stewart boomed again with the opening of the Premier mine, which operated from the 1920s to 1952 and was North America’s largest gold mine.
How deep are the CEO’s ties to Stewart? Rob’s father was born in Stewart in 1927 and served as mayor for 15 years. He also owned the King Edward Hotel in Stewart from 1952 to 2001. IDM’s Executive Chairman is Mike McPhie, a mining veteran who was CEO of Curis Resources (bought by Taseko Mines) and a director of Silver Quest Resources (bought by New Gold). Another third-generation miner, engineer Ryan Weymark, joined IDM Mining in the spring. His father and grandfather were also mining engineers and spent their careers at Teck Cominco.
4. RESOURCE UPSIDE
IDM’s high-grade stepout hits at Red Mountain mean the 5.4-year mine life outlined by the Feasibility Study is likely to be extended, perhaps considerably. Infrastructure costs for a mine would be fixed, so finding additional ounces is highly accretive to mine economics. And the upside goes beyond defining additional ounces at Red Mountain. Glacial melt has uncovered areas of mineralization that have never been drilled or explored, such as Lost Valley. A resource update is expected in the first quarter of 2018.
Lost Valley gold mineralization
5. STRIKEPOINT GOLD STAKE
A deal IDM announced in late 2016 has given the company a call option on a promising portfolio in the Yukon, one of the world’s hottest exploration jurisdictions. The company sold its Yukon projects (formerly owned by Ryan Gold) to Strikepoint Gold (SKP-V) for $4 million, most of it in StrikePoint shares. As a result IDM holds 18% of StrikePoint’s outstanding shares, joining other major shareholder Eric Sprott, who owns a 12% stake. StrikePoint’s VP Exploration is Yukon veteran Andy Randall, who was chief geologist for Ryan Gold when that Shawn Ryan vehicle spent $25 million to advance the Yukon projects. StrikePoint is spending $2.5 million this year to explore three properties: Mahtin, Pluto and Golden-Oly. The fledgling company, helmed by Shawn Khunkhun, has about $8 million in the treasury and is fully funded through 2018. IDM’s stake is worth about $2.9 million at StrikePoint’s current share price.
Disclosure: IDM Mining is a Resource Opportunities sponsor and the author is long IDM Mining shares, which makes him biased. This article is for informational purposes only. All investors are responsible for their own trades and need to do their own research and due diligence.
North Arrow Minerals is one of three Resource Opportunities sponsors.
The November 1991 discovery of diamonds in the Northwest Territories by Chuck Fipke and Stu Blusson put Canada on the global diamond map. It also triggered one of the largest staking rushes in the world, as hundreds of companies hurried north to find treasure.
A few years later, many had retreated to warmer climes. One company that remained in the hunt was Gren Thomas’s Aber Resources, with a large land package staked by Thomas and partners at Lac de Gras near the Fipke find. In the spring of 1994, an Aber exploration crew led by Thomas’s geologist daughter, Eira Thomas, raced the spring melt to drill through the ice in search of kimberlite — the rock that sometimes hosts valuable diamonds.
It was a longshot. Since the Fipke find, the great Canadian diamond hunt had virtually ground to a halt — despite the millions of dollars spent in search of the glittery stones. But the drill core from that final spring hole had a two-carat diamond embedded in it. The Diavik discovery meant it was game on for Aber — and Canada’s nascent diamond industry.
DIAMOND POWER PLAYER
A quarter century after that fateful hole was punched through melting ice, Canada punches above its weight in the world of diamonds. Measured by value, the country is the third largest producer of diamonds by value globally. And the valuable diamonds that continue to be unearthed at the Diavik mine discovered by Aber are a big reason why.
The discovery unleashed a wave of shareholder value. The shares of Aber and its successor companies went from pennies to more than $50 as the quality of the diamonds and the asset became known. Dominion Diamond Corp., as Aber is now known and which owns the Ekati mine and 40% of Diavik, is Canada’s premiere diamond company. Diavik is expected to produce about 7.4 million carats this year, making it among the world’s largest diamond operations.
The team behind the Diavik discovery has also created a fair amount of shareholder value in the years since, led by Eira Thomas. She has co-founded two diamond players, Stornoway Diamond Corp. and Lucara Diamond Corp., and remains a director of the latter Lundin Group company. Her most recent gig, as CEO of Kaminak Gold, ended rather well — Goldcorp bought the company for $520 million last year.
Thomas is also an advisor to North Arrow Minerals (NAR-V), a cashed-up junior company at the forefront of Canadian diamond exploration. Aber’s Gren Thomas is North Arrow’s chairman and the CEO is Ken Armstrong, a former Aber and Rio Tinto geologist. North Arrow recently raised $5 million to explore its portfolio of projects and a drill program is underway at its advanced-stage Naujaat project, which hosts a population of valuable fancy orangey yellow diamonds.
In a space with few new discoveries or development projects, Canada is home to two of the world’s new diamond mines. Stornoway’s Renard mine in Quebec and Gahcho Kue, a De Beers-Mountain Province joint venture in the Northwest Territories, have both recently begun commercial production.
Globally, the diamond industry has faced headwinds, including India’s demonetization and choppy rough stone prices. But diamonds remain a money maker for some of the world’s largest mining companies, including Rio Tinto (60% owner of Diavik) and Anglo American. Incoming Rio boss Jean-Sebastien Jacques identified diamonds as a “priority area” last year in a Bloomberg interview: “I would love to have more diamonds, to be very explicit.” The company recently backed up those words by signing a three-year, $18.5-million option on Shore Gold’s Star-Orion South diamond project in northern Saskatchewan.
And Anglo’s De Beers division remains a reliable profit generator. In 2016, rough diamond sales surged for both Anglo American (up 36%) and Russian producer Alrosa (up 26%), according to The Diamond Loupe. A recent hostile takeover bid for Dominion Diamond reflects the demand for well-run diamond mines, which are powerful profit machines.
The picture is less promising on the exploration front. Budgets dried up during the mining slump that began in 2011, and little grassroots exploration work is being done. It’s particularly problematic for supply because diamond mines take longer to discover, evaluate and build pharm. The new Canadian mines will help fill the gap, but it won’t be enough. Economic diamond discoveries have simply not kept pace with mine depletion, globally.
“There are definitely a lack of new projects, at least new projects that are close to infrastructure,” said Paul Zimnisky, a New York-based independent diamond analyst. “There really is not much at all in the global diamond production pipeline.”
Economic, world-class diamond projects are few and far between, and most exploration companies looking for them have failed, Zimnisky explained. That has resulted in wariness and declining interest among investors: “In general, shareholders have not done well in diamonds.”
The looming supply deficit is particularly acute for rare coloured diamonds, which fetch higher prices. Australia’s Ellendale mine produced an estimated 50% of the world’s fancy yellow diamonds before closing in 2015. The Argyle mine, also in Australia, is one of the world’s biggest mines and a source of valuable coloured diamonds, including extremely rare pinks. It, too, is slated to close in the coming years, after decades of production.
North Arrow’s Naujaat could help fill the void. The project hosts a population of fancy orangey yellow diamonds that are more valuable because of their rarity. Naujaat is on tidewater, which dramatically reduces costs, and hosts a very large diamondiferous kimberlite, Q1-4, that outcrops on surface.
It’s the focus of this year’s $3.2-million program, which will see North Arrow drill 4,500 metres and collect a 200-tonne mini bulk sample. The goal is to extend the Inferred resource to a depth of at least 300 kilometres below surface and better define the diamond population. The sample will be shipped south in late August and processed in the fall.
“There is excellent potential to extend the Q1-4 kimberlite at depth, beyond the reach of past drilling efforts,” said North Arrow CEO Ken Armstrong. “It’s the first drilling in more than 12 years. The work will help us confirm and update the size of Q1-4 and improve our understanding of the deposit’s internal geology and diamond distribution.”
In 2014 and 2015, North Arrow collected a small bulk sample at Naujaat (formerly known as Qilalugaq) with the goal of gauging diamond values. But the carat values on the small 384-carat package came in significantly below expectations. North Arrow shares were relegated to the market penalty box and the company has been largely under the radar since, despite important background work that set the stage for this year’s program.
RISK AND OPPORTUNITY
Contrarian investing and the ability to time cycles can lead to fortunes in the junior mining sector. Vancouver investor Ross Beaty has proven it, time and again. In the early 2000s, with copper trading for under US$1 a pound, his team assembled a portfolio of unwanted copper assets in a bear market. He developed and sold those projects during bull markets, turning $170 million in invested capital into shareholder returns of $1.87 billion. His latest win was a large bear-market investment in Kaminak Gold, later bought out by Goldcorp.
Beaty’s latest contrarian bet is on North Arrow, through a $2-million investment that was part of the recent $5-million private placement financing. Other investors included the New York-based Electrum Strategic Opportunities Fund ($2 million) and company management and directors. The money will fund an aggressive program at Naujaat including drilling and a bulk sample, as well as exploration at North Arrow’s Mel, Loki and Pikoo projects.
North Arrow also has exposure to drilling through the LDG (Lac de Gras) joint venture with Dominion Diamond Corp. That project borders on the mineral leases where Diavik is located. Ekati is 40 kilometres to the northwest. Dominion plans to drill several targets later this summer as part of a $2.8-million exploration program. North Arrow will have a 30% interest in the JV.
With a target on its back, Dominion is highly motivated to enhance shareholder value. And that extends beyond mine operations to exploration and new discoveries. In May, Dominion announced a “renewed strategic focus on exploration” and a $50-million, five-year exploration budget.
A FANCY EDGE
As for Naujaat, North Arrow is revisiting the project after a polishing exercise yielded fancy yellow diamonds that turned some heads in the industry. Several were certified “fancy vivid” diamonds, a coveted designation in the coloured diamond world. The quality of the polished stones suggests the fancy orangey yellow diamonds at Naujaat are considerably more valuable than the June 2015 valuation of the roughs indicated.
The primary conclusion of the diamond evaluators was that the 384-carat parcel of Naujaat diamonds was too small to properly evaluate. North Arrow plans to remedy that, in part, by collecting a 200-tonne bulk sample that should yield another 80 to 100 carats. The sample will be taken from the kimberlite’s highest-grade zone, A61. Lab results are expected in early 2018.
Another complicating factor at Naujaat is the presence of two distinct diamond populations of different ages, including a population of rare fancy yellow diamonds. It’s a consideration that was not factored into the prior carat valuation. It will be next time. Diamonds are a rarity play, and diamonds that occur less frequently — such as coloured diamonds and large diamonds — are more valuable. Yellow diamonds made up only 9% of the 2015 Naujaat sample by stone count, but more than 21% by carat weight.
The drilling at Naujaat is targeting kimberlite between 200 and 300 metres in order to bring material designated target for future exploration (TFFE) into the Inferred category. That drilling, plus the mini bulk sample, should help North Arrow better evaluate the diamond deposit on the path to a future Preliminary Economic Assessment. The Q1-4 kimberlite has a horseshoe shape that makes it amenable to open-pit mining and a low strip ratio. A larger bulk sample is planned for 2018.
Fancy yellow diamonds were thrust into the spotlight earlier this month when Dominion unveiled the striking 30.54-carat Arctic Sun, a fancy vivid yellow diamond cut from a 65.93-carat stone unearthed at Ekati. Dominion also played up coloured diamonds in their latest corporate presentation — specifically, the sweetener effect of high-value fancy yellow and orange diamonds at Misery.
The potential emergence of Canadian coloured diamonds could help solidify Canada’s position on the world diamond stage, according to analyst Zimnisky. On the branding and marketing side, Canadian diamonds continue to have strong appeal because of their high quality and ethical sourcing.
And the two recent Canadian mine openings are a bright spot for the global industry, despite early growing pains at both Gahcho Kue (lower-than-expected values) and Renard (breakage), he pointed out.
“There is absolutely an opportunity to sell Canadian diamonds at a premium, especially in North America,” Zimnisky said. The United States remains the world’s largest diamond market, despite the growth in demand from China and India.
Important hurdles remain before any mine is built at Naujaat, but the strength of North Arrow’s management team bodes well for success, according to Zimnisky.
“North Arrow is looking for something world-class and it’s high-risk, high-reward,” said Zimnisky, who has seen the company’s cut and polished fancy yellow diamonds: “They’re beautiful.”
The appetite for fancy yellow and other coloured diamonds remains strong, despite the closure or pending closure of two of the mines that produce many of them. Last year a De Beers store opened on Madison Avenue in New York, Zimnisky said, and the feature diamond on opening day was a very large fancy yellow of more than 100 carats.
Further north of Naujaat on Nunavut’s Melville Peninsula is another North Arrow project with a good shot at a kimberlite discovery. At the Mel property, 210 kilometres north of Naujaat, North Arrow geologists have narrowed down and defined three kimberlite indicator mineral (KIM) trains through systematic soil sampling over several seasons. Last year’s till sampling defined where the KIM train is cut off, suggesting the bedrock kimberlite source is nearby.
The discovery of a new kimberlite field this season is possible, since kimberlites in the region outcrop at surface. “It’s a first look, but there’s potential for discovery without drilling,” says CEO Ken Armstrong.
As for the Lac de Gras joint venture, the US$1.1-billion hostile takeover bid for Dominion unveiled by the private Washington Corp. earlier this year may work in North Arrow’s favour. In addition to spurring a stock surge, the bid forced the diamond miner to crystallize its focus on creating shareholder value. And a key strategy for Dominion, with its two aging mines, is a renewed exploration push.
Finding new diamondiferous kimberlites in proximity to its existing operations would be a big boost for Dominion. One of its best shots is through the joint venture with North Arrow, which covers 147,200 hectares south of Ekati and Diavik. Dominion is spending $2.8 million on the project this season, including a planned drill program in the fall. North Arrow is well-positioned to capture the value of any Dominion kimberlite discoveries made.
North Arrow also plans to drill two or three promising kimberlite targets at its nearby 100% owned Loki project, dovetailing with the completion of the LDG drilling. The company has received a $170,000 grant from the Northwest Territories government to drill Loki. North Arrow will also conduct till sampling in the fall at Pikoo, its Saskatchewan diamond discovery, in advance of a potential early 2018 drill program.
Disclosure: Author owns shares of North Arrow Minerals. North Arrow is one of three company sponsors of Resource Opportunities, helping keep subscription prices low for the subscriber-supported newsletter. North Arrow Minerals is a high-risk junior exploration company. This article is for informational purposes only and all investors need to do their own research and due diligence.
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Initiating coverage on Trifecta Gold (TG-V) Share price: .29 Shares outstanding: 23.15 million Market cap: $6.7 million
The Yukon is now one of the hottest jurisdictions globally for gold exploration. Goldcorp kicked things off in the spring of 2016 with its $520-million purchase of Kaminak Gold and the 5-million-ounce Coffee project. Since then Barrick, Newmont and Agnico Eagle have also entered through investments in Yukon projects.
As the Yukon’s largest claims holder, Strategic Metals is poised to capitalize on the upsurge in interest. But the company wasn’t getting much value in the market for some prime projects in the highly prospective Dawson Range gold belt.
It is now.
Strategic packaged four of the properties — Eureka, Trident, Triple Crown and Treble — into a new company called Trifecta Gold, which began trading on the TSX Venture last Thursday with the symbol TG. The new exploration play has just 23.15 million shares outstanding and Strategic retains a 9.19 stake. The rest of the shares were distributed to Strategic shareholders, on the basis of 1 Trifecta share for every 4.5 Strategic shares.
Trifecta stock is trading at 29 cents, giving the company a market capitalization of about $6.7 million. That’s almost a triple already on the deemed value of 10 cents a share at spinout. It’s a great example of shareholder value creation in a sector where the opposite is too often the rule. But I believe there is considerably more upside and have added to my position since Trifecta shares began trading.
Trifecta plans to initially drill 800 to 1,000 metres at each of Eureka and Trident, and conduct earlier-stage exploration at Treble and Triple Crown. Follow-up drilling later in the season is also possible, as merited, at any of the four properties. Eureka, Treble and Triple Crown are Strategic claims, while Trident includes ground Strategic staked as well as two optioned claims packages.
Eureka is an orogenic gold project located in the south of the storied Klondike Goldfields, along the proposed road route between Goldcorp’s Coffee and Dawson City. The lack of a significant bedrock gold source is one of the Klondike’s great mysteries. More than 20 million ounces of placer gold have been pulled from Klondike waterways since the great Gold Rush. But finding the bedrock source of all that gold has been an illusive quest.
Eureka straddles the headwaters of Eureka and Black Hills creeks, which together have produced at least 200,000 ounces of placer gold since 1978. The characteristics of the gold suggest a nearby source. The property has a 6-km by 2.5-km zone of gold-in-soil geochemical anomalies that has not seen much trenching or drilling.
But it’s the Trident project that may hold the most promise. Trident is located near the Yukon-Alaska border about 75 kilometres northwest of Goldcorp’s Coffee. The project includes claims staked by Strategic, as well as claim blocks optioned from a prospector (CH) and Metals Creek Resources (Squid). It’s road-accessible and has a gravel airstrip but has also seen limited trenching and drilling.
Drilling in 2013 by another operator during the bear market hints at the possibilities. Intercepts included 21 metres of 1.55 g/t gold and 114 g/t silver and 12 metres of 1.7 g/t Au and 81.78 g/t Ag. An overlying trench turned up 22 metres of 1.96 g/t Au and 160.6 g/t Ag.
Trifecta’s CEO is Dylan Wallinger (right), a former Archer Cathro project manager who resigned as a partner to take the helm of the new White Gold-focused company.
He said the idea at Trident is to aggressively explore the optioned ground and “prove it or kill it.” Trifecta plans a $3-million financing soon to top up the $500,000 currently in the treasury.
Wallinger got a taste of Yukon gold discovery while working at ATAC’s Rau property in the summer of 2010 as part of an Archer Cathro field crew. He split the core that turned out to be the Osiris discovery hole, which returned 9.26 g/t gold over 31.13 metres.
That discovery and subsequent high-grade gold hits that helped identify several deposits propelled ATAC shares to the $9 level in 2011 — and Strategic shares above $4.
In addition to being young and hungry — he’s 30 — Wallinger has a family history steeped in the mining industry, on both sides of the family. His path to Trifecta leads through storied Canadian mining districts such as Timmins, Ontario, and Faro, Yukon and companies including Cominco.
Wallinger’s great great grandfather, Noel Wallinger, was British Columbia’s gold commissioner from 1914 to 1922 and a former Conservative Member of B.C.’s Legislative Assembly. Both of Dylan’s grandfathers and several other relatives worked at the Yukon’s Faro mine, once the world’s largest open-pit zinc-lead operation.
Dylan Wallinger’s father, Neil Arnold-Wallinger, is third from left at top. Myra Falls mine, B.C.
Wallinger’s parents met in high school at Faro and both subsequently worked at the mine, as well. More recently, his father worked at Nyrstar’s Myra Falls polymetallic mine on Vancouver Island.
As for Trifecta, the new company’s other two properties — Triple Crown and Treble — are located between Coffee and Rockhaven’s Klaza deposit. They are earlier-stage, but prospecting has turned up some promising sniffs. One rock sample from Triple Crown assayed 6,680 g/t silver. Trenching returned 570 g/t silver, 2.76% lead, 0.08 g/t gold over 6.4 metres and 106 g/t silver, 0.84% lead and 0.03 g/t gold over 9.6 metres.
It is said that the best place to find a new mine is in the shadow of an existing head frame. That “closeology” thesis holds equally true in exploration. And Strategic has exposure — through prime land positions or equity stakes — to all of Yukon’s most exciting discoveries. That includes a significant equity stake in Arcus Development Group (ADG-V), exploring Dan Man on Coffee’s doorstep, and extensive land holdings bordering ATAC’s Rackla property, where Barrick Gold recently invested.
Yet Strategic’s share price has barely moved, creating a significant discrepancy between the share price and the energy that has been building in the Yukon. One of the knocks on project generators is the “holding company discount” and a structure that dilutes the tremendous shareholder value that can be created from discovery. It’s one of the reasons Strategic decided to spin out Trifecta Gold, crystallizing the value in four promising projects in one of the world’s hottest mineral belts.
Strategic CEO Doug Eaton has seen it before. The Archer Cathro principal has decades of experience on the ground and personal involvement in many of the Yukon’s best mineral discoveries. Archer Cathro is a storied Yukon geological consultancy with a proprietary database that Strategic has full access to (Strategic and Archer Cathro share offices).
“There is so much unlocked value in Strategic, we could do this 8 or 10 times with other properties,” Eaton comments.
Trifecta is the third company that Strategic Metals has spun out to shareholders. The second was Silver Range Resources (SNG-V), which has a market cap of about $16 million and is focused on high-grade gold prospects in Nunavut, Northwest Territories and Nevada. The first spinout was an ill-fated zinc spinout that launched just before the 2008 financial crisis hit.
The timing for Trifecta Gold’s emergence, however, could not be better. Yukon-focused exploration companies are deploying hundreds of millions of dollars in the hunt for bedrock gold, their treasuries fortified by some of the world’s biggest gold miners. Strategic itself has exposure to tens of thousands of metres of drilling this season through its equity stakes in ATAC (7.3%, worth about $6.2M) and Rockhaven (42.5%, worth $9.4M) alone.
The value of those two stakes alone plus Strategic’s $16-million cash position is $31.6 million, compared to a market cap of about $49 million.
The Trifecta spinoff is a classic “making the pie bigger” move. The timing could be exquisite. Owning Strategic Metals, the Yukon’s largest claims owner and most experienced operator, gives investors broad-based exposure to one of the hottest gold exploration jurisdictions, globally. The Trifecta listing positions speculators to experience the type of explosive share price appreciation that can accompany discovery.
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Disclosure: James Kwantes owns shares of Trifecta Gold, Strategic Metals, ATAC Resources, Arcus Development Group and Rockhaven Resources. Strategic Metals is one of three Resource Opportunities sponsor companies. Readers should always conduct their own research, do thorough due diligence and/or obtain professional advice. This article is solely for information purposes. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions.
Their unique combination of portability and value make diamonds a favoured target of thieves, both on the big screen and in real life.
In The Pink Panther, a distinctive pink diamond was fodder for several movies worth of escapades between bumbling Inspector Clouseau and the elusive jewel thief.
Away from the screen, one of the biggest thefts was the Antwerp diamond heist of 2003. Thieves planned it for years, including posing as diamond merchants and renting office space in the Antwerp Diamond Center. They then made off with more than US$100 million in diamonds and jewelry from a heavily fortified safe. The bad guys were arrested; the gems were never found.
However, the greatest diamond heist of all time didn’t involve masked men, gunpoint or intricate plans concocted over several years. In fact, it didn’t involve coercion at all.
It went down rather quietly in the fall of 2009 when upstart Lucara Diamond Corp. bought a controlling interest in AK06, a De Beers diamond project in Botswana, for US$49 million. De Beers’ discovery of the nearby AK1 kimberlite — now Orapa, the world’s largest diamond mine — had launched a diamond district in Botswana’s Kalahari desert. But the diamond giant was now shedding assets and William Lamb, then Lucara’s only employee and now its CEO, was looking.
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Lamb had been hired the previous year by Lukas Lundin, the Swedish tycoon whose international mining empire is based in Vancouver. The idea of a diamond company called Lucara was hatched earlier during a Lundin lunch with Catherine McLeod-Seltzer and Eira Thomas (who contributed the “ca” and “ra,” respectively, for the company name). Lamb spent more than a year scouring the globe for prospective diamond projects and plotted them on a spreadsheet, he told me during an interview in Botswana. AK06 made his short list.
He ironed out the purchase price for a 70% stake in AK06 during a 5-minute phone conversation with an executive at De Beers, where Lamb had worked for several years. Lucara later bought out JV partner African Diamonds — who couldn’t afford to fund their share of mine construction costs — to take control of 100% of the project. AK06, of course, became the Karowe mine, the source of many of the world’s largest and most valuable rough diamonds. Lucara has now sold 145 diamonds for more than US$1 million each, generating US$528 million.
Lucara sells its largest stones through Exceptional Stone Tenders, where buyers submit sealed bids over a number of days. On May 11 Lucara announced sales proceeds of US$54.8 million from its latest tender, the largest yet. The sale featured 15 diamonds for a total of 1,765 carats, including a 374-carat Type IIA diamond, below, that fetched US$17.54 million. The 374-carat stone broke off the 1,109-carat Lesedi La Rona, the world’s most famous diamond. It was purchased by Graff Diamonds, whose owner Laurence Graff is arguably the most powerful player in the global diamond trade. I suspect he desires the larger companion piece.
The “Lesedi La Rona” — “Our Light” in the local Tswana tongue — was unearthed in November 2015. It is the largest gem-quality diamond recovered in a century and the second largest ever. The stone was named last year in a contest open only to Botswana residents. Last year Lucara put the Lesedi up for live auction at Sotheby’s in London. But the diamond failed to sell because bids didn’t hit the reserve price. More on that later.
Lucara sold the 813-carat Constellation diamond, recovered at about the same time, for US$63 million — a record for a rough diamond — as well as a share of the profit generated from the cut stone. Notably, the price tag for the Constellation exceeded what Lucara had paid just seven years earlier for a controlling interest in the mine that produced it.
I travelled to Botswana recently to visit Lucara’s operations and learn more about both where the company has been and where it’s going. Also on the tour was the Africa correspondent for a Swedish daily newspaper and an analyst for Nordea, a large Swedish bank. There are plenty of reasons to be bullish Lucara and I have purchased more shares in the company since I returned.
“Big” and “beautiful” were recurring themes of the trip. After the site visit, I went on a two-day safari at a lodge on the Boteti — the only river that runs through the Kalahari Desert. Watching elephants, hippos, lions, giraffes and zebras in their natural habitat was an amazing experience. Fun fact: a group of zebras is called a “dazzle.”
BOTSWANA, DIAMOND POWERHOUSE
I flew into Gaborone, Botswana’s capital, through Frankfurt and Johannesburg. “Gabs,” as the city is known colloquially, has become a global diamond centre as Botswana has risen among the ranks of producers. The African nation is now the second largest producing nation by value, unearthing 22% of global supply, as outlined by New York-based diamond analyst Paul Zimnisky (Russia is first, Canada third). Most of the Botswana stones come from the Jwaneng and Orapa mines, located in the same neighbourhood as Karowe.
In 2013, De Beers moved its sorting and sales operations to Gaborone, an exclamation mark on Botswana’s emergence as a diamond power. Botswana owns the other 15% of De Beers not owned by Anglo American, as well as 50% of Debswana, a De Beers JV. Diamonds generate up to 50% of government revenues, funding universal health care and education (including post-secondary). Botswana is one of Africa’s fastest-growing economies and has a higher GDP per capita than South Africa.
One of the first stops for our small group was the gated Diamond Technology Park (DTP) on the outskirts of Gaborone. The compound is the headquarters for Lucara and other Botswana diamond miners. Down the street is the De Beers sorting centre. A helipad atop that building attests to former De Beers boss Nicky Oppenheimer’s fondness for helicopter transportation.
The DTP is ground zero for the billionaires, royalty and other high-net-worth investors who fly in from around the world to view Lucara’s finest merchandise: large rough stones that sell for millions — sometimes tens of millions — of dollars. The company picks up clients at the airport and whisks them in limousines to Lucara showrooms. Some spend hours with a single stone — investigating the clarity, evaluating the colour, envisioning the cut possibilities. The 1,109-carat Lesedi La Rona was not part of the latest Exceptional Stone Tender. But presumably some of the clients who flew in to view the diamonds on offer also viewed the Lesedi.
Security measures were extensive. My fingers were printed and retinas scanned. Later, on the way in to Lucara showrooms, I was searched in a secure room. On the way out, I was asked to remove a candy from my mouth to show that it wasn’t something much more valuable.
Steve Lincoln, Lucara’s sales manager, is a former De Beers man — like many in the sector. He led us into a room that shimmered with diamonds grouped by weight, colour and quality. Here, a group of 5- to 10-carat stones. There, a selection of the diamonds being sold in the Exceptional Stone Tender. Most were white and clear. Among them was the beautiful 374-carat Type IIA stone that went for almost US$18 million.
LESEDI LA RONA
Our final stop was at the icy elephant in the room. Sitting by itself on a white table under a row of lamps was the Lesedi. I picked up the rock, muscles adjusting to its heft as I cradled it in my fingers. Looking into the diamond through a loupe, what struck me was the stone’s architecture. Beyond the clear, smooth plane where the 374-carat diamond cleaved off were ridges, soft pools of light, jagged edges, rippled valleys. Close up, it’s easy to get lost in the stone’s landscape. The diamond occupies its own world.
And in the diamond world, news of its arrival landed like a lightning bolt. Once cut and polished, the Lesedi could be among the world’s largest clear diamonds. The largest, the 530-carat Great Star of Africa (or Cullinan), was cut from the 3,106-carat Cullinan diamond — the only larger diamond ever found. The Great Star is set into the British Crown Jewels. But not only did the Lesedi break, it broke the mould. The diamond’s size makes it difficult to determine how many stones could be cut from it, or how they might look. The rock doesn’t fit into the largest scanners made for diamonds.
The diamond’s incredible narrative was derailed by the unsuccessful auction. Following a global road show and marketing campaign, the Lesedi La Rona failed to hit the (undisclosed) reserve price at a glitzy live auction in London on the evening of June 29, 2016. The top bid was US$61 million, less than the Constellation had fetched and far below projections of a potential US$100-million sale price. The Constellation’s per-carat price, US$77,500, implied an US$86-million value for the Lesedi — plus a large premium given the stone’s provenance.
The fate of Lesedi La Rona remains the million-dollar question — perhaps, the $100-million question. Interest remains high — Lamb fields calls about the diamond most days (two on the day of the interview). Cash offers are rejected out of hand. A few members of the cast of characters drawn out by the giant diamond have been particularly interesting, Lamb said with a smile. He didn’t elaborate.
As author Matthew Hart documented in an Aug. 5, 2016 feature in Vanity Fair, it wasn’t for lack of interest that the auction fizzled. Moments after the hammer fell, Laurence Graff’s son rushed up to the CEO to express interest in the stone.
DIAMANTAIRES AND DISRUPTION
In the diamond business, diamantaires are the middlemen. They privately purchase rough stones from producers, cut them and take their cut of the value created. It’s a traditional, secretive system that goes back centuries. Lucara was the upstart that shook the foundations of that established order by auctioning the world’s most desirable stones.
“Diamantaires felt that we were trying to sell the stone to their end client,” CEO Lamb, right, states matter-of-factly. “The diamantaires hate the public process. … they will pay you more for that exclusivity.”
It goes some way to explaining why the second largest gem-quality diamond ever recovered, a stone with historical significance, failed to sell at the live auction.
Lamb reasons that Lucara is actually helping other producers — especially the handful of other producers that recover very large diamonds — by controlling the supply of such stones through orderly tenders. The company could easily swamp the market for large diamonds, he points out.
As for the auction, the company did not get to the pinnacle of the large-diamond world by shying away from calculated risks, the CEO noted. The live Sotheby’s auction, he acknowledges, was an experiment. The exercise, driven by the significance of Lucara’s find as Lamb tells it, didn’t ultimately pay off — at least monetarily.
“We wanted to maximize shareholder value and let the world know that we had recovered the only 1,000-carat stone that anybody on the planet had ever seen.” (The Cullinan was unearthed in 1905.)
Lamb continues: “It’s not because we just love the risk and we sort of don’t pack our parachute and jump out of the plane. We’re packing the parachute very meticulously. We’re going to the edge of the cliff and we’re jumping, knowing that we’ve actually done our homework.”
As “failures” go, the Lesedi La Rona marketing blitz and auction was rather successful. The company estimates about 1.8 billion people — a quarter of the world’s population — have either seen, read about or heard about the diamond. But only about 100 people have held the stone, and the list of potential buyers is shorter yet. The diamond’s fate has weighed on company shares, which have drifted down from the $4 level pre-sale to below $3.00.
Eighteen months after its discovery, Lamb still becomes animated when talking about the Lesedi. The diamond, forged deep within the Earth over billions of years, is likely as old as the Earth itself, the CEO enthuses. “That stone was growing as the Earth cooled down … the Earth was just gas clouds collecting. While that gas cloud is collecting, those carbon atoms were already trying to find each other. The stone was starting to grow that far back.”
Tall and trim, Lamb is a former elite athlete who has represented South Africa at the world track and field championships (he once placed fifth in the duathlon). Running remains a passion — a recent excursion with a friend and his son saw Lamb start at one edge of the Grand Canyon, run down and through it, and up the other side (it took him 4.5 hours). I got the sense that blazing a trail through the traditional diamond industry — not to mention proving naysayers and skeptics wrong — brings out his competitive juices.
That said, other extraordinarily large diamonds the company finds will likely not be sold at live auction. “We learn from our mistakes. We wouldn’t go back to auction.” Lucara is investigating various options for selling the Lesedi, Lamb said, including partnership and/or retaining a financial interest in the polished product.
A humorous moment in the showroom, which had an empty diamond scale sitting on the table when we walked in. When the Lesedi La Rona was placed on the platform, the reading that came up was 1,106 carats — prompting a few laughs as well as nervous glances between company officials. As it turned out, the scale had not been calibrated after it had been moved into the room. The stone does, in fact, weigh 1,109 carats.
TWO SUITCASES, $1 BILLION IN STONES
After viewing some of the most valuable stones pulled out of Karowe, we flew to the mine for a tour of the operation. It started in the open pit, which measures 820 metres across at its widest point and is about 80 or 90 metres deep. Weekly dynamite blasts loosen up the ore, which is transported out by 100-tonne dump trucks. The strip ratio is in the range of 5 or 6:1 for the next couple of years, then drops to below 2 due to the shape of the kimberlite. Lucara will then shift focus from accessing the treasure to mining it. The bottom of the pit will get about three times as deep by the end of the current mine life, in 2026.
Lucara recently brought in a new mining contractor at Karowe, a move prompted by consistent over-billing by the previous contractor for volume of ore processed, Lamb said. Open-pit mining was shut down for two months during the transition but operations were not affected — Lucara mined from stockpiles. It has worked out alright, Lamb says — the new contractor is cheaper and has more capacity.
About 40 million cubic metres of rock have been processed since Karowe opened. The diamonds recovered could fit in two suitcases. They have generated a billion dollars in revenue, and counting.
Lucara is working on economic studies — due out later this year — on an underground expansion that would extend the Karowe mine life well beyond 2026. And it’s the expansion that could really drive profitability if Lucara can continue to pull large stones out of the south lobe. That’s the largest kimberlite, from which the Lesedi and Constellation were unearthed. Lucara completed a deep drilling program at Karowe in February that included a 758-metre drill hole. An updated resource estimate is expected in Q4.
Lucara is also building a Mega Diamond Recovery unit (MDR) at Karowe. A particular challenge of diamond mining, especially for Lucara, is avoiding breakage during a process that consists of crushing and grinding rock into progressively smaller pieces. The MDR, at a cost of between $15 million and $18 million, will divert the largest stones at the front end of the mining process. The unit will be able to recover stones as large as 45-50mm. Lamb refers to the recovery of large stones as “mining money” and the MDR will help Lucara recover the largest, most valuable stones intact. The company is also installing four new XRT (X-ray transmission) diamond recovery units.
Viewed from the primary crusher — the first point of entry for the ore and one of the highest points of the mine — the operation resembles a kind of amusement park. The ball mill is the Ferris wheel, the conveyors the roller-coasters that deposit sometimes precious cargo at the next stop. In this Darwinian adventure park, only the most valuable cargo survives a series of crushing and shaking exercises.
Karowe has a been a phenomenal success, by many metrics. The mine was built in just 18 months and had a 9-month payback. In December 2016, just four years and eight months after the very first diamonds were produced, Lucara passed $1 billion in sales. The company implemented a dividend in 2014 and has now paid out more dividend dollars than it has raised in equity. The dividend policy also broke new ground as the first company in the Lundin empire to pay one. It took six months to convince Lundin, Lucara’s chairman, to go with a dividend, Lamb recalls with a smile.
Karowe mine staff also reaped the benefits of the recovery of the 813-carat and 1,109-carat stones. Each employee received a 20-30% large stone bonus. Jobs in the Botswana diamond industry — which is large enough to ensure salaries remain competitive — are typically coveted positions.
At a $2.95 share price, Lucara’s market capitalization is about $1.13 billion. Last year the company paid out dividends totalling 51 cents a share — 6 cents in quarterly payments plus a special dividend of 45 cents in the months following the failed Lesedi sale. This year Lucara hiked the full-year dividend to 10 cents — a 60% increase — for a current yield of about 3.4%. The list of mining companies paying that generous a dividend is very short.
Lamb is open to adding assets through acquisition, but only if they are accretive — a tall order given Karowe’s profitability. Late last year Lucara purchased a 9.9% stake in Tsodilo Resources (TSD-V), an illiquid diamond exploreco that is currently drilling its BK16 diamondiferous kimberlite. BK16 is six hectares at surface, located in the same Orapa kimberlite field as Karowe, and hosts a population of rare Type IIa diamonds. The project is another De Beers discard and the company is run by Mike de Wit, De Beers’ former VP of exploration for Africa.
ROUGH START, EXCEPTIONAL OPERATION
The company’s value can be expressed in a single sentence: Karowe produces less than .5% of global diamonds by weight, but more than 50% of the world’s “specials” (10.8 carats plus). And those large stones command exponentially higher prices. A 100-carat diamond is much more valuable than ten 10-carat diamonds. A 1,109-carat diamond? Its price has yet to be determined. But the stone remains in Lucara’s inventory, as under the radar as a world-famous diamond can be. I will be surprised if it doesn’t sell this year.
Karowe was no overnight success, Lamb recalled during an interview after the mine tour, in nearby Letlhakane. Lucara’s first sale was underwhelming, with average carat prices coming in at US$215 (2016 revenue was US$824 per carat). It was a “disappointing” outcome, below projections, and the stock plunged from the $1.25 level to below 50 cents, Lamb recalled.
“We’re now panicking. We’re thinking, ‘We bought this dud from De Beers.’ What’s happening?”
Then in April 2013, Lucara recovered a 239-carat stone. It turned out to be a sign of things to come, and the company took immediate steps to modify the plant, decreasing the risks of breaking large stones. Ever since, a steady stream of beautiful, unusually large stones — and the high prices fetched for them — have made Karowe one of the world’s most profitable diamond mines on a per-carat basis. Debswana’s nearby Orapa mine, the world’s largest diamond operation, mines more carats in two weeks than Lucara does at Karowe in a year. But size matters — Lucara has now sold 145 diamonds for more than $1 million each, generating revenues of more than US$528 million.
The company’s greatest success came in November 2015, when Lucara unearthed the three largest diamonds it has ever recovered in the space of a week. In addition to Lesedi La Rona and Constellation — the sixth largest gem-quality diamond ever recovered — there was the 374-carat stone that sold in the latest tender.
Lucara’s large-stone focus also insulates the company from two of the primary threats facing the global diamond industry: synthetic stones and changing relationship patterns among millenials. With its iconic “Diamonds are forever” narrative, De Beers inextricably linked love, commitment and diamonds for generations of couples.
However, lower marriage rates among millenials means fewer diamond engagement rings. The diamond industry is countering the trend through its “Real is Rare” campaign, which emphasizes authenticity and is aimed at people who didn’t grow up with “Diamonds are forever.”
Prospective husbands are not really the target audience for the large stones that generate most of Lucara’s revenues, anyway. The buyers for these diamonds travel by private jet and sometimes rule countries. Similarly, synthetic stones are much more of a threat to companies producing smaller stones. And synthetics take an enormous amount of heat and electricity to create, tarnishing their green credibility.
The “blood diamonds” legacy is another headwind in Africa. Blood Diamond, the 2006 thriller starring Leonardo DiCaprio as a diamond smuggler, helped stamp the narrative on the public imagination. To an extent, Lamb is resigned to it: “Diamonds will always have a tarnished image, no matter how much marketing you do.”
But when talk turns to DiCaprio, who is also backing a California-based synthetic diamond producer, frustration crosses Lamb’s face and his voice develops a bit of an exasperated edge. He links the 50% of government revenues that come from the diamond industry with Botswana’s emergence as a stable nation with a high GDP and low corruption. Botswana provides universal health care and free education, including post-secondary. Taxes are based on profitability and Lucara paid US$103 million in taxes in 2016 (full-year revenue was US$295.5 million).
Oscar-winning actress Charlize Theron, right, also provided a sort of counterpoint to the blood diamond narrative at the 2017 Academy Awards in February. The actress created a buzz with a pair of stunning diamond earrings cut from the Queen of Kalahari, a clear 342-carat diamond recovered at Karowe in 2015. The diamond sold for US$20.55 million and was cut by jeweller Chopard into a diamond collection dubbed the Gardens of Kalahari. Theron, who is South African, wore a 26-carat heart-shaped stone and a 25-carat pear-shaped diamond.
For me, a very brief foray into South Africa during a transfer — and in-flight conversations with a few South Africans — highlighted the geopolitical contrasts between the neighbouring countries. At the Johannesburg airport, the TV headlines were “No-confidence vote against Zuma considered.” In conversation, a few of the prevailing themes were presidential corruption on a massive scale, ANC infighting, racial tensions and the country’s downward slide.
In Botswana, by contrast, the current (elected) president — Ian Khama — is the son of a black father and a white mother. His father is Botswana’s founding president, Seretse Khama, a tribal leader who studied in England and fell in love with and married a white English woman. The union rocked South Africa — where apartheid was just getting started — as well as the rest of southern Africa. Fifty-some years later, the young country ranks high on living standards and low on corruption compared to African peers. Especially given what’s happening to the south, Botswana is a veritable oasis of stability.
There was, however, a bit of excitement during the Botswana visit. I was sitting across from Lucara CEO Lamb during dinner at a Brazilian restaurant in Gaborone when the table began to shake. “This is an earthquake,” he declared. The epicenter of the 6.5-magnitude quake was not very far away and the shaking lasted longer than any quake I’ve experienced in the seismically active Vancouver area. The quake did not cause any damage or deaths — only jokes that it was triggered by the falling rand.
In the diamond world, Lucara is the upstart that has quickly climbed to the top thanks to its high-quality, exceptionally large stones. Just four years into the mine life, Karowe is a dividend-paying profit machine. The company actually lost money in Q1 because revenues came in below projections, but that had more to do with timing of tenders than company performance. Globally, there is a looming supply shortfall for smaller diamonds. Few new mines are coming online; two Canadian mines, Stornoway’s Renard and De Beers/ Mountain Province’s Gahcho Kue, are among the exceptions. Demand for Lucara’s large stones remains strong.
And as countries go, Botswana is a young one at just 50. The Kalahari Desert covers most of the nation, and it was greener than usual this year because of above-average rainfall. Botswana’s Tswana language reflects the country’s desert reality — the currency is called the “pula.” The word has many meanings: it’s also the Tswana term for rain, as well as the declaration when you raise a toast.
It’s an apt metaphor for Lucara, because the consistent haul of large, high-quality diamonds from Karowe ensures the company will likely continue to “rain money.” The likelihood of underground expansion would extend the mine life beyond 2026 as Lucara focuses on the south lobe — the kimberlite pipe that produces the most valuable stones. The strong dividend, including further potential hikes, and share price growth makes Lucara a compelling investment under $3.00.
Disclosure: The author owns shares of Lucara Diamond Corp. and Tsodilo Resources but has no business relationship with either company. Lucara paid for flights to the Karowe mine site and associated costs, but not safari costs. Readers should always conduct their own research, do thorough due diligence and/or obtain professional advice. This article is solely for information purposes. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions.
Strategic Metals (SMD-V) is spinning out Trifecta Gold, with 4 projects in Yukon’s hot White Gold district
First-mover philosophy helps Strategic beat the majors into Yukon’s best area plays
By James Kwantes
Fortunes are made, and sometimes lost, in the great mining rushes that drive people, prospectors and dollars on the heels of exciting discoveries. One of the greatest was the Klondike Gold Rush of 1896-1899, kicked off by the August 1896 discovery of gold at Bonanza Creek by Skookum Jim, Dawson Charlie, George Carmack and Kate Carmack.
Almost a year after the discovery, the SS Portland steamship arrived in Seattle. Among its passengers were several of the most successful Yukon prospectors. Its cargo included more than one tonne of gold. Two days earlier, another gold-laden ship had landed in San Francisco. In Seattle, a crowd of thousands greeted the Portland. The Seattle Post-Intelligencer newspaper screamed “Gold! Gold! Gold! Gold!” in a banner headline. The race was on.
Treasure hunters came by the tens of thousands. But they soon discovered that the prime land around gold-rich creeks had already been staked by prospectors in the Yukon. For some who got in early, it was a ticket to riches.
Fast-forward 120 years and another gold rush is taking shape in the mineral-rich Yukon. This one is being led by major gold mining companies, who are systematically buying up stakes in exploration companies in a jurisdiction the Fraser Institute describes as one of the best in the world. Goldcorp (G-T) kicked off the new gold rush in May 2016 with its $520-million purchase of Kaminak Gold and the multi-million-ounce Coffee deposit in the hot Dawson Range gold belt.
In the original Gold Rush, those who arrived early — before the crowd — were most likely to secure their fortunes. It’s no less true today. In the hunt for geological riches, “location, location, location” is key for majors in search of the next big gold district. Public companies that can secure valuable land positions — and investors who get in early — will be the biggest winners.
The latest major to enter the Yukon is Barrick Gold (ABX-T), the world’s largest gold miner. In an option deal announced April 10, Barrick will invest up to a total of $63.3 million in ATAC Resources (ATC-V) for a staged buy-in that will give the miner up to a 70% interest in ATAC’s Orion project. The deal includes a flow-through private placement financing of $8.3 million that takes Barrick’s stake in ATAC to 19.9%. It’s a good deal made even better because the Orion project does not include ATAC’s major discoveries — Tiger, Conrad and Osiris.
Given Barrick’s history, the partnership with ATAC is a natural. In 1986, Barrick acquired the small Goldstrike mine in Nevada’s Carlin trend. Barrick soon hit a rich discovery and Goldstrike turned into a company maker, delivering enormous profits and 50 million ounces of gold production (and counting) to Barrick. ATAC has North America’s only known Carlin-type gold mineralization outside Nevada at its vast Rackla project in Yukon. And it was ATAC’s 2011 discovery of Carlin-type gold at Rackla that sent the company’s stock above $9 that year.
As the largest claims holder in the Yukon, no company is better poised to benefit from the majors’ renewed Yukon interest than project generator Strategic Metals (SMD-V). Strategic holds valuable land positions in each of Yukon’s major mineral belts, assembled over decades using the proprietary database of storied geological consultancy Archer, Cathro & Associates. Archer Cathro has had a hand in most of the Yukon’s major mineral discoveries and deposits.
In each of the recent investments by majors, Strategic had already staked claims and was positioned in the neighbourhood. The growing list of majors that have stepped up to secure their Yukon stakes is a who’s who of gold miners. Their investments validate Strategic’s early-mover philosophy.
The Barrick-ATAC deal was just the latest example. Strategic owns more than 10.1 million shares of ATAC Resources, an 8.3% stake that has increased in value more than 50% since the JV deal was announced. Strategic also has several claims and large land positions adjacent to much of ATAC’s Rackla project in Yukon’s Nadaleen Trend.
Of any of the investments by majors, Newmont’s deal with Yukon junior Goldstrike Resources (GSR-V) may have been the most surprising. The agreement, announced March 6, includes a private placement and could see Newmont invest up to $53 million for a majority stake in Goldstrike’s Plateau gold project in the east-central Yukon. It was another case of Strategic beating the majors to a potential district — the project generator had already staked ground in the prospective area. And on April 6 Strategic announced that it had added to its land position near Plateau through staking.
Goldcorp and Coffee — yes, Strategic was already there. It was Strategic CEO Doug Eaton who staked the Dan Man property, which borders Coffee’s northern boundary and is owned by Arcus Development Group (ADG-V). The Coffee gold mineralization extends right to the Dan Man property boundary and Goldcorp followed up its purchase of Coffee by buying a 19.9% stake in Arcus. Strategic owns 3,333,333 Arcus shares, a 4.5% stake in the company. Arcus is planning a 2017 drill program at Dan Man, with technical help from Goldcorp.
A NEW WHITE GOLD PLAY, FOR ‘FREE’
But the Strategic Metals holding with potentially the most upside remains under the radar, its worth yet to be determined by the market. The company is Trifecta Gold, a new precious metals exploration company that will come out of the gate with four projects in the Yukon’s hot White Gold district. Pending shareholder approval — the vote is this Friday — Trifecta shares will be spun out of Strategic Metals early next month. Strategic shareholders will receive one Trifecta common share for each 4.5 Strategic shares held. Trifecta shares will trade as “TG” on the TSX Venture Exchange.
For Trifecta, the last gold play to go public in the prolific district offers a glimpse at the possibilities. It was White Gold Corp (WGO-V), which holds a large land package after purchasing Yukon prospector Shawn Ryan’s White Gold claims. Ryan, of course, helped put the district on the map with discoveries that culminated in buyouts from Kinross (Golden Saddle in 2010) and Goldcorp (Coffee in 2016). He’s also chief technical advisor for the new exploration play. In late 2016, Agnico Eagle paid $14.5 million for a 19.9% stake in the company, valuing White Gold Corp. at $72.5 million. The market capitalization has since surged past $130 million.
White Gold’s trajectory is evidence that the Dawson Range belt has become one of the hottest gold exploration districts globally. With gold approaching US$1,300 an ounce and risk capital tentatively returning to the exploration sector, the timing couldn’t be better.
The renewal of action and interest bodes well for Trifecta Gold stock, which is expected to begin trading in early May. The share distribution record date is set for April 27. Investors who own Strategic shares before that date are staking their claim to a promising, tightly held exploration play before the stock hits the public market. Strategic will retain about 9.8% of Trifecta shares and distribute the rest to its shareholders.
Trifecta’s properties in the Dawson Range gold belt are: Eureka — Eureka is a 70-sq-km orogenic gold project at the southern end of the Klondike Goldfields. The Eureka claims straddle the headwaters of two of the most productive placer creeks — Eureka and Black Hills — in the southern Klondike. The creeks have spit out a reported 200,000 ounces of placer gold between 1978 and 2016, and the gold’s attributes suggest that it’s near source. Eureka is drill-permitted and exploration will focus on a handful of showings identified by soil geochemistry, trenching and drilling. Eureka is along the proposed haulage route to Goldcorp’s Coffee project and could progress quickly from exploration to development.
Triple Crown and Treble — The properties are located halfway between Coffee and Rockhaven’s (RK-V) Klaza, a polymetallic gold deposit. Initial prospecting at Triple Crown yielded a rock sample assaying 6,680 g/t silver, 30.22% lead and 0.80 g/t gold. A follow-up trench there returned 570 g/t silver, 2.76% lead, 0.08 g/t gold over 6.4 metres and 106 g/t silver, 0.84% lead and 0.03 g/t gold over 9.6 metres. There are several geochemical anomalies at Treble; 2011 prospecting at one of them revealed a 100m by 120m zone of brecciated hydrothermal quartz and gold mineralization in rock samples.
Trident — The road-accessible Trident property consists of 525 claims, 195 wholly owned by Strategic and 330 optioned from two other companies. At the Squid project, optioned from Metals Creek Resources, limited drilling returned results including 21.0 metres of 1.55 g/t gold and 114 g/t silver and 12.0 metres of 1.7 g/t gold and 81.78 g/t silver.
Trifecta’s CEO, Dylan Wallinger, witnessed firsthand the type of shareholder value that discovery can create during the summer of 2010. Working out of Archer Cathro’s Whitehorse office, Wallinger was part of a small field crew at ATAC’s Rau property, where his duties included everything from prospecting to splitting core. The project was not yet a major focus for ATAC. But that changed quickly when assays were returned from one of the cores Wallinger split. It turned out to be the Osiris discovery hole announced on Sept. 1, 2010, which returned 9.26 g/t gold over 31.13 metres within a larger interval averaging 4.65 g/t over 65.20 metres.
That discovery, as gold surged toward an eventual peak of US$1,900/oz the following year, was one of the catalysts that fuelled ATAC’s rocket ride in 2010 and 2011. The stock climbed above $8 in 2010 and cracked $9 the following year on excitement about the discovery of a new Carlin-type gold district outside of Nevada.
TRIFECTA CEO: ‘PROVE IT OR KILL IT’
As president and CEO of Trifecta, Wallinger will have the chance to play a more central role in creating shareholder value. The former Archer Cathro project manager has stepped down as a partner with the geological consultancy to focus on Trifecta. Strategic is seeding Trifecta with about $750,000. Depending on the work program, Wallinger knows he’ll have to raise more money. The CEO wants to finance at higher prices than where Trifecta shares start trading.
Trident may be Trifecta’s most intriguing project. The road-accessible property hosts an air strip and several roads, as well as gently sloping terrain amenable to a mining operation. There are drill permits in place but Trifecta has applied for more extensive permits. Trident has resource-sharing possibilities — there’s a producing placer mine on the property — but also spending obligations. On the Squid option, Trifecta must spend a minimum of $500,000 in the first year ($2.25 million over three years and issue 6.5 million TG shares) as part of a staged 60% earn-in.
Wallinger says Trifecta won’t spend any more than necessary to either prove mineralization at the optioned claims or walk away. If results are positive, the company plans to mobilize more drills, heavy equipment and fuel by road and continue to work into late fall. “The idea is to go in and explore aggressively, and prove it or kill it,” Wallinger says.
Strategic has more than 100 wholly owned projects in Yukon available for option, many of which are drill-ready and fully permitted for advanced exploration.The company also has an investment fund with dozens of junior exploration investments at various stages of development. Strategic owns major stakes in:
Rockhaven Resources (RK-V) — Strategic owns a 45.2% stake in Rockhaven, which is expanding and advancing the high-grade, polymetallic Klaza deposit towards production; Precipitate Gold (PRG-V) — Strategic owns 31.2% of Precipitate, which is advancing the flagship Juan de Herrera project located within the emerging Tireo Gold Camp in the Dominican Republic; Silver Range Resources (SNG-V) — Strategic owns 15.3% of Silver Range, which owns four zinc-lead-silver projects in Yukon and high-grade gold projects in NWT, Nunavut and Nevada.
For some mining-focused investors, one of the knocks on project generators is a structure that prevents them from capturing the full shareholder value driven by discovery. But with the spinout of Trifecta Gold, Strategic is changing the game by surfacing value unrecognized by the market. Shareholders will have exposure to both discovery upside in one of the world’s hottest exploration districts AND the diversification of Strategic’s valuable shareholdings and Yukon claims. The price tag is low — Strategic’s working capital amounts to almost $40 million currently and its market cap is just $50 million.
Price: 0.58 Shares outstanding: 89.1 million Market cap: $51.7 million Working capital: $39 million
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Disclosure: The author owns shares of Strategic Metals, Rockhaven Resources, Silver Range Resources and Arcus Development Group. Strategic Metals is one of three Resource Opportunities sponsors, who help support the subscriber-funded newsletter by keeping subscription prices low. The work included in this article is based on SEDAR filings, current events, interviews, and corporate press releases. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value, so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.
On March 20, Columbus Gold (CGT-T) released a bankable Feasibility Study on its Montagne d’Or gold deposit in French Guiana. The study was funded by major Nordgold, which earned into a total 55.01% interest in the project by completing it on an accelerated three-year timeline. The FS showed a net present value of US$370 million ($500 million Cdn) at a 5% discount rate and an after-tax Internal Rate of Return of 18.7%, at US$1,250/oz gold. Average annual gold production for the first 10 years (12-year mine life) would be 237,000 ounces at an average grade of 1.73 g/t, based on proven and probable reserves of 2.745 million ounces of gold.
The economic study vaulted Columbus Gold into a small group of companies globally with advanced-stage, FS-level projects capable of producing more than 200,000 ounces a year at above-average gold grades. However, investors focused on the lower-than-expected 18.7% after-tax IRR (a 2015 PEA with higher production showed an after-tax IRR of 23%). The following day Columbus shares fell 12% (from 99 cents to 87 cents). The stock has since recovered to 93 cents for a market capitalization of $142.1 million.
2017 is shaping up to be a catalyst-rich year for Columbus, so those who sold the stock may be missing out on value. Consider these factors:
Economics. With some modest investments in infill drilling and optimization, the after-tax IRR on Montagne d’Or is likely to move to 20% or even higher. And the major mining companies now taking a hard look at the 5-million-ounce Montagne d’Or deposit are interested even below 20%. With the FS in the bank, Nordgold now has 90 days to make a construction decision. If Nordgold goes ahead, Columbus can elect to fund its portion by diluting its interest in the project. The dilution formula was pegged to the number of reserve ounces outlined in the FS, giving Nordgold a disincentive to improving project economics. The deposit has 3.9 million Measured and Indicated ounces but only 2.75 million of those made it into proven and probable reserves. Now that Montagne d’Or is owned 55% Nordgold/45% Columbus, the JV partners are on the same page — making the economics robust and/or getting top dollar for the deposit.
Size. Size matters to majors, which wring out profits through economies of scale. The majors are increasingly only interested in mineral deposits they can turn into districts. Replenishing ounces has never been more critical in an industry where assets decline by the day. The large and growing (see #3) Montagne d’Or deposit fits the bill.
Drilling. The FS is an important milestone but not the finish line. Columbus is cashed-up and drilling at Montagne d’Or, for both resource expansion and discovery. The program consists of 36 core holes and 5,520 metres testing four target areas. One long 750-metre hole tested the depth extension of gold mineralization under the deposit envelope. Other holes will test the west extension of the deposit, a geochemical anomaly 750 metres east of the deposit, and mesothermal quartz/gold vein systems. Montagne d’Or is already a large deposit — hitting on this drill program will make it even more valuable.
Eastside in Nevada. Once Montagne d’Or is sold or developed, Eastside likely becomes Columbus Gold’s flagship project. Last year Columbus released a maiden resource estimate on Eastside showing an Inferred, pit-constrained resource of 721,000 ounces gold-equivalent, at an overall grade of 0.63 g/t. That resource is confined to just one square kilometre on the 58-square-km project. In January, Columbus added another 272,153 gold ounces (historical estimate) by purchasing claims adjoining Eastside’s southern boundary. Columbus has been quietly adding to its Nevada land package and systematically zeroing in on top targets. A 12-hole, 3,700-metre drill program is underway on a target that is geologically identical to the Original Target, which hosts the 721,000-ounce resource.
Andy Wallace. The geologist is the principal of Cordex Exploration and runs Columbus Gold’s Nevada operations. Cordex was founded by the late John Livermore, who became the father of Nevada gold mining when he discovered the Carlin gold mine and a new type of mineralization known as Carlin-type. Wallace joined Cordex in 1974 at the height of the Nevada gold rush and has worked there ever since. Cordex is credited with multiple major discoveries in Nevada, several of them under his management. Wallace’s experience and expertise gives Columbus an important edge in one of the best gold mining jurisdictions on the planet.
Columbus Gold (CGT-T) Price: 0.93 Shares outstanding: 152.77 million Market capitalization: $142 million
Disclosure: Author is long Columbus Gold shares and the company is a Resource Opportunities sponsor. This article is presented for informational purposes only and should not be considered investment advice. Junior mining investments are speculative and not suitable for many investors. Always do your own due diligence. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions.
This special report on Yukon mining plays was sent to Resource Opportunities subscribers on January 5. Share prices have been updated but market capitalizations reflect the timing of the dispatch. The last Resource Opportunities special offer was very well-received, so I’m offering a January special for those who missed out. New subscribers can get a 1-year discounted subscription for just $99 — a savings of $200 off the regular price — by entering coupon code JANUARY at this link. The year is young, but early portfolio company gains show why savvy speculators are choosing Resource Opportunities. Erdene Resource Development (ERD-T), a Resource Opportunities pick at 37.5 cents on Sept. 30, has surged to 86 cents on drilling success at the company’s high-grade, near-surface gold discoveries in Mongolia. NexGen Energy (NXE-T), a Resource Opportunities pick at 30 cents, is approaching 10-bagger territory as excitement builds ahead of a resource update at its uber-high-grade Arrow uranium deposit in northern Saskatchewan. Join Resource Opportunities today and prosper!
January 5, 2017
By James Kwantes
Good morning and Happy New Year subscribers,
I trust you enjoyed the holidays. In the (SW) corner of Canada where I live, we experienced the novelty of a white Christmas — something most Canadians live through annually. Snow or not, the pace of life slows at this time of year, and so do the markets. While many junior mining stocks have rallied of late, it’s a quiet time in the markets and volume is typically low.
It’s also a quiet period in the Yukon, the focus of this dispatch. At the time of writing it was -19 Celsius (-2 Fahrenheit) in Whitehorse, the Yukon’s capital, and even colder in the northern mining hub of Dawson: -22. The days are dark, and needless to say, mining projects in the Territory are buried under snow. News flow is frozen too.
Quite a contrast from July, when I toured several exploration and development projects that were buzzing with activity. Drills were turning, gold was riding high and M&A talk was in the air. One of our stops was Goldcorp’s Coffee project, acquired from Kaminak Gold just two months earlier for $520 million. Agnico Eagle — one of the companies that was interested in Coffee — is the latest major to enter the Yukon, paying $14.5 million to acquire 19.9% of White Gold Corp. White Gold has the option to acquire more than 12,000 claims staked by legendary Yukon prospector Shawn Ryan, who will be a major shareholder of the new company.
So it’s frozen, but signs of life are stirring beneath the snow cover. And parkas are required clothing for Yukon winters, but you don’t buy one now. The best time to get bargain pricing on a winter coat is when you don’t need it, after winter is over. Better yet, when the sun is blasting every day and the grass has died.
And the best time to pick up high-quality junior mining stocks with Northern projects for low prices is right now. This year the bargains are even better because of gold’s decline from summer highs of US$1,365/oz to the current (still rather chilly) $1,1164/oz.
In alphabetical order, here are summaries of several Yukon plays whose share prices are likely to warm up along with the weather, as exploration and drilling programs get underway and results come in. The Yukon has long been recognized as one of the world’s most prospective mineral jurisdictions — a contention validated by investments from Kinross (Underworld’s White Gold project), Goldcorp and Agnico Eagle.
Things are buzzing again in the Yukon after a period of relative stagnation. Several of the Yukon plays have moved hard last week with gold’s rise, but this isn’t the big move. Just remember to take some profits when it’s shorts and T-shirt weather, because all these stocks are cyclical. Please see important disclosures at the bottom. Good luck with your bargain hunting!
Arcus Development Group (ADG-V) Arcus remains under the radar, but its properties are among the best in the prolific White Gold district. Chief among them is Dan Man north of Goldcorp’s Coffee project, between Coffee and the Yukon River. Significantly, many of the 5 million ounces of gold at Coffee are located along north-south trending hydrothermal structures on the northern boundary, very near Dan Man. In October, Goldcorp took a 19.9% stake in Arcus after securing a similar foothold in Independence Gold, and Goldcorp will help design Arcus’s 2017 exploration program. Arcus is run by Ian Talbot, a lawyer and exploration geologist who was in-house counsel for BHP Billiton in Vancouver. Presumably he knows a thing or two about dealing with majors. Talbot is also chief operating officer of Strategic Metals. With any kind of exploration success by Arcus at Dan Man, snapping up the rest of the company would be a no-brainer for Goldcorp. Agnico’s recent investment in White Gold Corp. values the latter company at more than $70 million, many multiples of Arcus’s market capitalization. The stock hasn’t moved much, despite a likely drill program this year. For more on the company, see the special alert sent to Resource Opportunities subscribers on Oct. 24.
Shares outstanding: 72.8 million (88.5M fully diluted)
Market capitalization: $7.3 million Current price: 0.115
Alexco Resource Corp. (AXR-T)
Alexco’s latest assays from the high-grade Bermingham discovery can be measured in kilograms, not grams. The best intercepts (true width) included 7.16 metres of 4,375 g/t silver and 3.98 metres grading 6,477 g/t. On Tuesday Alexco updated its silver resource at Bermingham — indicated ounces grew from 5.2 to 17.3 million, inferred from 700,000 to 5.5 million ounces. Bermingham is one of two new deposits being explored by Alexco, which shut down operations at its Bellekeno mine in 2013 because of low silver prices. The other deposit is Flame & Moth, located near a processing plant that is ready to go at the flick of a switch — when silver prices cooperate. Indicated ounces in the entire Keno Hill district now sit at 67.5 million, up 22% from the previous tally. There are two major headwinds for Alexco: the silver price and a 25% silver stream that Silver Wheaton has on Alexco’s entire district. The stream was the price Alexco paid to finance in October 2008 during the height of the financial crisis. The terms have been amended but are still very punitive, and renegotiating the stream is a top priority. Perspective: Alexco shares are not trading much higher now than they were when the company announced the Silver Wheaton financing. Alexco stock, which also trades on the NYSE MKT as AXU, offers tremendous leverage to the price of silver, currently US$16.50/oz.
Shares outstanding: 92.9 million (105M f-d)
Market capitalization: $183 million Current price: $2.27
ATAC Resources (ATC-V)
ATAC is developing the Rackla project, Canada’s only Carlin-type gold district in the mountains of the Yukon. The rocks are comparable in lithology, mineralization and age to the Nevada trend that has produced more than 50 million ounces of gold. Rackla is a vast 1,700-square-kilometre property but the 30-kilometre Nadaleen Trend in the east is where much of the high-grade gold has been found in recent years. The latest intercepts included 61.29 metres of 2.75 g/t Au in the Orion zone at Nadaleen. ATAC also has the PEA-stage Tiger deposit in the Rau trend on the western part of the property. ATAC has consistently returned intercepts that are off-the-charts rich for the Yukon, including 38.8 metres of 17.11 g/t Au (2010) and 30.79 metres of 9.5 g/t (2014). The gold is rich but the exploration is expensive — some of the sites with the most gold are on mountaintops and require helicopters to visit and drill. ATAC shares have powerful leverage to gold and reached $10 a share in the summer of 2011 — a fact that puts the 26% move since Dec. 21 into perspective. Also in 2016, ATAC released an updated PEA for Tiger with better economics, including significant boosts in NPV, recovered gold and mine life. The stock has made a round trip from 30 cents at the start of the year, to almost a dollar at the end of July, to the current 43.5 cents. The Yukon’s White Gold district gets much of the attention these days. But Strategic Metals CEO Doug Eaton (Strategic owns 8.3% of ATC shares) reckons that in 100 years, the Nadaleen trend where ATAC has a dominant land position will have produced more gold than the Klondike trend that hosts the White Gold district. And Eaton probably knows as much about Yukon geology as anybody.
Shares outstanding: 122.8 million (131.35M f-d)
Market capitalization: $53.4 million Current price: 0.40
Banyan Gold (BYN-V)
Banyan is a relatively new play in the southeastern corner of the Yukon that is exploring the Hyland project. The company has an almost 400,000-oz gold-equivalent resource at a grade of about a gram per tonne AuEq, with a goal of adding ounces. Banyan had some drilling success in the fall, announcing assays including 30.7 metres of 1.3 g/t Au and 8.0 g/t Ag. The company says its Hyland project has similar Carlin-type mineralization to ATAC’s Rackla. There are also strong ties to Victoria Gold (VIT-V) — Victoria owns 8% of Banyan’s stock and the company’s chairman is Mark Ayranto, Victoria’s executive vice-president. In August geological engineer Tara Christie was appointed Banyan’s president — she comes from a powerful Yukon placer mining family and is married to Victoria Gold CEO John McConnell. Christie and Ayranto together own more than 8% of outstanding shares and the tight share structure ensures the stock will move on drilling success. I recently purchased some as a speculation.
Shares outstanding: 46.9 million (63M f-d)
Market capitalization: $2.4 million Current price: 0.055
Golden Predator (GPY-V)
During my visit to Golden Predator’s Three Aces project in July, I chipped rocks beside CEO Bill Sherriff as several of us searched for elusive visible gold (VG) at the site of a bulk sample. And we found some — it was Greg Hayes, then CFO and now a director, who identified some VG. Three Aces is Golden Predator’s exploration project north of Watson Lake in southeastern Yukon and home to two of the highest-grade surface outcrops ever discovered in the Yukon. Assays from a 4,300-metre 2016 drill program that went late are expected to be released in early 2017, which could be a catalyst for the stock. This year the company plans to drill up to 25,000 metres, so plenty of news flow is likely. Golden Predator also owns the Brewery Creek mine, a past-producing heap-leach operation located east of Dawson. Golden Predator is well-funded, with backers including Eric Sprott, McEwen Mining and Pat DiCapo. CEO Sherriff is a savvy operator with a promising exploration project near infrastructure and a development project that is economic at a higher gold price.
Shares outstanding: 76.7 million (123.1M f-d)
Market capitalization: $57.5 million Current price: 0.72
Independence Gold (IGO-V)
Independence Gold is exploring for high-grade gold on the property adjacent to Coffee’s western boundary. Independence CEO Randy Turner is a closeology expert whose exploration chops have been honed by both skill and luck. Turner sold his Winspear Diamonds and its Snap Lake diamond project to De Beers for $305 million in 2000 and followed that up by selling Silver Quest and its 25% of the Blackwater gold project to New Gold (NGD-T) for $131 million in 2011. Luck: Turner happened to be holidaying in the Yukon with his wife when Kaminak announced its discovery hole at Coffee. He quickly staked virtually all the property on Coffee’s western boundary and has been running small exploration programs ever since. Intercepts have included 7.23 g/t gold over 12.2 metres (Sunrise) and 4.56 g/t over 10 metres at Denali, the latter from surface. Goldcorp acquired 19.9% of Independence in June. IGO surged to 50 cents in the summer but is now trading at about the same valuation as when Goldcorp bought in. Unique to Independence is the bulging treasury: IGO has more than $6 million in the kitty and a market capitalization of just under $11 million. The stock was a Resource Opportunities pick at 8 cents (August 2015) and has risen 30% since Dec. 21. But there’s plenty more upside here.
Shares outstanding: 55.5 million (59.3M f-d)
Market capitalization: $10.8 million Current price: 0.185
Klondike Gold (KG-V)
2016 was a disappointing year for Klondike Gold shareholders. The stock ran from 11 cents to highs of 45 cents before plunging in August when the company announced several dusters at Violet Ridge, one of its Dawson-area projects. However, Klondike also consolidated an already dominant land position and announced some very good assays, particularly in the Nugget Zone and at Lone Star. 2017 has the possibility of starting out with a bang, too — Klondike has yet to release assays from its final holes at Lone Star, which were delayed by lab problems. With the larger land package, CEO Peter Tallman plans property-wide surveying to narrow down the best targets. Klondike’s drilling costs are among the cheapest in the Yukon and Tallman is playing the long game. Major shareholders include billionaire financier Frank Giustra and Roberto Aquilini of the Vancouver-based billionaire family that owns a vast array of assets, including the Vancouver Canucks hockey team. Tallman is searching for the motherlode that has deposited 20 million ounces of gold into area creeks over the past 120 years. But the discovery of an economic deposit would make Klondike’s stock worth many multiples of the current price. The journey between here and there will likely be bumpy but this is a low valuation considering the upside speculative potential.
Shares outstanding: 54 million (80M f-d)
Market capitalization: $10.5 million Current price: 0.185
Rockhaven Resource Corp. (RK-V)
Rockhaven’s Klaza is a high-grade polymetallic gold project with excellent infrastructure — you can drive a Honda Civic to the property, as CEO Matt Turner will tell you. But it also has a size problem: the deposit needs more ounces to improve economics. A PEA announced in March outlined a 14-year mine life that would start with an open pit and move underground, utilizing three (expensive) declines. Life-of-mine, the operation would produce 630,000 oz gold, 11.364 million oz silver, 51.2 million lbs lead, and 52.5 million lbs zinc. But total capex was $358 million and payback was 7 years, for a project with a pre-tax NPV (5% discount) of $150 million and IRR of 20% and after-tax NPV of $86 million and IRR of 14%. I published a sell recommendation in April at these levels, although still have exposure to Rockhaven through Strategic Metals, which owns 46.5% of Rockhaven shares (on Tuesday, Rockhaven announced it was settling a $2-million debt by issuing Strategic another 11,346,712 shares). Market reaction to the PEA last spring was tepid and Rockhaven shifted to drilling out and expanding the deposit. 2016 was a success on that front — drilling targeted near-surface veins that are close to the open pit but not included in the existing resource. In September, for example, Rockhaven hit 17.01 g/t gold over 4.32 metres in a stepout hole.
Shares outstanding: 118.4 million
Market capitalization: $23.7 million Current price: 0.19
Strategic Metals (SMD-V)
Strategic Metals is a project generator with the largest claims position in the Yukon and a long list of assets, as well as a very healthy cash position. Strategic had dipped below 40 cents and was trading at working capital levels before bouncing in the last couple of weeks. The company has been busy recently with these moves aimed at creating shareholder value:
– spinning out Trifecta Gold, a new exploreco that will list on the TSXV and hold the Eureka, Triple Crown (formerly called OOO) and Treble (LLL) properties. The properties are located in the prolific White Gold district, which is heating up again. Most of the Trifecta shares will be distributed to SMD shareholders, with Strategic also retaining a stake;
– optioning the Keno Summit and Gram properties in the Yukon’s Keno Hill silver district to Metallic Minerals (MMG-V), a new exploreco helmed by former Wellgreen Platinum CEO Greg Johnson;
– spinning out wholly owned subsidiary Terra CO2 Technologies. Terra CO2 is a green-tech company working on a technology that treats acid rock drainage by reacting it with discharged CO2 to produce a stable metal carbonate compound and saleable sulphur byproducts. Terra CO2 has reached the semifinals of the international Carbon XPRIZE competition, where first prize is US$7.5 million.
Strategic has almost half of its market cap ($20 million) in cash and stakes in dozens of explorecos, including:
– 8.3% of ATAC shares
– 46.5% of Rockhaven shares
– 32.5% of Precipitate Gold (PRG-V) shares
– 16.5% of Silver Range (SNG-V) shares
Perspective: Metallic Minerals, the new company that acquired Strategic’s two Keno Hill properties, has a market cap of $14 million. That’s about a third of the market cap of Strategic, which has a host of valuable assets, significant stakes in several explorecos and a large cash pile.
Shares outstanding: 89.1 million (93.5M f-d)
Market capitalization: $42.3 million Current price: 0.53
Victoria Gold (VIT-V)
Victoria’s Eagle gold project is shovel-ready, with all permits in hand and an agreement with the local First Nations. Victoria has a mineral reserve of 2.7 million ounces and the potential to produce 200,000 ounces annually at low costs. It’s a lower-grade operation (.73 g/t Au), but a low strip ratio and the addition of richer satellite deposits sweeten the economics. At a US$1,250/oz gold price and a 78-cent dollar, Eagle has a post-tax NPV of $508 million and IRR of 29.5%. Last year, speculation that Victoria Gold could be the next company to sell to a major took shares above 75 cents. The stock drifted down to the low-.40s last month and has since rebounded.
Shares outstanding: 503 million
Market cap: $286.7 million Current price: 0.54
Western Copper and Gold (WRN-T)
There are vast stores of gold and copper at Western’s Casino project, located near Goldcorp’s Coffee deposit. Casino’s proven and probable reserves measure 8.9 million ounces of gold and 4.5 billion pounds of copper, with a further 9 million gold ounces and 5.4 billion pounds of copper in the Inferred category. It would be the biggest mine in Yukon history and a major economic driver, with a 22-year mine life and capex of almost $2.5 billion. An LNG plant would power the whole operation. But Casino is also a dice roll because the project has been stuck in the laborious permitting process. That’s in large part due to a massive tailings dam, which was the subject of an independent review panel that suggested a few design changes. One of the changes will result in significantly less water — 80% less — than the prior iteration. Memories of the August 2014 tailings dam failure at Imperial Metals’ Mount Polley mine in British Columbia and the more serious Samarco disaster, which killed 19 people, loom in the background here. Western has an airstrip and currently transports materials by barge to the site, but a 120-kilometre unpaved road is planned. Because of the project’s size and footprint, Western is dealing with three separate First Nations. Permitting progress is never too headline-grabbing. But the stock has moved hard from the 30-cent level less than a year ago and Western is taking steps to derisk the project as it moves through permitting.
Shares outstanding: 94.5 million (100.5M f-d)
Market capitalization: $176.7 million Current price: $1.85
Disclosure: I own shares of Arcus Development Group, Alexco Resource Corp., Banyan Gold, Independence Gold, Klondike Gold and Strategic Metals. Strategic Metals is a Resource Opportunities sponsor.
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It’s been a company maker for several of the world’s most successful mining companies, notably Barrick Gold (ABX-T) and Franco-Nevada (FNV-T). Barrick’s purchase of Goldstrike and subsequent discoveries turned the property into a 50-million-ounce monster and Barrick into the world’s No. 1 gold miner. Franco-Nevada’s 4% royalty on Goldstrike laid the foundation for what has become a $13-billion market cap royalty juggernaut.
Key to the Nevada gold story is Cordex, the exploration firm founded by legendary geologist John Livermore. Livermore found the Carlin mine and discovered a new type of gold mineralization known as Carlin-type. Under the leadership of Livermore and later Andy Wallace, Cordex is credited with 9 significant gold discoveries in Nevada, including the multi-million-ounce Carlin and Marigold mines.
In the space of 50 years, Nevada has become the world’s best gold mining jurisdiction. The state’s largest export partner is Switzerland, a testament to the amount of gold that starts under the Nevada desert and ends up in bank vaults in the wealthy European banking centre.
Nevada gold is also, increasingly, the focus of Columbus Gold (CGT-T), which earlier this week released a maiden resource estimate for its Eastside gold deposit in the state. At a .15 g/t cutoff and US$1,300/oz gold, Eastside hosts an Inferred resource of 654,000 ounces of gold at average grades of .57 g/t and 3.999 million ounces of silver at grades of 3.5 g/t. It works out to 721,000 ounces of gold equivalent.
The first pass at a resource estimate is literally scratching the surface at Eastside, notes Columbus Gold Chairman and CEO Robert Giustra. Only about 50% of mineralized material was included in the pit-constrained resource estimate, and the deposit is open at depth and to the south and west. Metallurgy tests have demonstrated the gold and silver is amenable to cyanide leaching, whether oxide or sulfide.
“Considering that only about one square kilometer of the large 58-square-kilometer property has been drilled so far, and only 136 holes drilled, a maiden resource of 721,000 ounces constrained in a pit, is an excellent start,” Giustra said.
And Columbus is busy planning its next steps, most recently consolidating its land package and planning the next drill campaign. The architect of value creation in Nevada is none other than geologist Andy Wallace of Cordex, Columbus’s exclusive exploration partner in Nevada. In a nutshell, Columbus has a Nevada discovery pioneer running their exploration programs in one of the world’s best gold mining jurisdictions. It bodes well as 2017 comes into focus.
While the maiden resource estimate was being prepared, Columbus turned its attention to grassroots exploration. Company geologists used mapping and geochemical sampling — including 3,400 surface samples — to identify 41 rhyolite domes. The domes are important geological features associated with gold mineralization at the Original Target, where most of the resource drilling at Eastside took place.
The domes range in diameter from 100 to 1,000 metres and are located along dozens of faults on Columbus’s claim block, mostly trending north or northeast. At one of its highest-priority targets, Target 5 (eight kilometres south of the Original Target), Columbus recently received a permit to construct a road and drill pads and drill 12 holes.
The company also recently concluded two deals at its 100% owned Bolo gold property, northeast of Eastside, that expanded the land package and eliminated a royalty. Bolo is a secondary Nevada exploration property, but Columbus is considering a small drill program after the land consolidation. Mineralization is Carlin-type and occurs in pods along two parallel faults, each of them more than 2.2 kilometres along strike. That makes it higher-risk exploration.
However, several of the 2013 holes hit impressive high-grade, near-surface intercepts at the South Zone of the Mine Fault, including:
133 meters of 1.28 g/t gold from surface (including 30.5 m of 3.24 g/t gold) in BL-38;
89.9 meters of 1.0 g/t gold (including 40.9 m of 2.05 g/t gold) from surface in BL-39; and
51.8 meters of 1.27 g/t gold from surface in BL-41.
As for the land agreements, they’re a testament to the benefit and cost savings that can be achieved by having an experienced hand on the ground in Nevada. In the first, Columbus opportunistically picked up the “Uncle Sam” patented claim after the claim holder stopped paying taxes on the land. Columbus petitioned the county to secure the claims, then patiently and quietly went through a multi-step legal process that ended with them securing the land. Uncle Sam is a key claim on the southern end of the South Mine Fault Zone — near some of the best drill holes — and it was picked up for a relative song, CEO Giustra says. Surface sampling at Uncle Sam is underway.
In the other deal, Columbus eliminated an underlying 1-3% NSR royalty on Bolo by swapping its Weepah property to the royalty holder. Weepah was a non-core property located south of Eastside.
2017 is also shaping up to be a big year at Montagne d’Or, Columbus’s multi-million-ounce gold deposit in French Guiana. Montagne d’Or hosts an in-pit gold resource of 3.9 million ounces Indicated at average grades of 1.45 g/t and an additional 1.1 million Inferred ounces at a grade of 1.55 g/t, at a 0.4 g/t cut-off.
A bankable feasibility study for Montagne d’Or is expected to land in the first quarter. Gold miner Nordgold can secure a 55.01% interest in the project by funding a minimum of US$30 million in exploration expenditures and completing the FS. Montagne d’Or has excellent infrastructure and would be one of the highest-grade open pit gold projects in the Americas. At a US$1,200 gold price, a PEA for Montagne d’Or modelled an NPV of US$450 million (5% discount rate), after-tax IRR of 23% and annual gold production of 273,000 ounces in the first 10 years at all-in sustaining costs of US$711/oz. Capex would be US$366 million, with a 3-year payback.
JV partner Nordgold is the natural acquirer for Columbus’s 44.99% stake in Montagne d’Or. Nordgold is a fast-growing and acquisitive Russian-based producer listed on the London Stock Exchange. The company operates 9 mines in Russia, Kazakhstan, Burkina Faso and Guinea and produced 950,000 ounces of gold in 2015. Its newest operation is the Bouly gold mine in Burkina Faso, which went into production in September after a 13-month build that came in under budget.
Nordgold’s latest financials paint a picture of a thriving mining company generating healthy cash flow. In the third quarter of 2016, Nordgold generated EBITDA of US$131.8 million and operating cash flow of US$109 million on revenue of US$278 million.. The company’s Gross mine in Russia is expected to go into production in the first quarter of 2018, after which Montagne d’Or will be the only major gold deposit in Nordgold’s pipeline.
But rather than sit back and wait for a takeover offer, Columbus is working to add value to an already strong project. The company is mobilizing for a 41-hole, 6,750-metre drill program testing targets both within and outside the deposit envelope. Columbus will test the west and east extensions of Montagne d’Or, including a geochemical anomaly 750 metres east of the deposit where a historical hole hit 31.94 g/t gold over 3.5 metres. In addition, two holes will test the depth of mineralization — little drilling has been done below 250 metres at Montagne d’Or. Drill permits are in hand and Columbus is building roads and drill pads and mobilizing drills this month. Columbus is fully financing the exploration program.
Columbus shares have outperformed the S&P/TSX Venture Composite Index this year. But the stock has drifted down along with the entire junior sector since the summer, when gold peaked at US$1,350 an ounce. After hitting a 52-week high of 93 cents in August, Columbus shares have fallen to 54 cents on the Toronto Stock Exchange, giving the company a market capitalization of about $77.2 million.
But in intensifying the downward pressure on Columbus shares, tax-loss selling creates opportunity for investors. Columbus is a catalyst-rich gold play with active drill programs at both the Montagne d’Or development project in French Guiana and the Eastside exploration project in Nevada.
In Nordgold, Columbus is partnering with an acquisitive, world-class gold producer to develop a five-million-ounce gold deposit in the Americas. In Nevada, one of the world’s best gold mining jurisdictions, Columbus is advancing exploration both at and beyond its Eastside project. A follow-up drill program is being planned at Eastside, where a just-published maiden resource estimate shows an Inferred resource of 721,000 ounces of gold equivalent at .63 g/t AuEq at a cut-off grade of 0.15 g/t and a gold price of US$1,300/oz.
Columbus Gold (CGT-T) Price: .54 Shares outstanding: 142.9 million Market capitalization: $77.2 million Treasury: $5.2 million (as of Aug. 31)
Disclosure: Author is long Columbus Gold shares and the company is a Resource Opportunities sponsor. This article is presented for informational purposes only and should not be considered investment advice. Junior mining investments are speculative and not suitable for many investors. Always do your own due diligence. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions.
James Kwantes is the editor of Resource Opportunities, a subscriber supported junior mining investment publication. Mr. Kwantes has two decades of journalism experience and is currently the mining reporter at Vancouver Sun, the city's paper of record. He is also the founder of the World of Mining blog. Twitter: @JamesKwantes
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Resource Opportunities (R.O.) is an investment newsletter founded by geologist Lawrence Roulston in 1998. The publication focuses on identifying early stage mining and energy companies with the potential for outsized returns, and the R.O. team has identified over 30 companies that went on to increase in value by at least 500%. Professional investors, corporate managers, brokers and retail investors subscribe to R.O. and receive a minimum of 20 issues per year. Twitter: @ResourceOpp