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5 Reasons IDM Mining is Worth a Look at This Valuation

by James Kwantes
Resource Opportunities

IDM Mining is a Resource Opportunities sponsor company.

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

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

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

Underground drilling

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

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

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

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

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

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

 

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

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

1. GRADE

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

2. INFRASTRUCTURE

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

3. TEAM

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

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

4. RESOURCE UPSIDE

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

 

Lost Valley gold mineralization

5. STRIKEPOINT GOLD STAKE

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

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

A Canadian diamond play with discovery, development potential

by James Kwantes
Resource Opportunities

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.

A cut fancy orangey yellow diamond from Naujaat

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.

EXPLORATION DEFICIT
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. 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.

COLOURED CARATS
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.

Dominion Diamond Corp.’s 30.54-carat Arctic Sun fancy yellow

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.

DISCOVERY POTENTIAL
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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