Tag Archives: silver

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

By James Kwantes
Resource Opportunities

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

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

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

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

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

Strategic Metals: working capital vs. market capitalization

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sabina’s Goose camp, Back River, Nunavut

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

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

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

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

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

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

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

Author at the site of proposed Goose plant

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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