We’ll be updating this and all subsequent Mining News Review posts on a more-or-less daily basis. We will add to this review chronologically with the most recent updates appearing at the bottom. If there appears to be a significant news release that we have not discussed, please feel free to bring it to our attention in the comments section (subscribers only please) and we’ll make an effort to add it to the discussion if warranted.
This week in our Mining News Review we’ve chosen to spotlight Silver Standard Resources (NASDAQ: SSRI; TSX: SSO).
Two Fridays ago, Silver Standard announced that it plans to spin-off its Snowfield and Brucejack projects to a new company called Pretium Resources for total consideration of $450 million in cash and shares. Not much more than a month ago we wrote the following:
When it was an ounces-in-the-ground accumulator, Silver Standard was arguably valued more highly by the market than the sum of its parts, so perhaps it shouldn’t come as a surprise that having graduated to the coveted silver miner/developer status means the company is now seemingly valued at less than the sum of its parts. Silver Standard’s management is acutely aware of this problematic situation and we expect them to monetize Snowfield and Brucejack in the near future…[emphasis added]
Pretium’s IPO is planned for later this year, raising a minimum of $265 million and leaving Silver Standard with a significant equity interest in the new company which is to be run by Robert Quartermain. Mr. Quartermain served as the President and CEO of Silver Standard from 1985 through January 2010, and he is well known and well regarded within the industry. He remains a large shareholder of Silver Standard and it is great to see him getting involved once again. Considering that Seabridge Gold (AMEX: SA; TSX: SEA) is trading at a market capitalization of over $1 billion with its similarly-sized and located KSM project, Pretium is likely to be a hit especially as long as gold and silver stay hot. This of course means that the $450 million deal could soon be worth significantly more, and this is why the arguably-low price of $450 million doesn’t much concern us. Meanwhile the cash portion of the deal will give Silver Standard plenty of freedom to quickly advance its enviable portfolio of silver exploration and development projects.
Most important at this stage is for Silver Standard to demonstrate profitability at its only operating mine, Pirquitas in Argentina. The project entered into commercial production in late 2009, and although growing pains were to be expected, production has not stabilized and cash costs remain quite high. Silver recoveries are improving but have a ways to go and the mine needs to demonstrate that it can eventually produce significant amounts of by-product zinc and more importantly, tin, as contemplated in the original feasibility study. If Silver Standard cannot demonstrate profitability at Pirquitas in 2011 at silver prices north of $20 per ounce then that will spell serious trouble for a company that opted to change its business model from ounces-in-the-ground-accumulator to producer. But if costs at Pirquitas fall in line with expectations over the next 6-18 months, and the company can figure out how to improve recoveries of the problematic fine-grained tin resource, then we believe Silver Standard’s fair value lies somewhere between $30 and $35 per share at current metal prices. This means that presently Silver Standard offers one of the more compelling valuations compared with its peer group of mid-tier silver producers:
Note: International Minerals (TSX: IMZ) looks solid on the surface, but the majority of its valuation relies on 4 development projects, two of which are located in Ecuador and are likely 3-5 years away from production. On the other hand we have First Majestic (TSX: FR), which doesn’t look so hot in the above chart but is arguably trading at a similar valuation as Pan American, Hecla, Coeur, and Fortuna given that First Majestic’s significant Del Toro development project is not in our model due to the preliminary nature of production data. Rough numbers for Del Toro do suggest a significant boost to target valuation that tends to support the current share price. First Majestic is also likely benefiting from its cachet as the “purest” silver producer and anticipation of a U.S. listing in early 2011. Note that First Majestic is an institutional client of Metal Augmentor.
In conclusion, despite having moved about 50% higher since August, Silver Standard still offers good value. However, the remaining upside comes with a fair amount of execution risk, especially given what has so far been lackluster performance at Pirquitas. This can be overcome, but it will take time, and without any major near term price drivers besides possibly the IPO of Pretium, we are going to stick to our guns with the “take profits” call in in our most recent Avoiding a Hangover post. That way we get the best of both worlds, locking in some gains while continuing to hold some shares for further upside.
As any fool can see using Google Maps, the volcanic shield of western Saudi Arabia (and Eastern Egypt) is highly prospective for mineral deposits. Given its vast oil fields, one would think Saudi Arabia would be more advanced in mineral exploration but it turns out that Citadel is one of the first companies to obtain a mining license in that country. Citadel’s Jabal Sayid volcanogenic massive sulfide (VMS) copper deposit looks like a winner but Equinox is not paying AU$1.2 billion for only that project — much of the value lies in the discovery potential of this severely underexplored region of the world. We keep hearing this or that area is the last unexplored frontier in the world but it should be clear by now that the mineral resources of the Earth are virtually untapped in many places. This is good news for future explorers although probably not very good news for “peak ____” (fill in the blank) proponents. We certainly don’t believe in “peak copper” although that doesn’t mean we won’t see supply constraints from time to time in the future. In any case, we do believe that Citadel/Equinox could do for Saudi Arabian mineral exploration what Centamin (LSE: CEY; TSX: CEE; Pink Sheets: CELTF) has done for Egypt. [Silverax]
Mantra Resources (ASX: MRU; TSX: MRL; Pink Sheets: MNRZF)
Mantra Commences PFS On Heap Leaching for Phase 2 Growth – October 25, 2010
Here’s proof that not all uranium explorers/developers are severely undervalued in this market. Mantra is in pre-feasibility stage on an inferred + indicated 80 million pound U3O8 deposit in Tanzania and has a healthy US$700+ million market cap equating to about $9 per pound U3O8. The deposit is a low grade sandstone hosted deal but preliminary economics point to moderate capital and operating costs. The updated pre-feasiblity will help bring the value proposition into better focus but Mantra should make it clear that it isn’t uranium per se that is boring to investors these days but rather the lengthy development and permitting timeframes that are often involved. Thus, other than a major new discovery, an obvious price driver for uranium explorers/developers in the current market environment is meaningful progress toward production. Another obvious one is consolidation (senior producers buying juniors with prospective development projects). We’ll be looking closely for companies with these qualities given that they are likely to be the first and perhaps biggest movers as the uranium sector experiences a resurgence in the years ahead. [Silverax]
JPMorgan Chase & Co. (NYSE: JPM)
J.P. Morgan to Launch Physical Copper ETF – October 26, 2010
This should prove to be a great way to directly short copper, i.e. buying put options on the Copper ETF rather than having to identify less pure, company-specific option strategies. No start date or ticker has yet to be mentioned. [Zurbo]
Geodex Minerals (TSX-V: GXM; Pink Sheets: GXMLF)
Northcliff Exploration (a private company controlled by Hunter Dickinson Inc.)
Hunter Dickinson’s Northcliff Finalizes Sisson Brook Tungsten-Molybdenum Project JV for $17 Million in Expenditures – October 25, 2010
By spending $17 million Northcliff will be able to acquire a 70% interest in the Sisson Brook project, which implies a value of $7.3 million for the remaining 30% interest. Considering that Sisson is Geodex’s flagship property and Geodex has a market capitalization of over $18 million we’re not terribly impressed with the value on offer, especially in comparison to a certain zinc and lead developer that is trading at about 50% of its implied value. Since Hunter Dickinson is a quality partner, we might have come to a different conclusion if this were a gold or silver development project, but molybdenum and tungsten are metals with difficult supply/demand dynamics such that projects dominated by these metals are typically going to have to look very compelling economically using conservative price assumptions before we seriously consider them as a speculative investment. [Zurbo]
Oroco Resource Corp. (TSX-V: OCO)
Oroco Receives Cerro Prieto CAPEX Figures & Oroco Retracts Capital Cost and Operating Cost Estimates – October 26, 2010
Oroco is an interesting little company with a market capitalization of around $12 million. With the capital and operating cost figures released today, we have enough information to determine that Cerro Prieto will produce around 20,000 ounces gold per year for probably at least 5 years at a cash cost of about $280/oz and capital cost of about $25 million. The retraction is inconsequential, and we’re assured that the preliminary economic assessment (PEA) is imminent (est. within a week) and will contain essentially the same figures. The company is simply waiting on the engineers to run the net present value numbers. Having plugged what information we can into our valuation model (making conservative assumptions for the rest), we arrive at a base case valuation in the range of C$0.50-C$0.60 per share. That’s not incredible for a development stage company with such a small production profile, but we’re told financing options are already lined up to the extent that we can expect progress on this front within several weeks of the PEA being published.
Nearby Silvercrest (TSX-V: SVL; Pink Sheets: STVZF) is working towards declaring commercial production at its similar, albeit larger, Santa Elena gold-silver project. Its share prices jumped 20-30% in late 2009 when it announced project funding through a debt/hedge facility and a gold stream. One might expect a similar reaction out of Oroco, but before that happens the PEA may actually lead to a bit of a selloff if the market is anticipating a larger operation. We’ll be monitoring this one closely to take advantage of any trading opportunities, and our subscribers will be the first to know if we do decide to enter a position. [Zurbo]
Callinan Mines (TSX-V: CAA; Pink Sheets: CCNMF)
Callinan Proposes to Become a Royalty Company and Create a New Exploration Company – October 25, 2010
Callinan is an institutional client of ours, and we’re happy to see it is finally spinning out its royalty assets into a new company. A little over a month ago we wrote an abbreviated report on royalty companies and singled out Callinan as the top pick with significant base case upside. Since publishing that report Callinan has risen an impressive 72%, even despite releasing some negative news that we commented on in last week’s mining news review. It will be interesting to watch for what types of royalties the new company will focus on acquiring in an attempt to expand its portfolio beyond a 6.67% net profits interest on Hudbay’s (NYSE/TSX: HBM) 777 mine. [Zurbo]
Phoscan Chemical Corp. (TSX: FOS; Pink Sheets: PCCLF)
Phoscan to Conduct Tests for the Recovery of Niobium and Rare Earths at the Martison Property – October 26, 2010
At first glance this news seemed strange to us since we were under the impression that IAMGOLD had already investigated the potential for niobium recovery at the Martison project, and that this work had been deferred – see the June 8, 2010 press release – more or less implying that the potential was not great. But now we are told that this “deferral” was not the result of niobium proving difficult to recover, but more or less the result of IAMGOLD’s intentions on what to do with a niobium concentrate not being in the best interest of Phoscan shareholders. The following quote from Stephen Case, President and CEO, sums things up nicely:
“The ability to economically recover niobium from the phosphate tailings could be a game changer for the Martison Project…This could yield a sufficiently large enough by-product credit to possibly revisit the Martison project as a standalone phosphate concentrate producer, thus substantially reducing the project’s overall capital and operating costs. The recovery of rare earths from the lateritic oxide cap, where the metal value per tonne has risen dramatically over the past year, could also substantially enhance the project economics.” [emphasis ours]
To the best of our understanding, a niobium-rich concentrate would be desirable enough to entice someone else to deal with processing. The implication being that Phoscan could avoid building a phosphoric acid plant (est. cost of $130-$142 million*) and granulation plant (est. cost of $156-$200 million*). This would reduce capital costs by about 30-35 percent, and significantly improve the likelihood of being able to obtain project financing.
*According to the 2008 Preliminary Feasibility Study on the Martison Project
Stephen Case admits that the rare earths potential is more of a wild card bet at the moment, though we suspect that may be what made the market jump these past few days. [Zurbo]
There are actually three things going on here. One, the rare earth potential of the laterite cap is not fully understood and may still require more drill testing or sampling. Of course it is not unusual to have niobium and phophate associated with rare earths considering carbonatites are a source of all three minerals, often in combination. At Martison, however, the phosphate, niobium and rare earths aren’t necessarily spread out evenly throughout the resource area, and that will obviously impact the sequencing of the process flow.
Two, assuming rare earths are present in economic quantities, the ability to recover them in a concentrate needs to be investigated next. Here we’ll note that the Olympic Dam IOCG deposit in Australia contains about 0.50% rare earths and economic recovery has proved elusive so far (though at the current rate of rising prices that might not be the case for long). In the case of Martison, there is nothing to be lost by evaluating rare earth content and recovery especially if a modification of the strategic plan is being considered from a complex vertically-integrated fertilizer producer to a simpler mining operation selling concentrates to upstream industrial producers. By-product revenue becomes critical in the latter approach compared to the former.
Three, a viable niobium concentration process needs to be designed and tested. There have been numerous studies in the past that have looked into phosphate and niobium recoveries in concentrate but none seem to have provided definitive data demonstrating viability of the niobium stream to the end product stage. For example, the niobium pentoxide concentrate at IAMGOLD’s (NYSE: IAG: TSX: IMG) Niobec facility is around 60% (compared to under 40% in historic studies at Martison), which is processed into ferroniobium using a thermite reaction.
In sum total, Phoscan appears to be going back to the previous plan of producing phosphate and niobium concentrates and leaving behind for now the ambitious goal of becoming a vertically-integrated fertilizer and chemical producer. While this probably reduces the eventual upside, it does create a possible path forward where otherwise there wasn’t much of one and that might account for why the shares are finally trading above their cash value. [Silverax]
Advanced Explorations (TSX-V: AXI; Pink Sheets: ADEXF)
Advanced Explorations Moves to Close Strategic Partnership – October 27, 2010
Not surprisingly XinXing Pipes Group fully subscribed to a placement at C$0.25 when the share price is currently trading for over C$0.80. It appears someone was listening when we said “[Advanced Explorations] is still relatively cheap given the potential of Roche Bay not to mention a host of other opportunities that are now likely to be considered with XinXing as a strategic investor”, considering Advanced Explorations promptly shot up over 100 percent. Now AXI is trading for about 3x the implied deal value with XinXing. Meanwhile our favorite iron ore play continues to trade below the value of its cash and investments. A real steal, but no one seems to be listening. Not yet at least. [Zurbo]
VMS Ventures (TSX-V: VMS; Pink Sheets: VMSTF)
VMS Reports 6.69% Copper Over 71.69 Metres and 3.74% Copper Over 21.77 Metres from In-Fill Diamond Drillholes Three and Four at the Reed Lake JV Property – October 28, 2010
Needless to say these are very good results, confirming our initial estimate of the in-fill target of 1+ million tonnes with good continuity and possible upside within the known deposit envelope. Pitch and swell of the ore body combined with oblique drill angles makes it difficult to evaluate the true width intersected in these holes and ultimately expansion potential will be what drives Hudbay toward a development decision in the near term. The share price has at this point (more than) priced in a best-case scenario from the in-fill program but exploration potential does present some upside, such as at the Salis Lake project where exploration has recently commenced. [Silverax]
Golden Predator (TSX: GPD)
Golden Predator Intercepts 1.72 g/t Gold Over 146.3 m From Carlos Zone, Grew Creek Property, Yukon – October 25, 2010
The discovery of multiple vein trends and optimal drilling orientation are consequential for demonstrating grade continuity and increasing overall grade of the mineralized envelope but it remains of limited size and must be supplemented by additional discoveries on strike or nearby before the Grew Creek property rises to the status of highly prospective Yukon play. That said, the $15 million financing does indicate Golden Predator is a serious Yukon player and must be on the watch list. It would be a decent idea to buy the stock should it approach 50 cents because at that price the company’s royalty portfolio starts to provide some downside protection. We hope to complete the update to our royalty model next week to include at least 5 more royalty companies, making it the most comprehensive royalty model out there to our knowledge. [Silverax]
Queenston Mining (TSX: QMI; Pink Sheets: QNMNF)
Queenston Announces Strategic Investment by Agnico-Eagle Mines Limited – October 28, 2010
Queenston now must be considered a top take-out candidate with Kirkland Lake Gold (TSX: KGI; Pink Sheets: KGILF) chumping on one end and Agnico-Eagle (NYSE/TSX: AEM) on the other. There is still work to be done for the company to meet its goal of defining 2 million ounces of economic gold in the Kirkland Lake area but this entry by Agnico-Eagle is a strategic challenge to Kirkland Lake Gold and ups the stakes for control of the district. If I’m right about this, Queenston shares are headed over C$6.50 in a hurry and thus it might not be too late to get on board here. [Silverax]
Amazon Mining (TSX-V: AMZ; Pink Sheets: AMHPF)
Preliminary Economic Assessment for Cerrado Verde Provides Encouraging Results – October 28, 2010
With its market capitalization of about $100 million, a net present value of over $450 million in the more conservative production scenario is very impressive. We didn’t have a chance to listen in, but we’re told the conference call held on November 3rd was well attended by a number of analysts that may soon initiate coverage of the company, and that a transcript of the call will be posted to the company’s website shortly. For now the main takeaways seem to be that (1) the company is in discussions with the government to help finance the project and potentially allow for certain tax exemptions, (2) the newly elected (this week) president of Brazil was formerly the governor of Minas state (where Amazon’s Cerrado Verde project is located) and is apparently well aware and supportive of the project, and (3) there is the potential to significantly reduce input costs by using limestone contained in the project rather than sourcing it on the open market. With production targeted for 2013 the future certainly looks bright for Amazon. But before we get too excited and assume it’s going straight up to $10 tomorrow, let’s not forget about the wild gyrations this stock is prone to on both the upside and downside:
Orvana Minerals (TSX: ORV; Pink Sheets: ORVMF)
Bolivian Government Agency to Audit Orvana’s Bolivian Subsidiary – October 29, 2010
It is hard to say how much, if any, of a headache (or worse) this audit is likely to cause, but at least we can all be happy about the roughly US$7 million being granted to Orvana by the Spanish government because of the jobs the El Valle project will create. [Zurbo]
Peregrine Diamonds (TSX: PGD; Pink Sheets: PGDIF)
1.15 Carat Diamond Recovered from 840 Kilogram Microdiamond Sample Collected from Five Hectare CH-31 Kimberlite – October 29, 2010
The day that this news was announced, John Kaiser put out a comment saying:
…The market has not reacted [to the news] because it does not understand that recovering a 1.15 carat gem quality stone from an 840 kg sample along with several other big ones, while not indicating an overall high grade, has Victor style implications for CH31…the odds of critical mass for a large scale Ekati style diamond mining camp at Chidliak have improved substantially…If you have been waiting, don’t wait any longer. Initial mini bulk sample results for CH7 are expected during the second half of November. BHP must decide by November 30 [regarding earning additional 7% interest by funding project through bankable feasibility].
We agree with Kaiser’s assessment, especially considering that the beautiful 1.15 carat diamond was found in drill core. The scale of CH31 taken by itself could be reason enough for BHP to fund the project through feasibility, especially now that their bid for Potash Corp (NYSE/TSE: POT) has been rebuffed and they may have a bit of extra money to play with.
Nevsun Resources (AMEX/TSX: NSU)
Nevsun Begins Plant Commissioning – October 25, 2010
Careful now, this is primarily a copper operation. Don’t bit too hard on that juicy sounding 450,000 ounces per year gold production since it is only expected to last 2 years at that elevated level. In our valuation model Nevusun appears fairly valued at about $6.50. Since copper is the largest contributor to the company’s valuation we can’t get too excited. [Zurbo]
Creso Exploration (TSX-V: CXT; Pink Sheets: CRXEF)
Creso Exploration Reports 280 m of 1.15 g/t Gold from Preliminary Minto Hole 3 Drill Results in the Shining Tree Area, NE Ontario – October 29, 2010
Basically Creso has a small high grade pipe near surface that they have been drilling with oblique-angled holes, which accounts for the bonanza grade over significant intercepts. This is a 100,000 ounce range resource that could potentially support a small mining operation but does not deserve serious attention otherwise. In an attempt to see if the system descends at depth, however, the company drilled some deeper holes and came back with good intercepts but not at grades or thicknesses that would support an economic operation at those depths unless lateral dimensions are extensive.
They did add some “hope” to the release by suggesting they are proximal to an alkalic gold system, which are sometimes known to have significant tonnages of high grade (required at these depths), although typically with complicated structural controls that can account for hit-and-miss exploration (expensive at these depths). Evidence for the “big alkalic gold system” is Na depletion and presence of tellurium (note that other geological factors think alkalic porphyry can account for this as well), but until they actually identify the actual porphyry stock, assuming there is even one, this is all only speculation.
Even if it turns out to be an alkalic gold system, that doesn’t guarantee much — Evolving Gold has a confirmed example of one and has a market cap a bit over $100 million (about 1.5x Creso). Recently in Ontario as well, Gold Canyon (TSX-V: GCU; Pink Sheets: GDCRF) has been making big noise about its Springpole gold project but this also looks to be of limited size despite the best efforts of that management to portray it as a massive gold deposit — after its massive move higher, Gold Canyon now has a similar market cap to Evolving. Speaking more on alkalic gold systems, only the ones with very extensive veining became major gold districts, and owing to the ability of these systems to form disseminated deposits, that is what made Cripple Creek and Lihir so valuable. These disseminations should not be very difficult to find, and I would argue that if you don’t find them in large volumes than that may speak strongly about the extent of mineralization in the veins as well. Circular logic, I know, but it generally works in this case.
Generally what these examples are proving is that not all alkalic gold deposits are the size of Cripple Creek or Lihir. Of course in the current market frenzy it is altogether possible for Creso to still zoom skyward, but I am unable to find strong fundamental reasons to be on board here. [Silverax]
Disclaimer: We own shares in several of the companies mentioned in this analysis (Metal Augmentor subscribers know which ones), but no compensation has been received from any of the companies mentioned. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment advisor or broker.