I asked a friend who posts on Kitco under the name “Trotsky” to analyze some preliminary findings released on Douglas Lake Mineral’s website on November 24th. In addition I asked for a few of his favored picks in the junior miner sector from a valuation standpoint.
I have two reasons for asking Trotsky to do this.
- He is a highly respected poster and much more knowledgeable than I am at analyzing drill results.
- I want to eliminate potential charges of bias because of ads that appear on this blog.
Following is a review of DLKM (Douglas Lake Minerals), MRB (Metallica Resources), CRCUF (Canarc Resources), and OZN (Orezone), all by Trotsky except as noted.
Douglas Lake Minerals
From what I can tell, this is very early in the exploration process – rock chip samples from artisanal workings are a very preliminary investigation. But the results are indeed very good. This is the type of result that justifies a more in-depth exploration, and one can probably already speculate that the probability of this turning into an economically viable deposit is quite high, because it’s very near to surface. This appears to be a narrow-vein high-grade deposit, comparable to PMU’s El Dorado/Minita project in terms of structure.
However, at this stage all one can really say with confidence is “This looks very promising”. Whether it is truly viable depends on the actual size of the resource, metallurgical testing (i.e. what gold recoveries are possible) and other, extraneous factors as well (for instance, access to water and power). Tanzania is of course very prolific – when you find gold there, chances are good that you’ll find a lot of it. If they’re lucky and this turns out to be comparable to PMU’s find, it could be a company-maker but emphasis must be placed on could. What IS certain is that this looks very worthy of an intensive exploration program.
Technically the stock appears poised for a run after putting in what appears to be an a-b-c wave 2 correction from the initial run-up. The 50-day moving average has begun to rise and appears poised to make a bullish cross with the 100-day moving average, which in turn has begun to flatten, and the price is just above both. This actually looks like an ideal entry point, but there is the caveat that it will of course depend on what the gold price is doing forthwith. A protective stop should be considered at the recent reaction low at 1.25, or just below it, but hard stops on thinly traded issues have their own risks as well.
DLKM (Douglas Lake Minerals)
Following is a chart I put together a chart depicting the technical action Trotsky just described.
Click on the chart for an enhance image.
Since asking Trotsky for his analysis, I have confirmed the results released by Douglas Lake were indeed preliminary results and not the results of more extensive drilling that I wrote about in Chicago Natural Resources Conference Highlights. Those results were delayed and are now expected (but not guaranteed) to be out by the end of December.
Trotsky has again volunteered to analyze those drill results once they are published. Based on images of core samples in the Conference Highlights post (click to see some neat images) I am expecting favorable results, but the results will be posted regardless of what the findings are.
What follows now are three additional picks made by Trotsky also based on drill results and perceived value.
MRB (Metallica Resources)
84 million shares outstanding, 106 million fully diluted
MRB has no debt, and from 2007 onward will have considerable cash flows from Cerro (a gold/silver mine in Mexico). The bulk of MRB’s value is its 30% stake in El Morro, a gold/copper property in Chile. Technically, the stock has recently broken out from a base built over several months. A retest of the break-out point at or near $3.75 may be a reasonable entry point. Click on the above link for additional information about Metallica Resources.
Target for this stock is $8-$9 provided the gold price remains firm. On December 4th MRB announced a private placement of 6.67 million shares at C$ 4.50/share plus warrants (exercise price C$ 5.60, duration 3 years) for gross proceeds of C$ 34.5 million to the company. This placement may create some short term weakness in the stock that one might use to accumulate.
1. The Cerro San Pedro gold/silver mine in Mexico
Planned start-up: early 2007, 115K oz. gold equivalent (85K oz. gold, 2m. oz. silver) per annum.
Proven & Probable Reserves: 2.03 million oz. gold-equivalent
Measured & Inferred Reserves: 3.197 million oz. gold-equivalent total
Cash cost per gold oz. net of silver credits: $126 (at $600 gold and $9 silver)
Other: This project has been delayed a bit due to legal challenges involving the explosives permit, but MRB has won every single court case to date, and the explosives permit has recently been reinstated. Further challenges seem unlikely, but they can’t be ruled out entirely. In short, there remains a risk, but it’s probably a small risk at this stage.
2. 30% stake in El Morro, Chile
El Morro is a large gold/copper porphyry, in which Xstrata is earning a 70% stake by funding a feasibility study (this involves 10’s of millions of dollars in exploration drilling, assaying, modeling, etc.) Per the November 13th update by Xstrata, MRB’s 30% share of resources is 1.91 billion pounds of copper and 2.47 million ounces of gold in the measured and indicated categories and 0.67 billion pounds of copper and 0.82 million ounces of gold in the inferred category.
3. Rio Figueroa, Chile
This is another gold/copper porphyry system in the early stage of exploration with very encouraging results so far. One hole intercepting 108 metres contains 0.40% copper and 0.96 grams per ton gold. A second hole intercepting 158 metres contains 0.36% copper and 0.37 grams per ton gold. In addition, a near surface copper oxide orebody has been identified, and a copper-gold sulphide orebody just below it.
CRCUF (Canarc Resources)
68 million shares outstanding, 79million fully diluted
CRCUF’s main property is New Polaris, a high grade gold orebody in British Columbia. CRCUF also has a royalty stakes in the Bellavista mine (Costa Rica) and an outright 80% stake in Benzdorp after the earn-in is completed. Benzdorp is located in Suriname (Africa). Technically the stock looks quite bullish, and sits just below long term resistance in the 0.80 c. region. In spite of having risen quite a bit since its 2005 low, the stock remains cheap considering the underlying value of the properties. It is therefore a good buy on any short term reactions. Click on the above link for additional information about Canarc Resources.
1. The Bellavista royalty
Bellavista is an open pit heap leach mine in Costa Rica owned by Glencairn Gold Corp. It produces 60K. oz. per annum at a cash cost of $257/oz. The projected mine life is 7 years. Canarc exchanged its ownership stake in the project for a net profit royalty of 5.7% during the first payback period, rising to 10.4% during the second payback period and 20.2% thereafter. Canarc currently plans to sell this royalty, which has a NPV of $3.3m. according to a 2005 study.
2. New Polaris
New Polaris is where the bulk of Canarc’s value lies. This is a high grade gold orebody in British Columbia, Canada that supported a small scale mining operation in the past (from 1936 to 1942 and 1946 to 1951), producing about 240K oz. The property is currently subject to a phase 3 drilling program, and a number of spectacular drill results have been achieved to date with high grade visible gold mineralization and notable intersections grading 44.7 grams per ton over 6.2 metres (including 108 grams per ton over 1 metre), 22.5 grams per ton over 3.05 metres (including 48.9 grams per ton over 0.6 metres), and 16.1 grams per ton over 12.4 metres (including 118.5 grams per ton over 0.9 metres).
A new resource estimate, a mine plan, the initial economic evaluation and a mining permit application should be forthcoming by the end of this year. Clearly the results to date are extremely encouraging and make it very likely that a mining operation will be established. The resource update will likely show an 800K. oz. or better resource The company’s original target was to prove up 600K. oz., but the drill results have exceeded expectations, which could support a 60K oz. per annum or better mining operation. This mine alone could be worth about $1.10-$1.30 / share, assuming 35 m. shares would have to be issued for financing.
3. Benzdorp, a large gold-copper porphyry in Suriname (South America) is the ‘sleeper’ property of CRCUF that could potentially turn out to be a multi-million ounce resource. The mineralization begins at surface and is largely shear and saprolite-hosted, similar to CBJ’s Gross-Rosebel and KGC’s Paracatu. Canarc can earn an 80% stake by making annual cash payments of $250,000, expending $5million on exploration (more than that has been spent by now) and delivering a feasibility study by October 2008. Exploration at Benzdorp has temporarily taken a backseat to finalizing the New Polaris project, but results to date have been very encouraging. Several mineralized zones have been discovered, with most work focused on the 750 by 250 metres JQA zone which contains gold and copper in a quartz-diorite porphyry stockwork in saprolite. Notable intersection from drilling in 2005 included: 169 m. of 0.60 grams per ton (including 12 m. of 1.08 grams per ton and 10.5m. of 1.01 grams per ton) , 400 m. of 0.48 grams per ton (including 120 m. of 1.14 grams per ton), 315 m. of 0.45 grams per ton (including 25 m. of 1.01 grams per ton), 238 m. of 0.52 grams per ton , 256m. of 0.55 grams per ton (including 44 m. of 1.09 grams per ton). These are definitely economic grades considering this is porphyry starting from the surface and amenable to open pit mining. Subsequent metallurgical testing revealed that very high recoveries could be achieved.
Canarc also holds about 10% of Endeavor Silver, and a stake in privately held Aztec Silver. Major shareholders in Canarc are ABX and KGC either of which could be a future joint venture partner for Benzdorp, since the development of a large gold/copper porphyry requires a large initial investment.
117.1 m. shares outstanding, 124m. fully diluted.
Orezone is another Canadian based exploration company with the majority of its properties located in West Africa. It holds 10 properties (most of which are in Burkina Faso), covering some 8,900 square kilometres, which makes it the largest explorer in Burkina. Of these properties, the flagship Essakane, Segala and Bondi are considered the most important. Orezone also holds the Kossa property in Niger just across the border from Essakane, as well as a 50% joint venture interest in 2 further Niger properties and two permits in Mali. OZN acquired most of its interests during the final stages of the gold bear market when interest in such acquisitions was low, and the time to buy was at hand. Today most of them look like potential winners. Click on the above link for additional information about Orezone.
Technically, OZN was been very strong until April of 2006 but the long term uptrend that had been in place until then was broken in the May/June swoon in the gold sector. Since then, the stock has traded sideways in a tight band between $1.30 and 1.70. This several months long consolidation has now allowed the price to converge with the flattening 100 and 50 day moving averages, and the current price could be a decent entry point. Future news flow from ongoing drilling campaigns and the final feasibility study/project development decision on Essakane could reignite the stock.
1. Essakane is a joint venture with GFI, which has opted to earn a 60% stake by bringing the project to the bankable feasibility study stage. Its 1.9m. oz. resource now makes Essakane the biggest known gold resource in Burkina. GFI’s commitment nearly guarantees that a mine will be built. A recent preliminary assessment report outlined that the likely cash cost of production will be about $265/oz. producing ca. 310K oz. per annum over an 8 year mine life. A capital investment of roughly $128 million will be required for OZN to participate in the project at a 40% rate. A very conservative initial assessment showed a relatively paltry 15.8% Internal Rate of Return at a 10% discount and $625 gold price, which created some temporary pressure on OZN’s share price. However, my feeling is that the market is underestimating the project’s potential, as it seems likely that re-assaying will reveal somewhat higher grades. Other ways to improve project economics are also under investigation. For example: optimization of the pit slope is thought to improve the stripping ratio from the preliminary study’s from 5.4:1 to 4.4:1 with obvious implications for cash costs.
2. Sega and Bondi
After Essakane, the Segala and Bondigui deposits are the most advanced projects of OZN and it holds a 100% interest in both, subject to a 3% net smelter royalty in Sega’s case). Repadre (now IAG) previously estimated a resource of 300K oz. at 2.88 grams per ton at Sega, but OZN believes the deposit could ultimately host between 1m.-to 2m. oz. High grade discoveries at Sega as well as the large intercepts of lower grade ore strongly suggest the presence of an economically viable deposit.
Bondi has similarly had a number of impressive intercepts and it appears highly likely that either Sega or Bondi or both will eventually progress to the feasibility stage.
3. Kossa, Niger
Kossa is a project across the border from Essakane, and is hosted in the same sedimentary basin. The permit covers 2000 square kilometres and initial drilling has shown results very similar to the Burkina Faso properties in that large lower grade zones host high grade shoots at depth. This looks like a highly prospective
permit as well.
4. Other properties:
OZN has 2 more properties in Niger (Namaga and Koriya) optioned from Greencastle resources, whereby OZN earns a 50% interest by spending $1m. in exploration over 3 years, which rises to 75% upon preparation of final feasibility studies. Initial drilling has already shown encouraging results such as 22m. at 2.4 grams per ton at Koriya and 10m at 4.9 grams per ton at Namaga. Other properties in Burkina include Bombore and Golden Hill, both of which have been subject to previous exploration work by predecessor companies and show great promise (especially Bombore).
Seasonal factors should remain strong through the end of January. Shorter term the $HUI has put in a Demark trend exhaustion signal but the weekly chart technically looks sound. We may see a consolidation period for a week or two but the medium term bullish case remains intact as long as 335-340 holds. If it doesn’t, one will need to reassess the nature of the drop (does it look corrective in nature as opposed to a real trend change). Brian McAuley, my partner in the Survival Report, sent me the following chart and comments just this morning:
Here is a weekly chart of the HUI. I would not surprised at all if the HUI declined to test the recent breakout (black line) and/or the 20 week MA: both reside in the 325-335 range. If the HUI is preparing to rally beyond the 401 high it also would not be surprising if that preparation took some time. There is a chance that such a rally could be quite explosive (from an Elliot Wave point of view), so I half expect the HUI to try and throw some people off if that’s the case.
Click on chart for an easier to read view.
Note: I redrew the above chart as the one Brian sent had a scale not suitable for publishing in this blog.
Those wishing to add to (or enter) this sector may with to consider waiting for a pullback to the breakout line or 20EMA as shown in the above chart, or simply adding on dips on an individual issue basis.
Gold and the US Dollar
(From an Email on December 6th but also posted on Voy–The Kitco refugees gold and metals forum)
A break below 640 on gold can’t be good near term. Unfortunately, public bearishness on the dollar is at a fever pitch again. A recent Economist cover is particularly concerning. The Economist also put in the low for the dollar LAST time around (an Economist cover announcing a ‘disappearing dollar’ coincided perfectly with a 2 year low). The Economist is by now famous for spotting trends just as they end, and has become one of the most reliable contrary indicators magazine-cover-wise anywhere on the planet. Their classic ‘drowning in oil’ cover that promised $5 oil within days of oil making a historic low in the $10/bbl. region that was followed by a 700% price rally forever stands as a stark reminder of this fact. So yet ANOTHER bearish cover story on the dollar is quite disturbing here, as gold has lately taken its cues from the moves in the dollar.
However, I would also like to point out that the dollar’s moves against other fiat currencies are not necessarily an impediment to its continued long term devaluation against gold, the only REAL money out there. So far, the dollar’s devaluation against gold amounts to slightly less than 97% over a span of 73 years, and we have absolutely no reason to expect it not to give those final 3 percent up as well. Every fiat currency is ultimately on its way to utter worthlessness, it is only the speed at which this happens that is occasionally in question. Those final three percent, the last lap in the fall into the black hole that awaits every fiat currency at the end of its life are going to be a sight to see IMO.
[Mish note: It was “The Incredible Shrinking Dollar” cover of Newsweek that marked the bottom of the US dollar in 2005 to within a week or so. Nonetheless Trotsky is correct that Economist covers have a nasty habit of marking major turning points. Other recent notables include Time Magazine’s cover in the summer of 2005 “Home $weet Home – Why We’re Going Gaga over Real Estate” marking the tip top of the real estate bubble within a month. Yes, they did say “gaga” right on the cover.]
General Comments on Junior Miners
Mish and Trotsky:
At the present time, the junior sub-sector of the gold stock universe is ironically the one offering the best value. Most (but not all) of the senior and mid tier producer shares are overvalued by traditional valuation criteria and presumably profit mostly from their scarcity value (the gold sector’s total market capitalization is very small). At the same time, however, it should be clear that the prospective higher reward from investing in juniors also entails high risk. It is usually best to buy them when the mood is bleak, and their prices break down due to disinterest.
A cardinal rule that investors should heed is to diversify. Holding fewer than 10 junior companies in a heavily weighted miners portfolio entails increased risk. Concentrated bets will of course provide the biggest bang for the buck when they pan out, but in the junior miner’s universe one must always count on something NOT panning out according to expectations. The only way to mitigate that risk is by means of diversification. In a diversified portfolio it will not matter much if 2 or 3 of your 10 stocks go to zero provided you have 2 or 3 multi-baggers as well.
Sometimes properties are confiscated by an unfriendly government (this recently happened in Uzbekistan to NEM and others), sometimes the initial assessment of a property’s potential turns out to have been overly optimistic, and sometimes an individual stock falls out of favor for unknown reasons while everything else marches ahead. Careful study may weed out some losers but it is too much to expect that every pitfall can or will be avoided. Eventually some picks will turn out to be the silk purses and others will be the sow’s ears, so one simply MUST diversify within this sub sector. The companies presented in this write-up all seem to have better potential than most, but they are subject to the above mentioned risk factors, and one should always keep that in mind.
Whether or not one wants to invest in such companies at all depends on one’s personal risk tolerance. Those willing to invest in this sector simply must count on the share prices of the juniors to be extremely volatile and subject to extraneous factors including future movements in the price of gold, seasonal factors, currency effects, and the risk appetite of investors.
I do own shares of Douglas Lake Minerals and have ever since the Monday following the Chicago Natural Resources Conference. I have added on weakness since then. I consider those shares to be a “core position” unless and until drill results or other factors dictate otherwise. Those factors can change at any time and I reserve the right to make portfolio changes at any time, without notice, based on such factors. At the time of this writing I have no current position in any of the other picks mentioned above but that is very likely to change, and when it does it will be without notice.
Neither I nor Trotsky are being paid to write about any company listed above but I do receive ad revenue as previously disclosed.
The above post represents the opinions of the authors and should not be taken as investment advice. Any investment decisions undertaken after reading this (or any public post from anywhere) must in all cases be made by the reader. Please consult your investment adviser before taking action on the analysis and opinions presented above.
Mike Shedlock / Mish/