KTN on AOTH
Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Today I’m speaking with Jim McDonald and Ken Berry of Kootenay Gold Inc. TSX.V - KTN
Jim McDonald P.Geo, President and CEO. Jim co-founded and successfully developed Black Bull Resources, National Gold (merged w/Alamos Gold) and White Knight Resources.
Ken Berry, Chairman and Director. Ken has over twenty years experience in the financing (raising over $300m) and corporate communications of public companies.
Rick: Ken, could you tell us a little bit about the history of Kootenay Gold?
Ken: Jim and I were the founders of Kootenay Gold. I started the public company, than about eight years ago Jim and I had an opportunity to meet, we discussed our philosophies and looked at the various things that we were doing.
There was a lot of positive energy between Jim’s goals, his beliefs and what I was trying to achieve and that has created a real bond and a good partnership over the years. Jim had secured some mineral properties in British Columbia’s Kootenay region (southeast corner of province – R. Mills) and I had the public company. I was a former investment advisor so it was a good marriage between the geological side and the investment/finance side, and that’s where the relationship originally started back in 2003.
Rick: Jim why the focus on the Kootenay’s and how did the transition happen from there down into Mexico?
Jim: Kootenay Gold was the opportunity to get under one umbrella a group of professional prospectors and geologists that I’d been working with on various deals for 15-20 years. I’d been looking for an opportunity to get that expertise going in one direction, under one company banner. That opportunity came up in 2003.
We incorporated the company privately and then went out with a business plan, let’s generate some new projects in a prospective for discovery area using in-house talent, option the properties out and as we build value doing that we will look for more advanced projects.
The Promontorio silver project in Mexico is the advanced project that we acquired. That was in 2006 and Kootenay embarked on the first drilling program in 2007, we made the discovery at the end of the year.
Rick: Jim could you explain to our readers how you structure one of your joint venture deals?
Jim: Sure, the deals are basically structured on an earn in basis, so the idea behind the property generation side is that because we have this expertise, which is quite uncommon, very few companies have the ability to generate projects internally, so that gives us quite an advantage because we are able to identify targets and find mineral projects from the grassroots stage.
Now, at the grassroots stage a mineral project has a pretty high risk profile as to success in finding a mineral deposit. You have to go through quite a few of these projects before you find one so you want to mitigate that risk as much as you can.
You can keep on raising money through financings, and carrying those projects forward yourself, or you can farm them out to others, and because we are able to generate these things, and we are actively doing that all the time, our model works best, and the dilution factor is the least, when we option these projects out.
The best way for us to mitigate risk is to bring partners in and let them advance these projects. Any mining project typically has gone through several operators before the economic discovery is made, that’s common.
It doesn’t happen 100% of the time, but it probably happens 80 or 90% of the time, where a project has had four or five or more companies take a shot at it before a mine is actually discovered. Our Connor Creek property, has now gone through two partners and we are lining up a third.
It’s got a very good gold anomaly and a copper anomaly on it. Having a very strong structural zone it still has good upside and discovery potential. We’re able to, even when the partner hands these properties back, generate more interest and get another partner to test them further if the project still has very good merit.
Rick: If the first, or even second, model doesn’t work, it doesn’t mean the next one’s not going to work. It seems like there is almost always something new to try based on the flow of new information.
Jim: Well yes there is, because when you first go in, you are dealing with a limited amount of information. You’ve come up with enough encouragement, enough of a positive result to say “okay, here is the target, it needs to be tested, let’s test it”. So you do, and now maybe you haven’t taken it to a mine, but during the process you’ve extended the scope of the target, you have realized that the control on the mineralization is something other than what you thought.
Through the process of exploration, you’ve eliminated some areas, but at the same time, if the property is a good one, its led you into other areas of mineralization that need to be tested, and that process is an ongoing one.
The more you learn, the better able you are to target, and the more work you do, even if the results are not very positive, you’ve eliminated areas to test, so your becoming more focused.
Rick: People asked Edison why he kept trying to invent the light bulb after failing a thousand times, he told them, “I didn’t fail a thousand times, I found out a thousand ways it wouldn’t work.”
Jim: Right, well it’s a good analogy because exploration is exactly like that.
Jim: Every bit of information is valuable to you, in one way or another. We’ll bring a partner in and they’ll typically have the ability to earn a 50% to 60% interest from us, and in exchange for that, they have a commitment to spend “X” number of exploration dollars. It could be one million, two million, or three million dollars over what’s usually a three to five year term.
They make scheduled cash and stock payments to us along the way. As a mining cycle goes, we’re dealing with pretty bad markets right now, but nevertheless, base metals have held up pretty good and precious metals are doing very well, and the ability to generate new projects is a pretty rare one, so those exploration properties become more and more valuable as time goes on.
Rick: In a market downturn, mining is cyclical, the property generator business model (PGBM) that Kootenay follows, it might be the best one to follow, you are using OPM, other people’s money.
Jim: Well it becomes in a way a numbers game, you use the science and your expertise to increase your odds. But you’ll typically have to go through a thousand showings to find a mine, and you can accelerate that process quite a bit through the science and through expertise. So you want to get as many of these projects evaluated and tested as you can and these projects that we have, they all represent potential for new discoveries and of course carry forward their inherent value for future joint ventures.
Rick: Having a 100% owned property is much easier to promote then a joint venture and you decide when and how much to spend. Those are components many others following the PGBM don’t have. Tell us about Kootenay’s 100% owned Promontorio Silver Project in Mexico.
Jim: We’re building up the Promontorio project, it’s a brand new discovery of significant size and could immediately change the value of the company.
We’ve got all this high impact potential with the various joint venture projects that we have. Then, underpinning that value is the Promontorio silver project in Mexico, which is turning out to be quite a big, strong system.
Rick: Promontorio has a significant resource. The AGP resource estimate posted on your website comprises Indicated Mineral Resources of 5.22 million tonnes averaging 52.7 g/t silver, 0.86% lead and 0.96% zinc, containing 8.9 million oz Silver, 99.3 million pounds of lead and 110.8 million pounds of zinc. AGP also estimated that Promontorio contains 0.65 million tonnes averaging 55.7 g/t silver, 0.94% lead and 1.00% zinc in the Inferred category, containing 1.17 million oz Silver,13.4 million pounds of lead and 14.3 million pounds of zinc.
Jim: We’re looking to expand the size of that resource, we started on the largest and most aggressive drill program, with three drills, that has been conducted there to date. We have been in the current phase of drilling since May, with three rigs operating since about the end of June, beginning of July, and we’re generating a lot of very good results on step-out expansion drilling on the Promontorio trend.
Rick: It certainly seems like the numbers are building.
Jim: We can see the continuity is building beyond the resource side. We can see the potential for significant expansion, that resource is real, and we’re possibly half-way through a 25,000 meter program and so we are going to have steady drill news coming for the next three or four months. Then once we wrap the current drill program up we’ll be coming out with a new resource calculation, and taking it to the next stage.
Rick: Jim, can you tell us the location of Promontorio, is there any existing mines, infrastructure in the area?
Jim: Promontorio sits in northern Mexico, so it’s just outbound, west of the high Sierra, that’s in the foothills plains region just about 80 kilometers, in a straight line, from the coast of the Sea of Cortez, Gulf of California.
The access is really simple, it’s a 2-1/2 hour drive from a small international airport at Obregon City, and it sits in that prolific, well, all of Mexico is quite prolific for metal content, but it is just on the western edge of that well-known Sierra Madre mineral belt, where you have numerous silver/gold and gold deposits including Minefinder's Dolores gold silver mine, Alamos Gold's Mulatos gold mine, Agnico Eagle's Pinos Altos gold-silver mine, Gammon Gold's Ocampo gold-silver mine, Cour D'Alene's Palmarejo silver-gold mine, Goldcorp's El Sauzal gold mine and Pan American Silver's Alamo Dorado silver mine.
You know, when we first went into Mexico and starting looking around with Kootenay Gold, our region didn’t have any significant producers and now today, some seven years later, there are seven or eight significant producers within 100-150 km radius.
Jim: The belt we’re in hosts not only gold/silver deposits, but it also has a copper porphyry and up in the northern extent hosts some of the biggest copper porphyries in the world. This is a very rich mineral belt.
The Promontorio system itself is a breccia hosted epithermal silver/lead/zinc system with a significant gold component in it, which we have discounted until we work out the metallurgy on it.
We’ve done preliminary metallurgy and we’ve got good metallurgical results on recovery of the silver and lead/zinc, in the low 80’s for the silver, and mid 80’s for the lead, and low 90’s for the zinc.
Rick: Have you done any work on the gold at all?
Jim: We’ve done some work on the gold. The gold is refractory, so we need to do additional, what are called department studies, to learn where exactly that gold is sitting, these studies will help us to determine whether we can economically extract it. We’re just negotiating on some contracts to do more metallurgical work in addition to doing detailed studies on what that gold is doing.
Rick: Promontorio has an interesting history, tell us about that and why you initially liked the project so much.
Jim: What attracted us to the project to begin with was it was a former producer, it produced a couple times in the past going back to the 1920s when J.P. Morgan funded a private company to go in there and get it into production.
They were preparing for production when the Yaqui rebellion put a halt to all operations, there were some subsequent efforts of exploration development in the early 1960s. Then in the late 1980s, a private consortium borrowed money from the Mexican government and put Promontorio into production for about three years before it was shut down due to low metal prices.
So what we liked about it when this project was brought to our attention, and was available for acquisition, was the fact that there is established mineral potential, and by the fact that it has been mined a couple of times in the past. And we liked the fact it’s a breccia hosted system. Unlike narrow veins you can have a larger size potential and you can more rapidly build up a resource size of significance with a breccia system.
Also, some of the historic grades that were reported from mining were very high grade, in excess of three to four hundred grams per tonne silver plus the lead/zinc component. So there was good grade potential in it. When we did our due diligence and got on the ground, we saw from the geology that what had been mined in the past was just a small part of a much bigger looking mineral system, and that’s been confirmed by our subsequent work.
Rick: Kootenay is currently running a very large drill program, I consider results to date outstanding, but maybe even more significant is that you are discovering mineralization between the two already discovered zones and on the other sides of these zones.
Jim: What we’re doing is focusing this drill effort, this is the third campaign into it, on a one km long trend. It’s where we have what we call our pit resource containing, in silver equivalent numbers, about 20 million ounces of silver, about half of which is in the silver component and the other half in the lead/zinc component. So, that sits at one end of the one km long trend, and at the other end we’ve got what we call the Northeast Zone, where so far we don’t have a lot of holes, but we’ve got very strong encouragement.
Some of the latest results are 51 meters with 91g/t silver and 3.4% combined lead/zinc with an interior core there of 18 meters, 188 silver and almost 8% lead/zinc, so there’s some really good hits up in the northeast end.
These two zones are 700 or 800 meters apart, but there are scattered holes in between indicating mineralization is continuous between the two and so now we’re stepping off of those zones, and we’re stepping off of the pit resource in the opposite direction as well where we have what we call the Southwest Zone from where we’re getting good results. We’re showing continuity between it and the pit resource. It’s the same zone, so those two zones are connected and in fact one, we see the potential for a doubling of that pit resource, perhaps more, depending on what happens.
Rick: What is the potential upside from here?
Jim: We believe the potential is there for the resource to be in the 50 million ounce silver range plus an equivalent value in the lead/zinc
If we get up into our target range it’s got the potential to make a very nice mining operation. We’re doing all the steps to first of all determine what the size scope is here, and in the next stages after that, assuming we’ve got the positive results that we’re expecting, we’ll be looking for the scope of mining that you might be able to support here.
If we do get into that 50 million ounce range, plus an equivalent value in the lead/zinc, that’s like having a 100 million ounce silver deposit. Then you’ve got a resource that could support a very significant silver producer for a 10 or 15 year time period. You could be supporting something, on one project, that is doing three to five million ounces of silver a year over a 10 plus year time frame, and when you look at the silver producers in Mexico, particularly on the junior/midsize size, that’s a significant asset.
Rick: One asset producing that much silver is uncommon.
Jim: It typically takes two or three mines for companies to get into that 3-5 million ounce silver production per year. If you’ve got one asset that could support that, that’s a very good asset. So this kind of explains why we’re so excited about the prospects at Promontorio.
Rick: What are some of those midsize producers that produce four to six million ounces per year?
Jim: Endeavour Silver is one, First Majestic another, they are definitely in the senior midsize range now. First Majestic started out as a junior producer several years ago in Mexico. I think they have four mines going now, and they are in that six million ounce per year range, and with projections for much bigger going into next year.
Rick: It seems like Kootenay has something to offer every type of retail investor. You’ve got nine joint ventures and one 100% owned development property.
Jim: Well yes, so we do, we’ve got a lot to offer. We’ve got a really strong team put together, both from the technical side and the financial side. We’re a well-rounded company with a good business plan in place, a real good core asset and then all those generative projects which could lead to brand new exciting discoveries.
Rick: You’ve got strong management, ability to raise money, and quality projects.
Rick: And also very important, a decent share structure.
Jim: We’ve done a good job of maintaining the share structure. We’ve always kept a close eye on that.
Rick: One of the benefits of the project generator model.
Jim: Yes, and it’s also a benefit of having a management team that owns a large part of the stock position, it’s in their interests to keep that dilution down.
Rick: That places them right onside of the retail investor, doesn’t it?
Jim: Yes, it does.
Rick: Ken, anything you want to add?
Ken: No, I think Jim’s done a great job of giving an overview of the company. I’ll just touch on the issue of outstanding shares. That’s 45 million shares, so as mentioned, it’s a great share structure, and the project at Promontorio is more advanced than ever before. There is a constant flow of news coming out with this current 25,000 meter drill program underway, and the initiation of baseline studies as well, bodes well for the future of Promontorio.
Rick: How’s the treasury right now Ken?
Ken: We are fully funded for the current 25,000 meter program, that means fully funded right through to the end of the year, and as you talked about with the joint ventures, our partners are funding those grassroots exploration projects.
Rick: Kootenay has a lot of potentially good news flow over the next while.
Ken: News will flow right through to the end of the year and into the first quarter of 2012.
Rick: It’s been a pleasure talking to you Ken and Jim, thank you.
Richard Mills has previously written two articles regarding Kootenay Gold
Kootenay Gold – The Best of Both Worlds
Mexico's Newest Emerging Silver Resource
Richard (Rick) Mills
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Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.
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