Ounces in the ground

2020.04.14 

When looking for an investment the approach I take involves looking at the global – big picture – conditions. I study trends, read the news, basically watch and listen to what’s going on in the world. Then I study the different sectors in order to select the one that I think is going to match up well with, what I think is, the soon to be overriding theme. This is top down investing.

The second part of my search for the dominant investment is a bottom up approach. This is where I find individual companies in the specific sector I have chosen to invest in.

Company stage – risk v. reward

Only you can decide the level of risk you can tolerate and how much patience you have to sit while developments, the story, plays out.

The most upside (and by far the greatest risk) comes from buying a junior when they are exploring and make an initial discovery. Great drill assay results can send a junior’s share price skyrocketing. The reverse can also be true. Junior explorers, the green field plays, are the riskiest plays by far. Strike out on assay results and it could be goodbye to a share price rise for a very long time – till the company finds another project they can work on. If you’re buying into this kind of play make sure the company has another fallback project in its portfolio.

I always own one or two greenfield, early stage explorers, but my favorite stage junior is a junior in the post discovery resource definition stage (also known as brown field stage companies). These companies have all ready found something, the share price has settled back after the initial discovery (never chase a company whose share price has already exploded, the share price has had its run, for now the moneys been made. I try and enter after the excitement has died down and the share price has settled back) and the company is going in to see what they have and hopefully produce a 43-101 compliant resource estimate and build upon it. The risk has been greatly reduced, the waiting time for a discovery non-existent and the reward very nice considering the much lower amount of risk.

For nearer term producers – for those further down the development path towards a mine – you have:

• Preliminary Economic Assessment (PEA) or scoping studies are done to examine potential mining scenarios and economic parameters – A PEA or scoping study is an important milestone for a mineral project, it’s the first step in a company’s  economic and technical examination of a proposed mine

• Preliminary feasibility studies or pre-feasibility studies are more detailed than PEA’s and are used to determine whether or not to proceed with a detailed feasibility study. They are also used as a reality check to determine areas within the project that require more attention

• Feasibility studies will determine definitively whether or not to proceed with the project. A feasibility study or bankable feasibility provides budget figures for the project and will be the basis for raising capital to build the mine

Remember all these different stage studies are only yes/no decisions on whether to move to the next stage. NONE of them mean you are going mining, there’s no mine till every stage is completed, permits approved and the necessary financing has been arranged.

Because these companies are well advanced along the development path a lot of the guesswork about grade, size, costs and metallurgy have been taken out of the equation for us. They have done sufficient work to give investors a certain level of confidence that their project will successfully move towards being a mine.

The later stage companies (those doing feasibility, permitting and money raising) can have an excellent entry point for investors – they often enter a quiet period when they are doing the advanced studies and raising money to go into production. They often base (a flat share price) for quite a while through this period – possibly a good time for accumulation of their shares if you believe in the story. After the money is raised for production investors can see they are going mining – cash flow is just over the horizon – and the share price will often break out of its trading range.

With producers you have to look at the balance sheet, consider their plans for the future and judge for yourself the ability to meet those plans. Remember cash flow is king, but can they grow that cash flow? These large well established producers have the least risk and the least upside. But gains could be steady and maybe they pay a dividend.

Top down

Despite market turbulence from the coronavirus, gold and gold stocks are among the highest-performing assets of 2020, with physical gold up about 14% through April 10, and senior gold miners advancing 2.8%. 

There is no denying stock markets are volatile. But picking the right explorers who own the most in-demand minerals, that can be bought at historically low valuations, seems to me a very prudent investing strategy right now. 

Juniors, not majors, are the most adept at finding high-value mineral deposits. They already own, and endeavor to find more of, what the world’s larger mining companies need to replace their dwindling reserves. 

I believe A massive bull market is building for gold. As an astute investor my job is to find the cheapest metal, still in the ground, to earn maximum returns on investment. 

We also want experienced management teams with track records, tight share structures, and companies with money in the bank, to spend judiciously on exploration programs that will move projects forward in a timely fashion.

Seekers of Gold

“You see we prospectors are a dying breed. The world doesn’t function around us anymore like it used back in the gold rush. The people who care for you can’t understand. What in the world would make you want to risk your life to look for gold? They don’t understand the dream, but in the old days everybody understood. You didn’t have to worry about your wife leaving ya or your friends scorning you because you wanted to find the gold.

Everyone was doing it. Everyone dreamed of the day when they would be the one to strike it rich. represent freedom for all, but what does it mean to people today? I’ll tell you, a big house and a nice car. People don’t see that it’s so much more than just finding the golden score. It’s not seen as a building block for freedom. It’s been twisted and messed up to the point of being stuck on a scratch and win ticket. That is what is left of the prospector’s dream in today’s world. All the people around you don’t understand, they can’t see the freedom and the hope it brings you when you chase the dream. They just think you’re dreaming, but we know the truth don’t we?

The truth is you’re living and they are the ones that are dreaming…

Remember freedom is worth dying for and I’m not talking about dying in a war fighting for some illusionary freedom that your government tells you have. I’m talking the real stuff that comes from the open spaces and when you spent enough time in the mountains you’ll know what I’m talking about. It will grab your soul and won’t leave you until the day you die. It’s what pushes all great men and once you see it you’ll chase it for the rest of your days.”

Seekers of gold is dedicated to all the prospectors out there who have searched for the dream and all of those who are still out there searching for it.  Daryl Friesen author, ‘Seekers of Gold’

Chasing the rainbow

Prospectors are today still scouring the bush, in remote, and not so remote places – chasing the rainbow and its pot of gold – looking for the next discovery.

Prospecting is of course the integral first step in the process of discovery, walking the bush and hammering rocks means boots on the ground. Its people walking through the bush that have found the worlds mines. A prospector’s contribution to our society and to our overall economic well being is in their ability to find brand new mineral occurrences. These findings are what leads us to new deposits, new mines and all the benefits that spring forth.

Old time prospectors are independent minded, bush savvy and, geologically speaking, very knowledgeable. Unfortunately for them they lack the wherewithal to advance their discovery and most often option their property, or project if you will, to a junior they hope will raise money and develop it to the point where a more senior company wants to get involved, or perhaps take it over outright.

Making a deal with a junior resource company, a vendor’s agreement, is often the second step – the prospectors claims are turned over to be worked for shares and or cash and a one or two percent net smelter royalty (NSR) from a mine if the showing goes all the way. Being publicly traded they have access to capital and expertise the prospector most often does not.

Its hard to invest in a prospector. Fortunately, if you want to invest in a potential discovery or the building of something of value – be in on the discovery of a mineral deposit and be there as the company moves it down the development path towards a mine there are quality junior companies, both private and public, to choose from. There exists enormous opportunities to back excellent management teams with your investment money. We can dream of discoveries made and money hard won, we too can chase the rainbow through our publicly traded junior resource companies – prospecting success and drill programs that are targeting these showings should be on every investors radar screen.

Juniors outperform majors

Mining is a self-depleting industry meaning mines have an inherently limited lifespan. Every day a mine operates, it is that much closer to running out of ore. The industry needs to find new deposits in order to replace these ever-depleting mines.

For the past decade, junior mining companies have outperformed senior miners at finding new mineral deposits and generating wealth for stakeholders.

“These are among some of the findings released in a study conducted by resource company strategist MinEx Consulting, which analyzed the performance of explorers and producers operating in Canada between 1975 and 2014. What the consultancy firm found is that, in the last decade, junior companies were responsible for more than three quarters of all new mineral discoveries and were approximately 30 percent more effective than senior companies at generating wealth…

In 2009, 2010 and 2012 senior companies failed to make a single new discovery.

Juniors handily beat the seniors when it comes to the total number of discoveries. Of all the deposits found, over three quarters were made by junior miners.

Juniors also spent more than the seniors on exploration – $14.6 billion compared to $12.5 billion – and their discoveries collectively had a much higher valuation – $12.1 billion compared to $7.9 billion.” Frank Holmes, Junior Mining Companies Have Taken a Senior Role

Bottom up

Champion Bear Resources’ (TSX-V:CBA) has four prospects all located in the Canadian province of Ontario – the Plomp Farm gold project near Dryden, the Parkin JV (copper, nickel, platinum, palladium, gold), Separation Rapids (tantalum), and the flagship Eagle Rock containing copper, platinum group elements (PGE) and precious metals. 

Champion Bear is, to our knowledge, the only PGE exploration company in Canada with a “reef” type of deposit. Two of the biggest reef PGE deposits in the world are Flatreef in South Africa and the Stillwater Complex in Montana. 

Eagle Rock Cu-PGE-PM hosts a number of sulfide showings including the Campbell Zone, which Champion Bear describes as “a continuous, predictable, PGE reef-type horizon exposed at surface over more than one kilometer.” With mineralization starting at surface, the company considers Campbell open-pittable, and will continue drilling it to define the nature and extent of the zone.

An airborne geophysical program (HRAM) is planned, along with more prospecting and geological surveys, as Champion Bear moves towards a maiden resource estimate at Eagle Rock. Previous exploration including a 2019 drill program identified a large orebody, open in all directions, meaning Champion Bear is able to skip the discovery phase and jump right into resource expansion and delineation. In this sense, Eagle Rock isn’t a greenfield project per se – we already know the minerals are there, we just need to know how much. Not a bad position to be in. 

Champion Bear
TSX.V:CBA
Cdn$0.09, 2020.04.18
Shares Outstanding 52,393,326m
CBA website

Cypress Development Corp (TSX-V:CYP) last year completed the first two phases of a prefeasibility study (PFS) at its Clayton Valley Lithium Project in Nevada – confirming that lithium can be acid-leached from claystones and extracted at high recovery rates. The US now has a major source of lithium carbonate and lithium hydroxide, from which to build a true “mine to battery” electric vehicle supply chain in North America. Potentially, there is also a not-inconsiderable amount of rare earths including scandium – a highly prized metal used in aircraft components, for example.  

The eagerly-awaited prefeasibility study is crucial to moving the project forward, not only for proving that the metallurgical process for separating lithium from clays is commercially viable, but demonstrating that Cypress’ costs are in line with its 2018 preliminary economic assessment (PEA).

Considering the huge amount of ore available for mining – its nearly 9 million tonnes of indicated and inferred lithium carbonate equivalent (LCE) is among the largest lithium resources in the world – and the valuable products that will be coming out of the relatively easy processing flow sheet at the end.

Why did I add CYP to a list of PM Co’s? – I believe Cypress may have the most important mine in America in decades; yet, imo at 17 cents a share this stock is obscenely undervalued. 

Cypress Development Corp
TSX-V:CYP 
Cdn$0.175 2020.04.18
Shares Outstanding 90,077,001m
CYP website

Getchell Gold (CN-GTCH) Nevada-based Getchell Gold seems to be the perfect example of pairing ounces in the ground with exploration upside. Not only does the company have ample gold resources with tremendous expansion potential, it has yet to be recognized by the market and in my opinion is still undervalued, despite the stock’s recent run-up to $0.27/sh.  

At Getchell’s Fondaway Canyon project, the majority of the 1.1 million ounces are hosted by the Paperweight, Halfmoon and Colorado zones. A way to add significantly more ounces is to change the cut-off grade. The resource estimate is based on underground mining scenario, it says that with a cut-off of 1.8m @ >3.43 g/t, at an average grade of 6.18 grams per tonne, there is an estimated 409,000 oz in the indicated category, and 660,000 oz inferred, @ an average 6.4 g/t.  

Put simply, this means that any grades below 3.43 g/t were excluded from the resource estimate. For ounces to be included, they had to be at least 3.43 g/t. (the cut-off grade is also known as the break-even grade). In Canarc’s 1.8m wide section, which runs mostly through the Paperweight, Halfmoon and Colorado zones, there were gold grades higher and lower than 3.43 g/t; but the average grade was 6.29 g/t (average grade of indicated and inferred resource). 

Plugging in dollar figures establishes the per-tonne value of the ore. Using Canarc’s US$1,250/oz gold (Canarc used $1,250/oz in the resource estimate) yields $40.32 per gram ($1,200/31 grams per ounce). Ie., if gold was $1,250/oz, anything less than $138.29 a tonne (3.43 g/t x $40.32) over the 1.8m horizontal width was uneconomic to mine. 

Now, if we drop the cut-off grade, the indicated and inferred grades will be lower, but the number of ounces will definitely rise. With a higher gold price at say $1550 per ounce each gram is now worth $50 ($1550/31g) so the same $138.29 breakeven allows the cut off to drop to 2.76 grams Au which could add nicely to the resource ounces.

Interestingly enough Fondaway could also have a very attractive open-pit scenario that would need far lower grades to be profitable than the underground model used by Canarc.

And we haven’t even talked about the Pediment zone, under which there may be a large pool of gold which feeds a highly mineralized corridor with a number of targets. We expect the resource at Fondaway Canyon could up significantly, and anticipate the stock to be revised upward accordingly. I’ve put a watch on GTCH and will be following it closely. There are still cheap ounces to be had in Nevada and Getchell Gold is the perfect example.

Getchell Gold
CSE:GTCH
Cdn$0.145, 2020.04.18
Shares Outstanding 54,807,477m
GTCH website

Max Resource Corp. (TSX-V:MXR) continues to make good headway at its Cesar Copper + Silver Project in Colombia, having recently discovered a new zone and extended an existing zone. For six months, Max’s geological teams have been identifying copper and silver targets using rock chip sampling to identify structures, continuity of thickness, and strike length, to determine potential size prior to drilling. 

Cesar is unique, in that it is both a precious metals (silver) and base metals (copper) project. If Max’s theory of Cesar being analogous to the “Kupferschiefer” sediment-hosted copper-silver deposit model is proven correct, and we are encouraged by recent high-grade copper and silver discoveries at the AM North and AM South targets, we think Max will be a winner. According to the US Geological Survey, the massive volume of metal in Poland’s Kupferschiefer deposits is due to continuous mineralization that extends down dip and laterally for kilometers.

Vancouver-based Max has also spun off a new company, PGE Americas Corp, from which to build a portfolio of PGE assets, cemented by a trio of metals with strong market fundamentals – platinum, palladium and rhodium. Palladium, in high demand for its use in catalytic converters, is worth about $400/oz more than gold, at over $2,000/oz, while 30-day rhodium, also needed for autocatalysts, currently trades at an eye-popping $4,719/oz. PGE Americas’ flagship project is the PGE Choco Project in Colombia. The Max subsidiary also recently acquired the Ebay Palladium, Platinum and Rhodium Project, located 30 km southeast of Matagami, in the Abitibi region of Quebec, Canada. 

Max Resource Corp.
TSX-V:MXR
Cdn$0.09, 2020.04.18
Shares Outstanding 27,906,155m
MXR website

Newrange Gold (TSX-V:NRG) is led by CEO Robert (Bob) Archer, the co-founder and former President/ Chief Executive of Great Panther Silver. I got to know Bob when I was invested in Great Panther during the mid-2000s, and I consider him to be one of the best explorationists in the industry.

Bob joined Newrange Gold in 2018, two years after the company acquired the high-grade Pamlico epithermal gold project in Nevada. If you thought all the gold in Nevada has been found, I suggest you take a closer look at this property, located within the gold rich Walker Lane trend. A recent induced polarization (IP) survey at Pamlico generated several targets worthy of drill testing. The company also staked an additional 105 claims, pushing the land package up to 2,548 hectares. 

Covering six targets, the IP survey was designed to penetrate below the deep blanket of oxidized mineralization for indications of sulfide mineralization (containing gold) at depth. Next on the agenda is a drill program to test the most prospective anomalies identified by the survey. We see this as the ideal project for Bob to sink his teeth into and we can’t wait to bring you some exploration news. There are literally gold showings literally all over the property. 

Newrange Gold Corp
TSX-V:NRG
Cdn$0.11, 2020.04.18
Shares Outstanding 114,632,046m
NRG website

Palladium One (TSX-V:PDM) Last year Palladium One published a maiden, NI 43-101-compliant resource at the Kaukua target of its LK Project, passing an important milestone en route to developing an open-pit PGE-nickel-copper mine in Finland. 

The deposit hosts 1.2 million palladium-equivalent (Pd_eq) ounces and has a strike length of one kilometer. Palladium One wishes to add at least a million more ounces of Pd_eq to the Kaukua optimized pit resource.

Palladium prices, like gold prices, have held up well despite widespread market convulsions due to the coronavirus pandemic. As palladium continues its multi-year run, amid supply constraints, new sources of palladium are needed to meet demand for gasoline autocatalysts, required to achieve stricter air quality standards. This bodes well for explorers like PDM whose deposits contain significant amounts of palladium, as well as nickel and copper, which are also required by electric vehicles and their lithium-ion batteries. It certainly looks to us like Palladium One, currently sitting at 9 cents a share, is on track to grow its already considerable palladium ounce count.

Palladium One
TSX.V:PDM, Frankfurt:7N11, OTC:NKORF
Cdn$0.095 2020.04.18
Shares Outstanding 114,393,599m
PDM website

Spanish Mountain Gold (TSX-V:SPA) is exploring in the heart of British Columbia’s copper-gold country. Famous for the Cariboo Gold Rush, the region has produced nearly 4 million ounces from placer and lode mining operations. 

The project, located about 6 kms from the village of Likely, features a measured and indicated (M&I) resource of 4.7 million ounces, in a constrained pit.

Graded 0.47 grams per tonne gold, this PEA level near-surface Measured and Indicated resource is considered economical for open-pit mining. Over $80 million has been spent so far on exploration, with +900 drill holes and 180,000 meters of drilling completed, along with multiple scoping studies. This project with proven metallurgy is not only attractive for its ounces but its location, near the producing Mount Polley and Gibraltar mines. An all-weather road runs right to the property, a power substation is close by, and a trained workforce is within commuting distance. 

In my opinion SPA needs a 10:1 rollback and financing @ Cdn$0.75.

Spanish Mountain Gold
TSX.V:SPA
Cdn$0.085 2020.04.18
Shares Outstanding 238,625,957m
SPA website

Conclusion

A prospectors place in the resource sector food chain is to explore for and find mineral showings. A junior resource companies place is to acquire these showings and develop, to a certain point, the world’s future mines. Nowhere are prospectors and juniors more important to mining then right here in British Columbia, a vast and under explored treasure trove of minerals.

When was the last time you heard of a major mining company making a discovery? Prospectors/juniors find most deposits and prove them up to the point where a major would step in and buy them

Today the relationship between juniors and majors is so inextricably linked that it’s doubtful a major mining company could replace its mined reserves, let alone grow them, without keeping a close eye on junior’s activities and a check book handy.

FACT – Without our prospectors and juniors many of today’s operating mines would simply not exist.

“Without new exploration our mining industry will languish. Without mining and the encouragement to develop new and large mines, all industries that support it, such as transportation, utilities, banking, and the service sectors ranging from catering to equipment manufacturing and sales, will suffer immensely.”

Historically, and especially so today, for all the reasons to like gold, the greatest leverage to rising precious metals prices has been owning the shares of junior resource companies focused on acquiring, discovering and developing precious metals deposits.

Importantly, juniors are a cost-effective answer to the problem of gold reserves depletion. Because gold reserves are being used up faster than they are being replenished, it behooves the industry to come up with a strategy for reversing this trend – one that doesn’t involve high-grading the best ore, which diminishes the value of the deposit – and M&A. 

Do you want to own the cheapest gold and silver you can find to reap the maximum coming rewards? If you do, buy it while it’s still in the ground. Perhaps the importance of prospecting and junior resource companies in the exploration and mine development food chain should be on all our radar screens.

Richard (Rick) Mills
aheadoftheherd.com
Ahead of the Herd Twitter

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Richard does not own shares of Palladium One (TSX.V:PDM). PDM is an advertiser on his site aheadoftheherd.com.

Richard does not own shares of Spanish Mtn Gold (TSX.V:SPA).

Richard does not own shares of Newrange gold (TSX.V:NRG).

Richard owns shares of Max Resources (TSX.V:MXR), MXR is an advertiser on his site aheadoftheherd.com.

Richard owns shares of Cypress Development Corp. (TSX.V:CYP).

Richard does not own shares of Getchell Gold (CSE:GTCH). However, GTCH is an advertiser on his site and is paid by GTCH to write articles on Getchell Gold. The Management and Board of Getchell Gold Corp. does not endorse this or any article, nor do they certify the accuracy of its contents. 

Richard owns shares of Champion Bear (TSX.V:CBA), CBA is an advertiser on his site aheadoftheherd.com