The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
One of the world's most successful precious metals royalty companies commits to partnership in Alaska gold-copper-silver discovery
Two companies that trace their roots to the oil and gas sector have agreed to form an alliance to continue exploration at the Tetlin gold-copper-silver property in Alaska's eastern Interior.
In early October, Contango Ore Inc. announced that it inked a deal with Royal Gold Inc. that provides the Colorado-based royalty company the opportunity to earn up to a 40 percent interest in Tetlin.
The agreement, which awaits final approval from Contango Ore shareholders, calls for the formation of a joint venture to advance exploration and development of its Tetlin properties.
Contango Ore's contribution to the JV includes its 676,200-acre Tetlin lease, some 83,720 acres of state of Alaska mining claims near Tok and other personal property - a package the pending partners have valued at US$45.7 million.
For its part, Royal Gold has agreed to invest up to US$30 million to buy into a gold-copper-silver deposit with an initial 1.1 million-ounce gold-equivalent resource and a vast land package that has shown the potential to host a number of precious and base metals deposits.
Contango Ore President and CEO Brad Juneau said, "We are excited that Royal Gold has agreed to join our effort to expand upon the promising exploration work we have initiated on the Tetlin lease and neighboring claims covering over 750,000 acres. Royal Gold has demonstrated experience and expertise that will be invaluable in expanding upon our Chief Danny Prospect, including the Peak Zone discovery. We look forward to working with Royal Gold on this venture."
Royalty success
Royal Gold acquires and manages precious metals royalties, streams, and similar production-based interests. The deal it signed with Contango Ore is not the path it typically takes in acquiring an interest in a project.
Metals royalty and streaming companies normally either buy any available royalties on a property for an agreed upon amount or invests in a mining project in exchange for a portion of the metals produced once a mine is in production.
In either case, the capital invested by the royalty company provides funds for activities needed to advance a mining project, such as development, expansion or exploration.
This royalty and metals streaming business model is relatively new in the larger mining sector but, if managed properly has proven to be effective. Royal Gold, which traces its roots back to the oil patch, has built one of the world's largest and most successful precious metals royalty and streaming companies.
The Denver-based company got its start as Royal Resources Corp., an oil and gas exploration and production company that found some success in the early 1980s.
Following the collapse of oil prices in the mid-1980s, the company turned its focus to exploring for and mining gold. Further market turmoil, however, thwarted the company's plans to become a major gold producer but set it on its path toward becoming a royalty company by shifting the company's focus to being minority owner of interests in a number of significant gold properties operated by major producers.
From this humble beginning, Royal Gold has built a portfolio of nearly 200 projects on six continents that includes 37 producing properties, 23 development stage properties, 48 evaluation properties, and 91 exploration stage properties.
Royalty and streaming companies such as Royal Gold have found a golden niche in the ofttimes cyclical business of mining.
Or as Pierre Lassonde, chairman and co-founder of Franco-Nevada, currently the largest gold royalty company, put it, "When times are really tough, as they are now, and we have over $1 billion in liquidity, we can put our balance sheet to work. We can buy and create royalties. And when times are really good, and mining companies can get all the equity financing they want, that's also great for us because that money goes to explore the lands that we already have. The cycle is our friend."
Like its counterpart, Royal Gold is prospering in the cyclical world of metals mining - ending its 2014 fiscal year (June 30) with US$713.5 million in working capital that includes US$659.5 million in cash and equivalents.
"In fiscal 2014 we successfully delivered strong financial performance despite a significantly lower gold price," said Royal Gold President and CEO Tony Jensen. "We returned over one-third of our operating cash flow to our shareholders this year, and we still have over $1 billion of liquidity to invest in new opportunities."
Tetlin discovery
Like the royalty company that it has taken on as a partner at Tetlin, Contango Ore is rooted in the petroleum sector.
Contango Ore co-founder Juneau, a petroleum engineer with a knack for finding oil and gas deposits in the shallow waters of the Gulf of Mexico, came to Alaska in 2008 to evaluate the natural gas potential of 675,000 acres of lands owned by the Tetlin Village Council, an Alaska Native group.
Ruling out the potential for natural gas, the Texas oilman, however, did feel the property was prospective for minerals.
With metals exploration falling outside his expertise, Juneau sought the advice of Curt Freeman, president of Fairbanks-based Avalon Development to take a look at what he had found.
While Freeman may have been skeptical of the Texas oilman's claims of finding a never- before known gold prospect in a region of Alaska that has been traversed by prospectors and geologists for more than 120 years, the geologist and consultant agreed to take a look.
It did not take long for Freeman to agree that Juneau indeed had found a copper-gold prospect worth investigating.
Over the ensuing five years, a systematic exploration program orchestrated by Avalon Development has culminated in an indicated resource of 5.97 million metric tons averaging 3.46 grams per metric ton gold, 11 g/t silver and 0.25 percent copper for 783,115 gold-equivalent ounces at Tetlin's Peak zone. Additionally, this skarn deposit has an inferred resource of 3.85 million metric tons averaging 2.07 g/t gold, 14.28 g/t silver, 0.23 percent copper for 332,969 gold-equivalent ounces.
"While we are very happy with the resource we found, we certainly don't expect that it is big enough to result in a significant mine on its own, but it is something that shows the property is capable of delivering that quality resource, and we believe that it can be much larger," Juneau explained to Mining News following the release of the maiden resource in January.
In addition to expanding the Peak zone to depth and along strike, the Tetlin property has turned up a number of prospects ripe for drilling.
While expanding and establishing an inaugural resource at Peak, the 2013 program included the continued investigation of other zones with a similar geophysical and geochemical signature.
"The Peak zone stands out as one of those really highly conductive and magnetic zones, and if you look around nearby, there are a dozen other places that you should go look because they have a similar geophysical signature," Freeman explained.
Some of these geophysical-geochemical targets are located within the larger Chief Danny area and in close proximity to the Peak zone that they resemble.
"In June 2013, we acquired new airborne data, and based on interpretation of these data, along with existing reconnaissance data, core data, and other data sources, we have identified several exploration leads both inside and outside the Chief Danny area, as well as a deeper target underneath the Peak zone," Contango ORE explains.
Tors, a promising target about five miles (eight kilometers) east of Peak, and Chisana, a prospect situated about seven miles (11 kilometers) further east, were two of the leads that were followed up on during 2013.
More than 1,400 augur soil samples were collected from Chief Danny, Tors and Chisana in 2013 - an effort that has refined drill targets at these prospects that stretch across the northern section of the Tetlin lease.
Further afield, reconnaissance crews collected 368 stream sediment and pan concentrate samples across the Eagle property, 56,500 acres of state of Alaska mining claims extending west from the 675,000-acre Tetlin lease. While rudimentary, the visible gold in pan concentrates and copper in stream sediments is reminiscent to the early work that led to the discovery of the Peak zone, roughly 15 miles (25 kilometers) to the east.
Pan and stream sediment sampling have identified another nine targets south of Chief Danny that are in various stages of readiness, from pan samples begging for follow up to drill ready prospects.
Value created
Despite its success in the discovery of Tetlin and building an initial resource at the Peak zone, Contango Ore never intended to advance the project to the cusp of production on its own.
Founded on the principle that "virtually all the mining industry's value creation occurs through the discovery of mineral deposits that can be developed into a commercially viable ore body," the company has always intended to find a buyer or partner for Tetlin once a discovery was made.
With more than 1 million ounces of gold outlined at the Peak zone and ample evidence that this initial deposit likely only provides a peek at Tetlin's potential, Contango Ore set out to find a buyer or partner for the project.
"We feel we have reached the stage of proving sufficient known resources and defined upside to attract a buyer for the company," Juneau said upon releasing the initial resource.
Putting a value on the property's blue-sky potential was a potential sticking point to any negotiations with potential buyers or investors in Tetlin.
When asked about putting a price on the 12-plus prospects identified on the Tetlin property, Juneau told Mining News in February, "I don't intend to give that away."
"I am sure buyers will have their own unique prospective on how they want to value that and approach that," he added.
It was Royal Gold's willingness to consider the value of some of these early stage, but promising, outlying prospects that led Contango Ore to choose the royalty company over some of the other parties interested in Tetlin.
Contango Ore had hoped to finalize a deal in time to continue exploration at Tetlin in 2014, but working out the intricate details of the JV prevented that from coming to fruition. Instead, the newly forged partners will resume the program in 2015.
The agreement calls for Royal Gold to invest US$30 million by October 2018. The 2015 exploration spending is expected to be at least US$5 million.
Contango Ore plans to hold a shareholder meeting to ratify the partnership later in 2014. Holders of roughly 39 percent of Contango Ore stock have already agreed to vote in favor of the joint venture.
Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.
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