The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
From partnerships to playing dead, some Alaska explorers endure tough markets
Mining is a notoriously cyclical business that generally ebbs and flows with the overall state of the global economy, and these cycles are amplified for junior mining companies charged with scouring the globe for the next generation of mines. Following a bull market that reached a crescendo at the end of 2010, the current bear market has been especially deep and painful for even seasoned mining sector veterans.
"This has been a particularly treacherous bear market," longtime natural resource investor, Rick Rule, noted during a recent appearance on Palisade Radio. "The reason that this has been a particularly treacherous bear market is that the last bull market was particularly generous."
The share prices of 12 junior mining companies that were exploring Alaska at the top of the bull market and are still around today have lost an average of 89 percent of their value over that span. This median would be well into the 90th percentile if you remove three of those companies that have only lost a relatively mild 60-70 percent of their stock value.
Despite the heavy losses to share prices, a handful of Alaska's juniors have found ways to survive the brutal mauling this bear market is inflicting on the sector.
Safety in numbers
One bear market survival strategy that has worked well for some Alaska mineral explorers is to form partnerships with companies that look beyond the current market cycle and have the financial wherewithal to see that vision to fruition.
Constantine Metal Resources Ltd. found such a partner in Dowa Metals & Mining Co. Ltd.
In 2013, Dowa and Constantine inked a deal that provides the Tokyo-based smelting and mining company the opportunity to earn a 49 percent stake in the Palmer project by investing US$22 million in the Southeast Alaska exploration property over a four-year span.
At the time, some analysts felt that Constantine was giving up too large a portion of the copper- and zinc-rich volcanogenic massive sulfide project for the money. Following two years of resource expansion in tough equity markets, however, the deal has worked out well for both parties.
"We felt from the beginning the scale of investment Dowa is making to earn 49 percent would give us a good chance to establish a resource at Palmer with potential for mine viability," Constantine Vice President of Exploration Darwin Green told Mining News.
In May, Constantine published an inferred resource of 8.125 million metric tons averaging 1.41 percent (252.6 million pounds) copper, 5.25 percent (940.4 million lbs.) zinc, 0.32 grams per metric ton (83,600 ounces) gold and 31.7 g/t (8.3 million oz.) silver for Palmer.
This 97 percent expansion of the resource is largely due to US$10 million invested by Dowa through 2014.
The Tokyo-based company has agreed to invest another US$5 million this year.
As part of its agreement with Dowa, Constantine receives annual cash payments totaling US$1.25 million over the four-year span. This, along with any other option payments and management fees received, has allowed the company to avoid raising money in the bear market.
"We are currently cash-flow positive, which is a bizarre and privileged position to be in," observed Green.
Contango Ore Inc. is another explorer that has been successful in bringing on a partner to fund exploration of its Alaska project.
In January, Royal Gold Inc. agreed to invest up to US$30 million in furthering the exploration and potential development of the Tetlin gold properties situated along the Alaska Highway near the crossroads community of Tok in eastern Alaska.
In return, the Denver-based royalty company will earn up to a 40 percent interest in Peak Gold, a joint venture that will hold the 676,200 acres of Native owned lands Contango leased from the Tetlin Village Council and some 83,720 acres of state of Alaska mining claims the company staked adjacent to the Tetlin lease.
While this extensive land package blankets numerous precious and base metal targets ripe for exploration, the Peak zone, a gold-rich skarn deposit located on the Tetlin lease, is currently considered the property's most promising asset.
Early in 2014, Contango published a maiden indicated resources of 6 million metric tons averaging 3.46 grams of gold per metric ton, 11 g/t silver and 0.25 percent copper for 783,115 gold-equivalent ounces. Additionally, the skarn deposit has an inferred resource of 3.9 million metric tons averaging 2.07 g/t gold, 14.28 g/t silver, 0.23 percent copper for 332,969 gold-equivalent ounces.
For 2015, Royal Gold has committed US$5 million to a phase-one program targeting some of the outlying Tetlin targets - Tars, Saddle, North Saddle and Saddle Skarn - as well as expansion targets at the Peak zone.
Contango Ore said that the partners may extend the 2015 program after seeing the results from phase one.
Intellectual capital
The "prospect generator model" is another means some Alaska explorers have employed to mitigate the risk of discovering new deposits with the size and quality being sought by world's pre-eminent mining companies.
In a nutshell, a prospect generator is a mineral exploration company that identifies a number of early stage mineral prospects, completes the data compilation and early stage field work necessary to market them to potential partners - preferably mid-tier or major mining companies - that have the financial wherewithal to do the heavy lifting needed to elevate a prospect to a deposit worthy of consideration for mining.
Resource investor Rule said he prefers the prospect generator model because it allows him to retain the value of the exploration team that he has invested in.
"Given that the chance of success on any one exploration property is small, maintaining your equity in the intellectual capital rather than having that diluted away to raise money to explore an individual property is the process of financing exploration which has worked for me," Rule explained in a May interview with Sprott Global Resource Investments Ltd.
The savvy exploration team at Millrock Resources Inc. has built a portfolio of 21 early-stage mineral exploration projects, including eight Alaska properties prospect for gold, copper, zinc and associated metals
Since 2008, roughly C$40 million has been invested in exploring projects generated by Millrock, about 85 percent of which was funded by partners. The company also receives management fees and options payments that offset overhead, which allows the prospect generator to go long periods without needing to raise money in the equity market.
Millrock anticipates roughly US$2.5 million of exploration in Alaska this year, including a US$2 million program funded by First Quantum Minerals to further exploration at the aptly named Alaska Peninsula project, a 500,000-acre tract highly regarded for its porphyry copper-gold potential, was the primary focus in 2015.
Much of the balance of Millrock's 2015 exploration involves the expansion of its "intellectual capital" through the collaboration with a yet-to-be-named major gold mining company to seek out high-grade gold deposits in Alaska.
So far, this partnership has acquired a wealth of knowledge from nearly two decades of exploration by Anglogold-Ashanti and International Tower Hill Mines.
Millrock CEO Philip St. George said, "With the acquisition of the Anglogold-Ashanti database, our company will have the most comprehensive store of geological knowledge on this district. We will have a distinct competitive advantage for generating new grass-roots exploration targets for high-grade gold deposits with our strategic partner."
The company acquired this geological knowledge from Corvus Gold Inc., a spin-out company formed to explore International Tower Hill's non-Livengood assets.
In addition to purchasing the geological database, Millrock purchased West Pogo, a gold property located about two miles west of Sumitomo Metal Mining Co.'s Pogo Mine, and the right of first refusal to acquire LMS, another gold project in the area.
Bear hunting
While a bear market may not be the ideal place to raise equity capital through traditional financings, it is a great environment to hunt for exploration companies with undervalued assets.
In June, NovaCopper Inc. closed a buyout of fellow mineral explorer Sunward Resources Ltd. that had US$20 million in the bank but a market cap hovering at around US$13 million.
"It really is a financing, that's how we view it. Sunward was a company that raised a substantial amount of money when markets were really good - fortunately for us they did not spend it all - but they were trading well below cash value," NovaCopper President and CEO Rick Van Nieuwenhuyse told Mining News earlier this year.
In exchange for the some US$20 million and Sunward's copper-gold project in Columbia, NovaCopper issued 43.1 million shares to Sunward shareholders, or 0.3 NovaCopper shares per Sunward share issued.
Considering the state of the junior mining sector, Van Nieuwenhuyse said, "We felt this is the best financing alternative, with the least amount of dilution."
With its improved cash position, NovaCopper can complete the work needed to complete a pre-feasibility study for a potential open-pit mine at its Arctic volcanogenic massive sulfide deposit, part of the larger Upper Kobuk Mineral Projects in Northwest Alaska.
NovaCopper said this pre-feasibility work he is expected to be carried out over a two- to three-year period.
NovaCopper has approved a US$5.5 million budget for the 2015 field program that will include 2,500 meters of in-fill drilling at the Arctic deposit designed to improve the confidence level of the resource model with the goal of re-categorizing the in-pit inferred resources to measured and indicated.
Other facets of this year's program include geotechnical and hydrology drilling to provide engineers with the information needed to design the mine; as well as wetlands delineations and continued environmental baseline studies required to have the copper-rich polymetallic project ready for permitting when the time comes.
Playing dead
If attacked by a bear, experts recommend playing dead until the predator loses interest and moves on. Many of the junior miners are employing a similar tactic to survive the current bear markets by conserving what little cash they have in the bank in hopes of surviving until the bear markets pass.
Rule told Palisades Radio that he does not know how much longer the bear market will endure but the junior mining sector has a lot more room to move up than down from here.
"I would say we are within 20 or 30 percent of a bottom, and we are 500 percent away from a top," he said. "In terms of when this blessed time might occur, I have no earthly idea."
The longtime resource investor anticipates the sector has a rough stretch of capitulation before recovery.
"This bear market has gone on long enough to even wear me out. I would welcome capitulation because in my experience capitulation, while violent, is of short duration and marks the beginning of the next bull market," he concluded.
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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