In our constant effort to find value in this recovering market we’ve spent some time this past week taking a closer look at a few microcap juniors. We’re not going to use too strict a definition of microcap here, but generally speaking these will be companies with market caps of under $30 million, and more often than not under $10 million. We’ll continue to add to the list in the future, and to this end we welcome your thoughts on what companies might make for good microcap speculation opportunities. Today we’ll take a brief look at International Enexco and Nevada Exploration. We plan to publish our initial take on Oro Gold, Oro Silver, Aura Silver, and Coral Gold very soon. Once again, we welcome your comments on other microcaps to consider, we simply ask that you include an explanation of why you feel they are worthy of speculation based on your research.
International Enexco (TSX-V: IEC)
Several comments from subscribers inspired us to take a second look at the company. We set out with great expectations, knowing of the company’s large cash buffer and multiple drill programs, only to come away disappointed.
The company’s primary asset is Contact, a small-scale developing copper project in Nevada with mediocre economics at a reasonable long-term copper price assumption. Even at current prices, the project only has a pre-tax net present value (NPV) discounted at 8% of about US$82 million. At roughly $2.00/lb copper, the NPV shrinks to about US$13 million. One might argue that with a market cap of about US$8 million that looks pretty good, but keep in mind that the company would still be required to spend a significant amount of time (est. 2013 as earliest production) and money (CAPEX of US$83 million) to fully develop the project. The company is currently planning to embark on a 33,000 ft. drill program to increase the resource quality at Contact with a goal of adding 4 years to the mine life (currently 8 years). If they move forward with the drill program, they’ll probably burn through much of their cash buffer (C$6.9 million at 9/30/09), and we’re still not confident adding 4 years to the mine life would bring this project’s economics anywhere near the level they would need to be to justify a positive production decision. If nothing else, it is hard to see anyone becoming interested in a less than 20 million lbs. per annum copper project as a potential acquisition and we can’t imagine self-funding it would be easy either.
Then there’s the issue of the mysterious Hannah gold property drill results. In its August 10, 2009 news release the company had this to say:
Assays are now pending on Enexco’s phase one drilling on the Hannah Gold Property in Churchill County, Nevada, the results of which will be published in a forthcoming Company news release…A total of 932 meters were drilled in 5 holes in the phase one program. Visual inspection showed at least 3 of the 5 holes encountered target host rocks with intervals of favorable alteration.
To the best of our knowledge, these results were never published in a news release. No doubt some investors are probably still waiting to hear how things went, not having spotted this little communique buried in the company’s notes to 9/30/09 financial statements:
…During the period ended September 30, 2009, the Company received unsatisfactory results and chose not to make further cash payments allowing the option to lapse. $529,137 in acquisition and exploration costs were written off for the period ended September 30, 2009.
We think this deserved to be disclosed in a promised news release and find it shameful if management did intentionally try to hide the bad news.
Then we come to the Hot Pot gold property that Enexco optioned from Nevada Exploration (TSX-V: NGE), having the right to earn a 70% interest. According to the company’s news released dated October 5, 2009:
The Phase One drilling program at the Hot Pot gold property in Humbolt County, Nevada, which commenced in July this year, is nearing completion… In the Phase One drilling program, Enexco, thus far, has succeeded in testing beneath the valley sand and gravel cover, with angled core holes to 500 metres depth. The Company is encouraged by the drilling, which has intersected altered quartzites and argillites similar to the host rocks at the Lone Tree and Marigold mines. Phase Two drilling at Hot Pot will continue to develop stratigraphic information and test the property for high-angle structures which are the focus of high grade mineralization at the aforementioned mines.
In other words, it appears that the results from the Phase One drill program are not very likely to return any significant mineralized intercepts since the favorable structures are apparently hard to hit (being near-vertical) while the program was designed primarily to develop stratigraphic information to better target the structures in future drill campaigns.
In this same press release, the company says that drilling is now underway at its Loomis Mountain project, optioned from Fronteer Development Group (TSX: FRG; AMEX: FRG). Here is how the company lays out some details of the drill program:
A 2000 metre RC drilling program consisting of 17 angled holes commenced last month. In addition to testing the gold potential of the structures within the upper plate rocks, the RC program is planned to provide direction for later core drilling to intersect the structures at depth within the more favorable lower-plate rocks, which are the host for high grade gold mineralization elsewhere in the Carlin Trend.
Complete assay results from the Loomis Mountain and Hot Pot drilling programs will be issued in forth coming press releases by the Company.
Here again it appears unlikely that the company is going to release any killer assays on the project since drilling is only “directional” and is not even targeting the more favorable lower-plate rocks, something which is being saved for future drill programs. So it remains to be seen whether results are actually forthcoming in a press release or if Enexco just plans to bury them in their next set of financial statements.
The only Enexco project left to consider is Mann Lake, where the company (30% interest) is partnered with Cameco (NYSE: CCJ) and AREVA Resources Canada. A 3,000-3,800m drill program has been planned for this winter, but we’re months away from any results and betting on eye-catching assays from this limited program is highly speculative (although not entirely unwarranted).
Overall we wish the company paid better attention to detail on its website (e.g. a misspelling of Uranium and claiming its operations manager worked for “Tech” Cominco) and was a little more polished in its presentations and corporate strategy (e.g. failed to post bios for two of its directors, most of whom are also company employees). As far as management goes, the team seems inexperienced and rather bloated for a company of this size. At the moment we see no compelling reasons to buy shares of Enexco and we don’t believe its cash position will serve as a downside buffer for much longer. We will, however, monitor the results of ongoing drill programs and may yet identify an opportunity in the future.
Nevada Exploration (TSX-V: NGE)
Apparently one of John Kaiser’s favorites, Nevada Exploration’s claim to fame is its unique approach to exploration in Nevada. With about 85 million shares and a market cap of around C$15 million, the company should do very well if its groundwater chemistry exploration methodology gains validation through successful drilling on one of the company’s 33 “highly prospective targets”. But that’s a big if, and the overhang of about 10 million warrants at C$0.10 from a dilutive financing carried out in August at C$0.0525 per unit isn’t going to help things in the short term. Having so far only joint ventured one of its projects (Hot Pot to Enexco), the share price potential in the near term appears to be rather limited and reliant on results from a drill program that doesn’t appear to have been designed to make a discovery but rather to obtain geological information for future drilling. As we’ve already explained above, however, it appears unlikely that Hot Pot results are going to come back with significant intercepts of economic grade material in the current drilling program.
In addition, perhaps it is worth quoting some of Tom’s earlier comments on the company:
[Commenting on Nevada Explorations methodology]
The exploration world is littered with methods like this (all of them basically failed) where they take a geophysical or geochemical signature that is in common with a certain deposit type and then they look for those same signatures to discover new deposits. So no, I don’t believe for a second that they “know there is gold there”.
I’m not saying groundwater is not a valid method, only that we should be careful about it being oversold on its ability to actually find gold deposits. For example most Nevada gold mines are low grade open pits that couldn’t be mined in the basins even if they were identified by groundwater. The Hot Pot project in particular appears to be prospective mostly because it contains some bedrock near surface, and this in itself could explain the presence of anomalies. Also consider that many of the gold deposits were formed in fault and fracture zones associated with the same formational processes that resulted in the basin-range configuration so the locations of these deposits is not as coincidental as the simplistic explanation that Nevada Exploration provides. If the deposits were distributed randomly as they seem to imply, they would be found all over the outcropping ranges and not predominantly at the base. All in all my sense is that the groundwater method would probably be most prospective for higher grade gold deposits, of which there are probably very large numbers in the basins left to be discovered but the problem is that even if the groundwater helps limit the area of interest it will still be extremely difficult to find such deposits (as it will require blind drilling) unless the mineralization has great vertical or horizontal continuity (not something that Nevada high grade gold deposits are particularly known for). Frankly I think this whole process is like looking for a needle in a haystack using a small magnet. Yes it’s better than using the eyes alone but not that much better.
At the current price of about C$0.15 we see few if any compelling reasons to rush out and buy NGE shares and we would rather prefer to enter at a lower price if possible after more progress has been made in joint venturing projects so as to increase the odds of validating the exploration methodology.
Disclaimer: We do not own shares in either International Enexco or Nevada Exploration and we do not currently intend to establish a position. We have not been compensated for this commentary by any party. This is not investment advice, which you should seek from an investment advisor or licensed broker.