PDAC 2012 Days 3 & 4

We decided to take our time to report on the last two days of our PDAC booth patrolling in order to save our sanity and health on account of way too much yakking, handshaking and BS’ing that took place during this “convention”. The quotes are because most times the Toronto Convention Center resembled a cattle stampede … certainly the fire marshal must have been that close to shutting the place down on account of being over capacity. If only those 30,000 people in attendance were buying resource stocks! Alas, most of them probably work for the resource companies, which we suppose is a problem (i.e., having more employees than shareholders). In any case, let’s get the reporting wrapped up.

Alexandria Minerals — We reviewed the company’s extensive land holdings on the Cadillac Break east of the town of Val d’Or with Eric Owens, President, and Mary Vorvis, IR Director, noting the close proximity to the Sigma-Lamaque Mine (~10 million ounces of historic gold production) and Agnico-Eagle’s troubled Goldex operation (over 2 million ounces of gold, production currently suspended). The strategy here is district scale land package consolidation followed by exploration using prospecting and modern exploration techniques. This approach has paid, and continues to pay, dividends in other parts of the Abitibi: Malartic (Osisko), Kirkland Lake (Kirkland Lake Gold, Queenston), Timmins (Lake Shore Gold), Detour Lake (Detour Gold, Balmoral), etc. So far the company has 3 prospective gold projects, the most advanced of which, Orenada, is already being evaluated for near-term production via partnership, toll milling or other methods. We looked through some “grade-thickness contours” (a nice way to visualize the relative size and significance of vein and other sheet-like deposits), noting the good prospects for expansion at depth and on strike. [As an aside, we recommended to San Gold's Tim Friesen that he use grade-thickness contour maps to help demonstrate the open nature of the 007 and other ore bodies at the Rice Lake mining complex ... if anybody knows of a good software package that can help generate these maps without requiring a Ph.D. -- he does have an MBA though --- please let him know.] We also noted that the mineralization is often less than 3-4 grams per tonne across drill intercepts and therefore it is critical that it form in envelopes thick enough to mine using bulk methods (either open pit if near surface or bulk underground mining). Other than at Sigma-Lamaque, there hasn’t been enough continuity or volume of higher grade gold (say over 5 grams per tonne) encountered so far in the district to consider traditional underground mining … which is probably why Alexandria had the opportunity to acquire the land package in the first place. And while the three main projects presently being advancing do not have obvious multi-million ounce potential at this stage, the relatively sparse and widely-spaced exploratory drilling on the Cadillac Break east of Val d’Or means that there is still plenty of opportunity to make a major discovery. This could be on a section of the break that has more-than-typical dilational structures or perhaps in some wide/multiple secondary structures or in areas with different styles of mineralization altogether (e.g., La Ronde type volcanogenic massive sulfides).

Argentum Silver — We kicked around the idea of bulk silver targets with Dhugald Pinchin, VP Business Development, at the company’s Coyote project in Jalisco, Mexico. In the northwest portion of the vein network there is indeed a confluence of mineral trends along with widespread mine workings to suggest the possibility of a bulk silver deposit, although the first stage drill program appears to be testing individual veins. The character of the high-grade silver-polymetallic ore that was mined historically is revealed by Hole 2012-3 (2 meters of 2,745 grams per tonne silver plus gold, lead and zinc). We note this hole intersected what may be the main historic workings that targeted a rich ore shoot of silver and therefore may not be representative of the average grade of the vein. Indeed, other drill holes on the El Tajo vein have given variable results. This is to be expected as typical epithermal veins contain ore shoots that extend only a few tens of meters along strike — Argentum appears to be spacing its first pass drilling 40-50 meters apart so at least two adjacent holes hitting the same tenor of mineralization would start to make things exciting — while often raking and plunging for hundreds of meters to depth. Meanwhile, the most attractive epithermal systems will develop wide (multiple meters) ore shoots with both a plunge and a lateral extent measuring in the hundreds of meters. Robustness in all 3 dimensions is how large tonnages come about, creating world-class epithermal vein deposits such as those in Zacatecas, Tahoe’s Escobal in Honduras plus perhaps Gold Resource Corp’s El Aguila vein (the latter to still be proven by tightly spaced drilling away from the plunging rake of the central ore shoots). Unfortunately the attractiveness of these polymetallic veins can diminsh quickly when one or more of the 3 dimensions is limited since that means tonnage is restricted (often to the point that there isn’t enough mineralization to pay back the cost of building the mine facilities). Argentum’s exploration program at Coyote should be watched for signs of “3 dimensional robustness” (ideally two adjacent drill holes hitting bonanza grade ore shoots over wide intercepts) as well as future drilling in areas where the mineralization may bulk up (such as the confluence of the Florida and Bocancha veins).

Astur Gold — This is a “permitting play” where CEO Cary Pinkowski and team have spent considerable effort to ameliorate the negative impacts of the proposed Salave gold mine on the lush and laconic landscape of the northern Asturias coast of Spain. Company commissioned surveys indicate a 70/30 split in favor of mining by the local population which can be taken either as a positive (majority in support) or negative (large minority opposition, though mostly passive). Certainly the depressed economy could use the boost and the Asturias provincial authorities will take that strongly into consideration as they process the underground permit application. They will also consider that Astur Gold has revised the mine plan several times (originally proposed as an open pit) to mitigate local disturbances and reduce the mine footprint (optimized tunnel location, state of the art processing facilities, paste fill to reduce size of above ground tailings storage, etc.). Still, a handful of retirees and unmitigated “nature lovers” — these generally being the type who prefer a nice meadow they’ll never set foot on to the well being of their neighbors who they see every day — remain adamantly opposed to the mine. It’s good that the permit decision is not in the hands of these people but not much better that it is in the hands of a moderately dysfunctional Asturias government where coal mining is a boon or curse depending on whether one is in Brussels on Tuesday or Madrid on Wednesday. All in all, Mr. Pinkowski makes a pretty good case — using a high resolution aerial map — that the chances of permitting are rather good. Certainly the shares are adequately discounted to both reflect the risk of rejection and to better reward those willing to hold a speculative position prior to permit issuance. For our own part we may look for an opportunity to “game” the permit by keeping close tabs on developments during the next few months. It would be especially fortuitous to take notice of a news release that announces issuance of the permits since the initial runup in the shares could be muted if the market is being lazy as usual.

Atico Mining — While visiting the Fortuna Silver booth (Fortuna is a “Peerless” silver producer that needs no update here as the story is straightforward and uncomplicated), intrepid Fortuna IR man Carlos Baca introduced us to Joseph (Joey) Salas, Senior Exploration Manager of the newly-minted Atico Mining (IPO just closed, started trading under symbol “ATY” this week). Mr. Salas and Misters Ganoza of Fortuna fame (both father and son were present) then kindly explained the strategy of exploring the El Roble VMS district in Colombia where presently there is small scale production that Atico eventually would like to expand by at least 10-fold to 3,000tpd assuming sufficient copper-gold resources can be defined. Out of the gate with 37 million shares and $10 million in cash means that any discovery should result in nice upward share price trajectory from the 50 cent IPO level.

Barisan Gold — This is the Indonesian porphyry spinoff from hapless explorer-in-remission East Asia Minerals. Barisan is being maneuvered by likable Alex Granger, CEO, toward discovery of a major copper-gold deposit in the Aceh province of Northern Sumatra with the benefit of hindsight from the botched Miwah exploration “strategy”. Alex has explained in the past and reiterated again in Toronto that a portion of the project is located on non-forest-designated lands with some fairly decent targets. As a result Barisan is in the rare position of a junior explorer that is actually drilling in Indonesia at the present time. The other one is Intrepid Mines, also with non-forest land and commanding a market cap of nearly $500 million. Intrepid Mines and its curiously strong market cap is really the only reason why we are spending any time at all evaluating something in Indonesia at this juncture. Latest idiocy from the Jakarta-based “anti corruption” politicians: after 10 years of operating a new mine, a majority stake must be sold by foreign investors to a local Indonesian company or the government. Sure doesn’t sound like additional opportunity for corruption there! In any case, Barisan’s Tengereng porphyry exploration results have generated a collective yawn from the markets so far despite a 700 meter intercept of arguably ore grade (0.39 g/t gold and 0.30% copper) released in January 2011 from Upper Tengereng. This assay, which also included a definitely ore grade intercept of 1.17 g/t gold and 0.48% copper over 59 meters, is what sealed the deal on the Barisan spinoff early last year when things in Indonesia still appeared a bit normal (if only because all the exploreco’s were simply ignoring the asininely convoluted regulations). That long hole ended at the rig’s depth capacity in strong mineralization vectored toward a possible skarn zone that Barisan intends to investigate with further drilling later this year. Notably, Barisan had a custom 2,000 meter deep rig built (in China, where else, and so the capacity of the rig is of course somewhat less than nameplate but still probably 1,600 – 1,800 meters, which is already deeper than we like to see holes being poked anyway) and shipped to Indonesia during the past month. This is the one that is now being used to test lower priority targets on non-forest-designated lands while official permits are being requested for drilling the higher priority targets on forest-designated land. It should be noted that Barisan is not completely without luck: there is a road traversing the Tengereng protection forest area whereby the highway corridor of a few meters wide is not considered forest and therefore a drill site can actually be situated in a traffic lane or shoulder if county and provincial authorities don’t mind (apparently they don’t). If Barisan were to start drilling hole after hole of the same or better tenor as Intrepid, can we realistically expect to see its current ~$15 million market cap streak toward Intrepid’s $500 million? Probably not, but perhaps one-tenth of that might not be unreasonable.

Cayden Resources — Discussed the Morelos Sur project with Chief Geologist Dan McCoy, who noted that magnetic anomalies define all the major deposits in the Guerrero gold belt. Although the initial drilling and focus have been about the small sliver of land that Cayden controls between Goldcorp’s Los Filos and El Bermejal open pits, it is the La Magnetita (apparently so called because it represents the largest magnetic anomaly in the gold belt) target that the market should really be focusing on. There are no holes drilled into the most prospective area of this anomaly (the part sandwiched between magnetic highs and lows similar to Los Filos and El Bermejal) but surface trenching has indicated the presence of sub-gram gold over a decent interval in highly fractured and brecciated carbonate rocks. Gold seems to love this stuff as a host rock in the district. The La Magnetita drilling is expected to start within a month and results should be forthcoming shortly thereafter. A best-case example if they hit some of the most attractive Guerrero-style gold would be Newstrike Capital ($300 million market cap compared to under $100 million for Cayden at this moment).

Claude Resources — We spent a bit of time joshing with Christine Magneson and Marc Lepage of the company’s investor relations team, who we mercilessly peppered with questions about the reasonableness of gold production forecasts out to 2016 (rising from a steady state between 40,000 and 50,000 ounces during the past few years to over 80,000 ounces in 4 years). There were no technical details offered up about where this production is coming from or how (other than generic mill upgrade, shaft extension and resource expansion such as the L62 Target). In particular we wanted to find out more about how the production growth would be sequenced given the distributed nature of the shear-hosted gold mineralization (by the time you are done reading this PDAC report, you’ll be sick of hearing about my personal issues with shear-hosted gold systems). “Higher grade” would be a great answer but that wasn’t offered up. So in the alternative we must consider that in mines developed on extensive shear zones, there tend to be central and peripheral deposits of gold. The trick is that you can’t use the same assumptions about mining efficiencies, costs or operating metrics in the peripheral zones as those encountered in the central zones. Now it is true that a large portion of the resource expansion at Seabee is within arguably the central deposits (including the L62 Target) so maybe that’s what makes it all work. But otherwise, we kept thinking about how mining gold from peripheral deposits can be like trying to skim water from a bunch of puddles. Technically possible but much easier to scoop it up from a single lake or pond. The thing is that mill capacity or published 43-101 resource size are rarely the choke points; availability of qualified personnel, sufficient development or production faces, consistent ore head grades and dilution, development sequencing (e.g., removal of pre-development and development ore from the workings) and other esoteric factors tend to be where the operating headaches develop. Perhaps I was just imagining things but Seabee mine manager Paul did not look as happy as pie when asked to confirm whether or not the forecasted production growth in the investor presentation was copacetic. If I were in his shoes, it would not be a-okay with me that corporate is making these projections … especially since the company is already cheap assuming the same steady-state production at Seabee while longer-term development is carried out at the high grade Madsen project in Red Lake and the open pit Amisk Lake project.

Crocodile Gold — We discussed the circumstances of the Cosmo Mine with Mark Edwards, GM Exploration and Business Development. Historic monsoonal rains during 2011 delayed mine development at Cosmo but things now appear to be on track. Our general feeling, however, as we heard Mr. Edwards describe this year’s upcoming developments such as the completion of the spiral decline into the ore body and the start of trial stoping, is that the company continues being somewhat aggressive and overly optimistic about progress and production levels for the balance of the year. This is only a feeling and we can’t point to anything firm other than little things like how it is possible for production to be estimated when critical factors like mining method and dilution rates haven’t even been established for the underground operations yet. It boggles the mind why companies with virtually zero credibility left (and therefore having nothing to gain from a good looking but ultimately unachievable plan) would continue to make the same broken promises that got them where they are in the first place. Maybe there is some statutory, compulsory or contractual requirement for management to keep making what, based on historical precedent, turn out to be wild guesses about production? If not that, why keep doing it?

Hecla Mining — We discussed the plans for returning Lucky Friday to production with Jeanne DuPont, Corp. Communications, who noted that the main setback is not necessarily the rock burst late last year but “rehabilitating” the Silver Shaft under MHSA (U.S. mining safety regulator) orders. We got the sense that the company is indignant that the shaft work is being forced upon them for no apparent reason. After all, it is normal for some shaft debris to collect at the bottom and would normally not be a reasonable cause to suspend production during cleanup. We got another sense that perhaps Hecla is making lemonade out of lemons by acquiescing to the shaft cleanup order so that it can get a lot of other (useful) work done that might otherwise be difficult if not disruptive while the mine is in production. If true, Hecla is turning the knee-jerk politics being used by the MHSA to make themselves seem like they are actually on top of mine safety into a production advantage when the mine starts back up next year. I’d certainly be using the time to fix and clean up everything and get the mine in such good shape that everything should run smoothly for years.

Lydian International — A cantankerous-if-loquacious British accountant is perhaps not the best guy to discuss permitting “what-if’s” or the potential risks of regional opposition to the Amulsar project. No sir, it is absolutely not normal for the prime minister or national legislature to preside over importation of cyanide for industrial use. Nor sir, the fact that the locally-bottled spring water has more arsenic than the maximum level permitted by the U.S. FDA is not meaningful to people who view this very same water as a national treasure and health tonic (as in, the very opposite of poison). And yes sir, the notion that the same people equate all forms of cyanide with death while happily consuming large amounts of their precious arsenic is not only highly ironic but makes such people, frankly, unreasonable and unpredictable. So instead of engaging in silly debates with shareholders who are merely interested in understanding the politics of the mine permitting process in Armenia, perhaps it might be better next time to explain what exactly you mean by this statement on the home page of your website: “With a strong social agenda and unique understanding of the complex political backdrop to this region, Lydian develops its projects responsibly with exceptional emphasis on social and environmental awareness and care. The company minimises environmental impact and engages local communities in order to deliver sustainable social development initiatives.” Clearly the market does not have the same “unique understanding of the complex political backdrop to this region” that you have attained … as amply demonstrated by the discounted share price. Therefore wouldn’t it be a good idea to explain some of this unique understanding so that the share price reflects fair value and any future equity raises for building the mine do not create unnecessary share dilution? What are we missing?

Magma Metals — Geoffrey Heggie, Special Projects Geologist, points out why he is personally opposed to the Paramount share takeout offer: as a Canadian without a foreign brokerage account, the buyout is essentially a cash deal for shareholders like him who do not get to participate in the benefits of post-merger upside by continuing to hold undervalued Paramount shares that only trade in Australia.

Orezone — Sean Homuth, CFO, could only nod in tacit agreement when we pointed out that the company has come full circle by first drilling the oxides/saprolite and then talking up the Bombore project’s fresh rock potential at depth only to finally return to the near-surface oxide potential once the PEA revealed the high initial capital cost associated with a single-stage mill and heap leach operation make the project economics seem anything but compelling. So of course the company is now planning to evaluate an initial run of mine heap leach operation targeting 2 million ounces of oxide gold resources in pit. Under this approach, mine operating cash flows would be used to pay for the mill and other infrastructure required to process the fresh rock once the oxides have been mined out (see Nevsun for how that process might work, warts and all). If successful, this approach in our opinion would make Orezone a better investment prospect than other West African mine developers like Keegan. Of course the devil is always in the details.

Oro Mining — Perhaps we have been a bit too harsh with John Brownlie and team for blowing out the share structure to simply raise a few million dollars for the advancement of the smallish Taunus gold deposit toward fast-track production. As Priscila Lima, CFO, and Marco Galindo, VP Operations, tell it, the plan is not to finance any more with equity but rather to raise the remaining capital in the form of debt or some form of gold sale agreement. That arguably leaves open some share upside perhaps to 25-30 cents as production gets going next year (this doesn’t consider exploration potential, which the company has just now finally started to elaborate upon re: San Carlos and San Cristobal targets in the latest investor presentation).

Prodigy Gold — The initial mine plan as several helpful company personnel (Fred Mason, VP Operations; Tom Pollock, VP Exploration; etc.) informed us will be to develop the Magino pit in two stages as this will allow permitting of a smaller footprint that does not impact any lakes. This is a common sense approach that removes considerable time and complexity from the permitting process. Also very good to learn is that there seems to be near universal agreement within the company that the old Kodiak Gold high grade properties (i.e., Hercules) are not worth talking about, much less pursuing, going forward.

Sandspring Resources — When you as a shareholder are more excited about the “in pit” resource potential of a project than anybody on the company’s own exploration team, then it must be time to reassess your enthusiasm. To wit, we wanted to talk about the resource upgrading opportunities in the conceptual pit outline at Toroparu but the explorationists manning Sandspring’s core shack insisted on deflecting the conversation to the importance of satellite deposits. That’s nice but what we were really after is to test our growing suspicion that these shear-hosted gold deposits that everybody and their mother is now trying to develop into open pit gold mines won’t always work out as nicely in real life (i.e., profitably mined) as they may look on paper. In many of the shear-hosted deposits (and a few other types like Trelawney’s Cote Lake, see below), there tends to be a zone of mineable bulk grades with good gold density, but the continuity of mineralization starts to get dicey in the lateral and depth extensions where mineralization occurs over narrower intervals along with typically higher grades. It seems the higher the grade, the more variable the distribution of gold can be. Therefore the peripheral areas may not have true bulk mining densities even though grade smearing (diluting high grades in narrow drill intercepts over much larger waste intervals) can make it seem otherwise … on paper. Indeed, some smearing is unavoidable with most if not all of these shear type gold distriburions … sometimes more so and sometimes less so. At Sandspring’s Toroparu it is our sense that smearing and internal waste are less problematic than some other deposits but maybe still enough of an issue to make the exploration team want to find satellite deposits with bulk tonnage characteristics capable of supplementing the main starter pit. In Sandspring’s case, the starter pit may constitute the first 5 or more years of production, exploiting a large portion of the truly bulk mining areas in the resource model but also paying back the startup capital costs according to the PEA figures. Importantly, if your starter pit cannot do that (pay back capital costs), you don’t have a real gold mine in my opinion. Need more info on why smearing and internal waste are not something you want to have in a bulk mining plan, whether open pit or underground? Consider a one meter wide gold zone that grades 100 grams per tonne. Theoretically you can mine this vein across a bulk width of 100 meters and average 1 gram per tonne in head grade, and this grade on paper at least might be economic for an open pit. But as Mark Twain famously quipped, “There are three kinds of lies: lies, damned lies and statistics.” The fact is that nobody would ever mine a 1 meter wide gold zone by diluting it with 99 meters of waste rock. They would instead selectively mine the 1 meter of mineralization and dispose of everything else as waste (if 99 meters of waste, that would make for a nearly 100:1 strip ratio in an open pit scenario). Otherwise there could be days or even weeks when only waste rock was going to the processing plant while mining through the 99 unmineralized meters during each mine cut or bench. The result of course would be zero ounces of gold recovered and a terribly inefficient operation. Not even a liar would do something that stupid! Despite this, a 100 gram per tonne one meter wide gold zone near surface could still make for a very economic open pit mine — by selectively processing only the mineralized material — and that is why Goldcorp paid over $3 billion for Andean a couple years ago. But in such cases, the gold zone has to have continuity (you must be able to follow and selectively extract it). The problem with many shear hosted gold systems, however, is that the gold zone extensions may not have continuity but instead tend to be variably distributed as high grade blips throughout the deformed host rock.

San Gold — As mentioned previously, Communications Director Tim Friesen likes the idea of showing grade-thickness contours for the Rice Lake resource areas, in particular the 007 zone that is still open in several directions and could become a major ore body potentially capable of supporting a large, long-lived standalone mining operation by itself.

Source Exploration– Brian Robertson, President, was there with his Exploration Manager Sonny Bernales to explain the drilling plans at the company’s southern Mexico gold skarn projects. The first one is already showing decent potential (Las Minas) but the company is even more interested in its recently-acquired Capricho property with its visible gold and high grade rock chip samples. It shouldn’t be too difficult to predict that Source will report some attractive assays along the way — the chunk of buttery gold sticking out of the rock sample at the booth is testament to the potential. With success, the company is prepared to joint venture or even sell its Las Minas project to fund additional exploration at Capricho in lieu of further shareholder dilution … although a good market reaction to Capricho drill results may obviate the desire or need for that.

Timberline Resources — Randy Hardy, CFO, went over the water pumping and road issues at the Butte Highlands project. As usual, things get screwed up by the most mundane and minor of details. A moderate increase in mine water pumping means groundwater recharging is no longer an option so now it must be directed into creeks. That in turn requires a water discharge permit with volume loads and metal content being controlled. Mine trucks transporting gold bearing ore to the offsite mill must not pass in front of the peaceful lodge or next to some annoyed guy’s cabin or they will sue and therefore the most convoluted, inconvenient back roads must be used … and of course these need upgrading. Other small details like that will probably keep Butte Highlands from producing gold for another year although the 10,000 tonne bulk sample will likely be mined and processed during 2012 .. and that means an opportunity to demonstrate the bonanza gold potential of this mine in the near term. If gold can be mined at an ounce per ton, even a small tonnage operation would be consequential to a company the size of Timberline. Meanwhile at Lookout Mountain in Nevada, plans are afoot to fast-track portions of the property to production after a round of definition drilling this year.

Trelawney Mining — The geos were on hand in the booth to go over cross sections and resource blocks for the Cote Lake gold deposit. It appears to me that even though the mineralization is breccia-hosted, it still retains the shear-like distribution of many Archean greenstone gold deposits. In the grossest sense, the greenstone shears may develop central areas of relatively low grade gold where plenty of physical space was available for fluid circulation and post-depositional gold movement was minor, surrounded by a lateral extent of narrow, high grade, discontinuous gold zones where fluid circulation was restricted and primary mineralization was remobilized and concentrated by subsequent shear-deformation-alteration processes. Similar physical processes may explain the distribution characteristics of the Cote lake breccias. In any case, the disseminated central zone of this deposit would seem relatively simple to mine by open pit or bulk mining methods while the narrow high grade style arguably does not belong in an open pit model without much better understanding of the continuity (if indeed there is one) between drill intercepts. So how much of the resource at Cote Lake is of the likely-bulk-mineable variety vs. the portion not quite there yet? Perhaps the breakdown of the NI43-101 resource between 0.9 million ounces Indicated vs. 5.9 million ounces Inferred can give us a decent clue. Then again, those numbers appears to be somewhat conservative by my reckoning and the actual portion of this deposit that already “hangs together” is probably more in the 2 to 3 million ounce range (the actual number should be confirmed after more infill drillling this year, i.e. we should see the Indicated resource grow to around that size).

Disclaimer: We don’t currently own any of the above companies with the exception of Lydian, Oro Mining, Prodigy Gold and Sandspring and we do not receive compensation for our reporting or commentaries from any party. This is not investment advice, which you should seek from a licensed investment professional.