Junior Mining Round-up May 2012

Right now there is a lot of carnage in my portfolio.

Selwyn: Uh oh

According to their May 28 2012 press release:

In current market conditions and with the technical and engineering data consolidated to date, SCML has reported to Selwyn and Chihong that, at the present time, an 8,000 tonne per day development concept will not provide an economic return.

This is not good news.  A higher tonne per day mine will enjoy economies of scale (thus higher margins) and allow Selwyn to take advantage of lower-grade reserves.  With a smaller 3500tpd mine, only the highest grade portions of the deposit will be economic.  The net present value of the potential mine (if it is still economic) is likely not that high.  However, we’ll have to wait until an updated feasibility study comes out.

Unfortunately this is really, really bad for Selwyn as the uncertainty will depress the share price when they badly need to raise capital to restart the ScoZinc project.  So you can see why they are hiring a strategic adviser (as mentioned in the press release), because they are in a bad situation.

Canada Lithium: why raise capital at such a low price?

Canada Lithium is raising a large amount of capital at 36 cents/share ($0.3366 to the company after fees).  Canada Lithium has around 39 cents/share in current assets after liabilities, and around 58 cents/share in book value.  They will face legal fees in their lawsuit and may have to fork out a large settlement.  On the other hand, their deposit may be worth something… possibly putting the value of Canada Lithium at around 80 cents/share (just my opinion).

I don’t like that Canada Lithium is raising capital at such a low price.  This is rather uncharacteristic of them.  In the past, they have pulled shenanigans to raise capital at high prices.  In one incident, they released a technical report claiming almost a million ounces of gold.  Shortly thereafter they sold equity and in the next quarter that property was written down to almost zero.  In the other incident, they were raising capital at $1.50/share ($1.41 after underwriting fees)… which is related to their current lawsuit.

Noront

Cliff’s and the Ontario government has announced in principle to develop the Ring of Fire area.  What exactly the Ontario government will contribute is unclear as far as I can tell.  And Cliff’s hasn’t yet consolidated the area by buying out Noront and KWG Resources (which would make sense as the deposits can share infrastructure).

In the past, Noront has started rowing its own boat by trying to get the Ontario government to chip in funds to develop a winter road to the Eagle One deposit.  (There is a lot of bad blood between Noront and Cliff’s as Noront made Cliff’s pay more for taking over Freewest.)  Their plan didn’t make the most sense in the first place as it would make more sense for Cliff’s and Noront to consolidate/merge and share better infrastructure (e.g. a railroad or an all-season road that isn’t restricted to winter).  So now Noront is changing its tune:

President and CEO Wes Hanson states: “The Company views the announcements by Cliffs and the Government of Ontario on May 9, 2012 as a very positive development in unlocking the vast mineral wealth identified in the Ring of Fire district of Ontario. In order to evaluate the potential benefits to our shareholders, the Company has decided to delay issuing the Feasibility Study for our flagship Eagle’s Nest nickel sulphide deposit. The commitment, by both parties, to a north south access route and the timing highlighted in the announcements, warrant a thorough review to evaluate the potential impact to our planned development of the Eagle’s Nest deposit.” (see news release)

As well, Noront sold a large number of shares to RCF Management and given one of their representatives a seat on the board.  In my opinion, RCF got a great price on their shares ($0.52)… Noront shareholders got shafted a little.  Unfortunately I paid more than 0.52 for my current Noront shares.  Kudos to RCF for having the liquidity to invest when junior mining stocks are having a 2008-esque crash.  In my opinion, RCF is smart money.  They have (ex)professional geologists on their staff so they have a good grasp on the technical aspects involved.  Taking a seat on the board helps to protect their investment so that Noront management doesn’t try to sell shares at a low price again.  On the other hand, I would also note that RCF owns 17.4% of Selwyn (their investment hasn’t really been working out as explained above).

KWG Resources

They are buying back more shares.  There is a chance that Cliff’s will proceed with developing the chromite deposits without buying out KWG.  Under the JV, KWG’s share will be watered down and revert to a NSR if they cannot put up their share of expenditures (ok so I should probably do more research).  However, Cliff’s will need to battle KWG in the courts over the right of way for a road to the deposit.  At the end of the day, Cliff’s might as well buy out KWG as there are synergies involved and they already own 20% of KWG.

Premier Gold: I don’t understand their royalty strategy

So PG (Premier Gold) sells shares in a private placement to raise cash.  They use this cash to buy gold royalties from other companies.  In the deal with Aberdeen International, part of the payment is in the form of a debenture.  PG basically has an option to pay Aberdeen in cash, shares of a royalty company (with a 10% discount), or shares in PG.  This option can make sense for both parties.  Aberdeen gets to mark its debenture at a high price, inflating book value (and if they get paid in shares of an IPOed royalty company, they can get instant mark to market profits).  PG has a chance to pay for something valuable with overvalued shares of a future royalty company or in PG shares.

Now that’s fine and dandy.  But PG has significant transaction costs in underwriting fees when they raise money in a private placement.  Will they make so much money in arbitrage / wheeling and dealing that they can overcome those fees?  I doubt it.  It seems more likely that PG management is of the opinion that their stock is overpriced.  This would explain why Goldstone Resources was so eager to be taken over by Premier Gold at a price that (to me) looked awful.  Maybe people like myself are overvaluing the Hardrock deposit and the potential in the other properties under exploration.

So I will be selling my shares of Premier Gold.

Queenston Mining

AEM (Agnico-Eagle Mines) invested in Queenston at $5.30 (less when you factor in the warrants).  Presumably AEM did due diligence on Queenston so hopefully it’s unlikely that management is overstating the economics of the deposits.  At around $3.51, Queenston is currently trading at a discount to the price that AEM paid.

Since the AEM investment:

  1. Queenston management decided that it was a good idea to give away free money by extending warrants.  (I do not like this.)
  2. Queenston sold its share of its joint ventures with Kirkland Lake Gold to KLG.  Personally I don’t think highly of KLG as they are a serial issuer to capital and haven’t had a year of strong free cash flow (i.e. it’s unclear if they have ever actually been profitable even though gold prices have skyrocketed).  The wonderful thing about the deal is that Queenston will be paid fully in cash (by Dec 2012).  They even retained a small royalty on the properties’ gold production.  Royalties can be a great method for taking advantage of stupid juniors as they tend to overproduce (e.g. to keep producing gold even when it is not economic to do so).

Disclaimer: I own or have owned shares in all of the companies above.

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