Mansfield, Atna bright spots in junior sector

Mineral exploration frauds such as Bre-X Minerals in Indonesia, combined with the Asian financial crisis of the late 1990s, are chiefly responsible for the ongoing slump in junior resource stocks, according to John Kaiser, publisher of the Kaiser Bottom-Fishing Report.

Bre-X was followed by several other bogus discoveries, including Golden Rule, Delgratia and Timbuktu, all of which discredited both Canada’s regulatory system and its mineral exploration industry. One outcome has been a new mineral disclosure policy that forces Canadian juniors to adhere to some tough reporting standards. Kaiser regards some of the new standards as excessive in that they restrict the ability of management to promote a prospect’s potential.

“Judging by how the Canadian Venture Exchange (CDNX) has jumped all over International Wayside and Birch Mountain, the chances of a traditional fraud slipping through are pretty low,” says Kaiser. “The real negative fall-out, however, is that management’s ability to stir up speculative fever has been put on ice. Mineral plays are like lottery tickets: they have poor odds of delivering success. But mineral plays have traditionally thrived on speculative market action.”

The industry was dealt a further blow in late 1997, when the Asian financial crisis sent base metal prices to historical, inflation-adjusted lows. And although nickel, copper and zinc have rebounded, albeit modestly, fears of a global slowdown led by the U.S. have dampened investor enthusiasm for metals, Kaiser says.

“The pessimism about the long-term downtrend for metal prices is so entrenched that, over the next few years, we will see metal prices climb a perpetual wall of worry to unprecedented levels.”

In other words, don’t bet on uptrending metal prices, because, in the long run, they will come down.

Kaiser also believes that investors have been spooked by the escalation of permitting risk in developed countries such as Canada, the U.S. and Australia.

As examples of how permitting delays can delay payout indefinitely, he cited the Crown Jewel gold deposit in Washington state and the Diavik diamond project in the Northwest Territories.

He adds that it’s no better in developing countries, where mineral plays can face both title and political risk. Such was the case for Placer Dome, at its Las Cristinas gold deposit in Venezuela, and Pan American Silver, which retreated from the Dukat project in Russia.

To make matters worse, the so-called “dot-com economy” has seen speculators abandon mining stocks in favour of technology plays. And while there are signs that the bull market in tech stocks may be dead, Kaiser is nonetheless concerned that investors will continue to shun the mineral sector in the belief that it has only limited upside potential.

“What the technology play did to the mineral play was to reveal the limited nature of a mineral play. An orebody has a size limit that you can often tell from the target size. There is also the problem with the commodity price. In a technology play, the speculation is about the adoption rate of new technology, which is essentially a marketing effort. With a technology play, anything is possible.”

Kaiser recommends investors avoid bottom-fishing for early-stage exploration plays, except those that feature reliable exploration teams and strategies, though, even then, the market is generally unresponsive until a discovery hole has been made. Among the juniors Kaiser says are worthy of consideration are Altius Minerals (als-v) and Inca Pacific Resources (ip-v). The former holds a portfolio of early-stage projects in Newfoundland and has the financial backing of Rick Rule’s network. It sits at 50 within a 52-week trading range of 60-22. Inca Pacific trades at 50 within a 90-18 range, on the back of early-stage and advanced prospects in Peru.

Mansfield Minerals

Kaiser also advises that attention be paid to Mansfield Minerals (mdr-v), which specializes in grassroots exploration in northwestern Argentina. Recently, the company outlined two potential Olympic Dam-type iron-oxide copper-gold prospects, one of which occurs on the Rio Grande property, 250 km west of Salta.

Teck (tek-t) can earn an initial 55% interest in the property by making payments totalling $1.1 million and spending $4 million on exploration over four years. Mineralization consists of disseminated and veinlet-controlled chalcopyrite and magnetite in a zone of potassically altered andesites. The main zone of mineralization measures 700 by 200 metres. Assays from 36 grab samples averaged 1.28% copper and 1.25 grams gold per tonne. In May, Teck excavated three hand trenches, which were channel- or chip-sampled at 1-metre intervals. Trenches 1 and 2 comprise a cross, with a 96-metre east-west leg averaging 0.58% copper and 0.98 gram gold, and a 30-metre north-south leg averaging 0.72% copper and 1.1 grams gold. A further 450 metres to the southwest, the third trench averaged 0.31% copper and 0.22 gram gold over a 19-metre section.

A similar-style target lies on the Arizaro property, 12 km southeast of Rio Grande. Mineralization and alteration indicate dimensions of 600 by 800 metres. Assays from 96 grab samples averaged 0.49% copper and 1.09 grams gold. Two hand trenches in the southeastern portion of the potassic zone yielded 22 metres of 0.59% copper and 1.18 grams gold, plus 8 metres of 0.66% copper and 1.44 grams gold. For a limited time, Teck holds a right of first refusal should Mansfield choose to joint-venture the property.

Mansfield is trading at the 60 level in a 52-week range of $2.25-30.

Atna Resources

Alternatively, Kaiser suggests investors might try adopting a new bottom-fishing strategy of focusing on existing deposits that could be minable at current metal prices. He likes the look of Atna Resources (atn-t), which is attempting to redefine itself as an intermediate producer of small- to mid-sized deposits. With $12 million in working capital, Atna is sitting at 50 in a 52-week range of 85-48.

The junior recently picked up an option on a Mexican gold project that it believes is under-explored and can be developed quickly. Atna is negotiating on several fronts to acquire existing mines, copper being the targeted metal.

“Once Atna has made a significant acquisition, you will see the push-pull market mechanism kick into gear,” Kaiser says. “The institutions will gobble up an emerging intermediate producer that specializes in upgrading marginal mines.”

Copper Ridge

Kaiser draws investors’ attention to juniors that have access to existing deposits which could be mined profitably with new technology even though, historically, they have been sub-economic. In this regard, he likes Copper Ridge Explorations (krx-v) and Redhawk Resources (rdk-v).

Copper Ridge has a deal to acquire the Howard’s Pass zinc-lead deposit in the Yukon for $15 million in future payments. The deposit has sat undeveloped since 1982, when Placer Dome (pdg-t) concluded that an underground mining operation was uneconomic. Howard’s Pass contains a resource of 110.5 million tonnes grading 5.3% zinc and 2.4% lead.

Copper Ridge believes that an innovative combination of existing and recently developed hydrometallurgical technology gives the project upside potential. The junior has struck a deal whereby Billiton can earn up to a 70% interest in the project, provided Copper Ridge spends the first $3 million, including a $2-million concept study and a $1-million payment.

“The Billiton deal puts all the initial risk into the laps of Copper Ridge shareholders but lets Billiton fund the tiresome prefeasibility stage to earn 50%,” says Kaiser. “Copper Ridge is an economics engineering exercise. Even if investors do not buy at current cheap prices, they still have incentive to monitor the stock.” Copper Ridge trades at 33 within a 41-to-12 52-week range.

Redhawk

Redhawk has its eye on the zinc oxide potential of the past-producing Reeves MacDonald and Annex mine properties in southeastern British Columbia, where sulphide zinc ore grading 10-15% was mined out long ago. Historically, there was no way to extract the zinc from the oxide mineralization, so it was never mined. The zinc oxide extends from surface to a depth of 450 metres and grades comparably to the sulphides. Redhawk estimates that five million tonnes zinc oxide is still in place.

The company’s objective is to confirm this resource and demonstrate that it can be economically extracted using new metallurgical processes. Redhawk has optioned a half-interest to London-based ZincOx Resources, a private group. The management of ZincOx was involved with Reunion Mining, which secured a 60% option from Anglo American on the Scorpion zinc deposit in Namibia. Reunion demonstrated that that deposit’s zinc ore (19.5 million tonnes grading 10.1% zinc) could be profitably mined using recently developed oxide leach technology. Anglo rewarded Reunion with a $90-million buyout.

“The ZincOx group thinks Redhawk’s Remac project can also be made economic by applying new technology,” says Kaiser. “It would not surprise me if Redhawk gets turned into an acquisition vehicle for similar zinc-oxide deposits elsewhere in the world.”

Redhawk has since entered into a joint-venture agreement with ZincOx to explore and develop the Torlon zinc-oxide prospect in Guatemala.

ZincOx holds a 31.3% stake of Redhawk on a fully diluted basis. Redhawk is at the 54 level in a 52-week range of 75-21.

Kaiser believes that gold is truly the only metal that could quickly restore investor faith in mining stocks, but until the central banks have finished liquidating their gold reserves, such a restoration is unlikely. “A gold market rally with staying power would revitalize many of the dormant resource juniors, but not so quickly that there would not be a window for bottom-fishing at cheap prices.”

Kaiser says consideration should be given to such cash-rich juniors as Takla Star Resources (tkr-v), at 46, which would be quick to refocus if gold comes alive, and St. Jude Resources (sjd-v), at 43, and Franc-Or Resources (for-t), at 33, both of which have gold-focused projects.

The junior sector has not benefited from a rise in platinum and palladium prices. Even though palladium hit US$800 per oz. earlier this year, the market has been lukewarm to platinum group element (PGE) plays. Kaiser attributes this to concerns that high palladium prices could threaten industrial substitution, which would lead to a collapse in prices.

Kaiser’s only PGE pick is Altoro Gold (atg-v), which trades in a 52-week range of 74-23 and sits at 39. Altoro holds a portfolio of early-stage PGE and gold prospects in South America, including the joint-ventured Pedra Branca platinum-palladium property in Brazil. Hunter-Dickinson’s Rockwell Ventures (rcw-v) can earn a 60% interest in this property by spending US$7 million over four years.

Altoro is set to merge with Solitario Resources (slr-t) on a 3-for-1 basis. Solitario, which sits at $1.26, owns the Bongara zinc project in northern Peru. There, Pasminco of Australia can earn Cominco‘s (clt-t) 65% participating interest by funding this year’s 10,000-metre drilling program and spending US$10 million on future exploration as part of a US$27.5-million work commitment. Drill results were recently tabled for the first 16 holes, totalling 4,912 metres. A resource calculation is due next year.

The merger with Altoro will reduce majority owner Crown Resources‘ (crrs-q) position in Solitario to 42%. Kaiser cautions that Solitario’s price may slump right after the merger, though he regards this as an extra opportunity to bottom-fish.

In the diamond sector, Kaiser says investor interest has been stirred by De Beers Consolidated Mines‘ (dbrsy-q) takeover of Winspear Diamonds and its more recent bid for Australia’s Ashton Mining.

Kaiser believes that Dia Met Minerals (dmm-t), with its 29% stake in the Ekati diamond mine in the Northwest Territories, is a prime candidate to be taken out by De Beers at no less than $30 per share. In three years’ time, Dia Met will be debt-free and receiving 29% of the run-of-mine production.

“De Beers wants Canadian diamonds, and Dia Met is the best way to get a foothold in the Ekati project,” says Kaiser, who does not believe De Beers will go after Aber Diamond (abz-t), at least not in the near term, owing to a restrictive marketing agreement that will provide upscale jeweler Tiffany & Co. (tif-n) with a portion of Aber’s 40% share of Diavik production.

Dia Met’s Class A shares had been trading at around the $17 level in a 52-week range of $22.70-14.25 when it was announced that the company was for sale (after two of its largest shareholders indicated they would entertain offers to sell their 38% stake). Dia Met closed up $4.65 at $21.70 on the news.

Only three juniors fit Kaiser’s model for pure exploration plays in Canada’s Far North: Ashton Mining of Canada (aca-t), Randy Turner’s Diamondex Resources (dsp-v) and perennial favourite GGL Diamond (ggl-v).

While Kaiser is intrigued by Ashton’s recent discovery of a sill-like kimberlite body at the Ric property in Nunavut, he sees only limited upside potential if De Beers is successful in its takeover attempt of Ashton’s parent company. Ashton last traded at 76 in a 1-year range of $1.50-50.

Diamondex, at $1.12 in a 52-week range of $2.60-52, is too expensive to qualify as a bottom-fish. Kaiser, on the other hand, says GGL is cheap at 24, suggesting that its Doyle Lake joint-venture project with De Beers may be the wild card in making Mountain Province Mining‘s (mpv-t) neighbouring Kennady Lake pipe cluster economic. GGL also holds a portfolio of several early-stage prospects elsewhere in the Territories.

Kaiser recommends Mountain Province as a good buy at its current level of 50 in a 52-week range of $2.35-48. “I think it’s only a matter of time before De Beers comes up with the additional tonnage it needs to make Kennady Lake economic.” Mountain Province recently lost its Nasdaq small-cap listing.