Investment Commentary — Best bets for 2002, Part 2

The Northern Miner asked five market watchers of the junior mining and exploration sector to offer recommendations and opinions for the year ahead. In the previous issue, we heard from John Kaiser of the Kaiser Bottom-Fishing Report, Brent Cook of Global Resource Investments, and Art Ettlinger of Yorkton Securities. This week, we offer commentary from Robert Bishop, publisher of the Gold Mining Stock Report, and James Mustard of Haywood Securities.

– Robert Bishop — Heading into 2002, Bishop is well-disposed toward diamond stocks and gold.

“Those viewing gold from the perspective of the past few years are in for an imminent reality check,” he writes. “Gold’s history of disappointment means that most of the market won’t give gold any respect until it has moved much higher — to, say, US$350 per oz. or so — but as those who have been paying attention during the past year know, the easy money in gold began to be made in 2001.”

Bishop feels every portfolio should have some Aber Diamond (ABZ-T) or Ashton. The former is one of the few major players left in the wake of recent acquisitions and consolidations. Aber holds a 40% stake in the Diavik diamond mine project in the Lac de Gras area of the Northwest Territories. The mine is to come on-stream in April 2003 and produce an average of 6 million carats per year over a life span of 20 years.

Says Bishop: “The extremely conservative assumptions that are built into Aber make me think it’s a stock one can buy and hold for the next 12-18 months, and probably gain 50-100% in 2002, up from the 43% gain it posted last year.”

He considers Ashton to be much more speculative though concedes it may have more upside.

Although Bishop recommended Majescor Resources (MAJ-M) at half its current price in December 2001, he still likes it at $1.20. The Quebec junior is poised to begin drilling on three separate diamond properties in the months ahead. “Majescor is likely to remain the proxy stock for the Quebec diamond play,” the analyst says.

With a diverse portfolio of projects covering tantalum, diamonds and gold, and a management lineage that derives from Aber, Navigator Exploration (NVR-V) is among Bishop’s top picks. He speculates that the company’s 51%-optioned Thor Lake tantalum play may become a coveted asset, based on positive metallurgical test results. Navigator also has exposure to diamond projects in the north Slave Craton of Nunavut, the Lac de Gras area of the Northwest Territories and the James Bay Lowlands of northern Ontario. In addition, the company holds ground at the northern end of the Hope Bay gold belt in Nunavut.

Navigator is trading at 49 and has 22.7 million shares outstanding.

Almaden Resources (AMH-V), “one of the best project generators in the junior company universe,” is recommended at 30. The junior is set to merge with sister company Fairfield Minerals (FFD-T) in an arrangement whereby shareholders of Almaden will receive 0.77 of a share in the new amalgamated company in exchange for each share held, whereas Fairfield shareholders will receive a share in the new company on a 1-for-1 basis. The merged company will retain Fairfield’s listing on the Toronto Stock Exchange.

In the next six months, Almaden will be involved in five drill programs on commodities, including diamonds, gold, copper-gold and platinum-palladium. The highest-profile project of the group is the Caballo Blanco copper-gold porphyry prospect along the Pan American highway, near Veracruz, Mexico. Noranda can earn a 75% interest in the project by making paying a total of US$2 million and completing a feasibility study in seven years. A drill program should begin in the first quarter.

Bishop considers Inca Pacific (IP-V), at 19, not only a bet on higher copper prices but a bet that partner Antofagasta will elect to increase its ownership of the Magistral copper porphyry-skarn project in Peru to 65% by electing to deliver a bankable feasibility within two years.

Drilling by London-based Antofagasta in 1999 and 2000 outlined a geological resource of 190 million tonnes grading 0.83% copper and 0.06% molybdenum. Antofagasta spent a further US$3 million last summer completing 16,000 metres in 49 additional drill holes. In addition, metallurgical, engineering and environmental studies were performed in an attempt to advance the project to the prefeasibility stage by the end of 2001. Antofagasta boosted its interest to 51% by completing last year’s program.

Also recommended is Francisco Gold (FGX-V), which Bishop says “represents one of the safest junior golds, buttressed by the El Sauzal gold project in Mexico’s Chihuahua state, a $32-million treasury, and a developing gold exploration play in Guatemala.”

Francisco holds 100% of El Sauzal, where feasibility work has outlined a potentially open-pit resource of 1.6 million oz. in a proven and probable oxide reserve of 16.3 million tonnes grading 3.47 grams. The final feasibility study, due by the end of the first quarter, is based on a 200,000-oz.-per-year operating plan, with a mine life of at least 7.5 years.

Francisco is set to resume exploration drilling on its wholly owned Marlin gold-silver project in western Guatemala, where, to date, 46 core holes have delineated a near-surface, oxidized, high-grade mineralized horizon that extends over 450 metres in length and 250 metres in width.

Francisco is trading at $6.75, with 16.3 million shares outstanding.

– James Mustard — The Haywood Securities mining analyst sees a strong growth opportunity for base metals, given the current historically low interest rates, which he believes will spur investors and expand consumption.

“Longer term, I am very positive for just about every commodity,” he says. “It’s gratifying to see the recent rise in gold … and I think there is a building pattern that can sustain itself. Gold is clearly poised for some possible significant gains should the U.S. dollar begin to erode.”

Ashton Mining of Canada is Mustard’s top diamond pick. “It’s the best-managed company in the diamond exploration business, it has a depth of experience that nobody else can match, and it has three high-profile projects that will see extensive work in the next 12 months.”

In addition to the northern Slave Craton region of Nunavut and the Otish Mountains area of north-central Quebec (where it has made significant diamond-bearing kimberlite finds), Ashton has been exploring for diamonds in Alberta. Mustard likes the potential of the Alberta play and is encouraged by last summer’s mini-bulk sample results from the K252 kimberlite, which yielded the most promising results of the 36 kimberlites discovered to date in the Buffalo Hills region.

A 22.8-tonne drill sample of kimberlite, collected in March 2001 from K252, returned a 12.54-carat parcel of diamonds greater than 0.8 mm in size, giving the sample a grade of 0.55 carat per tonne. The largest recovered diamond was a 0.94-carat colourless composite crystal.

Ashton and Alberta Energy (AEC-T) each hold a 45% interest in the Buffalo Hills project. Pure Gold Minerals (PUG-T) owns the remainder. Further exploration in the Alberta region is planned, along with additional drilling on the K252 kimberlite.

Stornoway

At 75, Mustard likes the chances of the Northair Group’s Stornoway Ventures (SWV-V), which has been transformed into a diamond exploration vehicle. The junior has been aggressive in assembling a land position along the ever-expanding fringes of the emerging Coronation Gulf district in the north Slave Craton of Nunavut.

“I truly believe management is capable of putting together a diamond exploration team that will be second in line to Ashton in terms of its depth,” says Mustard. Stornoway is a peripheral player in the Coronation Gulf area, but Mustard expects the company will continue to expand their presence and potentially become a dominant player in that area.

Stornoway has beefed up its mana
gement by adding Eira Thomas and Catherine McLeod-Seltzer to the board of directors.

Majescor Resources is regarded as the Quebec diamond flagship, with a strategic land position in the Otish Mountains, 275 km northeast of Chibougamau, and in the Wemindji area, 40 km east of James Bay. Mustard expects BHP Billiton (BHP-N) to begin drilling on the Portage property, which is down-ice from Ashton’s Renard kimberlitic discoveries and under option from Majescor. There are also several kimberlite targets defined on Majescor’s wholly owned Wemindji property, 400 km west of the Otish Mountains, that are slated to be drill-tested in February. Majescor is well-funded with close to $4 million in its kitty.

Canabrava

Mustard also likes the management experience of both Canabrava Diamond (CNB-V) and Navigator Exploration, and their ability to diversify into several areas, based on good science. “They are not necessarily chasing area plays,” he says.

Canabrava picked-up an option to earn a half interest from Majescor Resources on the Mistassini package of claims, west of the Beaver Lake kimberlite in the Otish Mountains. Canabrava optioned the Quebec property based on promising early-stage indicator mineral till-sampling results. An airborne geophysical survey over the property began in mid-December 2001 and Canabrava could be in a position to start drilling by March of this year.

The company is drill-testing a series of 25 high-priority kimberlite targets on the Groundhog project in northern Ontario. The project comprises most of the area covered by the former KAP project and parts of the former Rocky Island Lake project. At the outset of the current program, ownership of the project was shared equally by Canabrava and Paramount Ventures & Finance (PVF-V). The latter has elected not to fund its share of the current program and will be diluted down by 10%. Kennecott Canada Exploration retains a 1.5% gross overriding royalty on any new discovery made prior to June 30, 2003.

Plans are also under way for Canabrava to begin drilling on the Ontario joint venture with Kennecott in February. Last summer, crews discovered numerous kimberlitic boulders, some as large as 2 by 2.5 metres. The boulder trains correlate with a series of kimberlite indicator mineral dispersion fans, which were discovered by Canabrava and refined by Kennecott. The indicator minerals include sub-calcic G10 garnets and favourable chromite and chrome diopside compositions. Field mapping of a kimberlite outcrop discovered at the head of one boulder train revealed it to be dyke-like. No microdiamonds were recovered from a 132-kg sample taken from this outcrop. (A micro is here defined as measuring less than 0.55 mm in at least one dimension.) A 5,400-line-km airborne geophysical survey was completed in September 2001, and ground follow-up was done over several promising anomalies.

The Ontario joint venture is held 75% by Canabrava, the operator, and 25% by Paramount. This year, Kennecott will spend $500,000 exploring the joint-venture property, and the company retains the right to earn a 60% interest in the project by spending $25 million before June 2006, or by making a production decision. Canabrava closed a $740,000 private placement financing priced at 25 per share at year-end and is now trading at 40. Southwestern Resources (SWG-T) owns a 42.6% stake in Canabrava.

At 50, Navigator has several diamond exploration bets, along with a 51% option on the Thor Lake tantalum project in the Northwest Territories. “The [company] had gone sideways lately into tantalum properties but seems to have climbed back on to the diamond scene with several deals in the Coronation Gulf district,” Mustard tells The Northern Miner.

Until recently, Rhonda (RDM-V) had been trading in the 40 range on the basis of its core position in the heart of the Coronation Gulf district in the northern Slave Craton. De Beers is earning a 70% interest in the 10-sq.-km Knife Lake property, 80 km south of Coronation Gulf. The Canadian exploration division of De Beers discovered the multi-phase Knife pipe in 2000.

A 397-kg sample of drill core returned 208 microdiamonds and nine macros. Delineation drilling has confirmed that the pipe’s dimensions are 390 by 230 metres, equivalent to a surface area of about 6 hectares. De Beers collected 9 tonnes of kimberlite from six holes drilled into the pipe in spring 2001 for macrodiamond analysis. Results have been pending for some time now.

Rhonda also holds a 100% interest in 325 sq. km of adjoining ground, which it has held for many years and which it previously explored for base metals. Results are awaited from more than 500 till samples taken this past summer.

Fort Knox

Fort Knox Gold Resources (FNX-T), at around $2, remains one of Mustard’s top picks. The company recently completed an $8-million financing at a buck. Fort Knox has done a deal with Inco (N-T) on five core properties along the margin of the Sudbury Basin, within 50 km of Sudbury. The properties all consist of partially abandoned mines, or areas of limited or “orphaned” resources. Mustard says Inco has decided the resources are either too small to mine or else they’re the remnant of previously mined areas. Fort Knox intends to focus on these areas, conduct some definition drilling, and then engage Dynatec (DY-T), as a 25% partner, to mine these deposits.

According to Mustard, the grades of the current targets tend to be high because they are peripheral to what was historically mined as higher-grade nickel. Fort Knox will focus on the potential for platinum-group-metal (PGM) mineralization, which has so far been ignored.

Fort Knox can acquire a 100% interest in the properties, plus the right to all surface land and on-site facilities, by spending $30 million before the end of 2005. In addition, Inco’s stake in the junior will be boosted to 19.9%.

Inco can re-acquire a 51% interest in any deposit that contains mineral resources (based on then-current metal prices) of at least 600 million lbs. nickel by spending 200% of Fort Knox’s expenses on the new deposit and by advancing it to production.

Fort Knox is set to embark on a $14-million program over the next 16 months. The work will consist of diamond drilling and geological and geophysical surveys.

“They are well-funded, well-managed and in a very good mining camp,” says Mustard, referring to the Toronto-based junior.

Trading around 60, Canadian Royalties (CZZ-V) is rated a speculative buy because of its “key land position in a world-class camp.”

The company effectively controls a land package covering 100 km of favourable ultramafic rocks along the South Raglan trend in northern Quebec, where exploration crews have demonstrated the potential for widespread, previously unrecognized PGM mineralization.

States Mustard: “Many of the historical showings have grades that are similar to [Falconbridge’s] Raglan mine, and there is a low-grade copper-nickel resource on the Expo-Ungava property, in which Canadian Royalties is earning an 80% interest.”

He adds that the south trend is woefully underexplored and has a great number of geological and geophysical targets that clearly warrant thorough exploration.

The downside, he points out, is that Canadian Royalties is under-funded.

Santoy

Another Mustard fave is Santoy Resources (SAN-V), which holds interests in several nickel-copper PGM properties. “It’s a bit of a sleeper in that it doesn’t get a lot of publicity,” the analyst states. In September, Santoy and partner Fairfield Minerals optioned the Tropico property to Sumitomo Metal Mining, which can earn an initial 51% interest by spending US$3 million before March 31, 2003. Sumitomo can boost its interest to 70% by funding a bankable feasibility study and arranging all production financing. The property is currently held 60-40 by Santoy and Fairfield, and the latter is about to merge with sister company Almaden Resources.

The Tropico prope
rty is north of Mazatlan in Mexico’s Sinaloa state. It was originally acquired by Fairfield from BHP after the major had discovered several copper oxide occurrences with grades exceeding 1%. BHP recognized the potential for PGMs within the mafic intrusive complex, and sampling results revealed up to 1 gram combined palladium, platinum and gold per tonne.

Santoy explored the property in 2000 through prospecting, geochemical sampling, geological mapping and 30 line km of ground geophysics. Several anomalous areas were defined over an 8-km-long eastern portion of the mafic intrusion complex. “Clearly, it’s a large surface expression of a geological environment,” says Mustard. “I like the property, based on the chemistry and geology.”

Follow-up trenching on the Maricela zone yielded encouraging values, including 160 metres grading 0.53% copper plus 0.35 gram palladium, 0.23 gram platinum and 0.17 gram gold per tonne. A higher-grade, 16-metre section from this trench averaged 1.33% copper, 0.95 gram palladium, 0.57 gram platinum and 0.36 gram gold. Sumitomo completed 11 drill holes before Christmas 2001, with results pending.

Santoy is trading at 26 and has 9.3 million shares outstanding.

Twin Mining (TWG-T) gets the nod at around 70. The junior is exploring for diamonds on the Brodeur Peninsula of Baffin Island in Nunavut, while awaiting microdiamond results from last summer’s drilling on the Freightrain and Cargo 1 kimberlites. In addition, the company took six 50-tonne mini-bulk test samples from surface pits on Freightrain.

“Looking at the consistency of the large stones that are coming out of the Brodeur Peninsula, one has to be impressed,” says Mustard.

A parcel of 86 stones, exceeding 1 mm and weighing 3.64 carats, was recovered from an 18.4-tonne mini-bulk surface collected last spring from the Freightrain kimberlite. The sample has an implied grade of 0.198 carat per tonne. The largest stone weighed 1 carat and measured 6.98 by 5.64 by 3.6 mm.

More recent results from the new Cargo 1 pipe discovery were reported in December 2001. A 5-metre section of drill core weighing 18.6 kg returned seven micros and four macros. The largest stone, described as a fragment, measured 2.05 by 1.48 by 1.12 mm.

The pending results from the 300-tonne test sample, as well as some 3 tonnes of core from the Freightrain, will have to demonstrate that the large stone counts are reproducible, cautions Mustard. Twin Mining has about 70 million shares outstanding.

Northern Dynasty

Hunter-Dickinson-led Northern Dynasty Minerals (NDM-V), which trades at 55, is embarking on the newly acquired Pebble porphyry copper-gold project in Alaska. Cominco discovered the deposit, some 380 km southeast of Anchorage, in the late 1980s and outlined an inferred resource of 1 billion tonnes grading 0.34 gram gold per tonne and 0.3% copper, based on 110 drill holes. The deposit’s higher-grade core contains 54 million tonnes at 0.54% copper and 0.46 gram gold.

Northern Dynasty has acquired an 80% option on the Pebble project from the Hunter-Dickinson (HD) group and can buy the 36 claims covering the Pebble deposit by paying Teck Cominco (TEK-T) US$10 million in cash or stock by Nov. 30, 2003. As well, it can purchase the 20% Hunter-Dickinson interest using company shares at its independently appraised value.

The HD group staked additional ground southwest of the original claims and completed geochemical and geophysical surveys that have defined large coincidental anomalous target areas over the 258-sq.-km project.

Mustard expects the HD group will promote Northern Dynasty more heavily prior to summer drilling. The company has $3 million in working capital and 7.2 million shares outstanding.

Trading at 65, Rubicon Minerals (RMX-V) is all about Red Lake. The Vancouver-based junior “has put together a key strategic land position in what is Canada’s premier gold mining district,” says Mustard, referring to the famous Ontario camp. He considers Rubicon one of three primary players that hold any land of significance, the others being Goldcorp and Placer.

Rubicon has acquired a key property, called McFinley, that Mustard says has been long-sought by many. The property covers 4 km of strike length potential along the East Bay trend, 5.4 km northwest of the producing Campbell and Red Lake mines. It is immediately adjacent to, and on strike with, Goldcorp’s Abino gold property.

Rubicon can acquire a 100% interest in McFinley by initially paying $800,000, issuing 260,000 shares, and spending US$1.3 million by Sept. 30, 2006. The company holds more than 300 sq. km in the Red Lake camp and is engaged in work programs with AngloGold (AU-N) on several properties. The South African major is in the second year of an option agreement in which it is required to spend $5.1 million over five years to earn a 60% interest in certain designated properties. There are currently 23.3 million shares outstanding in Rubicon.

Major General

Mustard considers Major General Resources (MGJ-V), trading at 13, an unrecognized junior that holds a large number of exploration properties covering a broad range of commodities in Canada. It also has a significant portfolio of key diamond interests, including the Victoria diamond play in Nunavut. BHP Billiton has the right to earn a 51% interest in the Homerun project, and Mustard says the major is expected to drill some holes there this summer. Major General itself has a dozen targets it would like to drill on two other properties on Victoria Island, subject to funding. BHP acquired the Victoria Island option through the takeover of Dia Met Minerals.

BHP also has an option to earn an initial 35% interest in the Misty Lake diamond property, immediately south of the Gahcho Kue (Kennady Lake) De Beers-Mountain Province Diamonds joint venture in the Northwest Territories. BHP completed a helicopter-borne electromagnetic survey over the property in the fall.

Misty Lake is currently held 60% by SouthernEra Resources (SUF-T), 24% by Major General and 16% by the International Diamond Syndicate.

Elsewhere, Anglo American (AAUK-Q) affiliate Hudson Bay Exploration & Development is preparing to drill 3,000 metres on a base metal target at Major General’s Green Bay property in Newfoundland. The junior also holds an interest in the Sarah Lake property, which is part of the South Voisey’s Bay nickel project, where Falconbridge (FL-T) is planning a major exploration campaign this summer. Major General has 42.1 million shares outstanding.

Mustard also likes St. John’s-based Altius Minerals (ALS-V) and its extensive portfolio of early-stage properties in Newfoundland and Labrador. “I like the management and structure of the company, and their focus on funding their own exploration by joint-venturing projects at an early stage.” Mustard believes the company is still reasonably priced at $1, given their exposure to a lot of exploration activity that is being funded by majors.