Mundoro, Stornoway among best bets: analyst

The following is the second in a series of articles on stock recommendations by a select group of mining analysts and newsletter writers who monitor the junior mining sector. This week, we hear from Jim Mustard, a Vancouver-based analyst with Haywood Securities, who has worked as an exploration geologist in Canada, Mexico, and various parts of South America.

Following a great run in commodity prices in the past six to nine months, prices have come off the top a bit. Jim Mustard of Haywood Securities says this is only a short-term concern for investors and that he does not expect metal prices to go down the other side of the hill to any great degree. He says investors should be spreading their risk around by diversifying rather than focusing on one or two commodities.

At the top of Mustard’s list, with a target price of $4.50, is Mundoro Mining (MUN-T), a Vancouver-based junior active in China. The company has a deal to earn a 79% interest in the advanced-stage, multi-million-ounce Maoling gold prospect in the northeastern province of Liaoning. “It’s a new story,” says Mustard. “Few people have heard of the name or the project. These guys were fishing in China for close to two and a half years, looking at all manner of projects, and this is the one they selected before the interest in China began to reach a fever pitch.”

Mundoro is promoting Maoling based on an independently calculated gold resource of 1.1 million oz. in the indicated category and 4.4 million oz. in the inferred category, as estimated by AMEC E&C Services. Disseminated gold mineralization hosted by Proterozoic-age phyllite occurs in outcropping 80-to-150-metre-wide zones of silicification and sheeted quartz veins, with associated sulphides. Zone 1 is the more fully explored of the two main deposits identified so far on the 20-sq.-km exploration licence and is at least 700 metres long. The moderately dipping zone extends more than 500 metres downdip. Zone 1 contains an indicated 25.9 million tonnes grading 1.3 grams gold per tonne, equivalent to 1.1 million oz., plus an inferred 62 million tonnes grading 1.1 grams for another 2.3 million oz., based on a cutoff of 0.75 gram gold.

Zone 4 is the lesser-explored of the two deposits and is at least 1,500 metres long and 120 metres wide; it extends 250 metres down dip. The zone contains an inferred 55 million tonnes grading 1.2 grams, or 2.1 million oz. AMEC’s resource estimate for Maoling is based on more than 18,000 metres of previous core drilling in 62 holes (including seven holes completed by Mundoro in 2002), 1,500 metres of underground development, and 13,000 metres of surface trenching.

A Chinese mining entity had previously attempted, and failed, to mine some high-grade structures using underground methods.

Zone 1 is considered an open-pit, heap-leach target. Preliminary metallurgical tests returned gold recoveries of 56% in 10 days and close to 80% in 60 days for column-leach tests. In addition, testing by Mundoro’s Chinese partner indicated a recovery of close to 97%.

The exploration licence for the Maoling property is held by Liaoning Tianli Mining Corp., a Sino-foreign co-operative joint venture with the corporate arm of the Liaoning provincial government. In return for funding all exploration and development activity undertaken by the joint venture, Mundoro is entitled to a 79% share of the profits.

Mundoro raised more than $13 million in an initial public offering in November 2003 at a price of $1.25 per share. Dominick & Dominick Securities and Haywood acted as agents.

China, like a lot of countries, carries risks in terms of the minability of some projects, and there are bureaucratic obstacles related to permitting and ownership. “In some of these locations, there is geopolitical risk,” says Mustard. “In this case, I know that there has been a lot of homework done to vet the legal title.”

He adds: “Our evaluation of this company has a target price of $4.50, based on US$25 per oz. in situ, which discounts the inferred category by 20%, so we didn’t take the entire resource base.”

Mundoro is in the midst of 13,000-metre program of core drilling using three rigs. Fifty holes are planned, including both infill and stepout drilling on the main mineralized zones. Selected highlights from the first eight holes included 174 metres grading 1.21 grams gold, 134 metres of 1.64 grams gold, and 173 metres of 1.4 grams gold. There is a concerted effort to convert much of the inferred resource to the indicated category. Stepout drilling on Zone 1 returned a 21.9-metre section grading 1.06 grams, closely followed by 54 metres of 1.1 grams, demonstrating potential for expansion.

“The drilling clearly confirms that this is a large open-pittable asset,” says Mustard.

Mundoro has 25.5 million shares outstanding and is trading around $2.57 in a 52-week range of $3.20-1.70.

At around $5.50, Mustard sees a lot more upside in Wolfden Resources (WLF-T) and has set a target price of $9.75, based almost exclusively on its wholly owned High Lake volcanogenic massive sulphide project in the High Arctic region of Nunavut. High Lake has been expanded to include the 565,000-oz. Ulu gold deposit, providing a unique opportunity to develop both a base metal and a gold property from the same site. The projects are within 50 km of one another in the Kitikmeot region, 550 km northeast of Yellowknife. The High Lake project is 45 km of tide water, giving access for shipping concentrates. Wolfden is well-financed with $35 million in the bank and 44.8 million shares outstanding.

Last year, the company signed an agreement with Breakwater Resources (BWR-T) to acquire the Nanisivik mill and related infrastructure for the cost of dismantling the facilities and performing the environmental cleanup of affected areas. The acquisition of the Nanisivik mill and its associated shipping facilities provides Wolfden with a competitive advantage for developing High Lake and the satellite Ulu gold deposit.

Says Mustard: “These guys went out there and made a deal to acquire a mill for the cost of moving it from Nanisivik, and now, with all the concern over increased capital costs to put things into production, they won’t have to incur a lot of hard dollar costs to erect a new plant.”

Wolfden is exploring High Lake under an agreement with Teck Cominco (TEK-T), which provides technical assistance in exchange for a right of first refusal on a joint venture or the outright sale. The High Lake discovery was originally made in 1955 by Kennarctic Exploration, which subsequently became Kennecott.

The project sat dormant until Kennecott optioned the project to Aber Resources in 1991. As a result of the economic diamond discovery of Diavik, High Lake was again put on hold until Wolfden purchased a 100% interest in it in 2001.

The project contained a 5.3-million-tonne resource grading 4.05% copper, 2.36% zinc, 1.76 grams gold and 31.7 grams silver in the A/B and D zones. Wolfden has carried out exploration and definition drilling in each of the past three years.

Metallurgical work on the A/B zones shows 95% copper recovery to a 30% copper concentrate, with significant precious metal credits and no contaminants. The A/B zone is an open-pit target. The thickest part of the deposit, along with the highest grades, occurs at surface. The deposit has been drilled to a depth of 350 metres where it is cut off by a granodiorite complex.

In 2003, Wolfden made the promising West zone discovery while following-up on a regional airborne geophysical anomaly, 1.4 km away from the existing A/B and D zones. The large airborne conductor was further refined using ground electromagnetic and gravity surveys. The discovery hole into the anomaly drew 19.4 metres of 3.85% copper, 1.38% zinc, 0.89 gram gold and 104 grams silver. From the same setup, a second hole intercepted just over 10 metres of 6.15% copper, 1.91% zinc, 3.49 grams gold and 142 grams silver.

To date, 37 holes have intersected semi-massive and massive sulphide mineralization in the West zone over a strike length of 400 metres and to depths exceeding 500 metres, where it remains open on every section. The zone is about 12-15 metres thick and near-vertical.

Highlights from last year include:

— 33 metres grading 4.91% copper and 6.01% zinc, plus 2.1 grams gold and 147 grams silver per tonne;

— 46.7 metres grading 5.32% copper, 3.79% zinc, 2.1 grams gold and 118 grams silver; and

— 68.5 metres averaging 2.86% copper, 4.66% zinc, 2 grams gold and 132 grams silver.

Wolfden believes the West zone is likely the largest of the High Lake zones and has significantly increased the size of the total resource of the project. A resource estimate for the West zone, plus initial metallurgical results, are ex0pected to be completed in the first half of 2004.

Ulu

Ulu is a promising gold prospect acquired at the end of the year from Kinross Gold (k-t) for a total of US$3.1 million and 2 million Wolfden units. It contains a geological resource of 1.4 million tonnes grading 12.9 grams between surface and the 360-metre level, based on a cutoff grade of 5 grams and a mining width of at least 1.5 metres. Camp infrastructure is in place, including a decline and 1,762 metres of underground development.

“I think they got Ulu at a bargain, because there appears to be a lot of exploration upside on new zones as well as extensions of the existing resource base,” says Mustard.

Wolfden is spending $5-6 million at High Lake in 2004, where it has already resumed drilling, plus $5 million on exploration at Ulu. The company has begun community consultation and the environmental permitting process, and intends to complete prefeasibility and feasibility studies in 2004 and 2005, leading to production in 2007.

Mustard also likes Wolfden for its diversified portfolio. The junior has several joint-venture deals pertaining to properties in Ontario’s Red Lake camp, where programs are under way. “Any one of these could deliver unexpected discoveries,” says Mustard. Wolfden is also in the process of dewatering the Bachelor Lake mine site for a planned 15,000-metre program of underground drilling. The aim of the program is to define a deposit that would justify a return to production. Wolfden has the right to earn up to a half-interest from Campbell Resources (CCH-T) by spending $3 million on this property.

In addition, Bema Gold (BGO-T) and Wolfden commenced a 17,500-metre program at the Monument Bay project in Manitoba, with three rigs focused on resource expansion in the main Twin Lakes and Twin West zones. Prior to the fall 2003 program, in which another 30 holes were completed, the inferred resource at Monument Bay was 639,377 tonnes grading 20.4 grams, for a total of 418,371 oz. This program, budgeted at $4 million, will be funded 70% by Bema and 30% by Wolfden.

Julietta mine

Bema remains a favourite of Mustard, with a sector outperform recommendation and a target price of $6.25. Bema Gold operates the high-grade Julietta gold mine in Russia, the Petrex mines in South Africa, and shares ownership, with Kinross, in the Refugio open-pit, heap-leach mine in Chile. Refugio, with ore reserves of 3.4 million oz. in 124 million tonnes grading 0.86 gram, is projected to resume operations in the fourth quarter of 2004. The company is trading at $4.75 in a year-long range of $5.60-1.39.

This past year, Bema produced 250,315 oz. at a cash cost of US$262 per oz. and a total cost of US$279. Of the total production, 132,170 oz. or 53% came from Petrex, which Bema acquired in February 2003. Total cash costs at Petrex were US$100 higher than budgeted at US$397 per oz. The increase is blamed on a stronger rand, but cash costs were also affected by a delay in the ramp-up of production from open-pit operations, as well as lower-than-expected grades.

Earnings were dragged down by the high-maintenance Petrex mines, combined with a mark-to-market unrealized derivative loss on gold hedging. Bema piled up a loss of US$30.6 million (or 9 per share) for 2003, compared with a loss of US$3.3 million (2 per share) in the previous year.

Haywood expects 2004 production to amount to 320,000 oz. at a total cash cost of US$313 per oz., based on increased production from Petrex and resumption of operations at Refugio.

“Bema is clearly all about Kupol at this point in time,” Mustard tells The Northern Miner. “In my opinion, Kupol is one of the best undeveloped gold deposits in the world.”

The Kupol project is in the Chukotka Autonomous region of Far Eastern Russia, 940 km northeast of Julietta and 200 km east of the city of Bilibino. Under a definitive agreement with the government of Chukotka, Bema is earning a 75% interest in the project through a series of cash payments and work commitments. Previous exploration by a Russian operator revealed a high-grade epithermal gold-silver vein system that extended 4 km along strike. During Bema’s first year of exploration on the property, it completed 22,256 metres of drilling in 166 holes to outline an indicated 1.8 million oz. of gold and 19 million oz. silver in 2.5 million tonnes grading 22.3 grams gold and 232 grams silver. An additional 4.2 million oz. gold and 56 million oz. silver in 7.1 million tonnes grading 18.4 grams gold and 243 grams silver are inferred. Significant mineralization has been intercepted over 3.1 km of defined strike, extending from surface to a depth of at least 300 metres.

The company plans to fast-track Kupol for 2005 construction. An aggressive infill and exploration program comprising 57,000 metres of core drilling using seven rigs will begin in late May. This year’s program will include the construction of a runway for fixed-wing aircraft, earth works preparation for mine and mill facilities, geotechnical and condemnation drilling, and metallurgical tests.

Bema is leveraged to the rising price of gold through projects such as Refugio and Cerro Casale, says Mustard. Higher gold and copper prices have prompted Placer Dome (PDG-T) to update a 2000 feasibility study of Cerro Casale, a huge open-pit prospect in Chile where measured and indicated resources stand at 1.03 billion tonnes grading 0.69 gram gold and 0.26% copper, equivalent to 23 million oz. gold and 6 billion lbs. copper. “Obviously metal prices have changed, but so too have capital costs, and there may well be a balance there,” Mustard says.

The 2000 feasibility study contemplated daily milling rates of 150,000-170,000 tonnes from which would be produced 975,000 oz. gold and 130,000 tonnes copper annually over an 18-year life, with projected total cash costs of US$203 per oz., net of copper credits. Capital costs were pegged at US$1.4 billion. The original study concluded Cerro Casale was technically feasible assuming life-of-mine prices of US$350 per oz. gold and US95 per lb. copper.

Diamonds North

Turning to diamonds, Mustard believes both Stornoway Diamond (SWY-V), at $2.35, and Diamonds North Resources (DDN-V), at $1.24, to be speculative buys based on the commanding land positions, their respective diamond discoveries, and strong management. He cautions, though, that diamond investment is all about patience, because news is not delivered frequently, and waiting can be frustrating for investors who expect to trade in and out of these issues.

Stornoway holds varying interests in 86,000 sq. km throughout the Melville Peninsula, Coronation Bay and Rankin Inlet areas of Nunavut. “There has been an unprecedented amount of land acquisition in the eastern Arctic area, and Stornoway is clearly in the thick of it, with the lion’s share,” says Mustard. The company recently struck a deal with Majescor Resources (maj-v) to earn a 51% interest in the Portage project in Quebec’s Otish Mountains.

A 2004 budget of $18 million has been approved for aggressive diamond exploration on properties held by Stornoway in Nunavut, including its 70%-owned Aviat project, where two highly diamondiferous kimberlite discoveries, AV-1 and AV-2, have been made. “The AV-1 pipe continues to attract a lot of attention, as do rumours of all kinds of other discoveries up there, principally by BHP Billiton (bhp-n),” says Mustard.

Diamonds North controls more than 28,000 sq. km in Canada’s Far North, including a big land package on Victoria Island in Nunavut. Teck Cominco recently agreed to take up its option to earn an initial 30% interest in the Blue Ice project, which will be expanded to include the adjoining White Ice and Hadley Bay properties at Teck’s discretion.

Diamonds North has also picked-up a foothold in the eastern Arctic play through staking and a joint-venture agreement with BHP Billiton Diamonds.

Owing to its High Arctic location, Victoria Island is going to be a challenging environment in which to operate, says Mustard. Diamonds North has been focused on a 20-km-long corridor of diamond-bearing kimberlite pipes, blows and dykes. The most promising results from last summer’s program came from a composite surface sample taken from three separate sites over a 330-metre strike length of the Sculptor, a sub-vertical kimberlite dyke. In total, 724 microdiamonds were recovered from a 514-kg sample, including a good proportion of larger-size stones. Two of the largest diamonds remained on the +1.7-mm square-mesh screen.

“It’s a challenging exploration target, but certainly the diamond counts are encouraging,” says Mustard.

Imperial Metals (III-T) gets the nod for its new “high-grade” copper-gold discovery on the Northeast zone at the dormant Mt. Polley mine, near Williams Lake, B.C. “This brand-new discovery will have a huge impact on the economics of that operation, considering there is a 20,000-tonne-per-day, fully permitted mill and mine operation that could start up literally overnight,” explains Mustard. “I view Imperial as one of a handful of companies that can take advantage of this current copper market.”

Although Imperial has done well in the market, Mustard still sees upside and has a target price of $7.

Ross River

On the speculative side, Mustard favours Ross River Minerals (RRM-V) for its El Pulpo joint venture in Sinaloa state, Mexico. The company has identified at least five high-grade vein systems and a couple of copper-gold porphyry prospects that show bulk-tonnage potential on the 200-sq.-km property.

It’s very early-stage, but Mustard is highly encouraged by the work to date, which has revealed extensive alteration and mineralization on the largely unexplored project. “I don’t expect any hard dimensional data, such as trenching or drilling, for some months, but at least Ross River is moving the project forward and they could well deliver some good surprises,” says Mustard.

Ross River can earn an initial 50.1% interest in the property from Almaden Minerals (AMM-T) by spending US$2 million on exploration before April 2008 and issuing a total of 425,000 shares. Upon earn-in, Ross can boost its interest to 60% by spending US$1 million more over the next two years. Ross River is trading around 90 in a 52-week range of $1.55-10.

Other speculative picks include:

— Victoria Resource (VIT-V), a 38%-owned subsidiary of Bema that is exploring for gold in Nevada;

— Simon Ridgeway’s Radius Explorations (RDU-V), which is exploring for gold in Guatemala and Nicaragua;

— Cassidy Gold (CDY-V), which is drilling for gold in Guinea, West Africa; and

— Slam Exploration (SXL-V), which is exploring for base metals in the Bathurst camp of New Brunswick in a joint venture with Noranda (nrd-t).