January 30, 2015 – Resource Opportunities Monthly Update

January 30, 2015 – Resource Opportunities Monthly Update
Message from Tommy Humphreys
My team is building a real-time, searchable Canadian financial mobile chat application:
chat.ceo.ca
Subscribers are encouraged to use the service during our “beta phase” and we welcome your
feedback during this R&D project that will run through the spring. All of our substantial research
on junior mining companies will be restricted to you, Resource Opportunities subscribers.
Today I want to introduce two of my closest colleagues.
James Kwantes, mining writer at the Vancouver Sun, and editor of the World of Mining blog, has
edited some of my best work over the past few years. Stocks he has featured at World of Mining
included Lumina Copper (bought by First Quantum) and Probe Mines (Goldcorp). His profiles of
Vancouver’s top mining executives, including Ian Telfer and Eira Thomas, are must-reads.
James Fraser provided a lot of the research on this issue. Mr. Fraser is a co-author of the
Mining Stocks Investors Guide (2010) and was formerly with Visual Capitalist before joining
CEO.ca as Mining Analyst in October 2014. James has already proven himself by calling recent
takeouts Cayden and Probe Mines and dedicates his time to researching mining stocks.
I met the two James’s some years ago, and they have since become two of my best and most
trusted mining friends. I am constantly tapping their ideas; so this issue will be introduced and
edited by James Kwantes, and researched and written by James Fraser.
And with that I pass the baton to JK.
---
Resource Opportunities in late January 2015:
by James Kwantes, Mining Editor
I'm not a runner. But confronted with the inevitable gravitational flows of middle age and a sitdown job, I have become one.
In addition to getting re-acquainted with my body, an added benefit has been a fresh
perspective -- seeing things in a different way or noticing new features on an existing landscape.
On a recent morning, the stars were still twinkling and fog hovering as my shoes hit the
pavement. When I arrived at a nearby track, the fog had lifted, leaving only wisps of cloud. Soon
the eastern sky brightened, revealing the outline of Mt. Baker to the southeast. And by the time I
arrived back home, a beautiful day was underway.
The sun also rises on the junior resource sector, particularly the gold space, after a painfully
long and cold winter. This deep freeze has been no mitts-and-toque event -- more like a nuclear
winter where the parka, long johns and balaclava are necessary accessories.
So junior resource investors can be forgiven for casting a wary and cynical eye on the modest
upturn that began late last year and continues, despite pullbacks along the way including a 2%
drop Thursday.
But gold's rise to start 2015 feels more like the resumption of a bull market than another false
start. And early November is looking alot like the bottom, for both gold and the junior miners.
At $1,283 an ounce, the precious metal is trading $100 higher than a month ago and more than
10% higher than the November low. Notably, it has moved higher in the face of a relentlessly
rising U.S. dollar.
And gold's strength has been reflected in rising share prices across the spectrum -- from the
intermediate gold miners and royalty/streaming plays, to the senior producers, to the junior
exploration companies.
Several intermediate gold developers and royalty/streaming companies have seized the
opportunity to raise cash to the tune of almost $800 million, as detailed by Peter Koven in the
Financial Post.
Among those raising money was Resource Opportunities portfolio company Asanko Gold
(AKG.T), which announced a $40-million bought-deal financing for construction of its Ghana
gold mine. Sean Roosen's Osisko Gold Royalties (OR.T), the Osisko Mining spinoff that is
merging with portfolio company Virginia Mines (VGQ.T), also raised $200-million in a boughtdeal financing.
Rising share prices have provided the big boys with stronger M&A currency. Goldcorp, whose
stock has risen sharply -- 45% -- in the past month, recently capitalized with a $526-million
takeover offer for Probe Mines (PRB.V) and its Borden high-grade gold project in northern
Ontario. Probe is chaired by former Barrick boss Jamie Sokalsky.
In a recent Globe and Mail article, Goldcorp chairman Ian Telfer described acquisitions as a
matter of survival for mining companies. He should know -- prudent acquisitions are how
Goldcorp became the world's largest gold mining company by market capitalization.
But Goldcorp lost out last year in its hostile bid for Osisko Mining and its Malartic mine in
Quebec when Yamana and Agnico Eagle partnered on a winning $3.9-billion bid. While
Goldcorp balked at the final price tag, it had been willing to pay up to $3.6 billion for the prize.
That's significant for junior resource investors, because it suggests that Goldcorp is armed with
dry powder and not yet done with acquisitions. Which brings us to the juniors.
It's true that a rising tide floats all boats, so gold juniors as a group have benefited from gold's
recent ascent. But our quest as junior resource investors remains to identify the best of breed.
After all, why navigate Uncle Joe's rusty motorboat, which could spring a leak at any point,
when you can skipper a finely tuned machine that has been maintained rather then languishing
on care and maintenance?
And over the past couple of months, it has indeed been the most "seaworthy" of vessels -including Resource Opportunities portfolio companies Kaminak Gold (KAM.V) and Klondex
Mines (KDX.T) -- that have weathered the junior mining storm and are sailing strong.
Kaminak, the Yukon developer run by diamond finder Eira Thomas, is up 93% since early
November. With a positive PEA in hand (at $1,250 gold) for its Coffee gold project, Kaminak is
working on a feasibility study while drilling to expand the resource. Solid infill drill results have
helped too: intercepts announced earlier this week included 3.95 g/t over 13 metres, 3.09 g/t
over 10 metres and 9.23 g/t over 3 metres.
Klondex, a new Nevada gold producer, is up 55% from November lows and just upped its Fire
Creek resource estimate by 47% (measured and indicated). In 2014, Klondex produced 107,860
gold-equivalent ounces at its Midas and Fire Creek operations (86,239 oz Au, 1.365 million oz
silver) and the company has budgeted for an extensive 2015 drill program that should extend
the mine life.
And Mark O'Dea's Pilot Gold (PLG.T), which is drilling the Kinsley Mountain gold project in
Nevada and has two joint ventures with Teck in Turkey, is 73% higher. Pilot just updated a PEA
on its 40% owned Halilaga showing an after-tax IRR of 43.1%, an NPV of $474 million (7%
discount) and a 1.3-year payback. The improved economics were undoubtedly noticed by Teck,
Pilot’s 60% joint venture partner on the project. Pilot shares have risen 73% since Nov. 5.
Each of the three companies operate in safe, mining-friendly jurisdictions. Recent events that
have befallen O’Dea’s other gold play, True Gold Mining in Burkina Faso, offer a cautionary tale
for junior resource investors on the perils of projects in less stable jurisdictions.True Gold was
building its permitted, fully funded and low-cost Karma gold mine and had secured financing
through a streaming deal with Franco-Nevada and Sandstorm Gold.
Burkina Faso has long been touted as a safe jurisdiction for mining companies, and several
Canadian companies operate mines there, including B2Gold, Iamgold and Endeavour Mining.
But at the end of October, Burkina Faso’s citizens took to the streets in mass protests against
the rule of Blaise Compaoré, who had ruled the west African country for 27 years. Before long,
Compaoré had fled on a helicopter and a military officer seized control of the government.
Then on Jan. 14, True Gold announced it was suspending operations because of a
“demonstration” that damaged company property -- causing damages of $4 to $8 million,
according to a subsequent new release that also announced chairman O’Dea would replace
CEO Dwayne Melrose. The release talked about the “state of affairs” remaining “fluid” and
“competing interests” in nearby villages.
In its latest update, Jan. 29, True Gold confirmed that one of the reasons for the unrest was
concerns about damage to the Ramatoulaye mosque, an important religious centre located
about a kilometre from one of Karma’s open pits. In an age of ISIS that has seen Western
countries rocked by Islamist-motivated terror attacks, news of potential religious tension can
hardly be encouraging for True Gold shareholders.
Owning the stock was always a high-risk proposition, and True Gold’s latest troubles up the
ante and push the “reward” part of the equation further back. The unsettling events are a
reminder of the importance of social licence -- and that Canadian mining companies are merely
visitors in lands where locals are rooted. True Gold shares last traded at 17 cents, near 52-week
lows.
January 30, 2015 – Initiating coverage: Eurasian Minerals (EMX.V)
Eurasian Minerals – The Royalty Generator
By James Fraser, Mining Analyst
There are over 70 projects worldwide in Eurasian’s portfolio
As resource investors, there’s nothing better than being part-owner of in a company with a tight
share structure that makes a discovery. Hence the appeal of mineral prospect generators, which
have exposure to multiple projects and partner-funded drilling.
Often the most valuable asset in a mining project is a royalty. Why? Because they have no
financing risk, and they trade at a premium.
Franco-Nevada (FNV.T), the grand-daddy of the royalty space, has demonstrated how
successful a royalty business can be when management consistently executes on royalty
acquisitions.
Franco has built its portfolio into a $10.8-billion (C$) market cap company, the largest precious
metals royalty play in the world. The stock, trading at a 52-week high, has outperformed both
the gold price and gold equities in the last several years.
The Eurasian business plan
As an exploration geologist with Newmont Mining, Eurasian Minerals (EMX.V) founder and CEO
David Cole helped develop the Carlin trend that was a company maker for Newmont, the
world's No. 2 gold producer. Nevada operations account for about one third of Newmont's global
gold production.
Carlin has also been lucrative for Franco-Nevada, which owns royalties on Barrick's Goldstrike
mine and Newmont's Gold Quarry mine.
As CEO of Eurasian, Cole has leveraged his knowledge of the Carlin trend by purchasing the
Leeville gold royalty on Newmont operations in the northern Carlin trend - one of 70 properties
in Eurasian’s portfolio. And he’s employing a business model that is similar to Franco-Nevada's,
but with a twist.
The prospect generator model has been successful because companies reduce risk by
optioning off properties to partners while keeping a percentage. Eurasian options off projects but
keeps a royalty instead of a percentage. This means no further requirements from Eurasian,
helping to control the burn rate.
Eurasian’s plan is to grow a royalty portfolio organically rather than through acquisitions. The
business model does not provide an overnight home run but offers potential for tremendous
value creation over time as projects are de-risked through exploration, development and
eventually, production.
Not all junior miners with leverage to the gold price have seen their shares respond to rising
gold prices, and Eurasian is an example, with the stock up a relatively modest 32% since early
November.
Eurasian should thrive when the bull market returns. The company meets all the prerequisites
on my checklist when making an investment decision:
●
●
●
●
Great management with a proven track record and skin in the game
A strong balance sheet
A strong shareholder base
Excellent properties with significant upside
As the chart below shows, the large royalty companies have outperformed all other mining
equities since October 30, 2008. Silver Wheaton (852%), Franco Nevada (475%), Royal Gold
(245%), Gold (75%), and the TSX Gold index (21%).
The smaller royalty and streaming plays have also outperformed since the dog days of late
2008: Callinan (266%), Sandstorm (105%), Eurasian (36%), Gold (75%), (TSX V -26.6%)
*EMX only became a cash-flowing royalty company in August 2012.
With over 70 properties worldwide, Eurasian is well diversified and owns assets in various
jurisdictions, with a primary focus on copper and gold. The properties range from grassroots
exploration through to development projects and currently include one producing asset, the
Leeville royalty.
Eurasian’s partners include majors such as Newmont, Rio Tinto, and Freeport-McMoRan who
are not only funding work on projects but providing additional geological expertise. Eurasian
also works with juniors and private companies to move projects forward.
Management:
David Cole, Eurasian’s founder and CEO, has a masters in geology and 25 years of experience
in some of the world’s most prolific gold belts. He was part of Newmont’s exploration team and
contributed to development of the world-class Carlin Trend, Yanacocha, and Minahasa mines.
Members of Eurasian’s management team have extensive work experience with majors and
many have come over from Newmont Mining.
Key management insider holdings
Name - Position
David Cole - CEO
Michael Winn - Chairman
Stephen Enders, COO
David Johnson, chief geologist
Shares held (not including options)
935,251 (1.27%)
618,908 (0.84%)
435,050 (0.59%)
468,415 (0.64%)
One thing to be concerned about is the relatively high salaries of Eurasian management: David
Cole earned $427,772 and Stephen Enders $267,358 in 2013.
Eurasian’s key properties
Leeville Gold Royalty (Carlin Trend)
The Leeville Gold royalty was acquired when Eurasian purchased Bullion Monarch in August
2012 for $48.5 million in a share-based deal. The entire market cap of EMX right now is less
than $70 million.
The royalty consists of a 1% net smelter return over a portion of Newmont Mining’s operations
on the Northern Carlin Trend in Nevada, including the Leeville, Four Corners, Carlin East, and
Turf deposits.
The royalty, paid monthly, generated $1,780,472 over the first 9 months of 2014.
Newmont is in the midst of a $400-million expansion (Turf Vent Shaft project) at its Leeville gold
mine. $218 million has already been spent, with commercial production expected in late 2015.
Newmont has forecast additional production of 100,000-150,000 ounces per year. At this time
Eurasian management tells Resource Opportunities they are not “exactly” sure how much of this
increased production falls on their royalty holdings but that it should increase cash flow.
Akarca (Turkey)
Eurasian’s Akarca project in Turkey is optioned to a private Turkish company (Colakoglu) and is
a district scale gold-silver discovery. The Akarca property deals brings a combination of cash,
gold, work commitments and a 3.5% NSR to Eurasian.
The terms of the deal could bring up to $5 million in cash payments over 3 years, 18,000
ounces of gold if/when reserve estimates hits certain levels, as well as a 3.5% NSR when in
production.
A $500,000 option payment is due on or before March 10, 2015 as part of the agreement. All
indications are that Colakoglu will continue, but if the company pulls out, 100% ownership
reverts back to Eurasian.
In the third quarter of 2014, Colakoglu moved the project forward with 20 drill holes completed,
all hitting oxide gold/silver mineralization. Oxide gold mineralization is easier to mine and
therefore lowers costs. Work on engineering, metallurgical, and environmental studies is
underway.
Serbian royalty (Freeport/Reservoir)
Eurasian holds a royalty on one of the most exciting high-grade mineral discoveries of the last
five years made by partners Freeport (75%) and Reservoir Minerals (25%). Eurasian holds a
0.5% uncapped NSR royalty on RMC’s portion of the “Brestovac” and “Jasikovo” properties in
the Timok district of Serbia.
Reservoir announced a 43-101 compliant resource estimate on the Cukaru Peki deposit (part of
Brestovac) in January 2014 containing 3.8 billion pounds of copper and 3.1 million ounces of
gold. This royalty using a net present value of zero exceeds $20 million and was purchased for
$200,000.
Eurasian also owns a 2% NSR on gold/silver and 1% on all other metals royalty on the
Brestovac West property, located 700m west of the Cukaru discovery.
Freeport and Reservoir announced on Oct. 29 they have 5 drill rigs turning on the Timok project,
comprising multiple projects on and around Cukaru Peki.
The Timok royalty properties add strategic upside potential in an ongoing copper-gold discovery
in one of Europe’s richest copper-gold mineral belts.
ICG Copper (strategic investment)
Eurasian holds 42.3% (39% on a fully diluted basis) of a private company called IG Copper LLC
(IGC). IGC Copper holds a 51% interest (Freeport McMoran holds the remaining 49%) in the
Malmyzh copper-gold porphyry project in Far East Russia.
EMX has invested a total of $7.9 million in IGC to retain this interest, which translates to the
company holding 21.573% of the project. Mr. Cole is chairman of the board of ICG and
represents Eurasian’s interest in this strategic investment.
Malmyzh is a huge district-scale (16*5km) project. A total of 14 targets have been drilled on the
property and all hosted near-surface copper-gold mineralization. To date, over 70,000 meters of
drilling has been completed.
Drilling has been focused on three principal prospects on 200m centers (Central, Freedom, and
Valley)
Drill highlights include (these intercepts start near surface between 14m-44m)
●
●
●
Central: 406.7 m @ 0.52% copper and 0.29 g/t gold (0.69% Cu eq)
Freedom: 111.6 m @ 0.80% copper and 1.01 g/t gold (1.41% Cu eq)
w/in 459.3 m @ 0.36% copper and 0.41 g/t gold (0.61% Cu eq)
Valley: 99.4 m @ 0.69% copper and 0.40 g/t gold (0.93% Cu eq)
w/in 459.2 m @ 0.47% copper and 0.21 g/t gold (0.59% Cu eq)
The advanced-stage Malmyzh project is flying under the radar, but Eurasian management
believe it to be one of the best copper-gold porphyry projects discovered worldwide in the last
couple of years. Note that IG Copper is a private company that does not have to publicly release
drill results/information.
Malmyzh is located 220 kilometres northeast of the Russia-China border at Khabarovsk. The
location suggests a potential acquisition by a Chinese company. Infrastructure at the property is
terrific, with a near high-voltage power line, natural gas pipeline, paved highway, and rail line.
IGC also holds another 650 square kilometers of prospective land that is 150 kilometers
northeast of Malmyzh.
In the latest MD&A, Eurasian reports “Several major international mining companies have
recently expressed interest in Malmyzh, as well as IGC's other projects. This interest not only
results from the quality of IGC's exploration properties, but also the Russian Federation's
continued encouragement to develop mineral resources in their Far East (administrative
regions).”
One Chinese group has completed over $1.6 million in due diligence on the property, according
to Eurasian management.
The sale of its investment in IGC would potentially see a significant amount of cash come into
Eurasian.
Other projects
Eurasian also has interests in 21 exploration properties in North America under its wholly owned
subsidiary Bronco Creek Exploration. The majority of the portfolio is located in the proven
mining districts of Nevada, Arizona and Wyoming. Eight of these projects are currently under
agreements with partners.
Eurasian has three projects - Red Top, Copper Springs, and Copper King - optioned to Desert
Star Resources. All three are located in elephant country for copper, Arizona. Copper King and
Red Top are both located within 10 km of the Resolution copper project, one of the world’s
largest undeveloped copper projects. Drill testing of these projects could occur this year.
Eurasian also has properties in Australia, New Zealand, Norway, Sweden, and Haiti. Projects in
Haiti are partnered with Newmont and have been halted since 2013 as the government
continues to work on reforming the mining law.
A small equity position of 3,523,809 shares and 2,952,381 warrants in Revelo Resources Corp
(RVL.V) gives Eurasian exposure to a portfolio of 16 exploration projects in Chile.
Valuation
Eurasian has 73.4 million shares out and is trading at 95 cents, giving it a market cap of ~$70
million. If you strip out the $7 million in cash EMX is trading at an enterprise value of ~$63
million.
This looks relatively cheap if you break down a few of the assets EMX has.
Leeville gold royalty - In 2013 the royalty paid $3,102,888 to EMX. Based on an 11-year mine
life, the NPV of this asset alone is ~$34 million. Note this is using a 0% discount rate and would
change with an increase/decrease in production and the gold price.
Serbian (Timok) royalty - The 0.5% royalty has a NPV worth ~$20 million on the current 3.8
billion pound copper and 3.1 million ounce gold resource. Again this is calculated using a 0%
discount rate and will change with metal prices and if the deposit increases in size.
These two royalties along have a net present value of let`s say ~$50 million. This means the
market is currently valuing the 70 other odd projects at ~$13 million.
It is tough to put a value on Akarca and Malmyzh ($7.8 million invested) as they do not yet have
resource estimates but at these levels the market is placing little value on either.
Summary
As Eurasian Minerals projects mature, project value will be unlocked in the share price. If a few
more royalties begin cash flowing, the potential for a re-rating of Eurasian share price is high.
Increased cash flow will allow them to acquire more projects and continue to grow organically.
If management is successful in selling Eurasian’s stake in IG Copper, shareholders would see a
significant amount of cash come into the company.
At these levels, I feel the stock offers tremendous value with great upside and little downside.
The stock trades at very thin volume and the ideal entry would be sub-90 cents. If you move the
stock price substantially, you’re doing things wrong.
Many successful investors have a position in Eurasian. On Dec. 12, Paul Stephens of Stephens
Asset Management filed an opening report as a 10% shareholder, and he’s since been adding
to his stake. Stephens currently owns 7,613,647 Eurasian shares, a 10.38% stake.
Stephens is a well-known investor and an early backer of Robert Friedland’s Diamond Fields
International, the African diamond explorer turned discoverer of the Voisey’s Bay nickel mine in
Newfoundland. Mr. Stephens was a leading beneficiary of the company’s $4+ billion sale to Inco
in 1995.
Other shareholders include Sprott, IFC (World Bank), Newmont Mining, Antofagasta, Lundin
Family Trust, and Euro Pacific.
In a tough mining environment, investors should only consider companies that have top
management, great projects and a solid balance sheet. Eurasian has all three of these
requirements, and is an attractive investment at these levels.
Key numbers
Share price: $0.95
Shares outstanding: 73.4 M
Market Cap: $70 M
Cash: $7.14 M (as of Sept 30, 2014)
Phone: 1 (303) 973-8585
www.eurasianminerals.com
Charts of Interest:
SPY Monthly chart: The S&P 500 printed its first full bodied bearish engulfing candlestick since
early 2010. The combination of increased volume/volatility in equities on shorter time frames in
addition to this bearish candlestick offers a cautious outlook for US equities.
Crude Oil Sentiment chart: (from investup.com) Sentiment on crude oil is below where it was
during the 2008/2009 Global Financial Crisis. Meanwhile, we are seeing multiple bullish
divergences in terms of price, momentum, and volume. Friday's 8%+ rally from low to high on
heavy volume offers a promising outlook heading into next week - the $49 level represents the
next significant level of resistance for WTI crude oil.
CDNX Daily chart (TSX-Venture): While the Venture chart certainly isn't pretty we have some
early positive signs in the form of two higher lows. A weekly close above the 710 level would
offer the most bullish sign the beaten down Venture has seen in nearly a year.
Gold Daily chart: Gold found support exactly where it was 'supposed to' and rallied
impressively to close out the week. The double-top at $1307 will be the nut to crack next week.
USD/CAD Monthly: The 'loonie' has become parabolic oversold in recent days. The monthly
chart shows price testing the 50% retracement of the entire 2002-2007 decline and important
support/resistance dating back to 2004 and 2008/2009. USD/CAD is stretched far above the
upper Bollinger Band on the monthly and the Relative Strength Index (RSI-14) has never been
higher. We are likely to see a pullback to the low 1.20s in this currency pair over the coming
weeks.
Brent Crude Futures Timeline Chart (Via Bloomberg briefs): Self explanatory
Editorial Policy, Disclaimer and Disclosure: Resource Opportunities is written, edited and published by Tommy
Humphreys, 1040 Palmerston Ave, West Vancouver, BC, V7S 2J3, Toll Free 1-877-972-3387,
www.ResourceOpportunities.com
Editorial Policy: Companies are selected for presentation in this publication strictly on the merits of the company. No
fee is charged to the company for inclusion.
Currencies: Dollar and $ refer to US dollars, unless stated otherwise or obvious from the context (for example, a
share price on a Canadian exchange).
Disclaimer: James Fraser owns shares in Eurasian Minerals. Readers are advised that the material contained herein
is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or
obtain professional advice. Nothing contained herein constitutes a representation by the publisher, nor a solicitation
for the purchase or sale of securities. The information contained herein is based on sources which the publisher
believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or
summary of the available data. Any opinions expressed are subject to change without notice. The owner, editor,
writer and publisher and their associates are not responsible for errors or omissions. They may from time to time
have a position in the securities of the companies mentioned herein, and may change their positions without notice.
(Any significant positions will be disclosed explicitly.)
Copyright: This publication may not be reproduced in whole or in part, in any form, without the express permission of
the publisher. Permission is given to extract parts of the report for inclusion or review in other publications only if
credit is given, including the name and address of the publisher.