Chieftain Metals Inc. (CFTMF.PK) is a great opportunity to participate in a company with a bankable feasibility study published that states in no uncertain terms the economic viability of a polymetallic project in a safe jurisdiction that has only 14.7 million shares outstanding. In fact, one might rightly conclude that the very light trading and low share price of the company's stock is a result of "too-good-to-be-true" syndrome. It wouldn't be the first time. Chieftain Metals had the good fortune of right place right timing just as the first blush of the financial crisis rendered the former owner of the Tulsequah project, Redcorp Ventures Ltd., insolvent.
After a six month negotiation, Chieftain agreed to purchase the Tulsequah Project out of receivership for $15.5 million on September 29, 2010, and the purchase price was paid in full using proceeds from the Corporation's equity and debt private financing and the issuance of securities. The company raised $17.5 million at $5 a share in its IPO round, and thus it sits today with a total of 14.7 million shares outstanding, a 43-101 compliant feasibility study stipulating a pre-tax NPV of $192.7 million, and post-tax IRR of 14.7%.
Third quarter research published by widely respected Mackie Research Capital Corp. puts a target of $8.50 per share on the company, stating, "Chieftain continues to stand out as a high margin, construction ready, brown-fields polymetallic mining project with a total indicated resource of 6.3 million tonnes grading 6.32% zinc, 1.38% copper, 1.23% lead, 2.64 g/t gold, and 98.1 g/t silver or a zinc equivalent grade of 24.2%." (September 2012).
National Bank Financial, a participant in the IPO financing, puts a target price of $8 per share as of September 25, 2012, and is no less bullish than Mackie on the project. According to that research report, "Chieftain Metals Inc.'s Tulsequah project fits the bill - an advanced-stage, zinc-rich polymetallic VMS deposit with compelling precious metal by-products and robust economics. We contend that Chieftain affords investors exposure to one of a precious few well-advanced, low capex intensity polymetallic development assets. As the company achieves development milestones, notably in respect of residual project permitting efforts and project financing, and transitions toward production, we contend that the merits of the Tulsequah project should become apparent and result in a positive re-rating of Chieftain shares.
While the current zinc market is well supplied and is keeping a lid on both zinc prices and CFB shares, the closure of several large mines in the coming years should afford Chieftain a myriad of benefits, not the least of which should be higher zinc prices. Until then Chieftain plans to leverage the project's material precious metals content, low cash cost potential and concentrates that are free and clear to negotiate off-take agreement to de-risk the financing options for Tulsequah. The recent deal with CAMC Engineering is a by-product of these efforts."
There is no denying that sentiment is colored by ownership. But it is my opinion that we could realistically expect to see significant share price appreciation in Chieftain in 2013 - especially once permits are received.
The Tulsequeh Project
The Tulsequeh project is a former producing mine that has been determined to have significant additional mineable resources. According to the company's feasibility study published in December 2012:
"In 1946, Cominco Ltd. (Cominco) acquired the Tulsequah Chief and Big Bull deposits, and exploration and preproduction work began shortly after in 1947. By 1951, Cominco's two properties, Big Bull and Tulsequah Chief, were mined successfully at an average production rate of 482 t/d (530 tons). Total production was 935,536 tonnes (575,463 tonnes from the Tulsequah Chief mine and 360,073 tonnes from the Big Bull deposit). Average grade of ore was 1.59% Cu, 1.54% Pb, 7.0% Zn, 3.84 g/t Au, and 126.5 g/t Ag. The mines produced 14,765 tons Cu, 11,439 tons Pb, 54,910 tons Zn, 95,340 oz Au, and 3,329,938 oz Ag at a recovery of about 88% Cu, 94% Pb, 87% Zn, 77% Au, and 89% Ag.
Low metal prices in 1957 forced the suspension of mining activity at both of Cominco's mines.
Cominco never reopened the mines, and caretakers lived at the site until the mill equipment was dismantled and sold in the late 1970s. At shutdown, ore reserves at the Tulsequah Chief Mine were estimated at 707,616 tonnes grading 1.3% Cu, 1.6% Pb, 8.0% Zn, 2.40 g/t Au, and 116.5 g/t Ag. Cominco geologists estimated these reserves in 1957. They are based on detailed underground drilling and sampling. The estimates were prepared before the implementation of NI 43-101 and, as such do not conform to the NI 43-101 standards. The historical estimates do not use mineral resource and mineral reserve categories that are in accordance with NI 43-101.
The historical estimates are believed to be reliable as they were based on historical plans at the time the mine was in operation. The historical estimates should not be relied upon."
In 1981, Redfern commenced a reconnaissance exploration joint venture with Comaplex Resources Corp. (Comaplex) in northwestern BC, which ultimately resulted in the staking of a block of claims surrounding the residual claims held by Cominco over the Tulsequah Chief mine.
Geological mapping (1:2500) was completed in 1981, and the property was flown by Dighem and Input EM/Mag in 1982. Redfern then recognized that the deposit had the geological characteristics of a VMS deposit rather than the replacement/shear-hosted affinity previously ascribed to the deposits.
This recognition meant that there was likely to be more ore at the Tulsequah Chief property than previously identified which resulted in Cominco staking additional claims to expand their holdings around the known deposits. Redfern acquired its partner's interest in their JV Tulsequah Chief claims and initiated discussions with Cominco concerning joint exploration. Eventually, an agreement was signed whereby Redfern could acquire a 40% interest in the amalgamated claims by funding the first $3M of renewed exploration.
Work started in 1987 with surface diamond drill holes and progressed to drilling from the rehabilitated underground workings in 1988. By 1989, Redfern had earned its interest and the subsequent ongoing exploration was jointly funded. Extensive exploration programs continued each year on this basis until 1991. This work ultimately included an extension of the historic underground workings in 1989, 1990 and 2004 to develop new drill platforms.
In 1992, Redfern negotiated and exercised an option to purchase Cominco's interest in the property. Redfern, as sole owner, proceeded with a comprehensive work program in 1993. The large program included an initial evaluation of the stratigraphy between the Tulsequah Chief and Big Bull, as well as diamond drilling of the Big Bull property, which eventually led towards feasibility assessment and permitting decisions.
In 1993, Redfern received a positive prefeasibility study in 1994, they initiated full feasibility studies and an application was made to obtain a Mine Development Certificate under the prevailing provincial and federal environmental assessment regulations. Due to delays associated with permitting and subsequent litigation, including a legal challenge launched by the Taku River Tlingit First Nation, technical geological work during the period between 1994 and 2003 was limited to the collection of a bulk sample from the 5200 level.
Technical work resumed in 2003, after a Project Approval Certificate was granted by the Government of British Columbia, and an amended screening level environmental assessment was authorized by the federal government in July of 2005.
The 2003 program focused on the search for new deposits at the same stratigraphic level and within the same hydrothermal system as the Tulsequah Chief deposit. This program successfully discovered a new mineralized zone stratigraphically above the Tulsequah Chief, which remains open along strike to the west.
In 2006, Redcorp commissioned Wardrop Engineering to carry out a feasibility study for the Tulsequah Chief deposit. Wardrop estimated that the Tulsequah Chief deposit had probable mineral reserves of 5,378,788 tonnes grading 6.33% Zn, 1.40 % Cu, 1.20 % Pb, 2.59 g/t Au and 186 g/t Ag. Mineral reserve tonnages and grades were derived by performing detailed mine planning based on an orebody represented by a geological block model. In all, twelve solids were developed from the drill data. The reserve was derived from a mineral resource determined at an NSR cut-off of US$94/tonne of ore. Subsequent detailed mine planning indicated that the orebody could be economically mined at an NSR cut-off of US$71/tonne of ore. The NSR was based to the following metal prices, gold US$550/oz, silver US$8.95/oz, copper US$1.85/lb lead US$0.42/lb and zinc US$0.92/lb. Mineral reserves were assumed to be sufficient to support mining operation for eight years at an annual production rate of 2,000 t/d. The study concluded that the Tulsequah Chief could be developed with an initial capital cost of $201M and that the project had a pre-tax NPV of $160 M and an IRR of 30% based on an 8% discount rate. The Wardrop mineral reserves estimates were prepared in accordance with NI 43-101 and used categories for mineral reserves as stipulated in NI 43-101. The estimates are believed to be reliable.
SRK has not done sufficient work to classify the mineral reserves as current mineral reserves and Chieftain is not treating the historical mineral reserves as current mineral reserves.
Subsequent to the completion of the feasibility study and technical report on the Tulsequah Chief, completed and filed by Redcorp in 2007, Redfern, the 100% owned subsidiary of Redcorp, undertook a comprehensive mine permitting and development program at the Tulsequah property. This work was suspended by Redcorp in December 2008 on a temporary basis an later extended into an indefinite shutdown in February 2009, followed by Redcorp's filing for creditor protection under CCAA in March 2009. Attempts to restructure Redcorp's debt or obtain a project partner were unsuccessful and in late May 2009, the Court appointed a Receiver over the assets of Redcorp and Redfern.
Prior to the shutdown, Redfern had secured a number of key permits for the development, including Mineral Exploration Code permits for initial access roads from a barge landing on the Taku River to the Tulsequah Chief mine site and construction of a new airstrip on the east side of the Tulsequah River. A Mines Act permit was obtained to convert these facilities for eventual mine production purposes and to allow construction of roads connecting the new airstrip to the Tulsequah Chief site and to the barge landing. An amendment to the Mines Act permit further allowed construction of waste storage pads and preliminary mill and plant site foundation preparations (partially completed). Other permits acquired by Redfern included a license to cut from the BC Ministry of Forests, a construction discharge permit from the BC Ministry of Environment and a number of stream crossing and bridge authorizations from Fisheries and Oceans Canada, Transport Canada and BC Ministry of Environment.
No additional resource drilling was conducted by Redfern in the time and no mine development works were initiated.
In January 2010, Chieftain negotiated a Purchase Agreement with the Receiver and the Trustee in the bankruptcy of Redcorp and Redfern to purchase the 13 mineral claims, 25 crown-granted claims and four fee-simple lots comprising the Tulsequah project plus some miscellaneous equipment assets including a water treatment plant. That agreement was subsequently amended to include agreements reached with the holders of registered lien claims on the property assets subject of the purchase. On September 22, 2010, the purchase was approved by the British Columbia Supreme Court and a Vesting Order issued to Chieftain granting full unencumbered ownership of the Tulsequah property, free of any liens or debts. Title to all of the real property assets and the mineral claims were transferred to Chieftain on September 29, 2010.
Current 43-101 Reserve and Resources
In 2011, Chieftain carried out a detailed drilling program focused at upgrading some of the inferred mineral resource to the indicated category. In total, 10 surface holes and 50 underground diamond drill holes totaling 22,630 m were completed. Overall, the drilling program was successful in upgrading some of the inferred resources to the indicated category.
Underground mineral reserves are reported at a cut-off of US$125. Cut-off grades are based on a price of US$1,350/oz of gold, US$22/oz for silver, US$1.10/lb for zinc and lead and US$3.10 for copper and recoveries of 81.8% for gold, 79.5 for silver, 87.8 for copper, 44.5% for lead and 88% for zinc. The Probable Mineral Reserve then is currently Probable 6,447,098 tonnes grading 1.13% copper, 1.04% lead, 5.59% zinc, 2.30 grams per tonne gold, and 81.39 grams per tonne of silver.
Streaming Contract with Royal Gold
In December 2011, Chieftain entered into a gold and silver purchase transaction with Royal Gold to sell a portion of the precious metals expected to be produced at the Tulsequah Chief mine. Chieftain received a US$10 M up-front payment upon the signing of the contract, and will receive an additional US$50 million for the project build (upon certain conditions being met) that will be prorated during the development of the project.
The advance payments and future proceeds will allow Royal Gold to purchase, upon production of the Tulsequah Chief mine:
• 12.50% of payable gold at US$450/oz for the first 48,000 ounces delivered, decreasing to 7.50% thereafter at US$500/oz;
• 22.50% of payable silver at US$5.00/oz up to 2.8 million ounces, decreasing to 9.75% thereafter at US$7.50/oz.
This contract has been included in the economic analysis of the project. Total silver and gold ounces expected to be sold to Royal Gold Inc. under this contract total 2.7 million ounces and 49,500 ounces respectively.
Chieftain's products include copper, zinc, lead, gold and silver. Besides providing a degree of risk mitigation through diversification, the potential for the company to benefit from rises in metals prices widely anticipated in the years to come suggests that the company is severely undervalued.
The U.S. inability to curb its spending has forced it into a position where it must continue to print with abandon even while being the lead order for 90% of its debt. Despite the interpretation by the uniformly clueless mainstream financial media, that does not indicate a strong U.S. dollar or economy. Quite contrary - it underscores just how desperate and dire the American situation is. Sovereign reserves are accumulating gold, especially in Russia and China, and the day will soon arrive where the U.S. dollar must reflect the insupportable debt load that it represents. This is nothing short of pent-up demand for precious metals, which is over half of Chieftain's production revenue.
The zinc market is experiencing a perfect storm of rising demand against diminishing supply, and that is sure to result in higher zinc prices as Chieftain advances toward production. According to a Bloomberg article published February 11, 2013:
"Zinc rose in London, extending a fourth weekly gain, after prices at this year's high prompted buying by traders who study technical charts.
The metal used to protect steel from corrosion reached $2,218 a metric ton on the London Metal Exchange on Feb. 8. That was the highest price since Jan. 26, 2012. Zinc is up 6.2 percent this year on the LME, the second-biggest advance after nickel among the six main metals, even as stockpiles tracked by the exchange remain near the highest level since 1994.
'Technical buying was triggered above $2,190,' Andrew Silver, a broker at Triland Metals Ltd. in London, said today by e-mail. 'Fundamentals are poor.'
Zinc for delivery in three months climbed 0.2 percent to $2,209 a ton by 10:16 a.m. on the LME. Investors bought and sold 1,605 contracts, about 6 percent of the three-month average. Copper for delivery in three months slipped 0.1 percent to $8,283 a ton and the metal for delivery in March was little changed at $3.7615 a pound on the Comex in New York.
Financial markets in China, the world's biggest zinc and copper user, are shut this week for the Lunar New Year holiday. Buying and selling of LME copper contracts was about 2 percent of the three-month average."
While there is a general sense that prices for base metals remains weak in the near term, that will likely change if economic growth can be revived in Europe and the United States.
1. Capital Markets Risk: There is the possibility that the company will be unable to secure capital on terms favorable to it or its existing shareholders. It is possible that terms of any debt and/or equity deal could negatively impact the economics of the project and render it unviable.
2. Commodity Price Risk: There exists the potential that prices for base metals may deteriorate to the point where aspects of the company's existing feasibility study are invalid, and that have the potential to render the project uneconomic.
3. Execution Risk: There is the potential that the execution of the company's business plan may encounter unforeseen problems that could delay the onset of production, or that could limit the company's ability to extract and produce metals concentrates profitably.
4. Human Resource Risk: There exists the potential that the company will not be able to attract and retain senior leadership consistent with the company's requirements to build and operate a mine in a remote section of northern B.C.
5. Liquidity Risk: Chieftain trades very lightly and so building a large position may result in an inability to exit quickly without impacting the share price negatively, which could result in substantial losses.
Chieftain's management team has demonstrated the ability to raise capital and move the Tulsequeh project forward in an aggressive manner despite soft capital markets and a remote location. They have solved all issues relative to First Nations participation and approval of the project, and have attracted financial and industrial partners with significant capital resources. It is my expectation that the company will continue to add resources to the current inventory, build the mine more or less on time and within budget, and realize cash flows more or less in line with those stipulated in the company's feasibility study.