Junior mining companies can be an attractive type of investment for those looking for an investment that has the potential to explode in size and exponentially grow one's returns. Investing in these types of stocks takes a certain type of know-how and there are two factors I would like to bring up that are important. "Location" is one big factor in determining whether or not a company could be profitable in the long run. A second important point would be "production" because I need to know if a company is getting ready to bring something to market. It is much more profitable to invest in a company getting ready to bring something to market than one that is doing nothing but exploring.
Chieftain Metals (OTC:CFTMF) is one of these companies that has a combination of a great mineral resource location and is in the final stages of proceeding with development to extract the metals. Its location in the Tulsequah Project in Canada is in the last stages of getting ready to start production, which to should take place in the next couple years. Let's take a look at how the company acquired the project and what it sees in its potential.
Then let's take a look at the investment atmosphere that a person will have to deal with in today's market.
Chieftain Gains Ownership of the Tulsequah Project
Before Chieftain acquired ownership of the property, it was owned by a company called Redcorp. It looked like the company was in full development and production mode by the actions it took prior to running into financial problems. Before everything was shut down, here are the actions that the company took that made it look like it was in a full mining and development program:
- Mineral Expiration Code permits were secured for beginning access roads
- Permit for the construction of a new airstrip
- A permit to convert the facilities to eventual mining production
- Construction for waste storage pads and a mill and plant site
For all general purposes, it looked like the company was ready to move forward and begin production, but then problems set in. Progress came to a halt at the end of 2008, and morphed into a complete shutdown by the end of winter in 2009. It appears that Redcorp could not pay nor protect itself against creditors and the property went into receivership in the spring of 2009.
Chieftain appeared on the scene in 2010, and by the fall of that year a purchase agreement was approved by the powers that be in British Columbia. The company was granted full ownership of the Tulsequah property without being held liable for any debts while property, assets and mineral claims were transferred to the company. This is how Chieftain came into ownership of the property.
What does Chieftain see in the Tulsequah project?
This is a hot piece of mining properly! Not only is it second among properties identified with high-value resources, but it is also considered the piece of land with the highest concentration of precious metals. Compared to similar pieces of land, it is also considered the most undervalued in all of Canada. Just to give you an idea of the potential, more than half of the $192 million NPV metal's deposit at Tulsequah is derived from gold and silver.
The Tulsequah Chief Project
- 47% Gold
- 25% Zinc
- 25% Copper/Lead
- Tonnage 6,447,098
- 5.59% Zn
- 2.30% g/t Au
- 81.38% g/t Ag
- 1.12% Cu1.04% Pb
When the old exploration data was revisited, new multiple targets were identified for expansion beyond what was known in the past. Chieftain believes there are untested extensions to the present sites that may parallel in "potential" newly identified sub-basins already. There is a lot of land left to explore with great potential and all expectations point to adding to resources that are already known.
The potential investment here is incredible for the individual and the company as a whole. The property has a good mixture of metals including: zinc, copper, lead, silver and gold, which will allow it to respond and work depending on how different metal prices move. The land is already well into the "permit process," which is a major part of the development of any mining parcel. It is a good position the company is in right now.
The project that Chieftain is looking at developing has a net present value of $193 million. The stock is presently trading at $1.84 a share. With 15.9 million fully diluted shares, this gives us a "share" market cap of about $29.26 million. This is perplexing. What is happening out there that a company with a project like Tulsequah (fully permitted and close to bringing into operation) has such a discrepancy between market cap and NPV of its project?
I believe there's a combination of things that have created this atmosphere for the whole mining industry, not just Chieftain. It may have started with the years of currency fabrication that we have been experiencing by developed nations and an easy mistrust with the financial sector as a whole because of the 2008 experience. As analysts continue to lower their expectations for corporate profits in the United States and revenue appears to be shrinking for companies, investors are hesitant to put money into the resource sector. Could this be making valuations more conservative?
So as an investor, when can I speculate that dollars will be liberally moving back into the resource sectors? Even though the U.S. economy continues to inch its way to recovery and we are in record market territory, jobs are not manifesting fast enough to create stability and a sense of optimism in the markets like the resource sector. Much of the market performance is attributed to the $85 billion per month federal stimulus and analysts believe this might have already hit a plateau. I believe when we see the feds start cutting the stimulus and the markets have to adjust to that, we might see them balance themselves out and investors possibly focusing on concrete investments again. Concrete investments mean real assets, things like resources. This is when investors will be looking for companies like Chieftain.
In this present atmosphere investment finances and projects like this are tighter and that's a fact. Because of this, Mackie recently decreased its price target on Chieftain Metals from C$7.00 to C$2.90 with a "speculative buy" rating on the company. Given the present atmosphere this is not surprising. I do not believe it is a reflection on Chieftain as much as the present global atmosphere the company has to work in.
It would seem logical that investors would generally be struggling with a project like this for fear that capitalization can only be raised based upon market valuation of the company and not resource evaluation. The Chieftain is looking at raising money by tying its valuation to the NPV of the project and wanting partner financing on these terms. The company is presently in dialogue with a few prospects. For would-be investors, if a deal is cut like the company desires it to be it should have a generous impact to the company's share price. This is something to consider for investing right now.
What are you getting into?
I don't want to sugarcoat the potential for this investment, but I honestly believe that the long-term opportunities here favor the investor. Present global and economic atmospheres are not favoring the resource and development sectors right now. This is important to understand. For this reason, any investor should look at this as a long-term (multi-year) investment and it may take a number of years before that payoff comes. This is definitely a long-term investment for anybody. Chieftain metals is sitting on the best undervalued plots of land in Canada, and almost all the pieces are in place to bring it into production. All we need now is for the economic Outlook to turn in favor of resources again.