(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)
Recent Wellgreen Platinum (OTCQX:WGPLF) (WG.V) news included the discovery of a higher grade zone of mineralization typically ranging between 3 - 6 g/t Platinum Eq. - with continuity over at least 600 meters in strike length. We don't believe the market yet appreciates the significance of this new discovery nor the blue-sky upside that is suggested in these deeper "Priority Target" zones.
- Strikes in South Africa continue to shut-down almost ½ of the world's platinum production.
- Some Platinum miners, including Implats - the world's second largest - may be out of supplies by the end of March.
- Two reasonable project analogs for comparing Wellgreen's smaller capex start-up and full-scale production can be found in Kevitsa and Osisko, respectively.
- Trading activity and reliable sources indicate the block of shares overhang has been fully absorbed and the associated selling pressure is now gone.
Price and market action over the past month have only solidified our original call that Wellgreen is both a rare gem and has "genuine multi-bagger upside."
From God's lips to our keyboard
We think we got it just about right. Predicting the future is never easy, yet our first Seeking Alpha report "introducing" Wellgreen Platinum dated January 21st began what we expect will become a continuing year long re-valuation. Our belief that Wellgreen's time was "now" looks spot-on.
Of course, a large part of our call was based on expectations of a strong tailwind, which has occurred both in metal stocks and specifically in platinum, as continued labor unrest in South Africa brings attention to what may soon be a serious supply deficit. Strikes always get settled, but our anticipation is the cost of platinum production will further increase, forcing prices higher.
Platinum is a critical component and palladium requires a 2-for-1 substitution ratio. Since roughly 80% of world supply comes from Southern Africa, we expect interest in Canadian platinum-palladium-gold (PGM) will only grow.
Honestly, you can't make this stuff up
When we tell you to expect increased interest in PGM projects, we point to that well-known mining powerhouse, China National Arts & Crafts Corp., who last month bought Aquarius Platinum's (shut down) Blue Ridge and Sheba Ridge mines for $37 million. Who knew platinum mining is considered arts & crafts in China? They are a state-owned enterprise, of course.
Timing looks great
We have done Wellgreen investors a great service as our initial report flushed out what appears to be the last remaining share overhang. This has enabled our clients and Seeking Alpha investors to accumulate a good-sized position over the past month.
It is no big secret who the holder of that block was and it seems clear that the non-restricted position is now history. The importance of this cannot be overstated; aggressive selling was the only factor keeping something of a lid on the WGPLF share price over the past month.
For this reason we choose "near-term accumulation" as our suggested entry method; it is fair to all. Back in 2011, Wellgreen went up over 10 X in just 2 weeks. That is insane. We are pleased to see the shares advance, consolidate, then advance again.
We believe the share base is now tight and the flippers are gone.
Clint Eastwood is in mining stocks?
Actually, it was Eli Wallach who uttered "sometimes a man's life depends on a mere scrap of information" in the immortal classic The Good, the Bad, and the Ugly (which also sums up mining stocks rather well). After 30 years, we have learned that successful investing requires taking "action" based on expectations of future events. This means frequent extrapolation from small bits of solid information which "the crowd" cannot, or does not care to, see. The Warren Buffetts do not wait for the "crowd" to initiate their investment entry.
If there were a hundred platinum projects around we would not argue too strongly against those who urge caution until every last bit of feasibility study has been made public. We wish it were that easy; everybody could be a billionaire. Our suspicion is, however, that most investors will miss this boat as the shares could be at $4 by then.
Why Wall Street never "gets" commodity stocks:
Please read carefully. The following paragraphs explain the how and why of our reasoning:
Investors need to recognize the similarities between mining stocks and technology stocks - in that you only make money when they are on the upswing. Every year a mining company must find or buy the equivalent of their annual production, just to hold their metal reserves steady. For this reason, the large producing, major miners are always on the lookout to buy promising projects from the small explorer/developers; the one-out-of-a-thousand who make a real discovery. Since these early stage companies generally trade at a significant discount to their net asset value, these acquisitions are generally accretive to the acquiring company and provide the crucial reserve replacement the producing companies need to survive, let alone to show any growth.
Likewise, technology companies have to continually reinvent themselves or face extinction; today's high-flyer is tomorrow's dinosaur (BlackBerry (BBRY) anyone?). Old-tech "dogs" like Intel (INTC) and Cisco (CSCO) have been poor investments for the past decade, just like most old-guard miners - even though gold has tripled.
In mining, just like technology, you make your best profits with the "upstarts."
We observe an endless parade of professional investors on media such as CNBC who seemingly fail to understand this basic principle, or have interest only in the mining-related ETFs - which are mostly filled with (in our opinion) junky, or underwhelming names.
"Let me make this perfectly clear…"
Case in point: We first met Keith Neumeyer, CEO and founder of First Majestic Silver (AG) in 2006. He was spending his weekend working the booth (alone) at a small mining show. We ended up spending much of the afternoon talking - no other investors were interested. We saw a clear focus, intelligence and vision; we decided to "bet on the jockey." Our follow-up note to clients said "this one's a winner." However, it still took five long years before the mining establishment caught on. We profited because we bought excellent management. Eventually, both the numbers and crowd caught up.
Another example: We were interested in Silver Wheaton (SLW), co-founded by visionary CEO Randy Smallwood, back in 2004. But there was little buzz; most "mining experts" did not like SLW and questioned their validity. We recall an "expert" (one who we see on CNBC) saying he "didn't like the business model." We missed a 10 bagger, because we assumed the "experts" were right. Fortunately, we got a 2nd chance at $2.70 in the '08 crash. Today, SLW is at $26, and has grown from a start-up to $9 Billion in the past decade. We've had a chance to thank Randy in person.
Our point: you beat the Wall Street and mining crowd buying excellent management and a unique product, especially after the periodic "shakeouts." Like right about now.
What Lies Beneath
In our opinion, the importance of Wellgreen's news release dated January 30th was somewhat overlooked. The continuity is exciting and the latest cross sections on the website really highlight the openness and obviousness of where the priority drill targets are.
A highlight from the recent news release include this quote from President & CEO, Greg Johnson:
"This higher grade zone of mineralization which typically exceeds 2.5 g/t Pt Eq. now shows continuity over at least 600 metres in strike length, 500 metres width and 100 to 350 metres in thickness within a much larger mineralized body. The higher grade zone also contains a subzone that ranges from 30 to 80 metres in thickness with mineralization between 3 and 6 g/t Pt Eq. This is an exciting development as this material may be amenable to bulk underground mining and may be combined with near surface higher grade zones that have been identified as potential starter pits along the length of the Wellgreen deposit."
The above quote is one of those "scraps" of information, which we suspect will become increasingly important.
Recent work has highlighted wide bands of higher grade mineralization that appear throughout the deposit (dark purple and orange in the sections below). Section 578,275 shows these bands are nearly 400 meters thick in the Far East Zone (that is the equivalent of a 100 story building of continuous PGM mineralization). To put this in perspective the widest zones intercepted at Ivanhoe Mines' (OTCPK:IVPAF) huge Platreef deposit are 100 m wide!
In addition, the latest drill results on the East section showed that historic drill holes stopped in +3 g/t platinum equivalent (Pt Eq.) material but were well short of testing for the bigger target seen in the Far East zone. It's pretty clear to us why the area below it is a high priority target for management to test in their next drill campaign. It looks to us like this is just the beginning of testing this giant system and supports the idea of bulk underground potential in some areas.
We note that many of the very best PGM rich systems like the world famous system at Norilsk in Russia have extremely rich "feeder zones" which are the sources of these huge concentrations of rare PGM metals. With the strength of the system already being shown at Wellgreen and the systematic work being done by the veteran technical team on the project we wouldn't be surprised to see some huge high grade zones drilled at some point.
It should be further noted that the size of the new target areas could exceed that of the known resource. It appears to us that though there are a number of high grade zones at surface, the size/tonnage could be dramatically affected by further drilling to depth and it appears that grades are increasing with depth.
This could be very rewarding for Wellgreen's shareholders as the ultimate scale of this world class system is fully revealed; it could be a giant discovery.
A significant amount of crucial information in this regard was gleaned from analysis of the reassaying of cores from historic surface and underground holes from across the property, which had only been tested for very high grade massive sulphide mineralization. The 'new' management team discovered this during their review and had the foresight to undertake this work, which has led to a much greater understanding of the deposit.
All the information resulted in the tighter, higher confidence modeling we've seen and this has revealed the mineralization trends seen in the cross-sections above. For example, the three underground holes shown in section 578,075 had only been 10% assayed. Retesting for the full intercept revealed that 3 of the 4 ended in mineralization grading of up to 3.2g/t, which appears to be roughly average for these higher grade bands.
Think small, then big
One of the most compelling aspects of the targets for the 2014 PEA is the fact that it will consider a smaller scale, higher grade start-up operation on the order of 10-15,000tpd throughput for which the Company states it is targeting a $300-$400 million initial capex - compared to the 2012 PEA of 32,000tpd and $863 million.
The questions that emerge right away are whether the economics are still enticing at this smaller production size and whether that is a reasonable target for capital outlay.
This is a process still ongoing so we use some extra flexibility with our number crunching. Extrapolating the grades from the East Section such as WU-511, which was the deepest test yields the following in terms of potential 3E (platinum, palladium and gold) production at the smaller target throughput proposed for the 2014 PEA:
3E's (Pt + Pd + Au): 15,000tpd x 1.64g/t = 24,600g/day x 360 x 0.03215 = 284koz / year x 68% recovery rate (cited target for 2014 recoveries is 60-75%) = 193 k oz 3E production/year with over 100k ozs of platinum alone. To put this in context Stillwater, the largest North American PGM producer, mines around 90k ozs of platinum per year from their largest mine.
In monetary terms (using conservative approximate 3-year average trailing prices typically used by the majors for reserves) as an example with recovered metal above:
Platinum: 104koz x $1500/oz = $156M
Palladium: 55koz x $750/oz = $42M
Gold: 34koz. X $1500/oz = $51M
Total 3E: ~$250 Million/year with value from the copper and nickel likely to cover mining costs as by-product credits. We believe that in production cash flow would achieve a price to cash flow minimum of 10x or $2.5 billion market cap.
Though we still need to see if running this kind of elevated 3 g/t equivalent grade material or better is possible, this example demonstrates how significant Wellgreen can be even at a reduced throughput startup level.
GMP Securities, in its initiating coverage report, also supported the idea of smaller scale startup scenarios before the higher grade zones were highlighted (see table below):
Source: GMP Securities
Our model for the new, lower CAPEX Wellgreen starter pit: Kevitsa
We believe that First Quantum's Kevitsa mine in northern Finland may be an even better model for Wellgreen.
Source: First Quantum Minerals
First Quantum Minerals' (OTCPK:FQVLF) (FM.TO) Kevitsa nickel-copper-platinum group elements (PGE) mine is located approximately in Finnish Lapland north of the arctic circle with similar geology of the deposit in terms of nickel and copper, but about ½ the PGM grade of Wellgreen.
First Quantum paid $281 million back in 2008 advancing it to production rapidly. Investors can review the complete 364-page technical report on the First Quantum SEDAR site. The project was commissioned in 2012 with an initial capex of $400 million at a throughput of 15,000 tpd with built in expansion capacity (they are currently permitting to nearly double throughput to 27,000 tpd with a modest additional capital investment).
Mining is carried out in an open pit. Processing is by conventional flotation to produce concentrate. Mined ore is crushed in a primary crusher. The primary crusher product is screened to send the Autogenous Grinding ("AG") mill media to stockpile, the mid product to secondary crushing and pebble storage for the pebble mill media. The crushed ore is then ground in a combination of AG mills and a pebble mill.
Copper and nickel ore is recovered in separate flotation circuits with each product being thickened and filtered to produce concentrates stored separately for transport. Two different concentrates are produced; the first being a Nickel-Copper-PGE-Gold concentrate grading close to 12% nickel. The nickel content in the concentrate is expected to produce approximately 10,000 tonnes of nickel metal per annum. The second is a copper-PGE-gold concentrate grading close to 28% copper. The copper content in both concentrates is expected to produce approximately 17,000 tonnes of copper metal per annum.
We think this could be a similar approach for Wellgreen with expansion following development of operating cash flow:
Just in its first full year of production, Kevitsa was already nicely profitable. This analogue of a successful open pit example of Wellgreen increases our confidence in the "do-ability" of the Wellgreen project. We also think it highlights that Wellgreen should also be of interest to groups like First Quantum or the South African producers with its low operating costs, low political risk and its scalability.
Mining stages 1 - 4: 7.5 Mtpa
Source: First Quantum Minerals
Source: First Quantum Minerals
Liquefied Natural Gas
The second most compelling feature of the upcoming 2014 PEA is the inclusion of LNG for power generation versus the much more costly diesel assumed in the 2012 document. Neighboring Alaska is blessed with untold natural gas riches. And Fairbanks, AK, about 400 miles along major trucking highways, is developing LNG facilities. We would expect some cost-sharing arrangements with peer companies in the Yukon as everyone is seeking to cut costs these days.
Wellgreen's current presentation states that LNG would enable an approximately ~50% reduction in cost vs. diesel. Energy is often 25% to 35% of costs, so yes, it is a big deal.
"Keep improving the project, we'll pay retail"
The above quote came from the CEO of a very large (over $20 Billion) mining company, as relayed to us by the CEO of an up-and-coming high-grade mine. Our previous assertion that "major multi-billion mining-related companies are interested [in Wellgreen]" was met with some skepticism, which we find rather naïve, considering that evaluating new projects is something that senior miners must do to address their depleting reserves.
The fact that nothing is public and no one is tipping their hand is not a big deal. It may take many months, even a year, or more, as potential buyers/partners review information and complete due diligence but when the ultimate potential of this asset becomes clear we would expect one of these companies to make a move securing their position before their competition. That's just fine with us as the value (and thus the price) will only increase. With the changes and announcements from Wellgreen we are confident that the majors are already watching this asset.
We have previously and unequivocally stated our opinion that the new Wellgreen management team is de-risking and positioning the Company to either credibly take the asset into production or for an eventual sale. Such an assertion should be obvious. These are experienced and seasoned managers who know how this business works. Again, we are confident the process has begun.
On the macro side, a global depression would not do Wellgreen, or anyone else, much good; although the platinum supply issue makes it probably the safest of commodities. More specifically we believe the metal recovery rates and methods are the #1 issue, and the "starter pit" concept needs the PEA-type of economics and IRR (as previously noted) which will attract both partners and bankers. We know Wellgreen management understands this. The conundrum is that "everybody" knows it, which is why we are betting with management and investing ahead of the crowd.
Our belief is that Wellgreen will advance, the Resource will grow from Inferred to Measured & Indicated, and they will ultimately be acquired. That would also eliminate the risk of permitting and mine building, however, there can be no assurance that these events will occur.
If management decided to build out the mine themselves, shareholders would most likely see a substantial share dilution, although we would expect a partnership or JV.
Outside of southern Africa and Russia there are few platinum-palladium mines. We have previously noted our disappointment with North American Palladium who has struggled to complete their underground expansion and reduce operating costs. Stillwater Mining though the largest 1st world producer of PGMs, has seen its own struggles as a narrow underground operation and the shares are selling at the same level as in 1995. We do note, however, SWC is presently near two-year highs - thus also note more upside leverage is likely available with Wellgreen.
In our next update, we will compare in depth Osisko against the ultimate potential project at Wellgreen and discuss how that project, at its 60,000 tpd throughput, 1 g/t grade at .3g cutoff is comparable to the ultimate Wellgreen project with approx. 2g/t grade at .5 g cutoff.
A strike in South Africa is not a good reason to buy Wellgreen today, even if it gets ugly. We are sympathetic with the miners - a livable wage is a reasonable request. Yet the cost of mining narrow seams deep underground is higher than the current price of the metal for many operations. Platinum and palladium are necessary to address air pollution globally but particularly in China and India; so our belief is that prices go higher. $1800 platinum will improve Wellgreen's economics markedly; it is also a number that would seemingly satisfy both labor and management in Africa.
We try not to write too over-enthusiastically, but in reality, Wellgreen could grow into a monster; that is a legitimate factor why we wish to accumulate and sit patiently. Of course, this will cost capital. We would not be surprised to see a financing into Wellgreen by a strategic-type or a high-caliber institutional investor. Not only would this validate our thesis, but subsequently may act as a signal for the 'herd' to follow.
Kevitsa has since come on-line and is nicely profitable, yet Kevitsa's cash flow is more closely tied to nickel and copper, with a PGM component (at about 1/2 Wellgreen's PGM grade). Wellgreen already has 7 million PGM ounces (Inferred), a number we believe could double based on the priority targets that have been identified. Thus, as the project matures, our long-term Target Price of over $6 per share is quite reasonable.
Wellgreen is one of the world's largest undeveloped platinum-palladium resources. We find it implausible that such a valuable asset, in such a great location, will not become a mine. Most likely an acquisition candidate first. Either way, the value will increase.
Tuck it away and enjoy the ride.