Seeking Alpha
Profile| Send Message| ()  
When I evaluate junior (exploration stage) mining companies I tend to like those with strong partners who are footing a large portion of exploration and development expense. There are now hundreds of junior companies, throughout the world, doing extensive drilling. It is really getting difficult, and time consuming, to look at every project. I am generally attracted to the companies who have partnerships, earn-ins and drilling agreements with major mining companies. While this is never a guarantee of success, it generally does pave the way for development if a project proves to be economical. It also means substantially less dilution when drilling and studies are completed with OPM (others people’s money).

The majors are getting very selective in the partners and projects they choose. Most have an attractive portfolio of in-house projects. They are looking for large deposits and are willing to spend the money to find them. They have large staffs of seasoned geologist and engineers. They have access to the drilling rigs, equipment and labor. They have the experience of mine development, construction and operation that most juniors lack. They have valuable political and industry relationships in foreign countries. And most importantly, they have access to the capital needed to develop a mine.

This is not to say that the majors have a lock on all the best projects. It is also not to say that a junior company can’t bring a mine into production on their own or with another junior partner. But when a major company is willing to fund drilling, managed by the junior partner, it speaks volumes about the junior’s management and engineering staff. The majors review many project before they commit the first drilling dollar. They are only interested in projects that can potentially have a serious impact on their production and reserves. When a major mining company is willing to move a project towards the feasibility level, it often means, “there is more here than meets the eye”.

Most of the major North American precious metal names do not need any introduction. These include Newmont (NEM), Barrick (ABX), Goldcorp (GG) and Kinross (KGC). In base metals, international companies like BHP Billiton, (BHP), Rio Tinto (RTO) and Xstrata [XTA:LSE] are also known entities. But, in Latin America, there are a few names that readers may not be familiar with.

Penoles is a Mexican company and is the world’s largest silver producer. They have been listed on the Mexican Stock Exchange since 1968. They have been mining in Mexico since 1887. They boast the worlds richest silver mine, Mexico’s richest gold mine, Mexico’s largest gold mine, Mexico’s largest zinc mine and Mexico’s largest lead mine. By the way, these are all separate mines. They also operate the world’s fourth largest refining complex. They have their own exploration company and their own construction company. They own most of their existing mines 100%. The companies that have been lucky enough to partner with Penoles have had extraordinary success. These include Mag Silver [MAG:CVE]) with their potentially monstrous silver deposit next to Penoles’ Fresnillo Mine, the world’s richest silver deposit.

Hochschild [HOC:LSE] is a Peruvian company and has been doing underground mining in Latin America for over 47 years. They are the world’s fourth largest silver producer. They have considerable experience in identifying, developing and mining large epithermal vein deposits. Hochschild currently operates three mines in Peru. They did an IPO on the London Stock Exchange last year. They have over $500MM in cash and are very profitable.

Votorantim is a Brazilian natural resource company with interests in metals, energy, chemicals, paper and agriculture. They are the leading Latin America producer of zinc and electrolytic nickel in Latin America. They currently operate two zinc mines in Brazil and are expanding into Peru. Votorantim has been in business 87 years and also operates a large finance and trading subsidiary.

Here a few companies that I follow with excellent projects and attractive partnerships with major companies.

Solitario Resources (XPL) was spun off from Crown Resources (in 2004) before Kinross (KGC) acquired Crown in a problematic transaction that finally closed in 2006. The spin-off left XPL with all of Crown’s exploration portfolio, a seasoned management team and 1.8 million shares of KGC. Solitario has a strategic partnership with Newmont to explore properties in Newmont’s South American portfolio. They are also joint-ventured with Newmont on their Pachuca Real property in Mexico and hold a net smelter royalty on 61,000 hectares just north of the Yanacocha Mine, South America’s largest gold mine. Newmont is currently drilling this property. Solitario also has a promising zinc property in Peru, partnered with Votorantim, a platinum project partnered with AngloPlatinum and a 100% owned gold project in Brazil. Newmont owns 9.9% of XPL.

Minera Andes (OTC:MNEAF) will begin gold and silver production this year from their San Jose Mine in Argentina. Hochschild is their 51% partner and will operate the mine. Initial production is projected to be 60,000 ounces of gold and 3.2MM ounces of silver annually. However, only 5% of the property has been explored and they have discovered a new vein with bonanza grade gold and silver. The partners are already evaluating doubling the size of the mill. MNEAF is also partnered with Xstrata on a very promising copper discovery, Los Azules. Rob McEwen of US Gold (UXG) compares the geology at San Jose to that of Nevada. He owns 30% of MNEAF.

Endeavour Silver
(EXK) is another one of those fortunate companies partnered with Penoles in Mexico. Their strategic alliance allows them access to Penoles’ Mexican property portfolio. This partnership was significant in consolidating the Guanacevi district, where EXK will produce over 3MM ounces of silver this year. Penoles holds 5% of EXK.

Metallica Resources
(MRB) has a “free ride” on their 30% of the El Campo project in Chile. Their partner is Xstrata, who must produce a feasibility study by September of this year to earn their 70%. Then they must finance 70% of MRB’s capital costs, if requested. Measured and indicated reserves at El Morro doubled in November 2006 to 6.38 billion pounds of copper and 8.22 million ounces of gold. This is one of the top three developments (.pdf) in Chile and will undoubtedly be developed.

MRB also has a gold/silver mine in Mexico that will begin producing ore next month. The Cerro San Pedro Mine was internally financed and production of 115,000 GOE is unhedged. Xstrata owns 8% of MRB.

The last company I am going to highlight in this report is Exmin Resources [EXM:CVE]. I recently discovered Exmin while researching junior exploration companies that will be moving to production for my report Gold Stock Earnings to Shine in 2007. EXM has consolidated over 520,000 hectares (1.2MM acres) representing 11 district-sized projects in the Sierra Madre Occidental. This may be the largest land package of any North American mining company in Mexico.

The VP of Exploration for EXM is Dr Craig Gibson. Dr. Gibson has extensive experience in the Sierra Madre gold/silver districts. His team was responsible for discovering and developing the Delores Mine currently being constructed by Minefinders (MFN). He has been consulting with Penoles for many years, worked for Hochschild in Peru and Echo Bay in Mexico.

Since quietly putting this huge land package together, Exmin has been able to attract some very strong partners.

In February 2006 they signed a JV agreement (.pdf) with Penoles on their Maguarichic District project. The District is about 40,000 hectares and will test the same vein system as the historic Patria Mine (.pdf). Penoles was required to drill 2000 meters in 2006, they drilled over 5000 meters and results are due out anytime. Again, Penoles is very selective when it comes to joint venture projects.

In July 2006, they signed a JV agreement with Hochschild on 73,000 hectares in the Moris (.pdf) district next to Gammon Lake’s (GRS) Ocampo Mine. At the same time the JV signed a purchase agreement for the Santa Maria de Moris mine and mill, which also added another 7000 hectares. Hochschild did six months of due diligence (.pdf) before closing the Santa Maria mine purchase in December. Exmin’s 30% share of the purchase price was financed by a private placement (.pdf) of 2.9MM shares to Hochschild. The mine will be brought back on line this year and operated by Hochschild. It should produce about 60,000 GOE in 2008. Hochschild will continue to drill the under-explored district to earn their 70%, expand reserves and increase production. This mine plan is very much like their “boot-strap” San Jose development with MNEAF. This is Hochschild’s first project in Mexico.

Cash flow to EXM from the Moris Mine will be used on their 100% owned projects (.pdf) like the Reyna de Oro (.pdf) project just a few kilometers from Goldcorp’s El Sauzal Mine.

Exmin has secured one more JV partnership to date, albeit with another junior company. In September 2006 they signed a deal with Yale Resources [YLL:CVE] on the Urique District (.pdf). This is 28,000 hectares right in the middle of several major projects. Yale will fund 2007 drilling, managed by Exmin under the guidance of Dr. Gibson. Also of note, Yale has a very interesting project with Impact Silver in the Zacatecus Region, not far from Fresnillo. Besides YLL’s drilling expenditures on Urique, EXM receives 1.5MM shares of Yale Resources.

Exmin holds 100% of the Batopilas Project. This is 195 square miles that completely surrounds Mag Silver’s Batopilas Development (35 square miles) that has historically produced over 250MM ounces of silver.

The sheer size of the Exmin holdings is very impressive. To put these into perspective, the entire Ocampo District is about 7000 hectares and Minefinder’s holdings at the Delores Mine are 1920 hectares. But Exmin’s holdings are not just large. They are in the heart of the most productive Sierra Madre activity. They have the right topography and geology. Dr. Gibson has previously evaluated many of these projects while working for Echo Bay and Minefinders. With their extensive property portfolio, I expect that Exmin will attract even more partners in 2007.

Exmin has about 68MM shares outstanding, giving it a market cap of about $38MM. They have 4MM warrants at C$.60 that expire this week. They have another 4MM (at C$.60) that expire in April. The stock has been under pressure from the February warrants. But with huge Mexican holdings, strong partners, a producing mine, lots of pending drilling results and equity from warrant exercises, Exmin Resources is my current “best buy” for 2007.

Disclosure: The author is long GRS, MFN, MNEAF, EXM and has no positions in any other stocks mentioned in this report.

Source: Junior Mining Companies: Other People’s Money