The Bullish Case For Tanzanian Royalty Exploration

| About: Tanzanian Royalty (TRX)
Tanzanian Royalty Exploration Corporation (NYSEMKT:TRX) is a precious metals exploration and royalty company with significant prospective mineral properties, all located within the Lake Victoria Greenstone Belt of Tanzania, in East Africa. Lake Victoria greenstone has been host to very large gold deposits, such as Bulyanhulu, Tulawaka, Geita and North Mara, among others.
TRX was created by the merger of Tan Range Exploration Corporation and a private company, Tanzam 2000. Tanzam 2000 was built by James Sinclair, via private acquisition of prospecting licenses, after the Bulyanhulu mine, which is still in production today, was sold to Barrick Gold (NYSE:ABX). At its peak Bulyanhulu contained reserves greater than 15 million ounces and still boasts known reserves of approximately 10 million ounces of gold.
Barrick acquired Bulyanhulu by purchasing a Canadian company, Sutton Resources, in which Sinclair was chairman. At the time of acquisition Sutton had known resources at Buyanhulu of 3.6 million ounces of gold. The transaction to purchase Sutton was valued at roughly $95 per ounce of gold when gold was trading at $285 per ounce.
At its inception, TRX was a purely royalty based company, such as Royal Gold (NASDAQ:RGLD) or Franco Nevada (NYSE:FNV). TRX, however, is different. Initially it controls the property underlying the royalty base, while Royal Gold and Franco Nevada generally purchase a royalty interest on properties controlled by other entities, in which the other entities receive cash to build or enhance their project.
Currently, TRX has a number of projects under royalty agreements. The most prominent is TRX’s Kabanga Nickel Project, which is under a royalty agreement with an entity associated with Jinchuan Mining, the largest nickel producer in China. Kabanga has potential as a nickel producer, and also for platinum group metals, as well as gold. In the future, should Jinchuan move Kabanga into production, a rich revenue stream for TRX would be created at virtually no cost to the company. It is important to mention that that the TRX Kabanga Nickel Project sits right next door to another Kabanga Nickel Project, a joint venture between Barrick Gold and Xstrata Nickel (OTC:XSRAF). TRX’s management believes the potential for the TRX project is at least as great as the Barrick/Xstrata Project.
Kibo Mining, formerly known as Sloane Developments, holds royalty option agreements on two properties which it can obtain from TRX if it meets its option commitments, at which point TRX is then in a position to derive royalty revenue from the project at commercial production. One of those properties, Itetemia, is known to host JORC compliant resources of 422,250 ounces of gold. JORC is a standard which is often used as an alternative to a NI 43-101 resource, and is more frequently used with companies doing business out of Australia and other parts of Asia. Luhala hosts JORC compliant resources of 111,900 ounces of gold. Itetemia appears to be the more promising of the two properties, and according to the royalty agreement signed between TRX and Kibo (known as Sloane at the time of signing), a production decision must be made by January of 2012 if Kibo has met its earn-in commitments. It appears per the Kibo Mining website that they are pursuing such an outcome in 2011. Mine engineering studies will continue to accurately establish likely capital expenditure and ongoing operating costs for a stand-alone mine. In this regard, the company intends to appoint a dedicated project manager in Tanzania to advance the project. As a first step, the company will undertake bulk sample metallurgical tests on the GHR (Golden Horseshoe Reef) ore to establish gold recovery levels and test the compatibility of the ore with the Bulyanhulu gold recovery process. The company will also instigate discussion with potential sources of development funding for the project during 2011. (Source)
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Itetemia Block Resource Model
TRX also has royalty agreements for gold exploration on various other properties with African Barrick Gold and MDN Inc (OTC:MDNNF). The last royalty partner TRX currently has agreements with is Kazakh Africa, on the Mwadui Diamond Project which contains kimberlites and therefore potentially diamonds.
While TRX detractors focus on what they describe as a lack of progress, they ignore that TRX has built a worthy portfolio of royalty agreements which may furnish significant cash flow, as the exploration and development of the subject properties progress to production. It is important to note the diverse minerals contained in TRX’s current portfolio of properties, including: gold, silver, nickel, copper, diamonds and platinum group metals.
During its evaluation of the various projects under its control, TRX determined it would be better served by managing its own mining operations on some projects rather than seeking royalties from other producers. Easily processed rich surface gravel, which can be mined very inexpensively, holds huge potential for lucrative cash flow. Opportunities to exploit rich surface gravel enticed the company to initiate NI 43-101 technical reports on four properties known as Kigosi, Lunguya, Ushirombo and Kibara.
The most well known of these four properties is the Kigosi Project. The company has widely touted the project and has previously stated that Kigosi should be in small scale production by now. After an initial period of bulk sampling, the company was forced to cease gravel processing operations until a full mining license is issued by the Tanzanian Authorities. The company is prepared to restart operations as soon as the proper licenses are acquired and a NI 43-101 compliant resource estimate for the surface gravel bearing aspects of the property is overdue and expected by many in short order.
Kigosi Location Map Among Other TRX Mineral Properties

Kigosi is said to be comprised of a number of zones, many of which appear to host economically viable sources of gold and continue for strike lengths of up to 7km. Although a significant amount of exploration has been performed at Kigosi there remains a great deal of strike length to explore on various zones. These features may or may not host additional resources.
Lunguya lies about 30km south of the Buyanhulu mine. According to the TRX website, “Initial sampling of vein material in 2002 from artisanal waste dumps left by indigenous miners demonstrated the presence of well-mineralized samples from the old workings. In fact, the site contains more than 200 of these small pits and shafts, ranging from 1 to 20 meters in depth. Of 125 grab samples collected, 43% returned grades exceeding five grams per tonne and 15% exceeded 10 grams per tonne.” There is no information regarding the planned scope of future work at Lunguya by TRX, as the company is currently focused on its Buckreef and Kigosi mineral properties. However, Lunguya appears to host a highly prospective gold bearing system that offers a rich exploration asset among the company’s large portfolio of prospective mineral properties.
Drill Hole Section - Lunguya Reef
Ushirombo lies approximately 30km southeast of the Tulawaka mine which is controlled by African Barrick Gold and MDN Mines. The Ushirombo project occurs in the same structural setting as the Tulawaka mine, and contains extensive gold bearing quartz rubble at or near the surface, particularly around the artisanal mining areas.
The Kibara Project in Northern Tanzania has returned high grab sample values for gold, copper and silver. In 2005, grab samples returned values as high as 6.0 g/t gold and 13% copper, according to a news release by TRX in 2005. In 2006, the company released additional results from a trenching program which returned 17 samples with values greater than 1% copper, nine samples greater than 5% copper, and four samples greater than 10% copper. According to the release, silver values ranged from detection levels up to 87 g/t.
Kibara Project Location Among Other TRX Holdings

In early 2011, TRX formed a joint venture with Stamico, The State Mining Corporation of Tanzania, on the Buckreef Mine Redevelopment Project. Stamico is a parastatal organization within Tanzania, which previously mined Buckreef in the 1980s, but was both an understaffed and underfunded organization at the time. Buckreef has inferred and measured and indicated resources which total approximately 2 million ounces of gold, of which 55% is attributable to TRX via the agreement. According to TRX, there is tremendous additional exploration potential at Buckreef. TRX recently announced that Venymn, a company from South Africa, was contracted to perform a preliminary economic assessment (PEA) on the project, based on the extensive historic data available. Under such circumstances, a PEA usually takes about 8 to 12 weeks to complete. In the meantime, at Buckreef the company has started a drill program to expand its resource base, exploring some of the more promising areas of the property.
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Buckreef Resource Table

Highlights of Historical Drill Results at TRX's Buckreef Project, as released by Iamgold:
MWNR044 9 m grading 6.40 g/t Au
MWNR044 24 m grading 6.35 g/t Au
MWNR047 21 m grading 6.81 g/t Au
MWNR050 3 m grading 8.14 g/t Au
MWNR056 22 m grading 7.51 g/t Au
MWNR098 23 m grading 6.79 g/t Au
MWNR099 11 m grading 3.62 g/t Au
MWNR110 4 m grading 6.01 g/t Au
MZDD001 24.8 m grading 13.72 g/t Au

Stamico’s choice of TRX as a partner on the Buckreef Project is significant and reinforces the company’s connections within Tanzania. As a Canadian company operating in a foreign country, the company must remain in good standing with the local authorities. Stamico is a parastatal organization, owned or controlled wholly or partly by the Tanzanian Government. It offers TRX direct access to data and information regarding mineral assets within Tanzania. Stamico also owns eight drill rigs with various drill depth ranges, and boasts access to a team of experienced drillers, which can be difficult to come by, as gold and mineral exploration increases due to the high price and demand for minerals. TRX’s relationship with Stamico is an asset that investors must consider as extremely favorable, not only in relation to the Buckreef project, but also for the development of all of the company’s mineral properties within Tanzania. The relationship also potentially opens the door to other opportunities, as Stamico currently lists eight properties on its website as “Mineral Properties for Joint Venture."
Further strengthening TRX’s management position in Tanzania is Mr. Joseph Kahama, the company's chairman and chief operating officer. Mr. Kahama is a native of Tanzania and has served as the president and director of the company’s now wholly owned subsidiary, Tanzam 2000. Importantly, Mr. Kahama represents TRX as councilor at the Tanzanian Chamber of Energy & Minerals. In 2007, Mr. Kahama was appointed to the Tanzanian National Business Council and the Local Investors Roundtable, and in 2006 was appointed as a member and advisor to the China Africa Business Council. Clearly Mr. Kahama is known with high regard in the Tanzanian business community, and this further strengthens the company’s relationship with Tanzania and its regulatory authorities.
Detractors argue that the assets of TRX are insignificant when compared to the market capitalization. It is essential that investors understand how exploration properties are assessed value. The assets of any exploration stage property are generally low before a company achieves production. Once a project has gone through a preliminary economic assessment, followed by a definitive feasibility study, and moves into production, it is then revalued on the company's books. Only then does it reflect the economic metrics set forth in the studies. Making statements that a project does not contain value, simply because the preliminary assessed value on the books is low, is a misleading attempt to dissuade investors. As TRX's projects move toward production, investors should expect the company's assets on balance sheets to increase significantly.
Detractors have also focused on the fact that TRX has never had an overly rich hoard of cash. This is primarily due to the fact that in its earlier form TRX was nearly entirely financed by Mr. Sinclair via private placements. More recently the company raised more significant amounts of cash with a group of European investors. In August, the company announced the closing of a bought deal financing in which TRX raised $30 million and brought its total cash on hand to nearly $37 million. Mr. Sinclair noted in this news release that the company “intends to pursue development of the Buckreef project very aggressively in the months ahead and we will keep everyone fully apprised of our activities.”
It is important to mention that the bought deal financing announced in October was completed with one investor, Platinum Partners. The financing represents approximately 5% of the total outstanding shares of the company, with warrants allowing Platinum the opportunity to purchase another 5% at $6.25 per share. One can surmise that a large equity investment in an exploration stage company lends credence to the promise for significant value in the underlying assets of the TRX property portfolio.
TRX is clearly turning a corner in which it will bring its promising portfolio of mineral assets into advanced stages of development and eventual production.
Tanzanian Royalty Exploration Corporation is in a unique position to exploit its highly prospective mineral assets near some of Africa’s most well known mines. In order to achieve this it has built a high quality management team led by Jim Sinclair, who has both experience and success within Tanzania, and Joseph Kahama, a Tanzanian National with extensive business acumen. Historically, the company’s mineral assets have been host to significant artisanal activity which is generally a very positive sign in the early recognition of economic mineral assets within Africa. TRX’s mineral properties are located with Tanzania, a country where excellent access to infrastructure is generally available to mining projects. A number of large mines are already in operation within the region.
The TRX investor relations department also apprised us of the following near term catalysts regarding its ongoing development projects:
The Bingwa Prospect at Buckreef is currently being drilled with the companies own RC (reverse circulation) rig. At last report two holes had been completed.
Principal Deposits at Buckreef Including Bingwa

TRX is actively seeking bids from outside contractors for additional RC drilling services.
Recently the company awarded a $1.8 million diamond drilling contract to an independent contractor which is currently mobilizing for the program which should start in late September. This diamond drill will be used to test the East Porphyry target at Buckreef where some excellent gold values were reported in earlier drill programs. The East Porphyry target is located 800m east of the Buckreef Main Lode. Previous RC drilling intersected a 300m strike of continuous gold mineralization.
That drilling included the following results:
18m @ 6.6 g/t (RC-IAMGOLD)
2m @ 8.8 g/t (RC-Ashanti)
2m @ 6.67 g/t (RC-Ashanti)
4m @ 2.1 g/t (RC-Ashanti)
2m @ 2.1 g/t (RC-Ashanti)
The company also referred to AngloGold-Ashanti (NYSE:AU), which drilled Buckreef previously, and owns and operates the Geita Gold mine, which is a short drive from Buckreef. Geita is now the largest gold mine (500,000 oz/year) in Tanzania, and the biggest contributor to AngloGold-Ashanti’s earnings. The company stated that AngloGold-Ashanti is “monitoring our progress closely.”
The East Porphyry drill program, which includes both infill diamond and RC drilling, is designed to upgrade the target resource category and acquire structural information. Currently planned drilling includes four diamond drill holes totaling 600 meters, along with 24 holes totaling 2,400 meters.
The company reiterated its treasury position of $30 million, and noted that the funds “will be used to fund the drilling at Buckreef, complete the Preliminary Economic Assessment (PEA) and begin a full feasibility study. Exercise of the warrants at $6.25 (In reference to the recent Platinum Partners bought deal financing) will get us through full feasibility and begin mine construction and development.”
The company also noted that they “are looking at one or more acquisitions that will bring new gold resources into the company."
Tanzanian Royalty Exploration Company appears poised to make Buckreef the next large active mine within Tanzania. When considering Buckreef, the company’s other grassroots exploration programs at Kigosi, Lunguya, Ushirombo and Kibara, the large portfolio of royalty projects that hold the potential to stream future cash flow, the potential for additional mineral property acquisitions and the diverse range of mineral assets (gold, silver, nickel, copper, PGM’s and diamonds) it appears that TRX is a company with a bright future.
Disclosure: I am long TRX.