At MicroCapClub we've been discussing a variety of topics as it relates to the junior mining sector. In Part 1, I gave a list of pros and cons to investing in junior mining companies and concluded junior mining companies represent an excellent risk/reward for those that are willing to educate themselves on the industry. For Part 2 of this editorial I'm going to discuss a few companies that I believe are compelling investments. I thought I'd start off with one that is, and continues to be, a very high quality company in the junior mining sector, and graduated from the rank of explorer to producer.
Alexco Resource Corporation (NYSEMKT:AXU)
Alexco is a very interesting story. The company, originally an environmental remediation company, landed control of the Keno Hill silver district in the Yukon by being able to package a clean-up plus restoration proposal. The Keno Hill district is one of the highest grade silver districts in the world, also hosting significant amounts of lead and zinc. The company, in order to preserve their share structure and raise capital to fund for production, sold 25% of the life-of-mine production to Silver Wheaton (NYSE:SLW).
The company has extensive exploration targets and is aiming for a 100Moz(million ounces) silver resource, having already gone from 20Moz to 40Moz in the last few years. The company has no debt and has ~$40M in cash on hand to fund their aggressive exploration profile. The company is currently producing just over 2Moz annually and is looking to reach annual production of over 5Moz per year within 4 years.
The company had everything anyone could want in a junior explorer prior to production: world class management(key to any micro-cap investment), great jurisdiction (Canada is mining-friendly and safe), an extremely high grade asset, healthy share structure, and a very short timeline from exploration to production. While I'm not currently a shareholder, I believe that Alexco is about as close to a set-it-and-forget-it investment you can make in mining if you believe in the continued bull market in precious metals.
Redhawk Resources (OTCPK:RHWKF)
Redhawk has a 3.5B lbs Cu compliant NI 43-101 Resource. I like this company because it is on the verge of a few major catalysts as well as already being very cheaply valued. The company is expected to release an updated 43-101 on their Copper Creek deposit in Arizona any day now, which some analysts expect to show 5B+ lbs of copper. This year the company will be working on putting together a Pre-Feasibility Study, which is a major catalyst in the life span of any junior explorer. This deposit is too large for a junior miner to put into production themselves, due to the CAPEX needed. The most likely scenario is an acquisition by a major producer, many of which already have operating copper mines as this is one of the world's most robust copper districts.
In recent history, copper explorers have been acquired at an average of $.07-$.10 per pound in-situ; Redhawk currently trades at approximately $.03/lbs in-situ and if indeed they are able to show 5B lbs that price will become even cheaper. The company has amassed a 28 sq mile land package, of which only 5% has been explored. With a current market capitalization of less than $80M, and a 2008 scoping study updated in 2010 showing an NPV(7.5%) of $350M, processing just 10,000tpd, the stock already looks cheap and ripe to be plucked by a major sometime in the future, possibly around the time the Pre-Feasibility Study is released.
Northern Graphite (OTCQX:NGPHF)
Northern Graphite's stock has traded in excess of $3/share in the past few months and, as I type, is trading around $2.30. The company has one of the most attractive total packages I've seen in the mining arena. NGC's flagship property is Bissett Creek, located a few hundred kilometers NW of Ottawa and very close to infrastructure. Graphite has become a very hot commodity, with the large flake type that NGC has in abundance, being the most sought after. Flake graphite, as opposed to the more common amorphous graphite, is the type that is used in Li-Ion battery technology, fuel cells, Vanadium Redox Batteries, and pebble bed nuclear reactors.
Graphite prices range from $600/tonne for the amorphous stuff up to $3,000/tonne for +50 Extra Large Flake, which is what Bissett Creek will be producing. The deposit, having had a slew of metallurgical tests (another released 4/23, consistently shows high quality flake graphite across the known deposit, which is large enough to handle decades of production at expected initial production rates.
Moving on to one of the finest things about NGC; the company plans on being in production in the latter part of 2013 and the project has a CAPEX of under $100M. They are currently expecting to release a Bankable Feasibility Study this quarter and begin construction in Q3 2012 with a 1 year construction schedule. The amount of attention given to Northern Graphite by analysts across the board has been resounding, the company has a decent share structure of just 52M shares, will likely get debt financing based on the BFS, and will be well on their way to producing 20,000tpy of high quality flake graphite in a safe jurisdiction, with a healthy share structure, at an estimated cost of $1,000/tonne.
There are other associated upsides such as the production of spherical graphite which has been shown to be possible with an additional processing facility(included in an estimated $90-95M total CAPEX figure) and which sells at roughly $7,000/tonne. Pretty much everything about what NGC is doing hits the mark and it is one of those stocks you buy and hold and buy more of when you can.
Prophecy Platinum (PNIKF.PK)
Prophecy Platinum is one of my favorite mining investments. It doesn't have the same short-term path to production as Northern Graphite, but it appears to be a screaming buy in most every way. According to a recent study, PGM (Platinum Group Metals) are the 2nd most geographically at-risk elements due to the main source of PGMs being South Africa and Russia. Both countries have their share of problems and the fact that PGMs are critical to the mechanical, industrial, and automotive fields means a secure supply of PGMs should be welcomed by any major mining company. Prophecy Platinum's flagship property, Wellgreen, is located in Canada's Yukon and jurisdictions don't get much more safe than that.
Prophecy has a pretty tidy share structure of 63M shares fully diluted, with approximately 40% of those shares being held by Prophecy Coal which it was spun out from last year; institutions, including Sprott(12%), also have sizable positions. The company has a Nickel + Copper + PGM + Au deposit that is massive. The deposit's in-situ value is north of $50B and contains Ni(2.64blbs), Cu(2.43Blbs), Co(206Mlbs), Pt(5Moz+), Pd(4Moz+), Au(2.4Moz) much of which is Inferred - for now.
The company is embarking on 15,000 meters of in-fill drilling this year plus 5,000 meters of step-out drilling over a 2.5 km expanse. The significance of this drill program should not be overlooked; in the decades that the deposit has been worked on since discovery in the 1950s, it has had approximately 45,000 meters of drilling done, so this year's drill plan is roughly half of what has been done historically in order to flesh out the already-large deposit.
The step-out drilling will get a lot of attention due to the fact that the company's land position spreads across 17.5km, sobetween the current resource and step-out plan, the company will only have drilled 5km of it. Management is world class and includes PGM experts like Larry Hulbert who actually worked on the property in the past.
Alongside the awaited updated NI 43-101(late 2012 or early 2013) the focus of most investor's attention is on the much awaited PEA. It was expected to be released in mid-April but has now been pushed back to mid-May. One possible explanation, and one that I find intriguing, is that only recently has the company even bothered to include rhodium + other exotic metals into their presentation of assay values which leads me to believe the company could potentially have decided to include rhodium + exotics into the PEA, hence the delay. What this has done, quite impressively, is flip the deposit from a base metal:precious metal ratio of 40:60 on its head in favor of a precious metals at 60:40. This is quite powerful and a select few assays showings are a good example:
length Pt+Pd+Au(g/t) Pt+Pd+Au+Ru+Ir+Rd+Os(g/t)
1.55m 4.23 8.239
1.55m 4.45 8.304
11.6m 2.68 5.396
0.4 5.741 9.594
As you can see, the total assay values increase quite a bit by including the more exotic elements. Until the PEA is released, we won't know how much value they add or whether they're even included.
No matter how you look at the project, which the company is looking at as a potential open pit, there is a lot of metal contained within which grades much higher than many already producing mines. The CAPEX on a project of this size runs well into the hundreds of millions of dollars, if not into the billion range, so the company will either need to JV with a major or be acquired. I believe the company represents very good value for the money as it's not every day you can find a $50B++ in-situ deposit in a safe jurisdiction having critical metals trading at well less than a $200M market cap.
A few other highlights are the potential to use the Platsol or Kell process, both of which should increase recoveries and make the mine even more economically viable. Metallurgical studies, having been conducted recently, will be included in the PEA.
Without having written an entire article on each company, and glossing over many interesting details, I hope that I've highlighted some of the more worthy points that make the above companies good investments and examples of the positives of mining companies. If you want some examples of mining companies that are headed nowhere, take a list of 100 junior explorers and throw a dart at it! 99 times out of 100 you'll hit a company bound for failure.
Disclosure: The author, MicroCapClub member Andy Ran, is long NGPHF, PNIKF, and RHWFK.