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Mike Niehuser
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Mike Niehuser is the founder of Beacon Rock Research, LLC which produces research for an institutional audience and focuses on precious, base and industrial metals, and substitutes, oil and gas, alternative energy, as well as communications and human resources. Mr. Niehuser was nominated to... More
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  • Pan American Silver And Minefinders Corporation Merger A Good Fit
    Pan American Silver Corp.'s (NASDAQ:PAAS) acquisition of Minefinders Corporation Ltd. (MFN) is an example of how "fit" is important for companies coming together and increasing shareholder value. In this instance, both companies are already successful in bringing mines into production and have excellent growth profiles. In addition, both companies have strong balance sheets and attractive corporate structures with accomplished management teams. The upside of the proposed combination appears to be expanding and balancing their geographic presence while enhancing and diversifying growth profiles as a precious metal producer.

    Minefinders Expanding Production Growth Profile

    Our familiarity with Minefinders goes back to about 2005. We came to know Minefinders at a point where they had just brought the elements of a mine together and were proving themselves to the market, moving from "minefinders" to "minebuilders." We first visited Minefinders' flagship Dolores project in Chihuahua, Mexico, in February of 2007. At that point, Minefinders' CEO Mark Bailey had been at work on the project for over ten years since making the initial discovery. In addition, Minefinders had just completed upgrading a 92 kilometer road, which included 15 kilometers of new road. It is important to recognize that the Dolores project is located in challenging mountainous terrain in order to fully appreciate the accomplishment of bringing the mine to full commercial production.

    In 2011, Minefinders met a milestone as a precious metal company (silver-gold or gold-silver depending on metal prices), producing 74,193 ounces of gold and 3,572,357 ounces of silver. This surpassed their guidance for the year of 65,000 to 70,000 ounces of gold and 3.3 million to 3.5 million ounces of silver. This is impressive, considering that Minefinders had completed the construction of the Dolores mine and achieved a record level of production while preserving their capital structure with only 81.4 million shares outstanding (96.3 million shares diluted) at the end of 2011. In addition, Minefinders has about $250 million in the bank and minimal debt.

    Minefinders has additional opportunities for organic growth. They are fully funded for identified opportunities and have expanded the management team. The current low-cost heap-leach gold-silver operation at Dolores has always been a starting point to jumpstart production without blowing out Minefinders capital structure. Minefinders has made a decision to pursue a 6,500 to 8,000 tpd mill. The capital cost of which is estimated to range from $163 million to $200 million. The mill will improve recoveries of gold and silver and boost economics by increasing production earlier in the mine life in addition Minefinders has received board approval to commence the development of the resource below the current open pit this has the potential to add to production.

    Minefinders has also decided to spend $40 to $50 million at its La Bolsa project in Mexico, on the Arizona border, to construct a low-cost heap-leach gold operation. We have had the good fortune to visit La Bolsa and are pleased that Minefinders' decided to pursue this gold project. While the addition of a mill at Dolores and a new mine at La Bolsa should make clear a path for organic growth, we believe that Minefinders' La Virginia exploration project has not received much attention in the proposed merger. La Virginia is a "Dolores look-alike" due to its larger scale, but with higher grades of gold and silver and the potential to become an underground mine if results continue to be good. This project is however a grassroots initiative and much work is required before it may go into production.

    Pan American's Production and World Class Development Projects

    We are less intimate with Pan American Silver due to the advanced level of its projects upon our introduction and established investment profile. Pan American Silver also has a proven management team well regarded in the mining industry. They have seven operating silver mines located in Mexico, Peru, Bolivia and Argentina, that produced a total of 80,000 ounces of gold and 22.5 million ounces of silver in 2011.

    Most interesting to us in 2012 is the success of advancing Pan American Silver's two development projects in Argentina. This includes the Calcatreu project with Measured and Indicated resources of 6.6 million ounces of silver and 676,000 ounces of gold. This is important because the local province repealed the ban on the use of cyanide, specifically allowing the project to proceed. Pan American Silver's world-class Navidad silver project is 150 kilometers to the south in Chubut, Argentina. This project has a Measured and Indicated resource of 632.4 million ounces of silver and 2.9 million pounds of lead. Pan American Silver is confident that Navidad will proceed with the repeal of legislation banning open pit mining and the use of cyanide, which was completed in surrounding provinces, and is working to complete a Feasibility study.

    Combined Geographic Diversification of Production and Assets

    Pan American Silver is already an established silver producer, with a substantial growth profile, that pays a dividend. Upon completion of the merger, based on the combined company's silver production in 2011, the distribution of silver production in Mexico, Peru, Argentina and Bolivia, will be 52%, 21%, 15% and 12%, respectively. Combined silver resources will be weighted most heavily to Argentina, then Mexico, then Peru, and then Bolivia at 67%, 23%, 7% and 3%, respectively. From Pan American Silver's perspective, in addition to the additional production from Mexico, they get a nice gold kicker, almost doubling 2011 gold production, and subsequently reducing the overall production cost on a silver basis. In summary, the combined company will have improved geographic diversification and growth profile.

    The combined company should have a market cap of about $4.0 billion, with total annual production of 26.1 million ounces of silver and over 154 thousand ounces of gold. Total silver production may exceed 50 million ounces annually by 2015, by company estimates. The combined company will have cash of about $570 million, with negligible debt, and roughly only 160 million shares outstanding.

    The friendly acquisition has been unanimously approved by the board of directors of both Pan American Silver and Minefinders. Owners of Minefinders' common stock may exchange each share for 0.6235 shares of Pan American stock, 0.55 shares of Pan American stock plus $1.84 in cash, or $15.60 in cash. Stock may be the way to go with Pan American Silver trading near its 52-week low and the newly combined company's positive growth profile. Subject to approvals and conditions, the transaction is scheduled to close in March.

    We think the acquisition is very positive for both shareholders of Pan American Silver and Minefinders. While the acquisition is coincident with the merger between Glencore International PLC and Xstrata PLC, and positive for the mining industry, we don't necessarily believe this is the start of a new wave of acquisitions. On the other hand, the acquisition does improve Pan American Silver's dominance as a silver producer in the Americas. While not likely an immediate candidate for takeover, we suspect that other plumbs in the silver industry interesting to Pan American Silver may include South American Silver Corp. (SOHAF.PK), with one of the world's largest silver deposits in Bolivia, and Aurcana Corporation (OTCQX:AUNFF), which is rapidly advancing to mid-tier producer status with its Shafter silver project in Texas.
    The shares of Pan American Silver provide investors bullish on silver or precious metals exposure and leverage to higher metal prices. For silver bugs, Pan American provides a potentially competitive option for silver leverage in addition to Silver Wheaton (NYSE:SLW). Perhaps most important, for a management team who prided itself on exploration and beating the odds of bringing a discovery to production and beyond, this good fit with Pan American Silver provides long-term shareholders and management of Minefinders even better leverage to higher precious metals prices with potentially less risk.

    Disclosure: I am long PAAS, OTCQX:AUNFF.

    Feb 21 2:09 PM | Link | Comment!
  • Alexco Meets Guidance For Initial Year Of Production At Keno Hill
    Alexco Resource Corp. (NYSEMKT:AXU) reported production of 608,093 ounces of silver in the fourth quarter of calendar year 2011, and 2,020,695 ounces of silver (plus about 16.5 million pounds of lead and 7.2 million pounds of zinc) in its first full year of commercial production at Keno Hill in the Yukon. This was within the current guidance range for 2011 of 2.0 to 2.2 million ounces of silver, which was revised downward from earlier revised guidance of 2.2 to 2.5 million ounces of silver, and initial guidance of 2.5 to 2.8 million ounces of silver. Alexco also offered 2012 guidance of 2.2 to 2.5 million ounces of silver (plus 19 million pounds of lead and 7.5 million pounds of zinc), which we have a high level of confidence that they will meet and possibly exceed. Production in 2011, with conservative guidance for 2012, is in-line with their long-term goal of annual silver production of seven to ten million ounces of silver in ten years.

    As of May 2011, Alexco management reiterated production guidance of 2.8 million ounces of silver (plus 18 million pounds of lead and 8 million pounds of zinc) for their first year of production, reflecting their confidence in the operation's ability to increase processing ore at Keno Hill to an average of 250 tpd and ultimately 350 to 400 tpd. This was subsequently revised following work stoppages caused by numerous disruptions by the power authority in the Yukon while connecting regional electric grids unrelated to operations at Keno Hill. Also, while optimizing mine operations in preparation of more efficient long-hole stoping, Alexco processed ore from stockpiles in the third quarter. Despite these challenges, the ore processed at the Keno Hill mill increased quarter-over-quarter, consistently producing higher levels of silver throughout 2011, accelerating in the most recent quarter with long-hole stoping.

    Operations at Keno Hill In-Line with the Technical Report

    Silver production at Keno Hill in 2011 was close to meeting initial expectations set in the Technical Report for the first year of commercial production. Most important, Alexco consistently mined ore for processing at the mill in amount and grades close to levels anticipated in the Technical Report. In the fourth quarter, ore processed at the mill averaged 889 g/t silver, above 871 g/t silver assumed in the Technical Report, with an average grade of ore processed in 2011 of 834 g/t silver. The average grade of lead and zinc processed in 2011 was 10.2% and 6.0%, which exceeded assumptions used in the Technical Report of 9.5% and 5.6%, respectively. Secondly, ore processed through the Keno Hill mill increased to 245 tpd in the fourth quarter, from 201 tpd in the first quarter, or an average for 222 tpd in 2011, which was below the 250 tpd estimated by the Technical Report for the first year of production. The consistent high ore grades and improving rate of processing is the foundation of our confidence that the recently offered guidance for 2012 is achievable if not conservative.

    Recoveries of metals at the Keno Hill mill have been slightly below, but generally consistent and relatively in-line with, the average recoveries assumed in the Technical Report. Most importantly, recoveries of silver have ranged from 90% to 93%, averaging 92% for 2011, slightly below 93.8% as assumed in the Technical Report. This is particularly important as silver is financially the most important metal produced at Keno Hill and this was only the first year of commercial production. Secondly, as most of the silver reports to the lead concentrate in processing, recoveries of lead ranged from 86.2% to 93% in 2011, and averaged 90% for 2011, below 96.9% as assumed in the Technical Report. Lastly, and least important from a financial and recovery perspective, recoveries of zinc ranged from 56% to 68%, averaging 65% in 2011, significantly below 88.4% assumed in the Technical Report. For all three metals, recoveries declined in the most recent fourth quarter from the third quarter.

    It is important to note that while recoveries for all three metals declined slightly in the fourth quarter from the third quarter, Alexco processed ore with the highest grades for each metal in the fourth quarter, at the highest processing rate at the mill to date, achieving record quarterly production levels for all three metal types. It is interesting that recoveries declined slightly in the fourth quarter, coincidentally at a record rate of processing ore at the Keno Hill mine, suggesting a ceiling for recoveries, but the correlation may be spurious. Nevertheless, Alexco achieved record levels of production for all three metal types. Recoveries may represent an area of improvement which will remain an area of attention in 2012 and over the life of the project. We anticipate that as the mine is early in its operation, this represents an opportunity for improvement, with possible stabilizing at a higher level of operation, which may also be a catalyst for meeting and exceeding guidance for 2012.
    Alexco to Establish Base for Long-Term Guidance at Keno Hill in 2012

    Alexco has provided production guidance for 2012 reflecting consistently improving operations in 2011. Commencement of long-hole stoping in the fourth quarter should continue throughout 2012, leading to higher levels of ore available for processing. While this style of mining is more efficient, it produces high amounts periodically, requiring additional attention for staging and organization to assure consistent levels of ore available to the mill. This is why commencing mining at Lucky Queen and Onek later in 2012 is important for increasing the amount of ore to the mill, making possible consistently higher levels of processing, increasing efficiencies at higher rates, and potentially significantly higher levels of production relative to 2011. This is also important for diversifying the sources of ore, reducing reliance on a single mine, and thereby assuring a more stable and higher level of silver and base metal production from remaining resources.
    Alexco notes that they may have a slight reduction in mill throughput in the current quarter, as they are assessing modifications that may be necessary to accommodate ore from Lucky Queen or Onek in addition to ore from the Bellekeno mine. This is likely to occur in concert with other regularly scheduled maintenance. While this suggests the potential for a slight decline in production in the first quarter of 2012, we anticipate production at similar levels compared to the fourth quarter, and any decline in the current quarter would have been factored into current guidance for 2012.

    Commencement of mining from a total of three mines in 2012 will establish a stable foundation for meeting long-term production. They are working to produce an initial resource at both the Bermingham and Flame&Moth exploration targets, which they believe at this early stage to be a tenor reminiscent of the Hector Calumet mine, which produced about 96 million ounces of silver (from 2.7 million tons, grading 35.4 opt silver, 7.5% lead and 6.1% zinc) over a period of twenty years. They also plan to produce an update of the resource at the Bellekeno mine, which will take into account ore mined and further drilling both underground and at surface. Alexco plans to increase surface and underground exploration drilling by 25% in 2012. With Lucky Queen and Onek moving into production, it will be important to monitor development activities for potential mine operations at Bermingham, Flame&Moth and the Silver King to expand resources, extend operation of the Keno Hill mill and increase annual production toward meeting long-term goals. These activities should support Alexco's growth profile to meet long-term guidance and potential to become a mid-tier silver producer.

    It is important to note that in addition to having an exceptional long-term growth outlook at Keno Hill, Alexco's environmental subsidiary provides a unique asset and competency which allowed the acquisition of Keno Hill. The additional value is not clearly recognized in the financial statements but clearly contributes to the permitting success which shortened the period from acquisition to production. Alexco does not release potential work in this area without permission from clients, but it has been active in the Americas and Europe. We have visited the Barrite Hill Superfund project in South Carolina and were very impressed. For this reason, we are looking forward to progress in the processing and clean-up of the Elsa Tailings at Keno Hill. In addition to the recovery of silver and base metals to the Keno Hill mill operation, further infrastructure for an additional mill and clean-up of historic mining operations, successful remediation of the Elsa Tailings may provide a clear example of the value of Alexco's environmental business for investors.
    Conclusion: Confidence in Meeting 2012 Guidance

    We have a high level of confidence for Alexco to meet production guidance of 2.2 to 2.5 million ounces of silver production. We also accept that there may be an interruption of throughput in the current quarter due to metalurgical testing and processing ore from the Lucky Queen and Onek resource, important to ensure smooth operations when these mines come on line later in 2012. Commencement of production from these two new mines will be important to increase production to a level of optimal operation at the Keno Hill mill and diversify sources of ore to reduce the risk of relying upon a single mine. While unforeseen events may make offering guidance risky, we find it difficult to envision a scenario in which Alexco is unable to meet at least the lower end of the range of guidnance for 2012 production. In addition, taking into account that Alexco revised guidance downward twice in 2011, we also find it difficult to envision that they will provide guidance which they cannot meet.

    We believe that beyond 2012, drilling results and advancing resources at Bermingham and Flame&Moth are important to demonstrate the potential to meet long-term production guidance of seven to ten million ounces of silver annually in ten years. We look forward to reportable progress on advancing the remediation of the Keno Hill by processing the Elsa Tailings to demonstrate the breadth of the environmental expertise as an asset to Alexco. The combination of activities including the optimization of the Keno Hill mill, new mines coming on-line, and increasing resources from districtwide exploration, should provide a decade of positive financial results and news flow for investors.

    Alexco has 60 million shares outstanding and 64.6 million shares diluted. It would appear that most of the warrants and options are in the money. Average daily trading activity is about 430,000 shares. Management and directors own about 13% and institutions own 44% of Alexco. As of September 30, 2011, Alexco reported having $49 million in cash and cash equivalents and $50.4 million in positive working capital. The company appears to have more than adequate cash flow from operations and financial assets on hand to complete activities scheduled for 2012. Silver Wheaton Corp. (NYSE:SLW) provided $50 million for construction and development of the Bellekeno mine and Keno Hill mill in return for purchasing one quarter of the silver production at the Keno Hill silver district for $3.90 per ounce. Alexco retains ownership of production of all other material including lead, zinc, gold and indium.

    Disclosure: I am long AXU.

    Jan 29 9:35 PM | Link | Comment!
  • High Desert Gold Nearly Doubles Gold Springs Project Area
    High Desert Gold Corporation (TSX – Venture: HDG) announced completion of additional staking at its Gold Springs project on the Nevada-Utah border, significantly increasing the size of its now district scale project. High Desert has a 60% interest in the Gold Springs project in a joint venture with Pilot Gold Inc. (TSX: PLG). Interestingly, staking increased the project to about 59 square kilometers, from 35 square kilometers, an increase of about 70%, nearly doubling the size of the project. Also important, staking encompassed two new targets in both Utah and Nevada, referred to as the Jumbo Extension and Midnight Extension. Prior to adding the Jumbo and Midnight extensions, Gold Springs had 18 individual target areas. 
    The Gold Springs project has a combination of recent exploration by High Desert and historic mine operations. Earlier mining followed visible or high-grade gold at surface underground. At current metal prices with modern exploration technology and methods, High Desert has been able to identify numerous targets at the project in and around a caldera, potentially suitable for low-cost open pit mining. High Desert was successful in sampling numerous outcrops, increasing the number of drill targets. High Desert also tracked gold mineralization in outcrops until they disappeared below alluvium. The ZTEM geophysical survey was particularly successful in identifying gold targets located beneath a thin layer of gravels hidden below the surface. As gold mineralization identified by sampling and drilling was coincident with high resistivity rock units, the ZTEM geophysical survey proved to be an economic tool to provide additional data for the joint venture and to stake surrounding areas of interest, with the potential for regional exploration.
    The Jumbo and Midnight extensions are along strike with earlier identified gold mineralization at Gold Springs. High Desert recently announced an initial Inferred mineral resource of 173,000 ounces of gold at 0.57 g/t and 3.88 million ounces of silver at 12.9 g/t (or 233,000 gold equivalent ounces at 0.77 g/t AuEq) over a portion of the Jumbo Zone in Utah, of which approximately 700 meters had been drilled. The high resistivity areas of the Jumbo Extension extend over 8 kilometers. High Desert staked an additional 1.5 kilometers beyond the northern and southern ends of this area of high resistivity.
    The Midnight Extension area of high resistivity in Nevada covers a six kilometer strike length. Like the Jumbo Extension, much of the Midnight Extension is buried under alluvium and anchored by areas of exposed areas with gold mineralization. The northern and southern ends of the Midnight Extension include historic workings, with a 4 kilometer area between covered with alluvium. High Desert has collected 56 samples at the northern end of the Midnight Extension ranging from 0.1 g/t gold and 13.85 g/t gold, and 34 samples at the southern end that contain gold mineralization ranging from 0.1 g/t gold and 19.58 g/t gold.
    We were exceptionally impressed with the Gold Springs project upon our visit in the fall of 2011. While the market may have preferred large and costly drill programs and drill results, it was apparent to us that High Desert management was better prepared with ZTEM geophysical survey results in hand to increase the long-term potential of the project and shareholder value. We have been impressed with the company’s success by encountering gold in each drill hole following gold sampled from outcrops above. This causes us to be optimistic about High Deserts future drill programs.
    We found the variety of host rock hosting mineralization quite interesting. Mineralization may have been deposited by hydrothermal activity surrounding the caldera. With the publishing of a map displaying the Jumbo and Midnight extensions, we find their proximity around the caldera in areas of high resistivity to be telling. In addition to the two new large extensions, we will be interested to see if High Desert encounters gold in other areas of high resistivity shown on the map.
    High Desert is formulating drilling and sampling exploration programs for 2012. The scope of the program will be determined by available funding and permitting. Weather is also a factor, as the project is about a mile high, and a thin layer of snow melts off around April. Potential remains for additional staking in the area of interest of the joint venture and regionally. In our opinion, we believe that with additional exploration and study, High Desert has an excellent opportunity to indentify a multi-million ounce gold resource at the enlarged Gold Springs project.
    High Desert has about 37.5 million shares outstanding and 48.4 million shares diluted. At the current market price, the market capitalization is about $10 million. High Desert has cash and cash equivalents, prepaids and receivables about of $1.2 million as of September 30, 2011, plus a 34.8% ownership interest in Highvista Gold Inc. (TSX – V: HVV) with a market capitalization of about $14 million. The company will likely raise funds from equity or financial arrangements with its position in Highvista to fund exploration in 2012. High Desert’s shares in Highvista become free trading in October of 2012. Presently, ownership of High Desert is about 12% by management and about 15% by institutions.
    Jan 21 1:06 AM | Link | Comment!
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