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In 2011 Peter Epstein, CFA, left a $3 billion hedge fund where he was a senior natural resources analyst to help increase awareness of a number of natural resource companies in which he's invested in. PLEASE FOLLOW ME ON TWITTER: @peterepstein2 Mr. Epstein formed MockingJay, Inc., a... More
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  • Gold Junior Falco Resources Prime Takeout Candidate

    M&A Picking Up in Safe Jurisdictions

    M&A activity is alive and well for gold companies in Ontario and Quebec. Earlier this week Goldcorp announced its intent to acquire Probe Mines in an all stock deal that valued Probe at C$ 5.00/share or C$526 million. Probe's stock is currently trading at C$ 5.30/share, suggesting that investors think a higher bid could be coming. Other mid-tier and majors in the area include Barrick Gold, AuRico, Hecla, Yamana, Argonaut, Iamgold, Agnico Eagle and Osisko Gold Royalties. On January 21st, Osisko announced a C$ 200 million capital raise. Speaking about capital raises, gold company financings in Canada in just the past week include Lydian International for C$ 16.5 million, Asanko Gold for C$ 40 million, Primero Mining $75 million in convertible notes, Detour Gold, C$ 141 million, Richmont Gold, C$ 34 million and Romarco Minerals, C$ 300 million.

    Increasingly, it appears that gold companies are stepping back from exotic locations in moderately to highly difficult jurisdictions to conduct business. Instead, North America is the place to be, especially in Canada. Osisko in particular making further acquisition(s) in Quebec makes sense. In November, 2014 Osisko acquired Virginia Mines' Quebec property in an all stock deal valued at C$ 508 million. Is C$ 500 million the new sweet spot for Canadian gold company transactions? Given recent M&A activity, it's reasonable to look at other companies that could be compelling takeout targets.

    Falco Resources Looking Especially Interesting

    One such company is Falco Resources (FPC.V) / (OTC:FPRGF). With a market cap roughly 1/10 that of the two other recent deals, Falco is in many respects an ideal target. Falco is one of Quebec's largest mining claim holders with over 740 square kms of the former Noranda mining camp, including 14 former producing mines. The camp has historic gold production of 19 million ounces of gold and is the last Abitibi gold camp which is not controlled by a major gold producer. Falco boasts a maiden 43-101 Inferred resource, obtained largely from Noranda's historical data, containing 2.8 million gold equivalent ounces.

    Strong Management and Board a Vote of Confidence

    Further, the profile of Falco's board and management team is unlike most junior mining companies, as it's made up of people who have built and operated some of the most successful mines in the Abitibi, including Agnico-Eagle, AuRico Gold and Osisko. I think it's a tribute to the quality of Falco's assets that it has been able to attract this magnitude of talent and experience. [Please see January Corporate Presentation].

    Why am I singling out Falco as an ideal target vs. other junior gold companies? For one very important reason. Last week, Osisko announced that it has filed an early warning report in connection with the 10,707,255 common shares of Falco Resources held by Osisko. Osisko has expanded the purposes for which it may continue to hold the Falco Shares, and determined that, in addition to investment purposes, it may use the Falco Shares for purposes of influencing the corporate, managerial and strategic policies of Falco. To sum it up, Osisko is known to be acquisitive, it already owns 11% of Falco, it has explicitly stated its intention to be more aggressive with regard to Falco AND it just raised a war chest of C$ 200 million.

    How to Value Falco- No Easy Way

    In trying to value Falco Resources given what Goldcorp is paying for Probe Mines there are some key takeaways, but no clear answer. For example, Falco is one of Quebec's largest mining claim holders with over 740 square kms, a much larger landholding than Probe's. That massive property would be attractive to a larger company with greater financial resources, a lower cost of capital and the ability to fast track Falco's main project.

    Most important, there are 5 nearby mills, all within easy reach of Falco's project. In fact, there's a rail load out nearby and Falco is no more than 50 kms by rail from those mills. By comparison, Probe's main project is 160km by truck to Goldcorp's mill. Falco is shooting for 5 million + Measured, Indicated & Inferred gold equivalent ounces by year-end. This is speculative in nature because the company only has a 2.8 million ounce Inferred resource to date. However, it should be noted that Falco has 80 years of Noranda's drill data and 14 past producing mines are on Falco's property. Therefore, if Falco can book 5 million or more ounces, that would be a larger resource than that of Probe's.

    Is Probe Mining Worth 10x that of Falco Resources?

    I may be getting ahead of myself. To be fair, one could assume that Falco is 1-2 years behind Probe in building a mine. That's the main difference, and Probe has a higher average gold grade than Falco's still respectable 3.4g/tonne. Still, is that worth paying 10 times the valuation for Probe vs. Falco? I think the Probe deal has placed a huge for sale sign on Falco and that a number of prospective buyers are kicking the tires. The reason why Probe was acquired and not Falco is probably because as I mentioned, it's 1-2 years ahead of Falco in terms of initial production.

    Falco Working on Updated Resource Report and PEA

    Make no mistake, the currently lower Inferred resource and the earlier-development stage profile make Falco more risky, but with the gold price up to $1,300/oz, there's considerably more margin for error than with gold below $1,200/oz. Perhaps what it will take to get suitors off the fence is for Falco to update its resource (moving to Measured & Indicated ounces, not just Inferred), and then for the company to deliver a Preliminary Economic Assessment, "PEA" a few months later. This should be accomplished within 12-18 months. However, each month that passes as Falco advances towards these meaningful de-risking events-- the higher the price tag on the company.

    Gold companies around the globe are cutting cap-ex and exploration, yet their mines are depleting each year. Buying Falco Resources would be a tremendously valuable call option on the price of gold and a way to replace depletion in coming years. If the gold price increases this year and/or M&A activity continues to pick up, potential suitors may want to acquire Falco to block peers from doing so. That's what happens in a better market for juniors. In the meantime, Falco has $12 million of cash, so suitors can't sit by and wait for Falco to run out of cash. All roads lead to a takeout of Falco in 2015 or 2016.

    Disclosure: The author is long FPRGF.

    Tags: FPRGF, AUY, AEM, AUQ, ABX, OKSKF, gold, M A
    Jan 21 8:02 PM | Link | 3 Comments
  • Interview Of Falco Resources SVP Of Business Development


    • Interview of gold junior Falco Resources' SVP of Business Development Dean Linden. Falco is one of Quebec's largest mining claim holders.
    • With negligible finding costs, Falco already has a maiden NI 43-101 compliant resource of 2.8 million gold equivalent ounces. Falco's property is on the site of past producing mines.
    • LaRonde is one of three modern bulk underground mines that Falco's Horne 5 project is compared to. LaRonde is Agnico Eagle's flagship mine located 80 kilometres to the east.

    The following interview was conducted on January 15-16 by phone and by email. Falco Resources' SVP of Business Development, Dean Lindenwas very accommodating making time for me in his busy schedule.

    Please describe Falco Resources to readers unfamiliar to the story.

    - Falco Resources (FPC.V) / (FPRGF) is one of Quebec's largest mining claim holders with over 750km of the former Noranda mining camp, including 14 former producing mines. The camp has historic gold production of 19M oz of gold and is the last Abitibi gold camp which is not controlled by a major gold producer. We have made a discovery of sorts at the Horne Complex with a maiden 43-101 inferred resource from historical data containing 2.8 million gold equivalent ounces.

    Can you describe some of the key players on Falco's team?

    - The profile of our board and management teams is unlike most junior mining companies, as it is made up of people who have built and operated some of the most successful mines in the Abitibi, including Agnico-Eagle, (AEM), AuRico Gold (AUQ) and Osisko Gold Royalties (OR.TO). It's a real tribute to the quality of Falco's asset base that it has been able to attract this type of relevant and extensive experience.

    Please tell us about Falco's capital structure and key shareholders.

    - We have a very strong balance sheet with about C$ 12 million in cash and no debt. Osisko is our largest shareholder at almost 12%. We have 93 million shares outstanding.

    You essentially inherited a maiden 43-101 Inferred resource of 2.8 million gold equivalent ounces, will that resource grow in 2015?

    - We had to do the compilation and analysis ourselves to come up with this resource estimate but we did indeed inherit an incredibly complete database of almost 4,400 historic drill holes. We were able to exploit a remarkable library of Noranda's historical data spanning 50 years to essentially rediscover a gold-rich deposit. In 2015, we intend to increase the size of the resource by at least 30% and upgrade the resource to the measured & indicated categories.

    Please describe the Horne 5 project in more detail.

    - From the 1930s to the 1960s, Noranda embarked on a very ambitious drill program in the Horne 5 Zone. Horne 5 sits immediately below the Horne Mine but it was a lower grade ore body and mining techniques of the period did not yet allow for large scale bulk mining of this type of ore body. In addition, the gold price was fixed at only $35 per oz, so the Horne 5 zone was not economic at that time. When we went into the Noranda archives we digitized almost 4,400 drill holes that had been spaced every 15 meters throughout the orebody. This level of drill density is very uncommon and it gave us great deal of confidence in this resource. We still see lots of opportunity to take it from its current 2.8 million ounces to close to 4 million ounces in 2015.

    You've said that LaRonde is a good analog to Horne 5, please explain.

    - LaRonde is one of three modern bulk underground mines that Horne 5 could be modeled after. LaRonde is Agnico Eagle's flagship mine and is located 80 kilometres to the east of us. Paul Henry Girard, who is a member of our board, was the VP of Canadian Operations for Agnico and was involved with the construction and operation of Laronde. When he joined Falco, Mr Girard saw an uncanny resemblance between Laronde and Horne 5. Since then, however, we have come to see similarities with another Agnico operation, the Goldex mine, as well as AuRico's Young-Davidson mine - both in the Abitibi. LaRonde is a much deeper mine with a higher cost structure than we envision for Horne 5, so we need to inspire our stakeholders from the best features at each of these 3 world-class operations in conceiving Horne 5. Large stopes, paste backfill, automated ore handling and a large tonnage shaft system are some the features that come to mind.

    Falco's controlled property is quite large, are there opportunities to monetize some of your land portfolio?

    While we are moving very aggressively in the exploration of Horne 5, it represents just a small piece of our land position. There are a number of other highly prospective areas of the camp and we cannot cover them all with our limited resources. There is a great deal of interest in this area of the world from a mining perspective. Falco is one of the largest landholders in the area and I do see opportunities to option and JV some properties in the camp. Our cost to maintain the camp is very manageable though, so we can be patient and do deals that make sense for Falco shareholders.

    How important to the overall economics of your project(s) is the copper, zinc and silver?

    - The grade of the resource currently stands at 3.4g/ton gold equivalent. Actual gold content represents more than 75% of the value of the current resource estimate, so the by-product metals are important but this is clearly a gold mine. Silver was not included in the initial resource estimate and we expect to address this in 2015 with a confirmation drill program. If all goes as planned, we anticipate up to 15 g/t silver content but this will not materially change the gold weighting once this is converted in a gold equivalent grade.

    How important is the 80 years of historical Noranda drilling data?

    - The importance of the Noranda database is difficult to articulate. The short answer is that Falco could not have come up with a resource estimate on a $500,000 budget without it. The database was solely responsible for the Horne 5 discovery and not one drill hole was required. The work was done and the data maintained by Noranda, a world-class mining company. The data was meticulously maintained with no detail overlooked. As a result, our 'discovery' cost is less that 0.25/oz of gold. This compares to a global average discovery cost of $40/oz worldwide and $24/oz in Canada. Falco is probably the most efficient exploration company in the world.

    Given that Falco's property includes 14 formerly producing mines, hasn't the low hanging fruit already been picked?

    - That is a very important question. Noranda was a copper producer, and they built a large copper smelting complex in Rouyn-Noranda in the 1920s. The mandate of the Company was to feed copper to the smelter. Gold was not important and was only produced as a byproduct of copper production. Despite never being a focus the camp produced 19 million ounces of gold (along with almost 3 billion pounds of copper) making it amongst the most prolific gold camps in the Abitibi. During the 50-year operating life of the Horne mine, from 1927-1976, gold averaged less than US$45/oz, or less than US$300/oz on an inflation-adjusted basis. Needless to say, with current economics the narrative of the camp has changed dramatically and opportunity abounds in this camp.

    Is Falco funded for 2015? How much drilling will you do?

    - We currently have C$ 12 million the treasury. We will spend about $3.4 million on our Horne 5 drilling program, an additional sum on engineering and other studies and about $2 million on regional exploration in 2015. This part of Quebec is home to some of the finest drillers anywhere in the World. We certainly benefit by these Companies wanting to work close to home and the competitive market for services as our many of our peers have reduced their activities.

    Falco's corporate presentation says that Falco controls the last of the large Abitibi Greenstone Belt mining camps, please explain.

    - The vast majority of the Abitibi Greenstone Belt is controlled by major gold producers like Goldcorp (GG), Agnico, Yamana (AUY), Hecla (HL) and AuRico, with the exception of this camp

    How is Falco Resources different from the number of mid-tier and majors surrounding you?

    - Falco is unlike any exploration company in the world. Firstly, we control an entire mining camp. It is extremely rare that a junior is able to acquire consolidated mining claims in a place as prolific as the Abitibi Greenstone Belt. Secondly, the value of the Noranda data library is hard to quantify. Falco bought the data in an analog form meaning it was in paper form and kept in file cabinets. Our efforts to digitize this data on just the first of 14 former producers resulted in the discovery of a 2.8 million gold equivalent ounces. This database was controlled and maintained by the same company for 80 years. It is not something that we will likely see again. Thirdly, our enterprise value per gold equivalent ounce is about $13, which is a very compelling entry point relative to a number of our peers.

    Are there any misconceptions about Falco Resources that you would like to address?

    - Generally speaking I think that we are living in skeptical times in the junior mining space. The burden of proof weighs heavily on juniors and we readily accept this burden. The first issue we have to address is the tendency to paint everyone with the same brush such that a misstep by a peer reflects badly on the entire industry. Management teams build companies and I am very proud of the team that we have. The second issue is that the average grade of gold deposits has been on a steady decline and some investors will not look at deposits with grades below 5-6 g/t. This ignores mining methods, metallurgy, infrastructure needs and a plethora of other variables. Our 3.4 g/t gold equivalent deposit is of a higher grade than two of the three world-class mines that we are benchmarking ourselves to. I am confident that we will convert non-believers over time. We have a good following already and our job is to add to that - one investor at a time.

    Disclosure: The author is long FPRGF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

    Disclosure: The author is long FPRGF.

    Tags: FPRGF, AUY, GG, AEM, NEM, gold
    Jan 21 8:21 AM | Link | Comment!
  • Timely And Informative CEO Interview Of Terraco Gold

    The following interview of Terraco Gold's CEO Todd Hilditch was conducted by phone and email on January 8-9.

    Please describe Terraco Gold to investors who don't know your story.

    Terraco Gold (OTCPK:TCEGF) is a gold focused company with assets in the western U.S. that gives investors and shareholders exposure to gold equity ownership through gold royalties and gold in the ground.

    Please describe Terraco's capital structure, including cash and debt.

    Terraco has 134 million shares issued and outstanding and 146 million shares fully diluted. The company has no traditional debt but does have an option to consolidate a royalty position of up to 3% onBarrick Gold's (NYSE:ABX) Spring Valley project for approximately USD$16 million which equates to buying gold at $184/ounce. The options expire at the end of 2016. The company has current assets of approximately $500k including cash. The issued and outstanding shares have not changed, as a result of financing, in 5 years based on creative cash infusions with royalty transactions.

    Who are Terraco's largest shareholders? How much equity is owned by the management team and Board?

    Terraco is largely held by retail shareholders, which has been one of its strengths in a very tough junior market. Insiders own 9% collectively with the CEO, Todd Hilditch owning near 5% of the 9%.

    Has there been any insider buying lately?

    From January 1, 2014, until January 6th, 2015, Terraco insiders bought 1,020,000 shares including the CEO buying 775,000 shares. Non-Insiders and strong shareholders continue to add to their positions.

    What is Terraco's quarterly cash burn rate?

    The current quarterly burn rate is approximately $100,000.

    Terraco's most valuable asset is its (up to) 3% Net Smelter Royalty "NSR" option on the Barrick/Midway Gold (NYSEMKT:MDW) Spring Valley project in Nevada. Please describe that particular asset.

    Terraco negotiated the purchase (from royalty owners) and financing (from large private equity firms) of over $30 million in gold royalty assets on Barrick Gold's Spring Valley project, where Barrick has now spent over $70m to take the project to pre-feasibility. As part of the multiple transactions Terraco negotiated, it also financed itself without issuing a single share of dilution to shareholders of over $6m in order to advance its Idaho Project and general working capital.

    The resulting asset to Terraco is direct royalty ownership and royalty options to acquire up to 50% of the acquired Spring Valley NSR royalty (up 6%) for a net benefit to Terraco of up to 3% NSR. Terraco's option exercise price (free debt in other words) is roughly $16m which equates to less than $184/ounce gold as a price to Terraco. The best way to see how the NSR royalty covers Spring Valley is to go to Terraco's website and view the Spring Valley presentation on the home page.

    Is there a way to roughly and conservatively estimate the value of the (up to) 3% NSR options based on a given gold price and the current number of measured & indicated ounces at Spring Valley?

    There is a rough way to estimate value but it does require one to rely on certain mining market and typical mining assumptions for this type of deposit. A simple, albeit not bullet proof way, is to take the number of ounces outlined/expected to be mined times expected/typical gold recoveries resulting in a rough number of ounces produced and multiply that figure by the NSR royalty (in Terraco's case up to 3%) for the attributable ounces to the royalty owner and finally, multiply that by the price of gold you are comfortable using.

    Based on certain assumptions and parameters available in the market, some of which is directly provided by Barrick JV partner Midway Gold in their most recent NI43-101 report filed on SEDAR and others from research reports by Canaccord and Cormark, Terraco management feels that based on an assumed 14 yr mine life, assumed 80% recoveries and a $1,250 gold price, that future cash flow from Spring Valley would be between $100-$150 million to Terraco. Of course these assumptions are open to change / substantiation based on Barrick's mining parameters and also on more gold found, but if you applied a NPV(5%) discount to the above (as a research report did) the valuation for Terraco far exceeds the current market capitalization.

    Barrick is clearly interested in expanding in Nevada. Is there evidence that Barrick is more likely to pursue Spring Valley over a number of its other Nevada interests?

    Barrick has been highlighting Spring Valley for the last 5 months in its investor presentations (available on their website) to which Spring Valley is profiled as one of their few Nevada based focused PFS projects. In the last year alone Barrick has spent over $17m at Spring Valley and we don't see them slowing down as Barrick spends more time back in Nevada.

    How will you raise the $16.1 million exercise price required to pay to Barrick by 12/22/16?

    Our royalty transaction is not with Barrick, it's with two private equity firms who wrote the large checks, but we have several scenarios that we can employ prior to the option exercise deadline. Keep in mind that our royalty option is a hedge on gold at less than $184 per ounce based on the Barrick resource so funding the required option payments is not expected to be a problem.

    We are also are not in a rush as we have time and it is better for us to, "option the car with no payments" versus, "buy it" in today's market. Our options to fund closer to the end of 2016 could include: an equity raise, a debt instrument, a combination of equity/debt or selling a portion of the currently held royalty to fund the option exercise. In the meantime, we have an interest free debt/option at the equivalent of $184 per ounce of gold….which we think is pretty valuable.

    Can Barrick meaningfully slow its development work at Spring Valley or does it have to hit annual development milestones?

    Barrick has earned its interest from Midway of 75% ownership and the project is a flagship PFS Nevada asset with over $70m spent to date so we don't believe Barrick will slow its development. That said, that is up to the Barrick/Midway Gold joint venture. Terraco is not privy to the joint venture agreement so we cannot comment on whether Midway can require continued spending after the earn-in.

    According to your corporate presentation, "Terraco's royalty portfolio in Spring Valley results in a cost base to Terraco of $283/oz." Please explain.

    At the conclusion of the 3 royalty acquisitions, the aggregate amount of money required by Terraco to exercise all three royalty options by 2016 (again a free debt carry or hedge) multiplied over the number of ounces covered / applicable in that royalty (Spring Valley NI43-101) came to $283…in fact with the new NI43-101 report, with in excess of 5.4 million ounces of gold, the estimated new cost base, once exercised, to Terraco is $184 per ounce.

    Can you give readers a description of both Terraco's VP of Exploration and its consulting geologist?

    We are blessed to have two gentlemen with strong geological pedigrees to which both have been discovered or co-discovered several economic gold deposits. Our VP Exploration, Charles Sulfrian, was involved in the original sampling/discovery of the deep post deposit which ultimately formed part of the ore body (Betze -Post) that Barrick operates under its flagship Nevada Goldstrike Mine. Ken Snyder, a consulting geologist to Terraco, discovered for Pierre Lassonde's Newmont Gold (NYSE:NEM), the Midas Gold (OTCQX:MDRPF) (Ken Snyder) Mine which was Newmont's lowest cost producing mine for a period at Newmont.

    Terraco's corporate presentation describes Idaho's Nutmeg Mountain Gold Project as, "advanced stage." Please describe this project.

    Nutmeg hosts a NI43-101 compliant gold resource near a million ounces. The deposit is open in several directions for resource growth and under better market conditions, Terraco will advance the project into a PEA, to which much of the work has been completed.

    Please describe the earlier-stage gold exploration opportunity at your 100% owned Moonlight Project adjoining the Spring Valley Project.

    Our Moonlight Project adjoins Barrick's Spring Valley project to the north and is now sandwiched to the south side of Sumitomo Corporation in a joint venture with Renaissance Gold (OTC:RNSGF). Moonlight is on strike geologically with the major fault system (Black Ridge Fault) that structurally controls the two deposits on our south end being Spring Valley and the silver producing Rochester Mine that operates under Coeur Mining (NYSE:CDE).

    The project has blue sky in its 35sq km land package and is amongst numerous major mining companies. Once again, in better market condition, Terraco will spend a significant amount more time and money to test Moonlight for gold and silver. In an earlier drill campaign (2008-2009) Terraco encountered up to 2 ounce silver within a 10 meter intersection (see Terraco's website), so we know the Moonlight project has mineralization, it is a matter of defining the silver in the north and the gold in the south of the project.

    Can you name any companies besides Barrick and Franco-Nevada (NYSE:FNV) that have the experience and financial wherewithal to acquire Terraco outright?

    I think there are many companies that have that ability and can come in many possible forms. Our Spring Valley royalty options are a tremendous asset for any royalty company (Osisko Gold Royalties(OTC:OKSKF), Royal Gold (NASDAQ:RGLD), considering Barrick is a good operator and has the financial ability to go to production in a great Nevada jurisdiction. In addition, there are other gold mining companies that may find our suite of hybrid type assets intriguing. Other players in the area include Pershing Gold (OTCQB:PGLC) and Rye Patch (OTCQX:RPMGF)

    Are there any misconceptions about Terraco that you would like to address?

    Not really though a few investors have hinted that it would be better for our valuation and market capitalization to exercise all the remaining NSR options so that we have full ownership today. Although I understand the opinion, I would argue that those investors and shareholders that have long term belief in the royalty would agree with us that it makes more sense in this very difficult, low share price, environment to not leverage ourselves today in ownership when we have the ability and time (free debt/option) to wait until market conditions/share prices improve before taking on equity dilution or debt required by the end of 2016.

    The other argument in favor of not exercising is that while we have another 23 months before we need to exercise the remaining royalty options, the Spring Valley project will continue to be de-risked by Barrick which also helps our value proposition by Barrick adding more ounces and moving into pre-feasibility. These items should help our share price. …..thus the ultimate reason to not exercise too early.

    Disclosure: The author is long FPRGF.

    Tags: FPRGF, gold
    Jan 14 8:52 AM | Link | Comment!
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