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Mining News Review: Week of October 25th

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Equinox Minerals (TSX/ASX: EQN; Pink Sheets: EQXMF)
Citadel Resource Group (ASX: CGG)
Equinox announces recommended takeover of Citadel & Takeover of Equinox by Citadel - October 25, 2010

As any fool can see using Google Maps, the volcanic shield of western Saudi Arabia (and Eastern Egypt) is highly prospective for mineral deposits. Given its vast oil fields, one would think Saudi Arabia would be more advanced in mineral exploration but it turns out that Citadel is one of the first companies to obtain a mining license in that country. Citadel’s Jabal Sayid volcanogenic massive sulfide (VMS) copper deposit looks like a winner but Equinox is not paying AU$1.2 billion for only that project — much of the value lies in the discovery potential of this severely underexplored region of the world. We keep hearing this or that area is the last unexplored frontier in the world but it should be clear by now that the mineral resources of the Earth are virtually untapped in many places. This is good news for future explorers although probably not very good news for “peak ____” (fill in the blank) proponents. We certainly don’t believe in “peak copper” although that doesn’t mean we won’t see supply constraints from time to time in the future. In any case, we do believe that Citadel/Equinox could do for Saudi Arabian mineral exploration what Centamin (LSE: CEY; TSX: CEE; Pink Sheets: CELTF) has done for Egypt. [Silverax]

Mantra Resources (ASX: MRU; TSX: MRL; Pink Sheets: MNRZF)
Mantra Commences PFS On Heap Leaching for Phase 2 Growth - October 25, 2010

Here’s proof that not all uranium explorers/developers are severely undervalued in this market. Mantra is in pre-feasibility stage on an inferred + indicated 80 million pound U3O8 deposit in Tanzania and has a healthy US$700+ million market cap equating to about $9 per pound U3O8. The deposit is a low grade sandstone hosted deal but preliminary economics point to moderate capital and operating costs. The updated pre-feasiblity will help bring the value proposition into better focus but Mantra should make it clear that it isn’t uranium per se that is boring to investors these days but rather the lengthy development and permitting timeframes that are often involved. Thus, other than a major new discovery, an obvious price driver for uranium explorers/developers in the current market environment is meaningful progress toward production. Another obvious one is consolidation (senior producers buying juniors with prospective development projects). We’ll be looking closely for companies with these qualities given that they are likely to be the first and perhaps biggest movers as the uranium sector experiences a resurgence in the years ahead. [Silverax]

JPMorgan Chase & Co. (NYSE: JPM)

J.P. Morgan to Launch Physical Copper ETF
 - October 26, 2010

This should prove to be a great way to directly short copper, i.e. buying put options on the Copper ETF rather than having to identify less pure, company-specific option strategies. No start date or ticker has yet to be mentioned. [Zurbo]

Geodex Minerals (TSX-V: GXM; Pink Sheets: GXMLF)
Northcliff Exploration
 (a private company controlled by Hunter Dickinson Inc.)
Hunter Dickinson’s Northcliff Finalizes Sisson Brook Tungsten-Molybdenum Project JV for $17 Million in Expenditures
 - October 25, 2010

By spending $17 million Northcliff will be able to acquire a 70% interest in the Sisson Brook project, which implies a value of $7.3 million for the remaining 30% interest. Considering that Sisson is Geodex’s flagship property and Geodex has a market capitalization of over $18 million we’re not terribly impressed with the value on offer, especially in comparison to a certain zinc and lead developer that is trading at about 50% of its implied value. Since Hunter Dickinson is a quality partner, we might have come to a different conclusion if this were a gold or silver development project, but molybdenum and tungsten are metals with difficult supply/demand dynamics such that projects dominated by these metals are typically going to have to look very compelling economically using conservative price assumptions before we seriously consider them as a speculative investment. [Zurbo]

Oroco Resource Corp. (TSX-V: OCO)
Oroco Receives Cerro Prieto CAPEX Figures & Oroco Retracts Capital Cost and Operating Cost Estimates - October 26, 2010

Oroco is an interesting little company with a market capitalization of around $12 million. With the capital and operating cost figures released today, we have enough information to determine that Cerro Prieto will produce around 20,000 ounces gold per year for probably at least 5 years at a cash cost of about $280/oz and capital cost of about $25 million. The retraction is inconsequential, and we’re assured that the preliminary economic assessment (PEA) is imminent (est. within a week) and will contain essentially the same figures. The company is simply waiting on the engineers to run the net present value numbers. Having plugged what information we can into our valuation model (making conservative assumptions for the rest), we arrive at a base case valuation in the range of C$0.50-C$0.60 per share. That’s not incredible for a development stage company with such a small production profile, but we’re told financing options are already lined up to the extent that we can expect progress on this front within several weeks of the PEA being published.

Nearby Silvercrest (TSX-V: SVL; Pink Sheets: STVZF) is working towards declaring commercial production at its similar, albeit larger, Santa Elena gold-silver project. Its share prices jumped 20-30% in late 2009 when it announced project funding through a debt/hedge facility and a gold stream. One might expect a similar reaction out of Oroco, but before that happens the PEA may actually lead to a bit of a selloff if the market is anticipating a larger operation. We’ll be monitoring this one closely to take advantage of any trading opportunities, and our subscribers will be the first to know if we do decide to enter a position. [Zurbo]

Callinan Mines (TSX-V: CAA; Pink Sheets: CCNMF)
Callinan Proposes to Become a Royalty Company and Create a New Exploration Company
 - October 25, 2010

Callinan is an institutional client of ours, and we’re happy to see it is finally spinning out its royalty assets into a new company. A little over a month ago we wrote an abbreviated report on royalty companies and singled out Callinan as the top pick with significant base case upside. Since publishing that report Callinan has risen an impressive 72%, even despite releasing some negative news that we commented on in last week’s mining news review. It will be interesting to watch for what types of royalties the new company will focus on acquiring in an attempt to expand its portfolio beyond a 6.67% net profits interest on Hudbay’s (NYSE/TSX: HBM) 777 mine. [Zurbo]

Phoscan Chemical Corp. (TSX: FOS; Pink Sheets: PCCLF)
Phoscan to Conduct Tests for the Recovery of Niobium and Rare Earths at the Martison Property
 - October 26, 2010

At first glance this news seemed strange to us since we were under the impression that IAMGOLD had already investigated the potential for niobium recovery at the Martison project, and that this work had been deferred – see the June 8, 2010 press release – more or less implying that the potential was not great. But now we are told that this “deferral” was not the result of niobium proving difficult to recover, but more or less the result of IAMGOLD’s intentions on what to do with a niobium concentrate not being in the best interest of Phoscan shareholders. The following quote from Stephen Case, President and CEO, sums things up nicely:

“The ability to economically recover niobium from the phosphate tailings could be a game changer for the Martison Project…This could yield a sufficiently large enough by-product credit to possibly revisit the Martison project as a standalone phosphate concentrate producer, thus substantially reducing the project’s overall capital and operating costs. The recovery of rare earths from the lateritic oxide cap, where the metal value per tonne has risen dramatically over the past year, could also substantially enhance the project economics.” [emphasis ours]

To the best of our understanding, a niobium-rich concentrate would be desirable enough to entice someone else to deal with processing. The implication being that Phoscan could avoid building a phosphoric acid plant (est. cost of $130-$142 million*) and granulation plant (est. cost of $156-$200 million*). This would reduce capital costs by about 30-35 percent, and significantly improve the likelihood of being able to obtain project financing.

*According to the 2008 Preliminary Feasibility Study on the Martison Project

Stephen Case admits that the rare earths potential is more of a wild card bet at the moment, though we suspect that may be what made the market jump these past few days. [Zurbo]

There are actually three things going on here. One, the rare earth potential of the laterite cap is not fully understood and may still require more drill testing or sampling. Of course it is not unusual to have niobium and phophate associated with rare earths considering carbonatites are a source of all three minerals, often in combination. At Martison, however, the phosphate, niobium and rare earths aren’t necessarily spread out evenly throughout the resource area, and that will obviously impact the sequencing of the process flow.

Two, assuming rare earths are present in economic quantities, the ability to recover them in a concentrate needs to be investigated next. Here we’ll note that the Olympic Dam IOCG deposit in Australia contains about 0.50% rare earths and economic recovery has proved elusive so far (though at the current rate of rising prices that might not be the case for long). In the case of Martison, there is nothing to be lost by evaluating rare earth content and recovery especially if a modification of the strategic plan is being considered from a complex vertically-integrated fertilizer producer to a simpler mining operation selling concentrates to upstream industrial producers. By-product revenue becomes critical in the latter approach compared to the former.

Three, a viable niobium concentration process needs to be designed and tested. There have been numerous studies in the past that have looked into phosphate and niobium recoveries in concentrate but none seem to have provided definitive data demonstrating viability of the niobium stream to the end product stage. For example, the niobium pentoxide concentrate at IAMGOLD’s (NYSE: IAG: TSX: IMG) Niobec facility is around 60% (compared to under 40% in historic studies at Martison), which is processed into ferroniobium using a thermite reaction.

In sum total, Phoscan appears to be going back to the previous plan of producing phosphate and niobium concentrates and leaving behind for now the ambitious goal of becoming a vertically-integrated fertilizer and chemical producer. While this probably reduces the eventual upside, it does create a possible path forward where otherwise there wasn’t much of one and that might account for why the shares are finally trading above their cash value. [Silverax]

Advanced Explorations (TSX-V: AXI; Pink Sheets: ADEXF)
Advanced Explorations Moves to Close Strategic Partnership
 - October 27, 2010

Not surprisingly XinXing Pipes Group fully subscribed to a placement at C$0.25 when the share price is currently trading for over C$0.80. It appears someone was listening when we said “[Advanced Explorations] is still relatively cheap given the potential of Roche Bay not to mention a host of other opportunities that are now likely to be considered with XinXing as a strategic investor”, considering Advanced Explorations promptly shot up over 100 percent. Now AXI is trading for about 3x the implied deal value with XinXing. Meanwhile our favorite iron ore play continues to trade below the value of its cash and investments. A real steal, but no one seems to be listening. Not yet at least. [Zurbo]

VMS Ventures (TSX-V: VMS; Pink Sheets: VMSTF)
VMS Reports 6.69% Copper Over 71.69 Metres and 3.74% Copper Over 21.77 Metres from In-Fill Diamond Drillholes Three and Four at the Reed Lake JV Property - October 28, 2010

Needless to say these are very good results, confirming our initial estimate of the in-fill target of 1+ million tonnes with good continuity and possible upside within the known deposit envelope. Pitch and swell of the ore body combined with oblique drill angles makes it difficult to evaluate the true width intersected in these holes and ultimately expansion potential will be what drives Hudbay toward a development decision in the near term. The share price has at this point (more than) priced in a best-case scenario from the in-fill program but exploration potential does present some upside, such as at the Salis Lake project where exploration has recently commenced. [Silverax]

Golden Predator (TSX: GPD)
Golden Predator Intercepts 1.72 g/t Gold Over 146.3 m From Carlos Zone, Grew Creek Property, Yukon - October 25, 2010

The discovery of multiple vein trends and optimal drilling orientation are consequential for demonstrating grade continuity and increasing overall grade of the mineralized envelope but it remains of limited size and must be supplemented by additional discoveries on strike or nearby before the Grew Creek property rises to the status of highly prospective Yukon play. That said, the $15 million financing does indicate Golden Predator is a serious Yukon player and must be on the watch list. It would be a decent idea to buy the stock should it approach 50 cents because at that price the company’s royalty portfolio starts to provide some downside protection. We hope to complete the update to our royalty model next week to include at least 5 more royalty companies, making it the most comprehensive royalty model out there to our knowledge. [Silverax]

Queenston Mining (TSX: QMI; Pink Sheets: QNMNF)
Queenston Announces Strategic Investment by Agnico-Eagle Mines Limited - October 28, 2010

Queenston now must be considered a top take-out candidate with Kirkland Lake Gold (TSX: KGI; Pink Sheets: KGILF) chumping on one end and Agnico-Eagle (NYSE/TSX: AEM) on the other. There is still work to be done for the company to meet its goal of defining 2 million ounces of economic gold in the Kirkland Lake area but this entry by Agnico-Eagle is a strategic challenge to Kirkland Lake Gold and ups the stakes for control of the district. If I’m right about this, Queenston shares are headed over C$6.50 in a hurry and thus it might not be too late to get on board here. [Silverax]

Amazon Mining (TSX-V: AMZ; Pink Sheets: AMHPF)
Preliminary Economic Assessment for Cerrado Verde Provides Encouraging Results - October 28, 2010

With its market capitalization of about $100 million, a net present value of over $450 million in the more conservative production scenario is very impressive. We didn’t have a chance to listen in, but we’re told the conference call held on November 3rd was well attended by a number of analysts that may soon initiate coverage of the company, and that a transcript of the call will be posted to the company’s website shortly. For now the main takeaways seem to be that (1) the company is in discussions with the government to help finance the project and potentially allow for certain tax exemptions, (2) the newly elected (this week) president of Brazil was formerly the governor of Minas state (where Amazon’s Cerrado Verde project is located) and is apparently well aware and supportive of the project, and (3) there is the potential to significantly reduce input costs by using limestone contained in the project rather than sourcing it on the open market. With production targeted for 2013 the future certainly looks bright for Amazon. But before we get too excited and assume it’s going straight up to $10 tomorrow, let’s not forget about the wild gyrations this stock is prone to on both the upside and downside:


Orvana Minerals (TSX: ORV; Pink Sheets: ORVMF)
Bolivian Government Agency to Audit Orvana’s Bolivian Subsidiary
 - October 29, 2010

It is hard to say how much, if any, of a headache (or worse) this audit is likely to cause, but at least we can all be happy about the roughly US$7 million being granted to Orvana by the Spanish government because of the jobs the El Valle project will create. [Zurbo]

Peregrine Diamonds (TSX: PGD; Pink Sheets: PGDIF)
1.15 Carat Diamond Recovered from 840 Kilogram Microdiamond Sample Collected from Five Hectare CH-31 Kimberlite
 - October 29, 2010

The day that this news was announced, John Kaiser put out a comment saying:

…The market has not reacted [to the news] because it does not understand that recovering a 1.15 carat gem quality stone from an 840 kg sample along with several other big ones, while not indicating an overall high grade, has Victor style implications for CH31…the odds of critical mass for a large scale Ekati style diamond mining camp at Chidliak have improved substantially…If you have been waiting, don’t wait any longer. Initial mini bulk sample results for CH7 are expected during the second half of November. BHP must decide by November 30 [regarding earning additional 7% interest by funding project through bankable feasibility].

We agree with Kaiser’s assessment, especially considering that the beautiful 1.15 carat diamond was found in drill core. The scale of CH31 taken by itself could be reason enough for BHP to fund the project through feasibility, especially now that their bid for Potash Corp (NYSE/TSE: POT) has been rebuffed and they may have a bit of extra money to play with.