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Daniel Paolone has a Bachelor of Applied Science in Mining Engineering from the University of British Columbia. He currently is working for DeBeers Canada Ltd in the Diamond industry and previously worked in the Oil Sands for Syncrude Canada Ltd. in Fort McMurray AB. He has had previous work... More
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Mining Investment
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  • First Gold then Silver, what’s next? Diamonds!
    Everybody watched gold skyrocket after the US started printing more money than they could afford. Then the poor man’s gold, silver followed even faster. What’s next you might ask, when the world recovers from a recession, the last thing to pick up are luxury items. Lately, I have been watching consumer spending rise across the world and with it the price of Diamonds. Diamond prices will continue to pickup (already more valuable than pre 2008 recession lows) as the world economy continues to grow. After all diamonds are a girl’s best friend (sorry couldn’t help myself), but what you might be asking yourself now is how do I invest in them and which companies are either overvalued or undervalued? I prefer Canadian companies, especially those companies with projects in Canada. The companies with the greatest potential and relatively low risk are these companies (listed from lowest risk to highest): Harry Winston (for comparison sakes), Stornoway, Lucara, Shore Gold, and Peregrine.
    Harry Winston (TSE:HW) (NYSE:HWD) is a 40% minority partner in Diavik Diamond Mine. On December 31, 2009, the Diavik Mine had 27.5 million carats of proven reserves and 32.2 million carats of probable reserves for nearly 60 million carats of total proven and probable reserves (Harry Winston has a 40% interest). Harry Winston has a market capitalization of 1.4 billion, giving it a value of 58.33$/carat, mind you Harry Winston has retail division included into its market cap you could argue has very big or very small part of its valuation, I would say no more than a few 100 million. This gives us a good starting point for company valuations.
    Stornoway (TSE:SWY) (PINK:SWYDF) in my mind has the least possible risk, but might not have the highest possible return of the bunch. They have a large amount of projects in their portfolio, but only their Renard Project strikes me as the best of the bunch. With 41.3 million carats of both indicated and inferred mineral resource, gives Stornoway with a market cap of 214 million, a value of 5.18$/carat. There are countless other reasons I like this project like the Quebec government owns part of the company, the Quebec government is building a road to the mine, and Rio Tinto and the Lundin family are also minority share holders. 
    Lucara Diamond Corp (CVE:LUC) (PINK:LUCRF) also makes my list although they have a small mineral resource of 15 million carats, I have been read the deposit holds a large amount of multi-carat diamonds, which fetch high valuations. Lucara is a Canadian listed company, but all of their projects are in the southern part of Africa. The company has a large market cap of 435 million. This gives the company a value of 29$/carat, probably close to fair value, but let me remind you diamonds are valued higher than the highs before the 2008 recession!
    Shore Gold (TSE:SGF) (PINK:SHGDF) made the list, but I am not sure if this company wants to be a gold miner or a diamond miner. Shore is sitting on a huge deposit of 46.7 million carats at their Star property, relatively low grade, profitable and mineable none the less! Shore is perfect example of a company that was beaten down after the recession and never bouncing back to fair value, right now Shore has a market cap of 180 million and a value of 3.85$/carat. The main reason for Shore being so low on the list is their main partner Newmont (a gold miner) has essential walked away from financing the project and their 33% share of the deposit will continue to be diluted.
    The last company on the list is Peregrine Diamonds Limited TSE:PGD, had to be added to the list especially when they have surface sampling of over 1 cpt, yes that is carats per tonne not carats per 100 tonnes(cpht)! There is also the possibility of the discovery of metals on their property. Their main partner is BHP, but I was shocked to read they are not really interested in helping Peregrine advance the project.
    On a side note, a highly speculative Canadian diamond explorer Metalex Ventures Ltd. TSXV: MTX, run and partially owned by the eccentric, but highly successful Charles Fipke (the man who discover BHP’s Ekati Diamond Mine). Is actively hunting for diamonds in and near the ring of fire, it is likely he will find diamonds, but the question is whether or not they will be mineable.
    Hope this helps!
    Apr 18 5:30 PM | Link | Comment!
  • Iron Ore and an emerging miner in the Canadian Indusrty

    After watching numerous Iron Ore Mining companies sky rocket, get bought out, or merge (Consolidated Thompson and Baffinland). I went on the hunt for something to take the place of Baffinland. I did not personally buy shares in Baffinland, but hopefully my readers did, I chose the metallurgical coal route with Grande Cache and Western Coal, (I do not own these companies now and feel they are both fully valued). I missed the Baffinland boat, but I am not going to miss the Champion Minerals boat! Iron is a fairly common metal, but finding a deposit that has the potential to be mined can be difficult, that is where I come in. I did some hunting and watched an iron ore company get upgraded recently. That company happened to be Champion Minerals, I dug a little deeper, comparing the deposits size and grade to other existing and planned mines. The results were not spectacular, but rather lukewarm. In this metal super cycle, I guess beggars cannot be choosers.

    These days I limit my exposure to mining and oil companies to a maximum of forty percent of my portfolio, but from what I can see the iron ore markets still have a couple more years of gains, although this would not be my first choice for an investment in the mining industry, it will none the less serve a small part of it.

    Champion has an 82.5% direct interest in the Fermont Iron Property consisting of 16 strategic iron-rich mineral concessions in the Fermont Iron Ore District of North-Eastern Québec, property’s claim blocks are adjacent or proximal to Consolidated Thompson Iron Mines Ltd.’s properties TSX: CLM and Arcelor Mittal’s properties NYSE: MT. They are all located close to power, roads and rail connecting to ports on Quebec’s northern shore of the St. Lawrence Seaway, jackpot!

    Management (3/10)

    The current President and CEO of Champion Minerals is Mr. Larsen since 2006. He has over 30 years of experience in the investment industry, specializing in corporate finance and management of junior mining companies. It doesn’t look like they plan to develop this property by alone, with a CEO like Mr. Larsen expect Champion to sell a major share in the property or be bought out by a major Iron Ore miner.

    Fire Lake North Deposit (7/10)

    Fire Lake North hosts 288.2 million tonnes grading 27.5% Iron at a 15% cut off grade. Champion and Fancamp Exploration Ltd. TSX-V: FNC are currently in an 82.5% / 17.5% joint venture on the Fermont Property. This alone is not too promising considering the current valuation of Champion, but the total current Mineral Resource of all Champion properties is 2113 million tonnes at 27%.  Expect this resource to continue growing with holes like of 123 meters of spectacular hematite rich iron grading at 34.1% Total Iron. For any uninformed mining investors, anything over 30% Iron is considered above average in the iron ore mining industry.

    Mining and Permitting in Quebec (9/10)

    Quebec is by far one of the most mining friendly areas in the world. The Fire Lake North deposit location is one of the best I have seen so far, located next to existing mines and in a mining friendly province with relaxed mining laws.

    Financials (8/10)

    The PEA study shows a Net Present Value (NYSE:NPV) of US$ 1.637 billion at a cash flow discount rate of 5% based on an Iron concentrate production rate of 7 million tonnes per year at a grade of 65% Iron. The internal rate of return (NYSE:IRR) for the project is 24.8%. These values are based on a 3 year moving average price of Iron set at US$ 1.25/dry metric tonne unit of Iron equivalent to US $81.38/tonne of concentrate FOB Pointe Noire and a US$ Exchange Rate of 1.1.

     This is all well and good, but how does that compare to other possible Iron Ore properties, for comparison purposes let us look at Baffinland (BIM) buyout. Baffinland has a market capitalization of 515.40 million CAD and a deposit of 1000 mt @ 66.3, which has a value of 0.80 $/t of Fe. Champion has market capitalization of approximately 200 million CAD and a resource of 2113 mt @ 27%, which gives it a value of 0.35 $/t of Fe. With another year of good drilling and continued high demand for Iron Ore from China, a doubling in Champion’s market capitalization would be in order.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Mar 28 4:56 PM | Link | Comment!
  • A copper play that has extreme upside potential! Northern Dynasty (TSX:NDM) or (NYSE AMEX: NAK)

    Everyone I know is always looking for or talking about that exploration company that is going to find the next mother lode. We all want to find that mining investment that is going to jump 1000% in the next 3 months, we have to be realistic, especially when exploration companies have a success rate of less than one percent. I wish I could be the one to pick the next Red Lake or Grasberg, but the chances of that happening are one and a hundred (I like to give myself better odds than most). What my goal with this website is to find a proven deposits that have the greatest possibility of becoming a mine in the near future and that is where Northern Dynasty (TSX:NDM) comes in. Of all the deposits I have done research on Northern Dynasty (TSX:NDM) has the largest proven reserves, let me put it this way, if you take the reserves of the largest deposit I have written about and multiple it by more than ten you will get a deposit the size of Northern Dynasty’s Pebble Project. At the same time the companies market cap and share price reflect a large part of that value, but there is still a lot of room for upswing. Especially when gold companies like Seabridge and Detour have stock values that reflect 100% of the gold value in their deposits and Seabridge has not even started fully developing its project.

    Company and Management (10/10)

    After looking at the team running Northern Dynasty it looks like it is stacked with a lot of mining heavy hitters. A lot of people inside and outside of the mining industry have never heard of Hunter Dickinson and that is the way they like it. Hunter Dickinson is a behind the scenes company and they have been responsible for a few major mining projects in production and on the way to production. Robert Dickinson the Chairman of Hunter Dickinson Inc is also is the Executive Chairman of Northern Dynasty Minerals Ltd. Wait it gets better, the Pebble Partnership is led by some of Alaska’s most respected resource development professionals including CEO John Shively, former Commissioner of the Alaska Department of Natural Resources. Another key figure and director is Stephen Scott. Scott is currently General Manager Commercial, Rio Tinto Exploration, Project Generation Group, a position that he has held since 2005. Wondering why Rio Tinto has a seat on the board, well not too long ago Rio Tinto invested $200 million to purchase 19.8% of Northern Dynasty’s shares and guess who owns another 11%, Mitsubishi Corp. 

    On a side not, it is worth noting that Hunter Dickinson is not one hundred percent successful with all the projects they develop, but below is figure showing all the projects they have developed or had varies parts in developing.

    Pebble Deposit (10/10)

    The Pebble deposit comprises 5.94 billion tonnes of measured and indicated resource with 55 billion lb copper, 67 million oz of gold and 3.3 billion lb molybdenum. On top of the measured and indicated, the deposit holds an additional 4.84 billion tonnes of inferred resources containing 26 billion lb copper, 40 million oz gold and 2.3 billion lb molybdenum. The Reserves like this are unheard of for an undeveloped mine, I have never seen an undeveloped deposit this large other then the oilsands!

    Mining and Permitting in Alaska (5/10)

    The one thing that leaves me a little worried about the future of this project is the underground dislike of the project from NGOs. Some environmentalists and locals are concerned that a mine could poses a significant and unacceptable risk to downstream fish stocks. Several prominent jewelers have announced a pledge not to buy gold from the Pebble mine if it is built.

    The Pebble Project has been a major issue in Alaska politics since the mid 2000s. A 2006 poll reported 28% of Alaskans in favor of and 53% opposed to Pebble. Another poll in 2006 reported 45% of Alaskans in favor and 31% in opposition. A poll of Bristol Bay residents reported 20% in favor and 71% opposed. Fifty-seven percent of Alaskan voters in a 2008 statewide election voted against a ballot measure that would have essentially outlawed mine development at Pebble, and perhaps elsewhere in Alaska.

    When has there been a mining project where everyone supported its development? The answer is never, any mining project is going to run into someone or somebody that does not want to see it go forward. The key is to get the local community involved in the development and make sure you have the government’s blessing. Northern Dynasty is working on both right now, but they believe that the mine can be developed and operated without significantly harming Bristol Bay area fish. Lastly, the proposal has strong support amongst state-wide elected officials in Alaska!

    Financial (10/10)

    There are very few deposits the size of Northern Dynasty’s Pebble Project that are still undeveloped. The Pebble Project has the potential to produce up to one quarter of America’s domestic copper supply for more than 50 years.

    In July 2007, Northern Dynasty and Anglo American plc entered into a 50:50 partnership to develop a modern, long life mine at Pebble. Under the terms of the agreement, Anglo American is required to fund US$1.425 to $1.5 billion in project costs to retain its interest, then all costs will be split 50:50.

    After estimating the NPV of the Pebble Project with current metal prices, copper prices have the greatest effect on the projects financials. I left out the current silver prices (30$/oz) to counter the poor USD to CAD exchange rate. North Dynasty shares trade at approximately 10 CAD/Share and a one billion dollar market cap. This undervalues the company by at least ten times if you look at current metal prices.

    Financial Analyses Using Varying Metal Prices - Case 1 (100,000 tpd)
    Metal Prices IRR NPV@ 0% NPV@ 5%
    Copper Gold Silver Molybdenum (%) (Billion $) (Billion $)
    $/lb $/oz $/oz $/lb    
    3.51350715100% +20
    Notes: All currency amounts are in 2004 US dollars. Analyses are on a pre-tax, 100% equity financed basis.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NAK over the next 72 hours.
    Dec 14 9:56 AM | Link | 1 Comment
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