Resource Sector Digest: Dolly Varden's Moving Goal Post

by: Itinerant

Dolly Varden is looking after its management.

Harte Gold is looking to the future again.

Hecla Mining is looking for ways to make money in Nevada.

Photo of a Dolly Varden


A junior explorer is making sure management remains incentivized. Enjoy this week's

Resource Sector Digest.

(Vol. 132 - May 13, 2019)

Brought to you by Itinerant and The Investment Doctor.

In case you missed out on previous editions of this newsletter, simply click here, here, or here to catch up.

Setting The Scene

Late in 2015, Junior explorer Dolly Varden Silver (OTCPK:DOLLF) issued a resource estimate for its namesake silver project in the Golden Triangle of BC; and Hecla Mining (NYSE:HL) proceeded swiftly to propose an acquisition offering C$0.69 per Dolly Varden share. Dolly Varden was in all kinds of financial strife at the time, but the company resisted Hecla's advances at the cost of significant dilution, apparently convinced it could provide better value for its shareholders than Hecla was offering.

Almost three years have gone by since then, during which Dolly Varden Silver has maintained a fairly constant news flow of high-grade drill results. The resource update last week was going to be the culmination of all that hard work, and as is often the case, our good Doctor was first to comment on the Itinerant Musings chat board:

The company did not share this sentiment, quite to the contrary. Dally Varden was "pleased" to provide the new set of numbers and talked about "reinterpretation of the geological model for the deposits, improving confidence and providing a more robust framework for the study and for future exploration." As it turned out in the ensuing chat board discussion, the Doc's initial assessment was a veritable under-statement. Here is a table and a visual comparing some salient results from the 2015 and 2019 estimates for the two main deposits on the project, the Torbrit and the Dolly Varden deposits:

In essence: after investing C$14.8M over three years, practically no ounces have been added; the high-grade Dolly Varden deposit has all but disappeared; and the company's fortunes now rest with the much lower-grade Torbrit deposit.

The market interpreted the resource update in no uncertain terms:

Chart Data by YCharts

In actual fact, one could argue the market has been overly kind to Dolly Varden in the aftermath of the release:

  • Hecla's $0.69 offer back in 2016 implied a market cap of C$12.6M or C$0.49 per indicated ounce of silver.
  • At today's share price of C$0.23, both numbers are virtually unchanged: the market cap computes to C$13.2M, which values each indicated ounce in the latest resource estimate at the exact same C$0.49.

Thus, market valuation hasn't really changed, despite Dolly Varden's disappointing lack of progress.

Unfortunately, for shareholders, this picture changes dramatically on a per-share basis. The problem here is the dilution: the share count has more than tripled over the past three years and hence the share price has taken the dive shown above. And, at this point, it may be worth noting that Dolly Varden's market cap is, in fact, less than the sum invested during the three years since the initial resource estimate.

Of course, this is a typical script in the junior explorer world where the chances of a proper discovery are small, and exploration activities are expensive. One can't blame Dolly Varden for trying, and one can't blame the company for continuing to have a go for as long as it can find investors to throw money at its project.

However, stewardship of shareholder money can be questioned when we reconsider the decision to rebuff Hecla's offer back in 2016: the stated intention to create superior shareholder value with the drill bit instead of accepting Hecla's takeover bid has clearly fallen flat. And, in this context, we would like to direct our readers' attention to the latest news release by Dolly Varden, announcing the approval to re-price 3.25M options. To note: the re-priced options can be exercised at C$0.40 - or 58% of what Hecla offered per share back in 2016.

In case you wonder, here is the explanation offered in the news release:

The board of directors of the Company determined to re-price the Re-Priced Options because the current trading price of the common shares of the Company on the TSX-V is considerably lower than the current exercise price of the Re-Priced Options. Accordingly, the board was of the view that the Re-Priced Options had little or no value or incentive for the holders thereof.

And, that's a brazen statement, in our view. Incentive options are issued to reward management in case they reach certain targets. In the case of Dolly Varden, such targets have been demonstrably missed, the market has cast its verdict, and hence management does not deserve to be rewarded. Re-pricing these options sends the exact opposite message of what the board is pretending to achieve with these "incentives": apparently with Dolly Varden Silver goals can be missed - and the board can be relied upon to simply move the goal posts for management to have another shot (and shareholders are expected to hold the bag).

After all, it's not as if management hasn't received a handsome salary throughout - C$240,000 in 2017 alone in the case of the CEO; plus, a $40,000 bonus and options (cough, cough). The Management Information Circular for 2018 will be filed on SEDAR shortly, presumably with plenty of numbers to ponder in this context.

News Release of the Week

News release of the week goes to Harte Gold (OTCPK:HRTFF) for staging an impressive comeback following setbacks discussed in the previous edition of this newsletter, announcing an $82.5M financing package sufficient to repair the balance sheet and pay for a mill expansion to 800tpd to boot. This gritty developer is providing a pleasing exception to Rude Otto's First Law of Mining News Releases.

Chart Data by YCharts

Drill Result Summary

  • Marathon Gold (OTCQX:MGDPF) reported "abundant visible gold" in drill core obtained during infill-drilling at the Leprechaun deposit at the company's Valentine Lake project in Newfoundland. Perhaps, more importantly, these latest drill results further demonstrate the continuity of the deposit and bolster confidence in the mineral resource.
  • Alamos Gold (AGI) reported impressive drill hits from its Island mine in Ontario. The results indicate significant growth potential at this underground mine.
  • Great Bear Resources (OTCPK:GTBDF) has extended known mineralization at the Hinge Zone with the latest drill results from the Dixie project at Red Lake, Ontario. To quote CEO Mr Chris Taylor: "the more Great Bear drills it, the more compelling the target becomes."
  • Integra Resources (OTCQX:IRRZF) has further expanded the footprint of mineralization at Sullivan Gulch at its DeLamar project in Idaho. The latest results will be included (and bode well) for the upcoming resource update.
  • Troilus Gold (OTCQB:CHXMF) has followed up its recent C$12M capital raise with interesting drill results from its namesake gold project in Quebec. The full treasury should provide for a constant news flow from this company in coming months.

Wheelings and Dealings

RNC Minerals (OTCQX:RNKLF) was going to sell its Beta Hunt gold mine in Western Australia not long ago, but the discovery of the Father's Day vein has changed the company's plans. RNC Minerals has now exercised an option to buy the nearby Higginsville mine and mill from Westgold Resources (ASX ticker WGX) for a total consideration of A$50M. Westgold had acquired Higginsville plus the South Kalgoorlie operations from Alacer Gold (OTCPK:ALIAF) back in 2013. After selling South Kalgoorlie to Northern Star (OTCPK:NESRF) a couple of months ago, Westgold has effectively turned a double on its 2013 investment.

Forum Energy Metals (OTC:FDCFF) and Rio Tinto (RIO) have agreed on a staged $30M option agreement for the Janice Lake project in Saskatchewan. If exercised in full, the major will earn an 80% interest in this copper-silver project. Transition Metals (OTC:TNTMF) holds a 2% NSR on the project, a stake with the potential to turn out as the main prize in this transaction.

GT Gold (OTC:GTGDF) received a major endorsement from Newmont Goldcorp (NEM) in the form of a C$17.6M strategic investment. The cash will be put into the ground at the Tatogga property in BC, and it is setting Newmont up in the immediate neighborhood of Newcrest Mining (OTCPK:NCMGF), which has recently acquired a majority stake in the Red Chris mine.

Vendetta Mining (OTC:VDTAF) has closed an A$3M funding package and finalized the acquisition of the Pegmont project in Queensland.

Polymet Mining (PLM) is attempting to raise $265M in a rights offering. The funds will be used to repay the debt owed to Glencore (OTCPK:GLCNF). Since Glencore is also providing a backstop for the offering, this transaction effectively represents a shares-for-debt settlement and will presumably further increase the major's stake in Polymet.

Ascot Resources (OTCQX:AOTVF) appears set to take another step towards becoming a serious player in the Golden Triangle of BC after upsizing a previously announced placement to C$15.2M.

Nevada Copper (OTC:NEVDF) announced a funding package consisting of $115M credit agreement, a $35M working capital facility, an offtake agreement, and a $26.4M cost overrun facility to fund ongoing construction of the company's Pumpkin Hollow copper mine; and to replace significantly more onerous debt with Red Kite Mine Finance. The mentioned funding initiative is contingent of a $30M equity raising for which the conditions are still to be announced.

Other News

Excelsior Mining (OTCQX:EXMGF) remains on track for first copper production from the Gunnison in-situ leaching project in Arizona. The company reported results from a pump test that further de-risked the project. Altius Minerals (OTCPK:ATUSF) investors should also be pleased and look forward to the imminent cash flow from the 1.625% gross revenue royalty on this mine.

Hecla Mining reported exploration success at various mines within its producing portfolio, but couldn't plaster over the bad news about the Nevada assets buried in the Q1 report released a day later.

Chart Data by YCharts

Cobalt 27 Capital Corp. (OTCQX:CBLLF) has received the final court approval for its acquisition of Highlands Pacific (OTC:HLPCF). The deal should close before the next edition of this newsletter hits the press.

And, here, it has come time again to bid our farewell, as always, in great hope to see youse all next week, awake and healthy for the next issue of this newsletter.

Disclosure: I am/we are long PLM, VDTAF, NEM, ATUSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.