There are three stages in a junior company's development.
- The most upside (and by far the greatest risk) comes from buying a junior resource company when they are exploring and make an initial discovery. Great drill assay results can send our junior's share price skyrocketing. The reverse can also be true. Junior resource explorers, the truly green field exploration plays, are the riskiest plays by far. If they strike out on assay results it could be goodbye to a share price rise for a very long time - till they find another project to go to work on. If you're buying into this kind of play make sure the company has another fallback project in its portfolio.
- Juniors in the post discovery, resource definition stage have all ready found something, the share price has settled back after the initial discovery (never chase a company whose share price has already exploded, the share price has had its run, for now the money's been made. I try and enter after the excitement has died down and the share price has settled back) and the company is going in to see what they have and hopefully produce a 43-101 compliant resource estimate and build upon it. The risk has been greatly reduced, the waiting time for a discovery non-existent and the reward very nice considering the much lower amount of risk.
- The advanced stage - those with a 43-101 compliant resource and in the scoping study, pre-feasibility and feasibility studies. Because these companies are further along the development path a lot of the guesswork about grade, size, costs and metallurgy have been taken out of the equation for us. They have done sufficient work to give investors a certain level of confidence that their project will successfully move towards being a mine.
For those further down the development path towards a mine - the company's who have been successful and have built a 43-101 compliant resource estimate - you have:
- Preliminary economic assessment (PEA) or scoping studies done to examine potential mining scenarios and economic parameters. A PEA or scoping study is an important milestone for a mineral project - it's the first step in a company's economic and technical examination of a proposed mine
- Preliminary feasibility studies or pre-feasibility studies more detailed than PEAs and used to determine whether or not to proceed with a detailed feasibility study. They are also used as a reality check to determine areas within the project that require more attention
- Feasibility studies to determine definitively whether or not to proceed with the project. A feasibility study or bankable feasibility provides budget figures for the project and will be the basis for raising capital to build the mine
Remember all these different stage studies are only yes/no decisions on whether to move to the next stage. None of them mean you are going mining, there's no mine till every stage is completed, permits approved and the necessary financing has been arranged.
In this article I show casing eight companies that have made discoveries, are advancing their projects and are Stage Three junior resource companies.
Following is a list (in no particular order) of current aheadoftheherd.com sponsor companies and their share price when they became aheadoftheherd.com sponsors, their highest share price between then and now and their current share price. In this authors opinion all these companies are either take out targets for their future production, future share of production or are going to be producers in their own right:
- Western Potash (TSX - WPX): $0.45 - $1.80 - $1.34
- Cangold (TSX.V - CLD): $0.15 - share consolidation one for five @ .10, PP@.50, $0.75, $0.36
- Kootenay Gold (TSX.V - KTN): $0.45 - $1.33 - $1.19
- Niogold (TSX.V - NOX): $0.30 - $0.55 - $0.335
- Uranerz Energy (TSX - URZ): $1.50 - $5.84 - $2.26
- VMS Ventures (TSX.V - VMS): $0.33 - $0.85 - $0.375
- Verde (formerly Amazon) Potash (TSX - NPK): $1.10 - $9.37 - $7.40
- Terraco Gold Corp. (TSX.V - TEN): .10 - .48 - .24
Western Potash (TSX - WPX)
It seems the main knock against a junior having a potash project like WPX's solution mine is the cost of building production, capex @ $2.9 billion.
That's a lot of money, but look at what you get - when all of WPX's potash is figured in you get upwards of 100 years of production and roughly $1.2 billion a year in revenues. That's big business.
Only the BHPs, the Vales and maybe a dozen or so other companies are big enough to take that on outright. But there are countries out there - China, India and Indonesia to name a few - looking to secure potash supplies, many of the world's most prosperous developing nations have virtually no indigenous potash production.
Potash One's Legacy project was bought for $430 million, and the buyer, K+S Group, still has to still spend the couple of billion to build production. And that was with potash prices 40% lower than today's.
WPX has the capability to go it alone. Securing off-take agreements - money now for guaranteed rights to buy eventual potash production - is within management capabilities.
Cangold (TSX.V - CLD)
Cangold negotiated a deal with Brigus Gold on the Ixhuatan Gold Project in Chiapas State in southern Mexico. The best way for the reactivated shell to finance the acquisition and work program, with a .10 stock, was do a one for five rollback and finance at .50 cents.
There's a measured and compliant resource of 1,041,000 ounces of gold and 4,400,000 million ounces of silver, and another 700,000 ounces of gold and 2,250,000 ounces of silver in the inferred category.
There has been 89,000 meters of drilling in 342 holes conducted across the project, the resource is mostly in the Campamento deposit and there are seven or eight other targets on the property.
The work needed to advance this project to a mine is mostly engineering studies. The engineers will start optimizing the open pit shell, looking for the best place to locate a plant and tailings pond etc.
Kootenay Gold (TSX.V - KTN)
Kootenay's 100% owned Promontorio Silver Project in Sonora Mexico already has a significant resource. The AGP resource estimate posted on their website comprises Indicated Mineral Resources of 5.22 million tonnes averaging 52.7 g/t silver, 0.86% lead and 0.96% zinc, containing 8.9 million oz. silver, 99.3 million pounds of lead and 110.8 million pounds of zinc. AGP also estimated that Promontorio contains 0.65 million tonnes averaging 55.7 g/t silver, 0.94% lead and 1.00% zinc in the Inferred category, containing 1.17 million oz. silver,13.4 million pounds of lead and 14.3 million pounds of zinc.
KTN is about 60% through a 25,000 meter drill program on the project and currently has three drill rigs working. The Promotorio resource is going to expand in size and the deposit will become a significant silver producer.
Niogold (TSX.V - NOX)
Aurizon can earn up to a 65% interest in NOX's Marban Block property. The initial 50% interest can be earned by incurring expenditures of $20 million over three years, completing an updated NI 43-101 compliant mineral resource estimate, and by making a resource payment for 50% of the total gold ounces defined by the mineral resource estimate.
The first phase program consisted of 50,253 meters of diamond drilling at a total cost of $6 million. Drilling was distributed between the Marban (41,270m) and Norlartic (4,319m) deposits and exploration drill hole fences between the two deposits (4,664m). Highlights include the identification of two new gold zones surrounding the former Marban mine named the "High Grade Western Zone" and "Eastern Down Dip Zone."
The $5 million second phase program will include 34,000 meters of diamond drilling, updated resource estimates and basic technical studies.
If Aurizon sees what it needs to over the just started phase two program they will not have a Marban production partner. In this author's opinion it does not make sense for Aurizon to do a third year and buy the ounces to complete their earn-in if they like the results of the upcoming studies.
Uranerz Energy (TSX - URZ)
For 2010 global uranium production was 140 million pounds. The 440 nuclear reactors in operation worldwide require 180 million pounds to keep them running. There are 62 more reactors being built and coming online. The yearly shortfall of uranium is covered right now by the US/Russian HEU agreement that's due to end in 2013, and there are some government and utility stockpiles. These stockpiles will run out and the price of uranium will increase.
The US has 104 nuclear reactors operating - the US has the largest fleet and is the largest market in the world for uranium. Last year it took up to 55 million pounds of uranium to keep the existing US nuclear fleet running - the mined supply of uranium in the US was about 4 million pounds in 2010.
Uranerz is licensed, at its Nichols Ranch project in Wyoming, for two million pounds of uranium production per year. The plan is to build the plant to initially handle 600,000-800,000 pounds a year. The company can easily ramp up production by bringing satellite deposits on.
VMS Ventures (TSX.V - VMS)
The VMS/HudBay joint venture Reed Copper deposit is 2.55 million tonnes of 4.5% copper with upside potential. The two companies are focusing on moving Reed Lake forward - first a preliminary economic assessment (PEA) and then the construction phase with production starting in early 2013.
HudBay has optioned VMS's Superzone property, the property consists of the Northwest, the Super Zone, the Northeast and the Tower Zones. The Reed North property in the Super Zone area is a new discovery in bimodal volcanism. HudBay's Trout Lake mine, soon to be closed, is in bimodal volcanism and produced 20 million tonnes over life of mine (LOM).
Verde (formerly Amazon) Potash (TSX - NPK)
Brazil has about 1/5 of all land available for agriculture in the world, has the world's largest renewable fresh water resources, and a climate allowing farmers to have up to three growing cycles per year - no other place on earth can match Brazil for its potential food production.
Brazil will also very likely be the world's largest potash importer in 2011.
Verde is developing fertilizer products from its at surface potash rich rock concessions and is in advanced stages of production planning. The company targeting a feasibility study in 2012.
Terraco Gold Corp. (TSX.V - TEN)
Terraco's Almaden low-sulphidation epithermal gold project is in western Idaho. It's hot springs related and is a very near surface system. Almaden is very similar to deposits like Hollister and the Ken Snyder/Midas mine.
There are 950,000 ounces of measured, indicated and inferred 43-101 compliant resources. There are 887 drill holes and some of the mineralization outcrops - the bulk of the deposit lies within 100 meters (300 feet) of surface.
Each of the aforementioned companies has, in this author's opinion, enormous upside potential as they make their way down the development path towards a mine.
In the junior resource sector the most risk, the longest wait and the biggest payoff is in the true Greenfield plays, next on the downside of the risk scale are the post discovery resource definition plays and then come the plays with the least risk, those further down the development path with compliant resources and advanced studies. Only you can decide the level of risk you can tolerate and how much patience you have to sit while developments - the story - play out.
No matter your level of risk and where you choose to invest your money, always remember investing in juniors means an investment in people. This is a people game long before it becomes a geological one. Share structure, the acquisition of quality projects, the development of said projects in a timely cost-efficient manner and higher priced financings all flow from, and to, management. This game isn't hard - get behind quality management teams early, let them go to work for you and build something of value. Have the patience and "stomach" to ride out the volatility; you need to give the story time to play out.
If real estate is location, location, location then junior resource companies are people, people, people. When considering an investment into a junior resource company, the major consideration - people, should be on your radar screen. Are they on yours?
If not, maybe they should be.
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
Richard Mills owns shares of Cangold TSX.V - CLD and Terraco Gold Corp. TSX.V - TEN
All company's mentioned in this report are advertisers on Richards website aheadoftheherd.com