KIM Report

Resurgent Commodity Sector for 2010

Posted by David

The 2010 annual PDAC convention this week was resoundingly more vibrant and bustling than last year’s. The nice thing about commodity downturns is that they are often self-correcting given time. The excess of supply that leads to commodity price drops and mine closures also ceases mine development. With no new resources coming onto the pipeline, supply drops as existing deposits are tapped out. This drop in supply leads to an increase in the commodity price, beginning the cycle all over again.

This current resurgence is much to early to be mainly due to this process, lack of exploration typically takes years to manifest into resource shortages. Whatever the cause, the mood of exhibitors, investors, and geologists was significantly improved over 2009’s show. Though there are still many companies out there just hanging on, both those with quality and questionable properties.

Gold was still king of the commodities this year, unsurprising considering it has remained at ~$1100 for some time in spite of the predictions of certain pundits. Though keep in mind that price is in American dollars. Well-run gold producers such as Barrick, Goldcorp, and Wesdome, have been reporting steady and strong profits. The Wesdome booth at PDAC had some impressive display samples of quartz-vein ore containing visible gold mineralization from their Kiena mine. Although some producers are still struggling, e.g. Yamana.

The buzz about exotic metals such as yttrium, niobium, and the rare earth elements has died down a little since the excitement of last fall. Leading juniors in that field, such as Avalon and Matamec, were still well represented at the show. In terms of fundamentals, however, nothing has changed, our increased dependence on technologies is leading to a demand that will continue to ramp up with each passing year and the Chinese control virtually all production. Not a pretty picture from either an economic, strategic, or political view (for everyone but the Chinese that is).

Copper, nickel, and other base and ferrous metal prices have all climbed back up significantly. The earthquake in Chile barely caused a blip in copper prices (Chile produces about one third of the world’s copper), and metal producers like Amerigo and Lundin are starting to see their first real profits in over a year. Speaking with Amerigo reps at the PDAC, they predict a return of their one-vaunted dividend should copper prices hold close to their current levels.

The investment talks for the junior diamond sector saw increased attendance this year. The best was saved for the last for talks by Peregrine, Shear Minerals, Shore Gold, and Stornoway, discussing the most promising Canadian diamond projects and their various stages of development. Peregrine’s Chidliak project on Baffin Island continues to steal the spotlight with preliminary results from CH-6 that indicate the potential for the highest grade diamond find since A-154 South at Diavik in the 1990’s.

Chidliak is still many years from and possible mine. The Renard and Fort a la Corne deposits of Stornoway and Shore Gold, respectively, are each within five years of a potential mine.  Last fall’s announcement by Stornoway regarding the expanded resource at Renard-2 is putting the company at odds with Shore Gold for the title of owner of Canada’s (and for that matter, the world) largest undeveloped diamond deposit (video interview with SWY founder Eira Thomas HERE). Shear Minerals, though somewhat stagnated by lack of funds, had returned a promising grade of 0.862 c/t from the Notch kimberlite in the Churchill property.

The repeated message from all diamond companies is that world diamond prices have recovered, and possibly then some. Unlike metals, getting firm numbers on world diamond demand and pricing is difficult, but some estimates put current diamond prices as high as 25% over those of pre-crash 2008. With the recovery as of yet incomplete, this could spell a significant jump in share prices for quality diamond stocks over the next 12 months.

Disclaimer: The author holds shares of SWY, YRI, SRM, ARG, and LUN. This article is based on the personal opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2010 www.kimreport.com

Stayin’ Alive: Canadian junior keeps Argentine operations afloat.

Posted by David

The current lack of credit in today’s world markets has left companies scrambling for cash. Mineral mining and exploration companies in particular are finding it hard to keep liquid and to have enough cash on hand to continue operations. As these companies have no income they were previously reliant on raising funds through private placements. This is no longer practical as the vast majority of juniors have extremely depressed share prices and severe dilution becomes a concern. Financing through credit institutions is also a no-go as many of these have become insolvent themselves and those that remain in business have become rather tight-fisted.

Juniors have had to resort to less common methods to raise cash. These include selling shares in assets that they have developed. Bringing in another junior or even senior partner to carry some or all of the costs of exploration for a project is a common tactic. Marifil Mines Ltd. is one such junior with these cash woes.

Marifil’s current cash position is just less than C$100,000, although a rapid reduction in expenses has reduced the burn rate to below $50,000/month. Management has voluntarily reduced salaries by 50%, staff involved with secondary projects have been cut, and the Argentina office is moving to a cheaper location. John Hite, president of the company, has commented that more than $200,000 is due within the next few months in property payments from other projects such as the spin-off of the K-2 potash property to Oxbow Holdings Corp. A $500,000 private placement is also in progress. What is of primary interest is the announcement of a letter of intent (LOI) between Marifil and Yamana Gold Inc (TSX-YRI, NYSE-AUY) that states Yamana’s intention to acquire 51% of Marifil’s Pedernal gold property in San Juan province, Argentina. This is on the condition that Yamana invest at least $2,490,000 into exploration on the property over five years and pay Marifil $510,000. The agreement would also allow Yamana to increase its share to 70% if a pre-feasibility study were provided within thirty months after the five-year period. Yamana now has less than ninety days to complete its due diligence with regards to the property and the agreement.

Pedernal is a “sediment-hosted Carlin-type gold deposit” and shares geological similarities with Yamana’s Gualcamayo property, 250 km to the north in the same rock group. There is a strong silica and barite association with the gold. San Juan is one of the more mining-friendly provinces in Argentina (think of it as Argentina’s Quebec in this regard) and is host to the 13 million oz. Veladero and 18 million oz. Pascua Llama deposits (Barrick). Marifil’s Amarillo is the other project located in San Juan, and was a joint venture with ATW Venture Corp. until this year when ATW decided to forfeit their share in order to focus on their Australian property.

Marifil’s business model of selling or joint venturing all their properties is similar to that of Franco-Nevada. They have numerous precious metals, base metals, exotic metals, limestone, petroleum, and potash projects, and they would rather allow diversity to be their strength, rather than focussing on a single project. The LOI is reflective of this strategy. However, lack of funds has meant that the company has had to restrict its operations to its most promising properties: K-2 (potash) and San Roque (Au-Ag-Pb-Zn-In).

Cost-cutting and actively seeking partners will allow Marifil to continue to operate for the next few quarters, and longer if this LOI goes through. Hopefully by then markets will be giving juniors a break.

Disclaimer: The author holds 1000 shares of MFM and 200 shares of YRI. This article is based on the opinions and experience of the author. Please do your own due diligence when investing.

Marifil Mines Ltd. holds diverse assets in Argentina

Posted by David

The strategy of Marifil Mines Ltd. (TSX.V-MFM) seems similar to that of Franco-Nevada (TSX-FNV): Prospect out a property with good potential, get in a larger joint venture partner to shoulder the development costs, and then collect royalties after production commences. MFM is focused solely in Argentina, where is has a variety of resources

 

In various Argentine provinces MFM is prospecting for Au, Ag, In (indium), Pb, Zn, Mo, Cu, cement-grade limestone, Ni, Co, PGM, U, and oil/natural gas. Activities are in 18 properties across 7 provinces. This company is no one-trick pony.

 

Having thrown off the Peronist junta in 1983 in place of a democratic system and surviving the economic crises of the 1990s, Argentina has been stable politically and economically since 2002. Although Argentina is on good relations with other South American nations, it does not seem to have caught the socialist nationalization trend of so many of its neighbours, such as Venezuela, Ecuador, or Bolivia, that has put a halt to mineral exploration in those countries.

 

The current share price is hovering around $0.40, but it had a recent pop to $0.89 a couple of months back due to results from one of its PGM projects that is a JV with Castillian Resources (TSX.V-CT). The project centers on the historic Las Aguilas Mine and neighbouring areas that the layered ultramafic complex extends to. Values of 0.61 g/t to 2.10 g/t Pt+Pd were found over significant widths (7 to 14.68 m) and zones up to 5.66 g/t Pt were found in smaller zones (~1 m). In terms of base metals, grab samples on the property have returned values of up to 6.71% Cu, 2.21% Ni, and 0.21% Co. Following the company strategy, CT is earning an interest in the Las Aguilas Ni-Cu-PGM project from MFM.

 

Aside from PGM, the In deposits are of particular interest as the metal is used in LCD screens. Old-fashioned CRT monitors and TVs are longer being produced and the increase in LCD screen production has resulted in a rise in In prices (see image below).

 

Current In prices average between $800/kg and $900/kg. The demand caused by the LCD market for In is supplemented by other uses in the chemical and electronics industries. In commonly occurs in sphalerite ((Zn,Fe)S) by replacing iron or zinc. In grades of up to 0.5 kg/t over 4.5 m have been found in core from the San Roque property (epithermal Au-Ag-Zn-Pb-In breccia vein deposit).

 

MFM has another JV with ATW Venture Corp. (TSX.V-ATW) on the Amarillo epithermal Au-Ag and Cu-Au porphyry deposit. Although sampling has recently started on this project, early grab samples have returned values of up to 2251 g/t Au (65.28 oz/t) from a 10 cm wide vein. This property is located in the same gold belt as Barrick’s (TSX-ABX) Veladero and Pascua Llama deposits. The geology is also similar to that of the Newmont-Buenaventura (NYSE-BVN) Yanacocha Mine in Peru. ATW can earn up to 70% interest in the property over 5 years in return for investing resources in the project. What is interesting about this deposit is that in addition to the potential for high grade Au and Ag, there is also the potential for high tonnage as well as most porphyry-type deposits are quite large in volume, being the left-over hydrothermal systems associated with volcanism at convergent oceanic-continental boundaries.

 

MFM has two non-metal projects: Mina El Carmen (oil/gas) and Punta Colorado (limestone). Although these commodities are not their specialty, the intent of the company as expressed to me by a company representative at last March’s PDAC is to sell them or enter into a JV in order to begin production and use the proceeds to fund their core metals exploration. Due to the nature of the deposit, MFM management believes that it will be much easier to exploit (particularly the limestone) or sell off one or both of these assets than any of the metal properties. They also believe that in the long run, many of the metal assets will prove to be more lucrative than the non-metal ones.

 

MFM certainly has a diverse set of properties with much potential. Their main challenge right now is to better define the deposits that have returned such promising values: Amarillo, Las Aguilas, and San Roque. To do so, this means coming up with enough cash for the drills. This may be difficult as MFM (using 2007 annual financials) has only about $1,000,000 (CAD) in cash and equivalents in the bank, and about $380,000 in debt. Their burn rate for 2007 was about $500,000, so they should probably be good until the end of the year, even if they ramp up spending on drilling a little. Using their FNV-inspired plan they should be able to mitigate these costs as JV partners take on a higher share as operators.

 

It seems that with their sound corporate strategy, diverse holdings, and liquid properties, MFM is poised to continue returning strong results from Argentina in spite of economic pressures on juniour explorers.

 

Disclaimer: The Author holds 1000 shares of Marifil Mines. This article is intended for entertainment purposes only and is based on the author’s personal opinion and experience. Investors are responsible for their own due diligence when investing.