KIM Report

Whose Land is it Anyways?

Posted by David

New Government in Greenland

The Greenlandic people recently applied the results of a 2008 referendum where they voted to gain further autonomy from Denmark that has held sovereignty over the world’s largest island for about 300 years. Greenland now has an increased share of future oil revenues, decreased Danish subsidies, made Greenlandic the sole official language, and has control over areas concerning police, coastguard, and the courts.

Greenland has recently elected a new government as well. The new government is dominated by the Inuit Ataqatugiit (Community of the People) party that has a decidedly socialist and pro-independence platform. However, it has yet to show to the world how it will deal with outside companies in the exploitation of the island’s natural resources: gems, gold, base metals, and petroleum to name a few. Will it take the approach of Alberta (at least until a year ago) with low royalties and taxes to attract foreign investment? Will they go to the other extreme such as the case with Mongolia (see Ivanhoe Mines) where government protectionism and incompetence has paralysed mining in the country? Or will they seek a middle ground as given by the case of Norway, which has exacted generous royalties, but at the same time sustaining corporate interest in exploiting the offshore oil fields there.

Only ~15% of the land area is not covered by glacier, but that number is increasing due to a current global warming cycle. With the lowest population density in the world of 0.03 persons/km² (Canada is 3); the world’s largest island has to balance its need for funds to better the life of its residents with the desires of some conservative residents to limit exploitation of the land and foreign influence.

Foreign Investment

Natural Resources are the only realistic draw for investment in Greenland. Population and infrastructure levels are too low for things to be otherwise. Although mines have operated on the island in the past (including the famous cryolite mine that allowed for relative fiscal autonomy after Denmark was occupied during World War 2), no mineral production is presently occurring.

The resources Greenland has to offer the mining industry is varied and a number of companies have exploration programs in the region. Hudson Resources Inc. (TSX.V-HUD) is looking at diamonds in its Garnet Lake property and rare earth metals, uranium, tantalum, and niobium in the Sarfartoq carbonatite nearby. Quadra Mining Ltd. (TSX-QUA) hopes to produce molybdenum concentrate from the Malmbjerg project (although with the collapse of Mo prices, we will have to see how that goes). Even the Greenlandic government is looking to directly profit from mineral exploration through its 37.1% share in Nunaminerals A/S (OMX Copehagen-NUNA) a company with nickel, tungsten, platinum, copper, gold, and iron exploration projects scattered throughout the island.

The Natives are Restless

The mineral exploration project that has attracted the most media attention as of recent is True North Gems’ (TSX.V-TGX) Fiskenaesset Ruby play in southwest Greenland. The company is arranging a private placement to pay for some of the final costs in obtaining a long-awaited mining permit by spring 2010 in order to start selling the large amount of rough gem corundum (ruby and pink sapphire) they have accumulated. In terms of the economic geology, deposit is exceptional in both grade and value of the gems present, rivalling the famed Burmese deposits while existing in a country that does not have the habit of imprisoning duly elected politicians or murdering peaceful protestors. The main focus TGX has now is on whether it can get one of the final permits it needs in order to begin selling the rubies and sapphires it has mined during its evaluation of its property and hopes to mine in the future. TGX has encountered a problem familiar to many companies operating in Canada with resistance from some local aboriginals to the project. This group claims right to traditional mining rights over all of Greenland including TGX’s staked claims. A fairly recent confrontation two summers ago between TGX employees and a group of locals who were collecting gems on a TGX claim resulted in police intervention and catalyzed the formation of the group of locals who accuse the Greenland Bureau of Minerals and Petroleum (BMP) of unfairly siding with TGX and denying their right to conduct traditional activities. A number of articles supporting the local group of aboriginals, calling themselves the August 16th Union can be found HERE.

Playing Hot Potato

For TGX’s part, they appear to (wisely) want to distance themselves from any conflict with locals. They state that the August 16th Union’s complaint lies with the BMP and that the incident just happened to occur on a TGX clam. Andrew Lee Smith, CEO of TGX, when directly questioned on the matter by the KIM Report replied:

“As a foreign company investing in Greenland, we feel this is an issue for the people of Greenland and their government to deal with. We have respected the laws of Greenland in acquiring our mineral rights and conducting exploration and will continue to do so. The company would be happy to support any process that would improve the Greenland mining act if requested to do so.”

A transcript of an interview with Mr. Smith can be found HERE and gives a similar, but more detailed message.

A Great Canadian Pastime, Now a Greenlandic One

Given that one bias of opinion on this issue was given by the blog articles linked above, I will play devil’s advocate. Though I am a geologist by training and admittedly know little about Greenlandic law, I think this issue is a major concern for any company looking to do exploration in Greenland. The election of a socialist, pro-Inuit government does not bode well for companies involved in land-use disputes with aboriginal groups. However, the desire for more financial independence from Denmark and thus the need for more foreign investment may temper the government’s approach to this matter.

As a TGX shareholder, I am of course concerned by any possible interruption of development at Fiskanaesset, but as a Canadian, I am all too aware of the ability for corporations and government to push aside aboriginal groups in the name of “progress”. However, I also know that often the best way to find “traditional aboriginal lands” is to stake a development claim (e.g. Caledonia, Ontario). This unfortunate stereotype is can be encountered when utilizing land in Canada and sometimes is all too accurate in the most cynical sense.

This dispute raises a number of questions by outsiders unfamiliar with Greenlandic law and custom. It can be argued that what has to be established here is: (1) Is gem corundum collecting a traditional Inuit activity and does solid historic evidence exist for it? (2) If the former holds true, what degree of mining is considered traditional? (3) If aboriginal mining is legitimate, is there evidence for past mining in the region claimed by TGX? (4) Is it reasonable to allow traditional miners to benefit from the exploration activity conducted by TGX (ore discovery, exposure at surface, etc.)? (5) Is selling gemstones collected by aboriginal collectors to the world market also a traditional pastime? (6) If the former is all or partly true, did TGX know of this and did the government inform them when they applied for their exploration permit?

Final Cynical Thoughts

While I understand the desire first nations have to preserve their traditional, pre-colonial practices, to demand special status can in certain cases be construed as hypocrisy. Much like the Inuit hunter using rifle and snowmobile to achieve their specially-sanctioned hunting quota in the Canadian Arctic, or the Atlantic Mik’mak Indian lobster fisherman using powered boats, radio, and sonar to bring in their catch, sometimes these “traditional methods” are none too traditional. Likewise, is mining – even on a small scale, of deposits found and exposed at surface using modern technology and knowledge really “traditional”? Going further, is selling those gemstones to offshore consumers “traditional” as well?

Disclaimer: The author holds 1000 shares of TGX. This article is based on the opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2009 www.kimreport.com

Hoping for a Copper Comeback

Posted by David

Background

Chile is probably the world’s #1 supplier of copper (~35%) through the state-owned entity Codelco and various foreign producers. The geology of the Andes lends itself to large-scale porphyry deposits rich in copper as well as gold, molybdenum, silver, rhenium and other metals. Such a huge drop in the prices of these commodities (with the possible exception of gold) has done serious damage to the Chilean economy. With copper exports representing such a huge portion of its GDP (US$37.6 billion, or 56% of total exports in 2007), Chile’s trade surplus for 2008 will appear puny indeed.

Gold vs. Copper

As with most base metals the price of copper has experienced a huge drop from about US$4.00/lb. in July to $1.29/lb. this Monday. This drop has caused any company that has copper as a significant component of its production to suffer serious revenue decreases. Good examples of these are VALE-INCO (NYSE-RIO) (although nickel and iron are to blame here as well) and Yamana Gold Inc. (TSX-YRI, NYSE-AUY, LSE-YAU). Yamana itself is an interesting case as although it is touted as a gold producer, a significant source of its revenue is from copper (e.g. Chapada, Brazil). This has caused Yamana to see a slower rise in share price than other more gold-oriented companies, such as Kinross (TSX-K).

Challenges for a Small-Cap Company

However, large companies have the obvious ability to weather these low metal prices and Yamana stock has still seen a rise from ~CA$5/share to just below $10/share in the past month, mainly due to interest in gold. It is the small-cap companies that have the most to worry about in the short term when metal prices slide. One such company in Chile that is feeling the pressure is Cu-Mo tailings processor Amerigo Resources. Things have changed for Amerigo since the last KIM Report article in April 2008, copper and molybdenum prices have tanked and most producers are happy if they are currently breaking even. At the time of that article, Amerigo was struggling with high energy costs due to a very dry season at the time as most electricity in Chile is hydroelectric in nature combined with high fuel costs. Now fuel costs are down, Chilean electricity is cheaper due to more precipitation, and electric generators running on cheap bunker oil have been installed at their facility near the Codelco-run El Teniente mine (from which they obtain the tailings for processing). Unfortunately, the timing of these energy-savings coincides with the drop in metal prices. Amerigo recently released news that it had incurred negative price settlements for sales of copper and molybdenum to smelter companies Enami and Molymet, respectively.

The Upside

The good news is that Amerigo believes it can reduce its production costs before royalties (which are tied to copper price) to $1.20-1.25/lb. The company has recently managed to partially defer energy, royalty (paid to Codelco), and negative copper price settlements. It is in the process of negotiating deferral for the negative molybdenum payments as well. Enami, a state owned entity, has an established mandate to support small to medium copper producers through price protection. How this will affect Amerigo has not been determined. Amerigo has also extended its banking line to US$5.6 million and has opened a new line with a second bank for $5 million. Negotiations are also occurring to open new long-term credit facilities of $10-20 million. On the shareholder end, management has enacted a shareholder rights plan – in essence a poison pill to dissuade any opportunistic takeovers.

Caveat Emptor

The real issue here is if Amerigo will maintain its CA$0.065 semi-annual dividend due this spring. Many shareholders considered a ~6% return to be excellent last spring when the price was around CA$2.25/share. Now with the share price at ~$0.35/share, this ~20% dividend is either an amazing opportunity, or indicative of extreme risk. Given the unclear forecast for metal prices, it appears to be anybody’s game. Amerigo’s future good financial health depends on its continuing good relations with its creditors and smelters.

Disclaimer: The author holds 500 shares of ARG and 200 shares of YRI. This article is based on the experience and opinions of the author. Please do your own due diligence when investing.

Canaries in the coal mine: resource juniors first to feel effects of slowdown.

Posted by David

As the American market for consumer goods contracts and the greenback devalues, the level of imports to the U.S. greatly reduces. Countries that have economies strongly dependent on manufactured goods to the U.S. (and other troubled countries such as Britain) are affected by this loss of consumer base and start to experience recessions of their own. As the U.S. imports less melamine-enhanced milk and children’s toys with Pb-bearing paint, the world’s most vibrant manufacturer – China, loses jobs. The next dominoes to fall in this depressing little game are the countries with resource-based economies: Canada, Australia, Brazil, South Africa, Chile, etc. With reduced manufacturing, there is less need for raw materials used therein. Also, as the manufacturing countries lose jobs, their own consumer base contracts. Construction in countries like China is reduced as there may not be a demand for homes or office space due to closed wallets.

 

The first sign of dire economic consequences experienced here in Canada is how producing juniors are affected by lower commodity prices. These juniors often have much smaller profit margins than do the seniors and feel the pinch much harder. The most common route of action for these companies when the price for their commodity (metal, potash, oil, gas, etc.) unexpectedly drops is to cease production and put the mine(s) into caretaking mode.

 

This occurred with Blue Note Mining (TSX-BN) when they recently announced they were temporarily halting production at their Pb-Zn-Ag Caribou and Restigouche mines at Bathurst, New Brunswick. This is a far cry from when initial commercial production was achieved last January and its grand opening in June. BN has had excellent technical success in streamlining production at their mines. An example of this was when Caribou exceeded the specifications for maximum tonnage per day milled by 0.2% for August. The have also vastly improved recovery since the start up. The company has also had success in expanding the deposit and thus mine life by further drilling on site.

 

A second example, First Nickel Inc. (TSX-FNI), a Sudbury Ni producer, has also put their Lockerby Ni mine into mothballs as of this week. Acquired from Falconbridge in 2005, this is FNI’s only producing mine. Although they do possess numerous exploration properties in the Sudbury and Timmins areas.

 

So why, in the face of this success, have BN and FNI put their mines on “temporary care and maintenance”? Although it leaves the company in life-support mode and hoping they can remain solvent until metal prices recover, it was the most logical course. Zn has fallen from highs in 2006 at $4000/t back to levels from 2004 at $1100/t. Pb has fallen in a similar fashion from ~$3500/t last autumn to $1300/t levels. Ag is also down from $19/oz to about $10.50/oz in mere months. Ni prices have been reduced from about $8.00/kg to $4.50/kg in just over a month. Price drops of such magnitude will quickly transform a rich deposit into one that is entirely uneconomic. This happened to the deposits at Bathurst and Sudbury and will continue to occur with numerous junior/small-cap producers until people are willing to pay reasonable prices for metals.

 

A company with the potential to go the direction that BN and FNI have gone is Great Panther Resources (TSX-GPR), a silver producer in Mexico. This company has two mines: Topia (Ag-Pb-Zn) and Guanajuato (Ag-Au), and two exploration projects: Mapimi (Ag-Pb-Zn-Au) and San Antonio (Au-Cu). The company has found numerous rich ore zones across their properties and has had success in fine tuning their mining operations to achieve high recoveries. However, GPR has had to cut back on exploration expenditures and had to focus on efforts to reduce cost per ton to process their ore. Their current cost to produce Ag is between $10/oz and $12/oz. As Ag prices flirt with $10/oz, these mines may no longer be profitable to operate in the short term.

 

The individual junior can do nothing to affect world commodity prices. Some may have been lucky or wise enough to hedge a portion of their production at prices from six months ago. However, even those contracts will run out. There may be a slight recovery in metal prices in the short term, but it will take a number of months to years to return to prices seen a short while ago. When metal prices are such that it is economic to return these mines to production, metals like Pb can once again flow from Canada to China and be used in manufactured goods such as children’s toys to be sent back to Canada. Until then, these companies and their investors will have to sit tight and hope that unlike the canary, they can withstand the toxic fumes emanating from the credit market that started this whole mess.

 

Disclaimer: The author holds 1000 shares of BN, 500 shares of FNI, and 500 shares of GPR. This article is in based on the opinion and experience of the author. Please do your own due diligence when investing. To the author’s knowledge, BN ships all of its metal concentrate to Europe.

Diamonds North works to turn high diamond counts into high share price

Posted by David

A rather vocal minority of Diamonds North (DDN) shareholders responded quite negatively to earlier criticisms of the company in regards to discussion on whether or not it was reading too much into rather high diamond counts from its Amaruk property.

 

Having attended the CEO’s (Mark Kolebaba) presentation to a sparse crowd at the 2008 Toronto Resource Investment Conference (Wake?) October 4th, it appears that DDN is not resting on its laurels and is attempting to make something of the encouraging results seen thus far from its arctic properties. Mr. Kolebaba gave a strong presentation outlining the importance of further diamond exploration in a market were the last significant deposit to start producing was Diavik in 2001 (no, Jericho does not count).

 

DDN’s main property, Amaruk, consists of ~2 million acres in Nunavut containing 29 kimberlite bodies. Many more geophysical targets remain to be drilled for kimberlite. Garnets from till samples in the region show strong G10 and G9 geochemical signatures (strong indicator minerals for peridotitic diamonds), with a minor eclogitic garnet component in terms of chromium and calcium contents.

 

One major criticism of the news release last March regarding the ~7 diamonds/kg result was that only 81.75 kg of rock from the Tuktu-1 kimberlite was sampled. Such a small sample is easily skewed to economic or uneconomic numbers by the addition or subtraction of a few carats, respectively. Mr. Kolebaba’s company is working to firm up the numbers for Amaruk by taking mini-bulk samples of 20 t from Tuktu-1, -2, and -3, and 15 t from the Qavvik body.

 

Larger sample sizes lower uncertainty and are especially important to diamond mining as even economic pipes have low absolute concentrations of diamond (well below 1% by weight). These samples have a higher chance of capturing economically viable macrodiamonds, rather than just the microdiamonds found do far. The mini-bulk sample is an important step as the Amaruk property moves from the reconnaissance stage towards the evaluation stage.

 

Interestingly, DDN’s share price has not been pounded down as badly as some other diamond juniors. It closed Friday at $0.40 down only 50% from its traditional support level at $0.80. Part of this may be due to loyal investor support, and the other part is that it has stumbled upon a potential base metals deposit also on the Amaruk property known as the Tunerq prospect. Rather than put it aside or option it out, DDN has decided to run with the prospect. Grades of up to 2.49 % Ni, 0.56% Cu, and 0.05% Co have been encountered in sulfides during drilling. An opportunistic and adaptable attitude by management should help keep the company’s head above water in a market that currently does not favour any sector, let alone diamonds.

 

Disclaimer: The author owns no shares of DDN. This article is based on the personal 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.

Small cap Cu-Mo producer gives steady payout

Posted by David