On March 16th, Underworld Resources' board of directors pledged its support for a bid by Kinross Gold Corp (KGC) for the remaining 49 million fully diluted common shares (~92%) it doesn't own.
The takeover offer was in the mail to shareholders soon after, and expires April 26th. The bid requires a minimum 2/3 of the stock tendered, including Kinross's share. If it is accepted, Underworld shareholders will receive 0.141 of one Kinross share plus 1 cent in cash for each of their shares. This works out to a value of roughly C$2.62 per share (C$140 million fully diluted), a premium of more than 30 percent.
The deal is worth 1% of Kinross, a global gold producer with a resource portfolio of 83 million gold ounces (plus other resources), and marks an exciting start to the 2010 Yukon exploration season. Underworld Resources (UW:TSXV) discovered the 1.3Moz Golden Saddle Zone in 2009 following up on relatively narrow intercepts during the previous exploration season (2008). According to a January 19th NI 43-101 resource estimate, it has delineated a total of 1,582,142 ounces of gold (indicated and inferred - including 1,298,707 ounces of gold attributable to the Golden Saddle Zone @ 2.93 gpt).
ATAC Resources (ATC:TSXV), meanwhile, has been busy defining its own discovery, also made in the Yukon last year... and which may represent a new style of deposit for the region.
Money has been pouring into the Yukon in what looks like it could be another historic gold rush.
While the Underworld news may catalyze the market in front of the 2010 field season, the discoveries by Underworld and ATAC, and other developments, are themselves the fruit of factors - some political, some technological and some economic - which have laid the groundwork for these and other discoveries that have yet to be made.
The Yukon as a Frontier?
The Yukon has produced over 20 million ounces of gold since the first gold rush in 1896-98, most of it placer gold. It is also highly prospective for other minerals -copper, zinc, silver, tungsten, and so on.
However, relatively little exploration has been directed at uncovering the sources of the placer gold.
Politics, bureaucracy and an unfriendly gold price conspired to discourage the systematic exploration and development of the region over the past three decades despite advances in knowledge, methods, and other technology that have opened the door to new geological models and deposit styles, with some even speculating about the possibility of Carlin Type systems. Perhaps the speculation is a sign of the relative under exploration of the Yukon. Certainly, the very real discovery of new deposit styles attests to its potential... not only from the application of modern methods, but of new knowledge.
One model type that is gaining traction on the Tombstone belt, a belt of gold deposits 600-800km long (trending NW-SE through the Yukon Territory into Alaska), is the intrusion related gold system (IRGS), discovered in the early nineties at deposits such as the Fort Knox in Alaska (Kinross) discovered by Amax Gold in 1991 (~250Mt grading 0.47gpt); Brewery Creek (50 miles east of Dawson) discovered by Noranda and Loki in the late eighties (later acquired by Viceroy); and Eagle Zone at Dublin Gulch (67Mt @ 0.92gpt indicated + 14Mt @ 0.8gpt inferred) -all low grade bulk tonnage deposits consisting of sheeted veins or porphyries above shallowly emplaced plutons (monzonite). While the oxides at Brewery Creek and Dublin Gulch have been known, and mined, there has been little effort expended at finding look alikes, and even less directed at finding deeper sulphide deposits or any of the other deposit styles that we have since learned tend to be proximal and associated with the main intrusion -i.e. local skarns, replacement bodies, vein stockwork and base metal deposits. But, this is changing.
The Economies of Devolution
Up until 1979, the Yukon was a Federal territory -directly under the jurisdiction of the Canadian Federal Government. Thus miners had to go through Ottawa for licensing and other business, which in turn had negative consequences for both mining and the aboriginal people who occupied the territory, ultimately impairing development. In 1979 a significant degree of power was devolved to the territorial legislature, which adopted a party system of "responsible government" - which means it is still under Federal authority, ultimately, but a local government is elected and accountable to the local territorial council rather than to the distant Federal government. Although the social democrat NDP party controlled the government for most of the period during the eighties & nineties, it initiated/drove both the devolution as well as the settlement of land claims, which was completed under the liberals.
After a few false starts, most of the land claims have now been settled (by 11 of 14 aboriginal groups) while the passage of the Yukon Act in 2003 formalized the devolution of additional powers to the territorial government. Mr. Scott Kent, Chair of the Yukon Gold Mining Alliance and a former Liberal Minister of Energy, Mines and Resources and former Executive Committee Member of the Yukon Environmental Socio- Economic Assessment Board, said that,
"The government has established a permitting and assessment process that allows proponents to deal with all levels of government in a one window approach making it easier for resource companies to engage in the process."
Mr. Kent notes further that while the process has been in the works since the 1980's it has only come to fruition in the past 10 years. The current exploration boom attests to it.
Investment Strategy
It is a little unusual for a major gold producer to buy a deposit smaller than 5 million ounces unless it thinks there's more than the 1.5 million ounces that Underworld Resources has defined so far.
The obvious conclusion is that Kinross thinks there's more, or else it would have waited out the end of the exploration season to buy the disappointment, rather than stepping up before the drills turn.
It is after all paying top dollar for the known ounces - roughly $90 per ounce in market cap - the high end of the range that advanced exploration companies get in the market today. Probably, it would not pay that for a 2Moz deposit. The news should thus interest the market. Based on a cursory analysis of Underworld's White gold prospect it is difficult to see where it can grow 3 or 4 fold to the world class size that has meaning for major producers like Kinross... at least not in one exploration season. It is possible they know something about the target at depth, or maybe about any one of a number of other targets nearby. Word has it Kinross has decided to make the Yukon a priority. If it is a 5-10 million ounce deposit, Kinross may be scooping it at a fraction of the ultimate cost, but much depends on how much exploration and development is required to prove it all up. Either way, the news is another chapter in a developing story that appears to be ushering in another historic gold rush in the Yukon.
For exposure to a potential area play surrounding Underworld's White gold property we believe that Kaminak Gold (KAM:TSXV), Golden Predator Royalty & Development Corp (GPD:TSX), and ATAC Resources (ATC:TSXV) are well situated.
Kaminak acquired its property from Shawn Ryan, the same prospector that scoped out Underworld's White gold project. However, Kaminak has a speculative valuation tied to a nice soil anomaly that hasn't been tested.
ATAC is controlled by a renowned group of geologists that has spent decades toiling through prospects in the Yukon. It has many properties in the Yukon including the RAU project where it has potentially discovered a new style of deposit for the region... a sediment-hosted system that rivals Underworld's discovery.
Golden Predator is headed up by one of the most widely recognized prospect generators on the west coast. It is earning a 75% interest in the Brewery Creek mine where it is trying to expand the 280,000 ounce oxide Au resource, and is following up on sniffs of high grade auriferous sulphides at depth.
Golden Predator is our best pick for value. Not only does it have several very attractive targets in the Yukon (three of them advanced), it has a strong balance sheet, a significant royalty income stream, and two mill sites in Nevada. One of these sites has a 1320 tpd gravity flotation mill (Taylor) next to a 19Moz silver resource (the resource is being spun out to Silver Predator but GPD will retain the mill), while the other site (Humboldt) is undergoing permitting for a 200 tpd modular mill. The long lead time equipment for this second mill has been ordered with a final installation decision awaiting development of the Adelaide vein in Nevada where the company expects to be mining by some time next year.
On a market cap basis, we therefore see a more favorable risk/reward here than in the others.
Table 1: YUKON JUNIOR MINERS & EXPLORERS
Golden Predator Royalty & Development Corp (TSX:GPD)
Golden Predator Royalty & Development Corp is a small cap exploration and development company, which we feel is overlooked. Aside from its relatively low market cap, its key investment features are,
- strong balance sheet with excess working capital of approximately $13 million
- royalty income stream of $1 million in 2009, $1.3 million in 2010, escalating after three years
- technically strong and experienced management group
- hidden value of Taylor mill (replacement value ~$40 million) adds muscle to balance sheet
- to start small scale mining in Nevada next year to fund Yukon exploration
- prime exploration and development assets in the Yukon
The company is led by Mr. William Sheriff, a former prospect generator turned company builder when he assembled a package of Uranium assets for Energy Metals Corp from 2004-06, and then sold it to Uranium One for $1.75 billion. Sheriff is considered to be one of the leading prospect developers in the Western United States having generated numerous exploration projects for many major mining companies including Newmont, Anglo, Uranerz, Atlas, Cordex, Homestake, FMC and others.
Through this work he was able to amass a wealth of base and precious metal interests consolidated into Golden Predator Mines in 2008, which subsequently split in two -with the precious metal business becoming Golden Predator Royalty & Development on 19 January 2009.
The company's immediate focus is to develop its world class assets on the Tombstone Gold Belt, in the Yukon's Tintina Gold Province, a 600-800 km long belt of gold deposits trending NW-SE through the Yukon -where it plans to drill 400-500 (RC) holes this year.
It is aggressively exploring its Gold (Scheelite) Dome, Antimony Mountain, Clear Creek and Brewery Creek projects for a model that has become characteristic in the Yukon over the past two decades, but has not yet been properly explored on the belt. Brewery Creek, a permitted former producer, hosts an indicated resource of 3.98 million tonnes grading 1.135 gpt Au (145,000 oz) and an inferred resource of 2.2 million tonnes grading 2.01 gpt Au (143,000 oz). The resource was delineated by previous operators and represents the remaining gold in known pits but a 2009 technical report indicates the potential for additions to the near surface resource, and the potential existence of a significant high grade sulphide resource at depth.
The technical report made reference to a Carlin Type system but that needs qualification. The report also recommended a two phase exploration program estimated at $3 million totaling over 10,000 meters of drilling to expand the open ended oxide targets beneath previous pits, and test for larger, and higher grade sulphide ore beneath the North Slope.
The first phase drill program began in August (2009) and has returned encouraging drill results -confirming the potential for depth extensions to the oxides at depths of up to 230 meters under the "Pacific" pit, as well as the potential for high grade sulphides at depth beneath the North Slope (best intercepts include 20.17 gpt gold over 1.90 m in hole BC09-137 and 4.72 gpt Au over 9.71 m in drill hole BC09-139 -December 2009- which "extended mineralization down dip by approximately 330m"). While Brewery Creek (Golden Predator is earning 75% from Alexco) is the company's most advanced exploration asset in the Yukon, it is not necessarily the favorite, or the most prospective. Management ranks other projects more highly. Its recently acquired 100% owned Eureka project (not a Tombstone style of target) is 50 kilometers from Underworld's White Gold camp; it boasts a 12 square kilometer soil anomaly that resembles the White Gold target.
Geochemical anomalies have been useful in identifying targets at Underworld and ATAC's projects.
In fact, Golden Predator's Chairman, Bill Sheriff, says, it is "about the only tool" used by Underworld. Sheriff also ranks Golden Predator's Gold Dome, Clear Creek and Antimony prospects highly.
At Gold Dome, one of its most highly regarded prospects, the company began drilling an eminently larger (10kmx3km) gold-bismuth geochemical soil anomaly in 2009 where values over 1 gpt Au were not uncommon in the soils.
The drill program returned impressive results, including one intercept (GD09-007) grading 11.12 grams per tonne over 25.4m from a depth of about 10m. Golden Predator has identified over 14 related targets and plans an extensive follow up drill program in 2010. The Gold Dome project is Golden Predator's largest property holding in the Yukon, and sits at the headwaters of an old placer district, operated to this day, whose source has not been found. Management believes the source of the placer is underneath the anomaly.
At its 100% owned Antimony Mountain, the company drilled 12 holes last year in order to demonstrate the continuity of the AJ vein, which has historically returned values of up to 77.7 grams per tonne gold.
The drill results returned values of up to 112 gpt (3.3 ounces per tonne) over widths of less than 5 meters at a depth of less than 100m... with variable amounts of quartz, tourmaline and sulphide minerals -arsenopyrite, pyrite, pyrrhotite and chalcopyrite. During the 2010 exploration season the company plans to follow up on the AJ vein and a new target discovered by Shawn Ryan called the Golden Wall, which is related to an extensive gold geochemical anomaly (600x900m).
Management has contracted four drill rigs "with the intentions of retaining two of them to work year round on the best two projects." Bill Sheriff also said, "most of the gold in Nevada and Alaska has been drilled out with RC drilling. We get a huge benefit compared to our competitors who drill core... First off, it is half price per meter or less... Secondly its penetration rate is double that of core... and we have 4 of our 5 projects road accessible... a true rarity in the Yukon... this means our costs are half to start with when compared to a helicopter support program. Bottom line is that we will get 5-6 times as many holes and samples for each dollar of drilling as our competitors."
Altogether, the company plans to drill as many as 500 holes in the Yukon in 2010.
In recent news, the company has announced a $5 million flow through financing, and has appointed Mr. Piers McDonald to the board. Mr. McDonald is the former Premier of the Yukon (1996-2000) who initiated and oversaw the final stages of the devolution and land claims processes in the Yukon.
Golden Predator Royalty & Development Corp has two main obstacles to overcome: 1) it has a lot of properties (too many some think); and 2) it needs a flagship to evolve.
We believe a flagship will come out of this year's exploration effort, and as for its large portfolio of properties, Bill Sheriff, the CEO, has built a career on squeezing value out of his property portfolio.
As one example, the company recently announced news that it plans to spin out its silver assets (including the 16Moz Taylor Silver Mine) into a new deal called Silver Predator that is to be headed up by Louis Lepry (Newcrest, Metallica, Crown Resources). The new company will merge with assets from Rockhaven and Strategic Metals -the folks behind ATAC.
That's a pretty good way to monetize some of its non core assets, of which they have more than 80!
Indeed, it was thinking like this that was instrumental in his previous success with Energy Metals (sold out to UUU for >$1.7 billion in stock). So where the market currently sees the number of projects in its stable as a weakness of sorts, we see it as a strength... something to realize value (or income) from.
Every Yukon portfolio should include some Golden Predator Royalty & Development Corp.
