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The Cortez Story - Part Two: The Fundamentals (2)

Precious Metals Special Report

... Part One: Overview
... Part Two: The Fundamentals
... Part Three: Overview of Players, Two Majors
... Part Four: Profiles of Sample Junior Players
... Part Five: Cortez Trend Maps, Pictorial Overview

Part Two: The Fundamentals (2)

But is the Company "For Real"?

In the Enron Age, this is a very important question. Ideally, in order to make a well-informed qualitative assessment of a company, the investor makes an on site visit, talks to expert geologists, meets the management in person, and reads all their financial and other public disclosure literature. We all nod our heads in agreement that this is a great idea, but in the real world most mutual fund managers and stock brokers are spread so thin even they can hardly find the time to take these prudent steps.

I think that John Kaiser has developed one of the best systems I have seen for screening and making an initial evaluation of junior mining companies. A number of industry insiders I have met at precious metals trade shows share this opinion. I provide his scoring system and summary comments regarding White Knight Resources below as an example that pertains to a Cortez Trend exploration company.

  Factor Rank Avoid(0) Bad(1) So-So(2) Good(3) Excellent(4)
1 Story - Target Size 4 No Targets less than 500,000 500,000 -1,000,000 1M-5M more than 5,000,000
2 Story - Portfolio 3 0 1 2-4 5-10 more than 10
3 Story - Frontier Bluesky 2 None Well Explored Area New Model or Technology in Well Explored Area Under-explored Unexplored
4 Story - Geodiversity 2 None One Country/one property One country /several properties One Continent /several properties Several Continents /Several Properties
5 Story - Political Risk 4 No Project Focus Unstable Trending toward instability Trending toward stability Stable
6 Story - Title Risk 4 No Title Disputed or pending private vendor; Aboriginal land claim or environmental permitting issues Uninvested or vested in third world from private vendor or pending from third world government In N. America vested via private vendor or pending via government or granted by 3rd world government Acquired directly from non third world government by staking, permit, concession, etc.
7 Asset - Working Capital 2 Zero or less less than 10% 10-50% 50-100% more than 100%
8 Asset - Non - Cash 0 Non Non - Cash Hard Assets less than 10% 10 -50% 50-100% more than 100%
9 Asset - Spec Premium 2 100% more than 90% 50-90% 10-50% less than 10%
10 Asset - Gold Oz Deficit 3 more than 20,000,000 5,000,000-20,000,000 1,000,000-5,000,000 500,000-1,000,000 less than 500,000
11 Structure-Distribution 3 Public owns more than 90% Insiders & institutions each less than 10% Insiders & institutions each less than 20% Insiders or institutions each more than 20% Insiders more than 30% & institutions less than 20%
12 Structure - Chart Pattern 2 Exponential Rocket Launch Long-term uptrend reversal or double top or head & shoulders Trough or long term downtrend or flags or pennants or plateau Long-term downtrend reversal or Long-term uptrend or Double bottom Emerging from lon g term bottom
13 Structure-Breakdown Risk 4 2 year Hi/Lo Ratio more than 10, price in upper 10% of range 2 year Hi/Lo ratio 5-10, price in upper 20% of range 2 year Hi/Lo ratio 2-5, price in upper 20% of range Price in upper 50% of range but below upper 20% of range Price in lower half of range or high/low ratio less than 2
14 Structure - Shareholder Mood 3 Class Action Lawsuits Hangover-liquidation Drunken Exuberance, Sobering Up, or Smug Satisfaction Tipsy about potential or gearing for comeback Just getting started
15 Structure - Resale Timebombs 3 more than 50% restricted for 1 year plus more than 30% restricted for more than 6 months more than 30% restricted for 3-6 months more than 70% free within 3 months 100% free
16 People-Technical 4 Blackbox specialists No geological or geographical Average geological & limited geographical Average geological and geographical Top-notch geological & geographical
17 People-Funding strategy 2 Public Offerings Retail: brokered or private Institutional: brokered Farm-outs or sophisticated Deep-pocketed insiders
18 People - Funding History 4 Zero $ less than $1M $1-5M $5-10M more than $10M
19 People - Mgmt Priority 4 Rollback Plan Failed promotion On the shelf Second String Flagship
20 People - Stable Size 3 More than ten Six to ten Four-six Two-three One


Summary: White Knight has been focused on Nevada since the mid-nineties when John and Gordon Leask recruited Pat Cavanaugh to run the company. Cavanaugh was the geological brains behind the discovery of the Pipeline deposit in the Cortez Trend. He brought Robert Cuffney on board as vice president of exploration in 1997, but he himself departed in 2001 when the realities of the resource sector bear market caught up with White Knight. His business plan was to generate conceptual projects and use his vast network of industry contacts to farm the projects out to others. By 2001 the low gold price had annihilated the field of partners and the business model was dead. The gold bear market took a devastating toll of small producers, two of whom, Atlas Minerals Inc and Alta Gold Company, filed for bankruptcy. White Knight managed to acquire for $4,000 a database Atlas had spent $20 million to generate. Cuffney recruited Greg French, a refugee from bankrupt Atlas, and together they sifted through the data, particularly that which pertained to the Cortez Trend. The bear market caused much of the land to come open as landholders went bankrupt, and many prospectors and ranchers found their properties handed back to them. The enthusiasm by the majors for the Cortez Trend created by Pipeline also lost momentum when Placer made the ET Blue discovery, a property that Cavanaugh had at one stage optioned on behalf of White Knight, but had been unable to fund. The ET Blue discovery caused Placer to think in terms of east-west structures, and it was not until the 2003 discovery of Cortez Hills that Placer's thinking returned to the north-south structural model. During that period the USGS had released the results of a magnetotelluric survey of the region which the majors had ignored, but which was closely studied by White Knight in attempt to understand the structural controls of the Cortez Trend. White Knight realized that the Cortez Trend was the axis of an ancient deep-seated crustal fault that been reactivated many times. So while companies abandoned their claims and the majors snoozed White Knight started to acquire claims along the north-south Cortez fault where nothing had been available on reasonable terms during the nineties. White Knight's speculation was that the Cortez Trend was a 1-3 mile wide corridor of structural traps associated with horsted blocks very similar in manner to the Carlin Trend, which hosts nearly 200 million ounces of gold. As a result of its geological sleuthing and willingness to "bottom-fish" for land during the gold bear market, White Knight has ended up with a very strategic land position within the Cortez Trend. There is no discovery yet on any of the properties, but their potential is attracting a growing audience among both majors and speculators.

[Source for chart and commentary: Kaiser Bottom Fish © 2004 John Kaiser. Please go to www.kaiserbottomfish.com for additional information, to include a free trial subscription]

After the reader considers the descriptions of other junior mining companies involved in the Cortez Trend portrayed in Part Four, and considers various geological theories illustrated in Part Five, he will be able to draw some of his own conclusions regarding Mr. Kaiser's qualitative assessment of White Knight depicted above.

Other Observations

Just as the research and development process in high tech industries involves converting intangible theoretical insights into tangible prototypes ready for production, the junior mining company exploration process involves converting intangible geological concepts and sample drilling results into a producing mine.

Garbage in, garbage out applies here as well. Expected value analysis is a terrific tool, but it has to be applied with heavy doses of common sense and also combined with substantial background research on qualitative factors to be effective. I have seen spread sheet and expected value analyses abused in the real estate and oil and gas industries in addition to the mining industry. Just because something looks like it is very rational on the surface may not prevent it from generating foolishness if false assumptions are cranked into the model.

General market behavior can change state under certain circumstances similar to the way water turns into ice. A major Achilles Heel of rational models takes place if commodities prices start plummeting, as they did in the late 1990's. Then fear takes over, and investor behavior can radically shift. A junior mining company may no longer be worth the expected value of all of its many projects combined, but only the expected value of its strongest flagship project, and if that does not work out, then game over. An analogous fear factor, incidentally, caused the derivatives markets to go haywire following the Russian Default and Asian Crisis in 1998 and led to the melt down of the hedge fund Long Term Capital Management.

However, when I use the word "melt down," I would like to restate my opinion that the days of serious gold price suppression are very likely behind us, and if anything, the coming general capital market disruptions, hyperinflation, and interest rate increases prophesied by such sources as James Puplava's Perfect Storm series will, if anything, tend to create an explosive gold price and junior mining company share price melt up.

Not all ounces are created equal. Another important issue, particularly in regard to my discussion of Cortez Trend companies in Parts Three and Four, involves making the distinction between "inferred and indicated" ounces and "proven and probable" ounces. These two categories are also known as "resource" as opposed to "reserve" ounces respectively.

When we go from "resource" to "reserve" ounces, we are moving along a scale of declining risk that the ounces in the ground do in fact exist as part of a continuous deposit and that they are economically mineable. Canada's National Instrument 43-101 requires Canadian companies to file technical reports and report "resource" as well as "reserve" ounces. In contrast the U.S. Securities and Exchange Commission (SEC) does not recognize "resource" ounces. The savvy investor needs to know the difference.

Placer Dome is a Canadian company based in Vancouver, B.C. Most of the junior mining companies active on the Cortez Trend are also Canadian. Hence, they all talk about "resource" ounces in addition to "reserve" ounces.

It is often best to go straight to the source. Going along the spectrum from the lowest to the highest levels of certainty, some definitions related to NI 43-101 are as follows:

Inferred Mineral Resource An 'Inferred Mineral Resource' is that part of a Mineral Resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity.

Indicated Mineral Resource An 'Indicated Mineral Resource' is that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics, can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit.

Measured Mineral Resource A 'Measured Mineral Resource' is that part of a Mineral Resource for which quantity, grade or quality, densities, shape, and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit.

A Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

A 'Probable Mineral Reserve' is the economically mineable part of an Indicated, and in some circumstances a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

A 'Proven Mineral Reserve' is the economically mineable part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

We also see a category called 'historical ounces" frequently mentioned in mining literature, but not covered by NI 43-101. This usually means ounces once identified by an old abandoned mining operation whose methods are considered too loose or unscientific by modern standards to be officially acceptable today. Another interesting term is "contained" ounces" which typically means all ounces historically mined out of in an area plus remaining current reserves in the ground.

To summarize, "measured and indicated" or "inferred" or "resource" ounces, a) do not have enough drilling to be sufficiently defined as a continuous deposit or b) are not economically mineable at the current gold price, but may be economically mineable at an above market gold price. An advantage of stating "resource" ounces is that a mining company can peg them to a certain gold price and keep them there regardless of market fluctuations.

"Proven and probable" or "reserve" ounces means that the surmised ounces are "real" because a) there is overwhelming drilling evidence regarding a continuous and definable shape of the deposit and b) it is economically feasible to mine at current gold prices. If the price of gold slips significantly, this will usually force gold mining companies to recalculate a smaller reserve base.

At one extreme, "resource" ounces can be a complete joke when they are claimed by certain cash-desperate junior mining companies with shaky track records in exotic Third World locations where mining has never been performed before.

At the other extreme, Placer Dome's "measured and indicated" or "resource" ounces in the middle of the Cortez Trend are in my opinion very serious numbers. The deposits were found next door to major mining infrastructure with a long production history. The resource data was developed by some of the best professional geological talent in the gold mining industry. Lastly, Placer Dome is a financially solid major gold mining company that can easily survive disappointments and the truth.

Mining still suffers from an English-Metric multiple personality. As you look at land positions and assay data in Parts Three, Four, and Five, it helps to be aware of some conversion information. If you need to go beyond the information provided below, you can easily transition between the modern scientific community and medieval England by typing in "feet per meter" or "grams per ounce" and other desired conversion factors into Google.

"Bonanza" Gold: more than 34 grams of gold per tonne or more than one troy ounce of gold per ton. (American Bonanza definition)
"High Grade" Gold:
About .3 ounce per tonne and above.
Land size
: One claim is 600 feet by 1500 feet or 20.67 acres. There are 640 acres per square mile. One square mile = 2.59 square kilometers
Weights: 1 Ounce = 28.3495231 grams. 1 Troy ounce = 1.09714286 ounces or 31.1 grams
Length: 3.28 feet per meter. (The "Googled" answer)

End of Part Two: The Fundamentals

Back to: Part One: Overview

Back to: Part Two: The Fundamentals (1)

Forward to:
... Part Three: Overview of Players, Two Majors
... Part Four: Profiles of Sample Junior Players
... Part Five: Cortez Trend Maps, Pictorial Overview

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