Palisade Research - Wed, Oct 5, 2016

Iconic Minerals (TSXV:ICM) - The Only Lithium Deal Backed By Gold

picture of lithium brines

Lithium companies continue to lead the stock market. While the TSX Composite gained about 13% year-to-date and S&P 500 scored a mere 6.4%, lithium companies grew by a stunning 24%.

Will this trend continue? Only time will tell but the energy metals revolution is still in its infancy and quality deposits will be required to feed the need for batteries worldwide.

Lithium Market - A Quick Summary

The lithium market remains strong, underpinned by growing demand projections and possible supply constraints. The two major demand drivers for lithium are electric-vehicle batteries and energy grid storage systems.

As a reminder, the lithium market is very concentrated. Four major mining companies are responsible for over 90% of the global lithium production. While these players have done well in the past, it is apparent that none of them have a robust pipeline of new projects that can fundamentally change the current supply-demand situation. Moreover, almost half of the total supply comes from South American countries, which always include some jurisdictional risk.

The only North American production site is in Nevada, which is controlled by one of the four lithium majors, Albemarle (ALB). This is a US$9-billion company that operates Silver Peak, the single producing lithium mine located in the United States.

As the lithium bull really heated up, many lithium companies rushed to purchase claims adjacent to Silver Peak, disregarding geology and simply buying for the sake of accumulating acreage. This may be a viable strategy for many juniors that simply want to draw attention, but Iconic steered away from this bandwagon approach and hired a proven technical team to find the best of the best. Iconic Minerals is now well positioned to fully experience the coming demand surge and supply constraint in the lithium market.

Iconic Minerals: The Company

Iconic is a junior mining company focused on exploring lithium projects in Nevada. Its flagship project is Bonnie Claire located 60 kilometers (37 miles) from Clayton Valley and the Silver Lake property.

sky view picture and property map of Albemarle's Silver Peak mine and Bonnie Claire to the south

Bonnie Claire may host lithium brine deposits that, once discovered, will be cheap and quick to bring to production. Lower costs and faster development make brines much more attractive for investors and junior mining companies than hard-rock deposits. Globally, about 61% of all lithium is produced from brines.

Iconic has 100% interest in a brine claim position that is 1.5 times larger than the existing Clayton Valley basin. Furthermore, samples to date actually exceed resources contained within Clayton Valley, with recent additional geochemical results from the first monitor well, starting where previous results ended at 980 feet (299 meters) and continuing to 1,340 feet (408 meters), lithium values ranged from 960 parts per million to 2,550 ppm.

This was one of the things that caught our attention. Instead of trying to squeeze in around the existing mine, the Iconic team took a step back and saw a larger opportunity elsewhere. But make no mistake: Bonnie Claire is not located too far from Clayton Valley - 37 miles is well within one-hour driving distance.

With 18,420 acres (7,450 hectares) worth of land, Iconic's land holdings are one of the largest in the region. However, the company does not plan to just sit on its land and wait until a potential suitor comes. After raising C$3 million in June 2016, Iconic began its first-year exploration campaign at Bonnie Claire.

This program is based on geophysics surveys that the company has already conducted. As a result of the reconnaissance, Iconic has outlined a well-defined layer of low resistivity which is characteristic of lithium brines. The picture below clearly shows the low-resistivity area 330 feet (100 meters) below surface:

geophysics model diagram

The low-resistivity layer is very consistent, and after conducting the first magnetotelluric (MT) survey the company analyzed the most promising targets for follow-up drilling. Along with that, it will continue conducting geophysics to better understand the property and areas that could host the strongest lithium aquifers.

In August, the first drill results arrived. The company reported that Phase 1 drilling has so far successfully located a high-conductivity zone that can represent a brine horizon. Drill results from the first hole (BC-1601) showed that, as predicted, there is potential for a brine horizon to exist. As mentioned earlier, the first well yielded lithium values ranging from 960 parts per million to 2,550 ppm and results showing that lithium content is highly anomalous for a total of 1,180 feet (360 meters).

The hole is part of a three-hole program that the company is currently working on. Initial results from the other two should be available in the next two months and if the results are positive, the company will widen the holes and conduct pumping tests. This will show potential production grade and flow rates and if the tests are successful, the company will eventually convert these holes into production wells. If the current exploration program is successful, we expect more exploration work to be done at Bonnie Claire.

Even though the company has just started drilling, the market is already paying attention. Iconic is one of the few lithium explorers that are actually exploring, and its progress has already translated into a higher share price. The appreciation was seen as the company knocked down milestones, including the closing of the private placement; commencement of drilling, and receiving the results of its MT surveys. In short, the company is working hard to deliver tangible progress and the market has been quick to appreciate it.

In terms of jurisdiction, Iconic operates in one of the world's best mining jurisdictions in Nevada. If you recall, a significant portion of the global lithium supply comes from less favorable areas, such as Chile and Argentina. Risk-averse investors are right to prefer a known and proven location. This is reinforced by the most recent Fraser Survey of Mining Companies, ranking Nevada as the world's third investor-friendliest jurisdiction out of 109 jurisdictions, right after Western Australia and Saskatchewan.

In the same survey, Chile is ranked 11th while Argentinean provinces scored very poorly. The most investor-friendly is Salta (71st place) with La Rioja coming at literally the lowest (109th place, the last of the pack). On average, Argentinean provinces ranked 93rd.

Iconic's team chose Nevada not only because of its investor friendliness but also because the company's top team members have experience working in this state.

The People of Iconic

The company's CEO is Richard Kern, a geologist with over 35 years of experience. As a Professional Geologist, he has been involved in exploration activities in the US, South and Central America, Australia, New Guinea, Malaysia, China, and Fiji. In the United States, Mr. Kern was involved in major gold discoveries, in Nevada, he and his team explored what later turned out to be a 1.6 million-ounce gold deposit at Eureka.

We are pleased to see a CEO who has not only management and business experience but also a hands-on attitude toward the company's exploration progress. As a Professional Geologist and the company's qualified person, Kern signs off Iconic's press releases containing material information.

We should note here that Mr. Kern is not the only technical person overseeing the company's exploration. The management understands that when it comes to early stage exploration stakes are as high as failure rates. To make sure the company is making the right decisions as it advances exploration activities at its properties, it has engaged three technical consultants to assist.

One of them, Mr. David Shaw, has over 30 years of experience in mineral exploration and financing. He was involved with Salares Lithium, a lithium brine company whose project was purchased by Australia-based Talison Lithium. Mr. Shaw remained a director of Talison when it was subsequently bought by Chengdu Tianqui Industry for C$800 million in 2013.

Another technical advisor working with Iconic is Mr. Ian Hutchenson. Back in 2010, he worked on Chilean brines project that was purchased by Talison Lithium.

Lastly, Mr. Matt Vitale brings to the company 14 years of experience as an independent hydrogeologist. He has experience in surface- and groundwater quality on various projects within North America and Australia. Along with his work in the mining sector, Mr. Vitale is also Project Manager for a number of Nevada State Department projects. Iconic should benefit from his experience and knowledge in hydrogeology and the policies of Nevada's natural resource regulators.

The management team and the company's insiders hold about 37% of the total amount of shares outstanding. We see this as a vote of confidence on their part. We also conclude that the management has significant motivation to make sure the company's ventures succeed.

Share Capital

Iconic's capital structure is robust. It had 63.9 million shares outstanding, 5.2 million options and 10.4 million warrants.

Four out of the 5.2 million options have an average exercise price of about C$0.12 with about 3.6 million of them currently exercisable. There are also over 10 million warrants exercisable at C$0.075-C$0.30 per share. At time of writing, many are in-the-money, potentially increasing the risk of dilution. The company issued most of the warrants to finance its Phase 1 exploration. We cannot argue with the fact that it is still challenging for a resource-sector junior company to finance its activities, so deal sweeteners such as warrants still need to be used.

However, we are not too worried about dilution here. As long as the company achieves its milestones (and we have already seen management team actively delivering on their promises), there should be little concern for the existing and new shareholders.

Iconic has C$3.6 million in debt. We do not think that this poses a threat, the company has managed to negotiate a 25-year repayment schedule with its creditors. As a result, debt servicing payments will not get in the way of the company's main activity of exploration at Bonnie Creek.

Finally, we should note that the company's shares trade both on the Toronto Venture Exchange and on the Frankfurt Exchange (symbol YQGB.F). As a lithium company, Iconic was prudent to list its shares on a European exchange. This will allow the company to have better access to environmentally-minded investors from across the Atlantic.

Other Assets - The Free Call Option

Although Bonnie Claire is the company's main project, it has other assets. Namely, the three gold projects located in Nevada: Hercules, New Pass, and Squaw Creek.

Nevada state map with locations of Squaw Creek, New Pass and Hercules projects

Hercules is a gold-silver property located in a historic mining region in Nevada. Iconic is in an earn-in agreement to acquire up to 100% interest in the lease of this project. A 2011, NI 43-101 compliant technical report mentions a historic indicated estimate (non-NI 43-101 compliant) of about 470,000 ounces of gold and 6.5 million ounces of silver for a total of about 580,000 ounces of gold equivalent. On top of that, an 'inferred mineral resource' of 427,000 ounces of gold and 6 million ounces of silver for a total of about 527,000 gold equivalent ounces (non-compliant).

Considering the company's current market capitalization is only $21 million, Hercules in itself gives Iconic significant downside protection. However, there are still more ounces in the ground. New Pass is another gold-silver property that the company has in Nevada. Unlike Hercules, it has a NI 43-101 compliant resource estimate. Specifically, the project hosts about 283,000 ounces of gold and 3.1 million ounces of silver for about 340,000 ounces of gold equivalent.

Lastly, Iconic also holds a 50% interest in the Squaw Creek project in Nevada. It lies 42 miles north of Battle Mountain, between the Midas and Ivanhoe mining districts. Squaw Creek is an earlier-stage project with reported gold mineralization over an area of 3 miles by 1 mile.

In sum, the company's gold projects are worth many times its current market capitalization already. They are cherry on top of its main lithium assets. When the market realizes their worth, Iconic's share price should increase correspondingly.

Investor's Takeaway

The lithium rush continues, and a lot of companies try to get into this market while it's hot.

From our perspective, Iconic follows a significantly more prudent strategy than some of its peers. It selected its projects based on its (prime) location and actual economic potential. Even though lithium brines can be brought to production relatively quickly, it still requires a lot of work and investment. And Iconic shows that it is committed to its assets and its shareholders.

With a geologist CEO teamed up with three technical consultants and enough cash in the bank to keep working on its promising Phase 1 exploration, Iconic is well-positioned to not only profit from a potential continuation of the current lithium rally but also weather a correction, should one occur.

The market sends clear signals that it is following this story closely. Future news releases will be acted on immediately as the company unlocks more value at its main project (possibly followed up by Iconic's gold properties), and its share price could reach several times its current value.

As a lithium play with a significant precious-metals component, ICM is a great early-stage story for the nascent resource sector bull.

Palisade Global Investments Limited holds shares of Iconic Minerals. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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