Palisade Research - Tue, Jun 13, 2017

Junior Mining's Infamous Guide To Investing

picture of a man wearing a suit with his hands beside a crystal ball

Mining hall of famer, Pierre Lassonde, revolutionized the mining industry with the creation of Franco-Nevada, the first gold royalty company. Its initial transaction was in 1986, the $2 million royalty purchase on Barrick's Goldstrike, which consequently became North America's largest gold mine.

Franco-Nevada's portfolio of royalties now collects over 460,000 of gold equivalent ounces, generating close to $500 million in cash flow per annum.

Thirty years ago, Pierre also released a chart that has now become a staple in the mineral exploration business - the Lassonde Curve. The Lassonde Curve is a chart outlining the life of mining companies beginning at exploration and ending in production, showing value that the market attributes to each stage.

line graph of the Lassonde Curve for mining stocks' typical prices from pre-discovery through production

There are now many variations of the curve, but the theory behind it holds the same. As a company de-risks its project, more value is unlocked for shareholders. The discovery phase is by far the most exciting, and ground-floor investors can see tremendous gains in a short time frame. The project is proven up until a deposit is finally defined.

After a deposit is delineated, the project enters the development phase where many initial investors begin taking gains off the table. This period can be accompanied by a lack of news flow as companies work on economic studies, which add to the sell-off by impatient investors.

When a company finally begins construction, the reality of cash flow becomes apparent, and value investors begin to enter the stock. It is up to the company to keep its 'pipeline' full to ensure value creation outpaces depletion.

As investors, we believe the Lassonde Curve holds true and try to time our entries and exits accordingly. Looking at our larger holdings, this point becomes quite obvious.

Discovery, High-Impact Plays:

line graph showing where Triumph Gold is on the Lassonde CurveTriumph Gold (CVE:TIG, FRA:8N61, OTCMKTS:NFRGF, Mkt Cap: C$23.3M) - Original Write-up - While Triumph already has a monster resource of over 6 million gold equivalent ounces, this company is still very much in its discovery phase due to its 20,000 hectare land package.

The company just began a $4 million exploration program, which will include 13,000 metres of diamond drilling. Drilling will look to expand the Nucleus and Revenue deposits, and to drill the newly discovered Generation zone. Triumph spent most of 2016 reviewing historical data, and determined that there is an early stage porphyry-style mineralization that was completely overlooked in the past.

Triumph Gold property map with its Nucleus and Revenue deposits circled

The first drill is already on the ground, and a second will be added in the coming weeks. We expect a strong stream of assay results to begin hitting the wire in late June.

Triumph remains one of the cheapest companies in terms of ounces in the ground, but it was the geology that enticed Goldcorp to invest $5 million and take 19.9% ownership.

line graph showing where Mexican Gold is on the Lassonde CurveMexican Gold (CVE:MEX, FRA:4QW1, Mkt Cap: C$13.6M) - Original Write-up - Mexican Gold has completed and released all the assays from a drill program it began in February, and the results have been more than satisfactory. The campaign's primary objective was to infill the El Dorado-Juan Bran zone for the purpose of a maiden resource. There was one step-out to test another parallel zone, and this was confirmed by drilling 2 meters of 15.98 g/t AuEq.

Mexican Gold is set to release its maiden resource sometime in late June or early July, and we are very confident that it will not disappoint. We believe the resource will attract the gold majors, and a much larger institutional round will occur to continue drilling out the El Dorado-Juan Bran, Santa Cruz, Cinco Senores, and four other potential zones.

Mexican Gold property map showing various target zones

The company has also been cleaning and bolstering its board, appointing Ali Zamani to Chairman, and adding John Anderson as a director. Mr. Anderson is also the Chairman of Triumph Gold, and it was through his network that the financing with Goldcorp was secured.

Orphan, Rebound To Full Value:

line graph showing where Northern Vertex is on the Lassonde CurveNorthern Vertex (CVE:NEE, OTCMKTS:NHVCF, Mkt Cap: C$55.9M) - Original Write-up - Northern Vertex is now fully financed to production, receiving a US$20 million investment from Greenstone Resources LP, a private equity fund specializing in the mining and metals sector. The company is also concurrently raising another US$5 million, under the same terms as Greenstone - $0.52 cents per share and a five-year half warrant at $0.92 cents for two years, and $1.04 for the next three.

NEE has thoroughly de-risked its project, receiving its final permit in April - the aquifer protection permit. In conjunction with the US$25 million financing, the company has also secured a US$20 million Sprott loan facility, US$9 million equipment financing facility with CAT Financial, and $5 million cash through the exercise of warrants. Needless to say, financing risk has been eliminated and the initial capex of US$33 million is covered.

Northern Vertex has also made incredible headway on its mine optimization plan, moving forward with a proposed construction of a power line to the mine site, and the sale and distribution of aggregates derived from mine waste rock. As we stated in this update, these are material improvements, and we reiterate a conservative price target of C$1.13, a 126% gain from current levels.

The company is on track for gold-silver production in Q4 2017 and is expected to produce an average of 42,000 ounces of gold equivalent per year for five years. The mine life is conservative, considering that it does not incorporate an additional 200,000 AuEq resource located on Federal lands, and other 'low hanging fruit' on the property. We believe Northern Vertex will be acquired.

line graph showing where Resource Capital Gold is on the Lassonde CurveResource Capital Gold (CVE:RCG, FRA:GNL1, Mkt Cap: C$21.0M) - Original Write-up - Resource Capital Gold is an interesting stock, the company has de-risked its flagship to the point of production, and has not been awarded any sort of appreciation.

Despite this, the company has been making all the right moves behind the scenes. RCG sold its non-core Corcoran silver project for US$2 million in cash payments and 43.9 million shares of AUSAG, the acquiring company. With this cash and from a previous equity raise, RCG was able to complete the start-up at the Dufferin gold mine and mill without incurring any further debt.

Dufferin's post-tax NPV5 is $89.2 million. With the receipt of its mining lease, the company can now move forward to unlock its full value, while also developing its two other projects.

Dufferin has potential to produce up to 30,000 ounces of gold per year, and will become a central processing mill for RCG's other projects. Cash flow will be used to explore and develop Tangier and Forest Hill, as well as further development at West Dufferin. The company is currently advancing the Tangier and Forest Hill gold projects and is preparing PEA on both.

Resource Capital Gold property map with gold resources circled and described

We mentioned in our initial write-up that Eric Sprott's investment was confirmation in RCG's asset and future growth. The company recently appointed Greg Gibson to its board, who will also Chair the company's technical committee. Mr. Gibson is Eric's partner, and also the President and CEO of Sprott Mining and Jerritt Canyon Gold LLC. We believe Resource Capital Gold is due for a parabolic move up the Lassonde Curve.

line graph showing where Amarillo Gold is on the Lassonde CurveAmarillo Gold (CVE:AGC, FRA:72A, OTCMKTS:AGCBF, Mkt Cap: C$29.9M) - Original Write-up - Another company looking to emerge from the 'orphan' stage. The last material AGC released was back in March, and the lack of news flow may be partially why the stock has traded stagnant.

But the last release was a good one, confirming economics at its flagship project, Mara Rosa. AGC's PFS was headlined by an after-tax NPV5 of $240 million, and an IRR of 35.2%, which places Mara Rosa in the top percentile in terms of project return.

Now the company is focused on the next stage of the permitting process, including continuous environmental monitoring, engineering of the tailings dam, basic engineering at feasibility level, procuring surface rights, and other social and archeological studies. This is all encompassed under the LI permit, and if awarded will allow mine construction to begin. AGC has already received the most difficult permit of the regulatory process in the Preliminary License (LP).

Concurrently, Amarillo is currently planning further resource definition drilling to expand on the mine life. The current pit reaches a depth of 260 meters in the southeast, and there is a strong geological possibility that it can also be extended at similar depths to the northwest.

The last step before the FS is investigating lower-throughput alternatives so all options are fully assessed.

Amarillo just announced the appointment of Rolly Uloth to the Board as the Executive Chairman. Rolly is a seasoned mining executive with almost 20 years experience, best known for merging Wesdome and Eagle River Mines, and chairing the combined company. Wesdome is now a $500 million market cap company that is on the wish-list of many gold operators.

We believe in Brazil as a mining jurisdiction and Amarillo has some of the cheapest ounces in the market. Management has a clear path of de-risking the project to production, but we believe Amarillo will be acquired beforehand. Mara Rosa's economics are very attractive and can be used to bolster the production profile of many mid-tier producers.

Royalty & Streaming Update:

Metalla Royalty and Streaming (CNSX:MTA, FRA:X9CP, OTCMKTS:EXCFF, Mkt Cap C$29.6M) - In 2013, Coeur Mining created Coeur Capital, a vehicle to hold the mining company's existing royalties and to eventually acquire royalty and streaming interests along with its strategic investments. End game was to spin out the portfolio and to experience the upside of the royalty sector as well. Since then, the company has decided to scrap the venture and to concentrate on its mining ventures.

Thus, Metalla's President, Brett Heath, was able to secure one stream and four royalties in a transformational deal. The assets were heavily bid on, but Coeur opted for Metalla because it will own 19.9% of the company, and will still be able to experience the upside of its royalties and the sector in general.

The Endeavour Silver stream will generate cash flow the next two years, enough to pay back the entire cost of transaction. However, is also a bet on zinc. If zinc appreciates in value, it will unlock more reserves that are currently deemed uneconomic and extend the life of mine.

The Joaquin project 2% NSR will also provide significant in the near future. Pan American recently acquired the project from Coeur for US$25 million and currently contains an M&I resource of 65.2 million ounces silver and 61,100 ounces of gold.

According to our analysis, the acquisitions are accretive. We bump Metalla's intrinsic value from C$1.50 to C$1.65, or a gain of 200% from its current share price.

Palisade Global Investments Limited holds shares of Triumph Gold, Mexican Gold, Northern Vertex, Resource Capital Gold, Amarillo Gold, Metalla Royalty. 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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