For all the years I’ve been following the junior sector, since my mid-teens, I’m hard-pressed to trot out a meaningful list of companies that succeeded in transitioning from ‘junior explorer‘ to ‘junior producer.’
Probing our planet’s subsurface layers to generate an economic mineral resource requires a very particular set of skills.
Navigating the complex permitting curve requires a different set of skills.
Capital market savvy – the unique skill set required to fund exploration, development, and construction without excessive shareholder dilution – is woefully lacking in the vast majority of junior exploration companies.
Mine building is a whole other kettle of fish. It demands a range of know-how and experience that’s altogether different.
Precious few companies in the junior arena possess the (multiple) skill sets – the pool of expertise – required to successfully push an exploration project along the curve to full-scale production.
Overzealous management teams who routinely over-promise and under-deliver tend to gloss-over weighty considerations like complex geology, environmental/social hurdles (permitting), financial constraints, land claim issues, fluid economic studies (blown out CapEx estimates), etc., etc. The list of potential risks is as long as my arm.
The promise in the deftly crafted promo often plays something like this: ‘once we achieve commercial production, free cash flow will fund aggressive exploration across our extensive, highly prospective land base to augment our global ounce count and drive shareholder value.’
Vertical integration is such a compelling prospect. If only it were that easy.
During the last bull cycle, companies like Metanor Resources (later taken out by Bonterra) and Alexis Minerals (name changed to QMX Gold before being taken out by Eldorado) attempted to transition from explorer to producer but failed miserably.
A half dozen years back, Rubicon Minerals hurried its high-grade Phoenix Gold project into production on the back of a PEA – a Preliminary Economic Assessment – skipping the essential PFS and Feasibility stage studies. Rubicon ran into trouble shortly after its attempted ramp up – Rubicon Minerals shares plunge on Phoenix gold project suspension. Slashing its Indicated resource estimate by 88% was the nail in the coffin for Rubicon’s beaten and bloodied shareholder base – Rubicon Updates Mineral Resource Statement for the Phoenix Gold Project And Evaluates Strategic Alternatives.
More recently, Harte Gold pushed their Sugar Zone Mine project along the development curve only to realize that profitable production was a pipe dream – pure fantasy. Operational challenges, waaaay high AISC, and excessive dilution created a world of hurt for shareholders – Harte Gold seeks creditor protection as Silver Lake closes in.
I highlighted Pure Gold in the early going of Highballer, believing their (high-grade) Red Lake ounce count would generate significant shareholder value. It did. Initially. Pure Gold ran from $0.64 when I first featured it in early April 2020 to the $3.00 level nine months later. Those were some fat (potential) gains. But it was mostly downhill from thereon.
In early 2022, Pure Gold’s CEO was shown the door and replaced by a “seasoned mining engineer.” That was a red flag.
As you can see from the above chart, the bottom really began to drop out in March of this year. At issue were decreased ore throughput, crappy grades, bloated AISC, debt, and the threat of significant shareholder dilution. The Company’s last update dropped on May 17 – PureGold Reports First Quarter 2022 Financial and Operating Results.
Earlier this month, Gold Mountain, a celebrated ‘fast tracked’ BC production play, blew apart at the seams when the Company announced lower than forecast ore production due to grade control and sampling process issues – Gold Mountain Provides Corporate Update.
Gold Mountain appeared to have all of its ducks lined up in a low CapEx mining scenario with a toll milling partner just down the highway. Like the other projects that went awry, Gold Mountain’s flagship is a narrow (high-grade) vein deposit with good scale.
The final chapter has yet to be written here. The Company brought on a pair of industry veterans – narrow high-grade vein experts – to breathe life back into the project. But from last summer’s highs north of $3.00 to its recent low of $0.325, shareholders have witnessed a decline of nearly 90%.
The list of (wannabe producer) mishaps goes on.
Alexco Resource Corp successfully consolidated the historic Keno Hill Silver District in Canada’s Yukon Territory in 2006. Keno Hills was hailed as THE highest-grade silver district on the planet back in the day, boasting over 200 million ounces of production at an average grade of 1373 g/t (48.4 oz/t) Ag. Today, even with the rich low-hanging fruit exploited, Alexco’s Keno Hills asset is regarded as “one of the highest-grade silver mines in the world.”
Unfortunately, Alexco shareholders were dealt a nasty round of What For via a June 22 headline – Alexco Provides Keno Hill Operations Update.
While highlighting specific improvements to their operation, the Company revealed that “underground development remains insufficient to achieve the necessary number of production headings to sustain 400 tpd feed to the mill before the end of 2022.” As a result, milling operations have been suspended for the next five to six months “to focus all efforts on advancing underground development.”
After this development period is complete, the Company anticipates accessing, cross-cutting, and having available a total of approximately 120,000 tonnes of ore inventory grading 1,050 g/t Ag at the Bermingham and Flame & Moth mines by year end 2022. Ore extraction and milling operations will be restarted in January 2023, and with our anticipated production, cash self-sufficiency should be achieved within the first quarter of 2023. The Company estimates that more than four million ounces of silver will be delivered as ore feed to the district mill in 2023.
Sadly, and in keeping with the negative sentiment permeating the junior sector, shareholders exited en masse.
Some mark an early streaming deal with Wheaton Precious Metals and the sale of their profitable environmental remediation business as the beginning of the end for Alexco. But like Gold Mountain, the fat lady has yet to sing on this one.
Ascot Resources, a Golden Triangle pre-production play, did NOT report problems of the subsurface kind with its flagship asset. It did, however, report challenges on the financing front as it’s now forced to find alternative funding to complete the build-out phase on its high-grade Premier Gold Project.
On June 23, Ascot dropped an update – Ascot Provides Update on Project Development, Financing, and Exploration – stating that it has been in talks with a number of (potential) financing partners, including lenders and streaming/royalty companies.
That reassurance fell on deaf ears.
Looking at Rubicon, Harte, Pure Gold, Gold Mountain, and Alexco, it would appear that GRADE is NOT always KING. But in my way of thinking, there’s a more important message/lesson here: If a company tries to convince you that they’re on the verge of a seamless transition from ‘junior explorer‘ to ‘junior producer‘…
Instead: Focus on companies developing significant projects that may appeal to producers looking to bulk up their project pipelines. Great Bear Resources and the $1.8 billion takeover by Kinross is a glowing (recent) example. I doubt Great Bear management was even remotely inclined to push its world-class Dixie Project – the prize in Kinross’ eyes – into production.
There are a number of junior entities in this arena with endgames – companies that are developing (potential) world-class projects that may enter the crosshairs of a resource-hungry miner. And most of these asset-rich companies are currently trading at ridiculous valuations.
There’s an opportunity to buy dollars for dimes amidst all of this carnage.
The following headlines topped my reading list in recent weeks (headlines dropped by companies with endgame potential):
Tower’s First Two Follow-Up Drill Holes on Lightning Zone Return Long Intervals Surpassing Gold Grade of Discovery Hole: Hole 028 Cuts 138.0 m @ 1.55 g/t Au including 24.5 m @ 4.76 g/t Au, Hole 029 Cuts 70.5 m @ 1.78 g/t Au including 13.5 m @ 4.92 g/t Au
– Greg Nolan
Full disclosure: I bolded the above headlines where I hold a position in the underlying company (Arizona Metals, Apollo Silver, Defense Metals, Forum Energy Metals, HighGold Mining, Lion One Metals, Patriot Battery Metals, and Teuton Resources).
Defense Metals, Forum Energy Metals, and Teuton Resources are Highballer clients. Highballer is compensated for its Apollo Silver content by Pacific Prime Communications Corp.
Highballerstocks.com (Greg Nolan) is not a licensed financial advisor and does not give investment advice.
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