Victoria Gold’s Eagle mine site groundwater highly contaminated, Yukon government says
Groundwater flowing from Eagle mine shows signs of high cyanide contamination, though much of the water is being contained on site.
A Surfeit of News
Euros woes temporarily gave gold a bounce
+ The economic recovery in the US does not appear to be compromised
+ Copper continues to be firm (relatively)
+ Ferrochrome prices ticked up
+ Nuclear energy continues its slow rehabilitation in political circles in Japan
+ Financing shows some sign of recovery in the Canadian markets
x Zinc and Lead fell back significantly
x Talk of prolonged recession continues in Europe
x Problems in major projects by mining majors are reaching plague proportions
It is almost a truism these days that large mining companies are clueless on capex but we are starting to wonder if the rocketing capex for major projects may not be a case of “the lady doth protesteth too much, methinks”. It would seem that companies have underestimated budgets but at the same time how can a $5bn project turn into an $11bn in just one year? Inflation? A defective spreadsheet? Are ballooning capex’s now so fashionable that they can be used as an excuse to can a project, often in conjunction with dropping the CEO overboard?
In recent weeks we have seen the rather dramatic manouevre of Vale in Argentina in which it decided to pull out of the project in Mendoza province it only recently bought from RTZ. Vale had almost doubled the estimated cost of its suspended potash project in Argentina to $11bn as the Brazilian miner showed itself to be the latest company to halt investments in the country (Pan-American being another vocal party). Vale attributed its departure to exchange rate controls amid rampant inflation causing costs at the Rio Colorado mine to spiral from an initial $5.9bn, making it commercially unviable. But what is Argentina’s inflation, 20%? 30%? Meanwhile the currency has declined by nearly 100% since Vale bought into Argentina from Pesos 4 to the dollar to nearly Pesos 8 to the dollar. Excuse our non-mining inflation techniques but 100% deval trumps 30% inflation any day. Or does Vale have some other sort of Brazilian-made calculator?
Quite rightly parties in Argentina have got their dander up about this move. They see it as more of a ploy to extract tax concessions from the Argentine government. Indeed Vale not only wanted tax concessions, it wanted an advance on the tax concessions…Even Quebec does not countenance that sort of a gravy train for miners. The Financial Times reported that Vale’s security department had instructed the project’s top two directors to leave Argentina last Friday because of “safety concerns” as tensions escalate over the issue. It’s not clear whether this tension is because the project is on or because it’s off.
Meanwhile courts in Argentina have frozen Vale from taking assets out of Argentina, in what we suspect is a move to stop the company draining out funds (and equipment) and then declaring concurso preventivo (the local version of Chapter 11) and dodging payments to redundant workers and suppliers.
You surmise well if you do not sense our tear-ducts welling up in sympathy with Vale.
Ave et Vale..
The market for mining equities was scarcely better in March. Gold’s rebound above the $1600 mark brought no respite. The Portfolio had a valuation of $4.078mn on the 28th of February and now stands at USD$3.973mn while cash went up slightly to USD$2.003mn because of the Short trade.
Only on trade was done during the month:
Added a Short Position in Argentex. Sold 500,000 shares in ATX.v at CAD$0.19 per share on the 26th of March 2013.
We suppose it was inevitable that someone would put their head in the noose that has been dangling for some while. One other miner briefly played with fire but got out before it was too late. However in the latest case it was Argentex who offered themselves and their shareholders up as the sacrificial offering. This week it was announced that the company had agreed to take a CAD$5 million strategic investment for a 19.9% stake from a junior gold miner called Austral Gold (which Mineweb claims had production of 30k ounces of gold in 2012 – in Chile). The attraction was supposedly the 97% premium to Argentex’s stock price in the run-up to the deal.
Odious is not the word. The new partners are the sometime self-declared anointed of George Soros in Argentina. Our days as primarily emerging analysts in that bailiwick come flooding back or maybe a better analogy is what happens when you go on a vigorous amusement park ride after a particularly greasy burger.
At the end of its press release, Argentex noted that it and Austral had agreed to start talks about a possible “business combination”. Oh, yeah….. We have added Argentex as a Short to the Model Mining Portfolio with a target price of 10 cents. Avoid… like the plague.
Not exactly sure how or why, but the Wessons are definitely out of Woulfe Mining. With what looked like a board made in their image we would have thought the incumbents at Woulfe would be at least safe as long as the putative deal with IMC was still in play. However, this was seemingly not the case. IMC actually extended its financing in an announcement just prior to the departures. The board has taken a turn towards a more professional slant as well with Hubert Marleau, a Montreal financier we have known for quite a while becoming interim CEO and Ned Goodman of Dundee Capital becoming a director. As at the 5th of December, Dundee owned 39,789,500 common shares and 10,000,000 warrants, representing an approximate 11.86% interest in Woulfe on an undiluted basis or 14.41% assuming the exercise of all warrants.
In early February the company had announced a $10mn convertible, arranged by Dundee. The debentures will be convertible at the option of the holder into 34,482,759 units of Woulfe, representing a conversion price of $0.29 per unit. Each unit will comprise one common share and one-half of one share purchase warrant. Each whole warrant will entitle the holder to acquire one common share of the Company at a price of $0.29 per share for a period of 24 months following the closing of the offering. If much of this ends up with Dundee either directly or beneficially, we could pretty much say that Woulfe has become a company in the Dundee stable. Not necessarily a bad thing.
It was not management that was ousted at Nevsun, apparently it was Nevsun itself. And the club from which it was removed was the constituents of the GDX ETF. The effect was a rather steep fall and then the stock rebounded to a higher level than it had been before the announcement then dribbled lower on the generalised malaise in commodity miners.
The company announced that it had been advised that on March 15, 2013, Nevsun would be removed from Van Eck’s proprietary Market Vectors Junior Gold Miners index (the GDXJ) because Nevsun’s revenue will switch to majority copper from majority gold during 2013. Nevsun was advised that therefore the Van Eck Junior Gold Miners ETF was required to sell its position in Nevsun since the ETF tracks the index.
As previously disclosed, Nevsun expects to produce 80 to 90 thousand ounces of gold in the first half of 2013, followed by 60 to 80 million pounds of copper in the last half of 2013. Production in 2014 is expected to be approximately 200 million pounds of copper at top quartile cash costs, generating strong anticipated earnings and cash flow.
We are on record in the past of noting the oddities of the GDXJ. Quite rightly Nevsun should probably depart from the index but then what about all those silver stocks that still infest the ETF? Somewhat ironically the deletion won’t do the GDXJ any favours as NSU had been an outperformer compared to the ETF in recent months.
In early March LIM somewhat waved the white flag in its struggle to go it alone in the tough (and underresearched and underappreciated) Canadian iron ore market when it made an announcement that the Indian steel giant, Tata Steel, had bought a majority stake in one of the deposits belonging to LIM for CAD$30 million.
In this latest deal, Labrador Iron Mines would transfer a 51% stake in its Howse deposit to Tata Steel Minerals Canada. The Howse deposit is estimated to have 28 million tonnes of iron ore resources. While in turn, Tata shall transfer its Timmins 4 deposit with a resource of 1.7 million tonnes to Labrador for CAD$3 million. The payment is recoverable from sales. As part of the most recent deal Tata can also increase its ownership of the Howse deposit to 70% for and extra CAD$25 million. The strategic relationship will include potential off-take arrangements and further exploration of Howse deposit.
Even without the move up to 71%, the first stage of the deal effectively makes LIM a sort of satellite of Tata. We can think of worse groups (Chinese, namely) that one could be in thrall to.
As the chart above shows the reason for this deal is that the market has severely pummeled the company. Its brief uptick came at the start of the year around the time of the strengthening in the global iron ore price (and the publication of our research piece on Lim) but it has tested new lows since then.
The Tata agreement involves cooperation in transport and port infrastructure development as well as transactions for development of the Howse deposit and the Timmins 4 deposit. They claim, probably with some justification, that there will be cost synergies from the rationalisation of various aspects of their respective iron ore operations. The Howse deposit is four kilometers from Timmins processing plant. Both the firms are to also co-operate to develop a rail line that will pass through Labrador Iron’s rail yard facilities and connect Tata Steel’s processing plant with the main rail line.
Infrastructure costs have been a bugbear for Canadian iron ore miners but in our estimation much of this is an imagined problem if they suddenly start producing massive amounts of ore. Frankly again the issue of “right-sizing” comes in when companies don’t seem to be able to balance making a profit against getting larger production but at the price of massive dilution on capex/infrastructure. As we made clear in our note small is beautiful if you already have rail and port access (even if shared) as LIM currently does.
Tata Steel holds an 80% stake in Direct Shipping Ore (DSO) iron ore project, which has 125 million tonne of resources spread over 25 deposits. The mine commenced production in September of 2012, and the processing plant is under construction.
Break out the party streamers and blow-ticklers for the TSX and TSXV were the self-proclaimed first in the world for new listings in 2012. Apparently some 372 issuers went public on TSX (132) and TSXV (240)
in 2012. These numbers were made up of:
We do not know what portion are mining focused and which are not but we could hazard a guess that most of the CPCs had a mining goal in mind. Not too many listings of mining companies (non-CPC) come to mind. We would repeat here our gripe though that with as many moribund miners as there are currently available there should not be a single CPC listing with a mining endgame. This is overproduction in all the wrong senses of the word. Frankly the Canadian listed miners need more corporate vehicles like they need a hole in the head.
An interesting tidbit of news involved two portfolio constituents interacting with each other. Late in the month, Veris Gold (formerly the benighted Yukon Nevada Gold) revealed that it had entered into a toll milling agreement with Atna Resources (ATN.to), to process ore from the Pinson Mine at its Jerritt Canyon Mill. The toll milling agreement has a one year term with Atna paying Veris a toll milling fee that will be adjusted on a quarterly basis to reflect any changes to input costs associated with processing the ore. The toll milling agreement is structured so that all dore produced from the ore will remain the property of Atna throughout the process and the associated toll milling fee charged to each ton will be treated as a credit to Jerritt Canyon operating costs.
Veris regards the deal as a win-win situation which hopefully is better than the perpetual losses involved in a similar deal with Newmont. The deal makes a lot of sense as processing third party ores makes use of the upcoming excess capacity at the Jerritt Canyon Mill as Veris gradually phases out the low grade stockpile ore. This should, in theory, provide VG with revenue which will increase positive cash flow from mining and processing operations. Jerritt Canyon’s operations are largely fixed-cost, so making use of the additional capacity will bring down the operation’s cost per ounce considerably. The parties to the deal expect to start toll milling early in Q2 2013 and low-grade stockpiles will be used in Q2 2013 to provide 100% of the necessary mill feed.
This agreement provides additional processing flexibility for Atna with a smaller lot size for Pinson and an outlet for its oxide-sulfide transition ores. The mere fact that such a deal has been done gets our mind whirring on the eminent sense of an eventual combine between the two companies. This reinforces our tendency to hang onto these two positions in the Model Mining Portfolio.
Oscar Wilde is oft-quoted as having said “The worse thing than being talked about is not to be talked about”. Ostensibly in this age of restricted coverage of companies and the plethora of companies to be covered by a relatively thin population of analysts one would think that companies would be happy to be “mentioned in despatches”, however our recent experience has been that companies are either blasé or dismissive of coverage that does not hew to the party line with an orthodoxy of Talmudic stricture.
We may wonder why this is so? Many company managements seem to have become inured to analysts only expressing an interest when there is a financing in the wind and as such the coverage tends to be sycophantic to the nth degree. This has trained companies to only expect coverage when they are pondering a financing. Pavlov and his dogs come to mind and we are not sure if the dogs are the companies or the analysts!
It might be useful to recall some experiences that we have found. Not that we make a practice of speaking “ill of the dead” but Woulfe Mining’s departed management had a rather erratic approach to coverage. We were urged on various occasions to update our coverage which had initially consisted of a section in our Tungsten omnibus note. When we finally found the stock meriting a revisit we contacted the company and indicated we desired a few clarifications on matters. The plea went out to the IR department and the management (who were notorious for either not reading or disregarding emails). Giving up on human contact we updated our coverage anyway and out went a research piece that gleaned some praise. None of that praise was from the company. In fact there was a stony silence. Maybe it was because we had repeated our original position that husband and wife teams on a board (which also lacked much geological or mining depth) were not to be desired. History has subsequently spoken with the board now having neither husband nor wife on board. Sic transit Gloria mundi.
Then there was another recent note we wrote. We reached out to the CEO who we had met while he was paying a notoriously erratic New York “IR” person to take him around the Big Apple. CEO didn’t bother to respond. We then called. No answer. In the absence of any signs of intelligent life, we launched into finishing the note having extracted the text from a long-stalled sectoral review on the metal concerned, on which we had suffered prolonged writer’s block. Note duly went out and again attracted praise. Not a squeak from the company. Finally a press release came in form the company trumpeting some piece of jaw-achingly trivial news and we responded by asking if the company had seen the note, to which we got the response “yes”. Damning with faint praise…
Then we have the thought police. We have, by our count, written three notes related to Oz Minerals, the large Australian copper mining company. While it has lots of coverage at home it had zero international exposure and as a virtual cash-machine it obviously could have staked out some ground as a dividend story for the international asset management crowd. Once again total disinterest greeted our coverage, moreover they refused all entreaties to add us to their email list for announcements. There are none so blind… Then later they did a deal with International PBX a copper exploration junior which only we covered. This type of major that thinks they will only speak to analysts that eat out of their hand, run the risk of matters getting out of their control if they don’t even want to talk to parties that, whether they like it or not, have a role in opinion-forming in a wider world beyond their fishbowl.
That brings us then to Nyrstar. This stock we started covering years ago when it began its diversification into upstream production (i.e. mines). The company though was VERY happy that all its coverage came from European-based industrial sector analysts who thought that zinc was interchangeable with facial wipes or instant coffee. This group was also supping at the bird-feeder that was marked “Earnings Guidance” and the company was very pleased to have them suitably trained. In the case of Nyrstar though we were chastised for not having “asked us about guidance”. So thankfully they were in talking mode. Well at least at the start. After that we were frozen out and told there was “no interest” in having their stock held or quoted in the US. Funny that, for just as Europe could not give a damn for Nyrstar’s stock, the company has suddenly turned up at a broker’s conference in Florida trying to tout its wares to a pack of virgin investors who hadn’t heard the name unless they had heard it from us…. We guess the analyst at Dexia who used to cover them is now sifting through the trashcans of Brussels. Not quite as lucrative though as the days of glory at the birdfeeder of “Earnings Guidance”.
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