Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Manitoba’s Flin Flon Greenstone Belt has yielded VMS discoveries resulting in dozens of mines. Callinex Mines has been a big part of that success for almost a century and believes it has the properties that will become the district’s latest winners. In this interview with The Gold Report, Callinex President and CEO Max Porterfield explains how high-grade assays and proximity to existing producers could lead to his company discovering the ore that HudBay will soon need.
Management Q&A: View From the Top
The Gold Report: Callinex Mines Inc. (CNX:TSX.V; CLLXF:OTCQX) has two strategic projects, Flin Flon and Pine Bay, located in Manitoba’s Flin Flon Greenstone Belt. What makes this district special?
Max Porterfield: This district has seen 32 mines over the last century, mining 145 million tons of ore. It’s famous for its volcanogenic massive sulphide (VMS) deposits of high-grade copper, zinc, gold and silver. It remains highly prospective and underexplored.
TGR: What makes Manitoba such a good mining jurisdiction?
MP: It’s in Canada, of course, so it’s safe and stable. Manitoba has excellent infrastructure and an experienced workforce. The provincial government is very supportive of mining through its Mineral Exploration Assistance Program that issues rebates of up to 40% on exploration expenditures, up to $200,000 a year. Furthermore, we’ve seen major companies such Alamos Gold Inc. (AGI:TSX; AGI:NYSE) and Yamana Gold Inc. (YRI:TSX; AUY:NYSE) recently establish a presence in Manitoba. We’re really excited to be here.
TGR: Tell us about your experience in the mining industry.
MP: I began my career at U.S. Global Investors, a boutique natural resource and precious metals investment manager in San Antonio, Texas, working under Frank Holmes. I then managed investor relations for two mining juniors in Vancouver, Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX) and Uranium Energy Corp. (UEC:NYSE.MKT).
TGR: You joined Callinex a year ago. Besides the properties and the jurisdiction, what attracted you to this company?
MP: The opportunity to work with Mike Muzylowski, our chairman, a renowned geologist and member of the Canadian Mining Hall of Fame. Mike has been involved in the discovery of 13 deposits that became mines in Manitoba, and he knows the Flin Flon district as well as anyone. He was with HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) for many years and was president of our predecessor, Callinan Mines. While president of Granges Exploration he made his most notable discovery within the Flin Flon Greenstone Belt with the discovery of the Trout Lake mine, one of the largest ore bodies ever discovered within the belt.
TGR: What other geological expertise does your executive team boast?
MP: In June, we appointed Alan Vowles and J.J. O’Donnell (who’s actually my predecessor) as technical advisers. Between them, they have over 50 years of experience in the Flin Flon Belt. Alan is a talented geophysicist who was crucial to the discovery of HudBay’s Chisel North and Lalor mines and was a member of the HudBay team that was presented with the 2009 Bill Dennis PDAC Prospector of the Year award. J.J. was senior mine geologist for HudBay’s 777 mine, which is just outside the door of our Flin Flon property, so he really understands the geology.
TGR: Your company has a long history in Manitoba. Tell us about it.
MP: Callinan Mines, our predecessor, was founded in 1927 by Jack Callinan and discovered many VMS deposits, including the Callinan mine. The 777 mine was discovered on claims originally held in Callinan’s exploration portfolio by HudBay in 1993 and went into production in 2004. HudBay was paying a hefty royalty to Callinan, so in 2011 the previous management split the company into two entities, Callinan Royalties, which was bought by Altius Minerals Corp. (ALS:TSX) this year for $2.27 per share, and Callinex Mines, which received the exploration portfolio. In 2014, Callinex renewed its focus on exploring for VMS deposits within the Flin Flon Greenstone Belt.
TGR: Looking at a map of your Manitoba claims, we see that your 2,455-hectare Flin Flon project is surrounded by HudBay claims, and your 6,000-hectare Pine Bay project surrounds a HudBay claim. How important is this proximity to Callinex’s future?
MP: Proximity and infrastructure are key in any market. They reduce the hurdles to making deposits economic by reducing the amount of capital required. We are the second-largest landholder in the immediate camp, and our properties are quite close to HudBay’s 777 mine and its processing facilities. HudBay’s Reed Lake mine is 130 kilometers away. 777’s mine life is scheduled to end in 2020, while Reed Lake is scheduled to be depleted by 2019. There is clearly a need for additional ore to continue operations at HudBay’s Flin Flon concentrator, and exploration on HudBay claims near the 777 mine has been unable to identify significant new ore sources.
Our land package has had little modern-day exploration, and the historic exploration was shallow. Many of the large VMS ore bodies in this district have been discovered at depth. We are now employing modern geophysical tools and techniques to fully discover what we have. Previous operators such as Place Dome, subsequently acquired by Barrick Gold (TSX:ABX ; NYSE:ABX), identified potential for a world-class deposit within our claim area.
TGR: So your idea is that the Flin Flon and Pine Bay properties could provide feed to extend the life of the infrastructure processing feed from 777 and Reed Lake?
MP: Yes, Callinex could be a natural fit for HudBay. Of course, a big discovery could allow us, with the support of our largest shareholder, Resource Capital Funds, to advance a new discovery on our own. The strategic nature of our projects with the potential for a large-scale discovery could attract interest from multiple suitors.
TGR: HudBay has in recent years expanded greatly outside of Manitoba to Arizona and Peru. How committed does HudBay remain to the Flin Flon district?
MP: Extremely committed. HudBay is having great success at its Lalor mine, which began production in 2014. Of the 32 mines that have gone into production in the belt, HudBay has been the operator of 27 and has made major infrastructure investments in Flin Flon. HudBay has committed $15–20 million to Manitoba exploration.
In fact, HudBay is drilling almost right at the claim boundary of our Pine Bay project and along strike of where our Phase 2 drilling campaign is focused.
TGR: Besides Flin Flon and Pine Bay, you have 12 other projects. What are your plans for them?
MP: Every healthy exploration company needs a pipeline of projects in its portfolio. Our pipeline was hand-picked by Mike Muzylowski, whose track record speaks for itself. Many of these projects are at various stages of development. We recently re-evaluated our portfolio in 2014 and selected the Pine Bay and Flin Flon projects to have the best potential to discover a world-class deposit, and certainly proximity to HudBay’s existing operations is an added benefit.
TGR: How much historic drilling was done at your Pine Bay and Flin Flon projects?
MP: There are about 700 drill holes, but their average depth was less than 150 meters. We have four historic deposits already identified on our Pine Bay project and envision potential to discover additional deposits of size. The Lalor deposit was discovered at 800m, which, combined with geophysical advancements, is why historic exploration has only scratched the surface so far.
TGR: How are you integrating this historic data into your current drilling plan?
MP: We have created a digital database combining the historic data from public and non-public sources. We then overlaid this with data from modern perspective of how VMS deposits are formed and geophysical tools, which have allowed us to maximize our drilling potential.
TGR: You completed phase 1 drilling at Pine Bay in the spring. What did you find?
MP: In April, we reported mineralized assays from two holes out of five, including 4% copper equivalent over 44.2 meters. Typical grades at historic mines in the belt are 3–5% copper, so we were quite pleased.
TGR: How much money did you spend on phase 1?
MP: Phase 1 and phase 2, which is underway now, were mostly paid for with the issuance of shares to our drilling company. The cash outlay was only $40,000 for drilling prep work. We are well funded for upcoming exploration with approximately $4 million in cash.
TGR: What are your drilling plans for the rest of this year?
MP: We aim to get the initial phase 2 assays published in a few weeks. We’ll follow-up based on the results of our current drilling campaign and identify targets for winter work. In northern Manitoba, winter drilling is easier and less expensive because there are a lot of lakes in the area and it’s easier to mobilize drilling equipment once they freeze over.
TGR: It was announced Aug. 6 that 18% of Callinex had been bought by Resource Capital Fund VI LP (RCF). What is RCF?
MP: RCF is a $2.5 billion private equity fund with offices in Denver, Perth, New York and Toronto and is now our largest shareholder. It’s managers are especially selective and patient investors who have invested in over 135 companies since 1998, deploying over $7 billion in capital. RCF isn’t fazed by fluctuations in commodity or equity prices. It takes a long-term outlook and seeks out quality teams with prospective land packages. Given that RCF has previously exclusively invested in development and construction stage projects, we are excited and proud that Callinex is one of the first exploration companies it has added to its portfolio.
TGR: How tight is Callinex’s share structure?
MP: We have 47 million shares outstanding with over 50% held collectively by RCF, insiders and close associates of the company.
TGR: A great many juniors today are trading at 52-week lows or close to them. Callinex’s 52-week high is $0.40 and its low is $0.16, while its current price is $0.31. In other words, your shares are trading much closer to their 52-week high than most other juniors. Why has your company done so well in the current bear market?
MP: This speaks to the quality of our people and projects and the access to capital we have. We have $4 million in cash as of Aug. 1 and no debt. We’re exploring in a VMS sweet spot, in a great jurisdiction near infrastructure with an immediate need for new feed. We will deploy $2 million in exploration between now and December 2016. Additionally, we have enough operating capital for the next couple of years as well. The fundamentals for the copper and zinc markets are good, and the gold credits on VMS deposits in the camp can be significant.
TGR: Where do you see your company in three years?
MP: With a new discovery, I hope, and multiple offers from mid-tier and major mining companies.
TGR: In the current depressed market there are many junior explorers whose shares are trading near all time lows. What makes Callinex a cut above the rest?
MP: Our properties are in a world-renowned district with infrastructure that’s in need of new ore feed. In addition, our award-winning technical team and shareholders like RCF are committed to success.
TGR: Max, thank you for your time and your insights.
Max Porterfield, CEO and President of Callinex Mines, is an executive with a decade of experience in the natural resources sector and in financial markets. He previously managed investor relations for Brazil Resources Inc. and Uranium Energy Corp (NYSE-MKT: UEC) and was VP of Institutional Services at U.S. Global Investors, a boutique investment management firm with a longstanding history of expertise in precious metals and natural resources. He is a graduate of Texas Tech University, with a bachelor’s degree in business administration.
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Source: Kevin Michael Grace of The Gold Report
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