Junior Miners: 2 Examples of What to Look For

Written by Gerardo Del Real
Posted February 18, 2018 at 7:00PM

Back in October 2017, Outsider Club Founder Nick Hodge and I held a workshop at the New Orleans Investment Conference.

The title of our presentation was “The Good, the Bad, the Ugly in the Junior Mining Space.”

At that same conference, I sat down with SmallCapPower’s Rachel Lee to discuss some of the main takeaways from that workshop.

In the interview, and in our workshop, we talked about how to use share structure to help vet companies.

There are several questions you can ask companies to see if management is truly aligned with shareholder interest.

How many shares are outstanding? How many warrants and options are outstanding? What does management pay itself, and how does that compare to the amount of money spent adding value to the company?

How many shares does management own? What did it pay for those shares?

We also picked a company that we felt had great assets but also had a past and future that would be limited by its share structure.

That company was Alexandria Minerals Corporation (TSX: AZX).

It was picked as an example because the exploration company has 474 million shares outstanding and 117 million options and warrants.

That's a lot of shares for an exploration company.

Since the workshop, the company has continued to deliver impressive drill results.

On February 14, 2018, the company’s board of directors also delivered a termination notice to CEO Eric Owens.

I won’t speculate on the internal conflicts or the merit of the termination — there are chat rooms for that. But it isn't surprising that one of the issues at the core of the termination was the potential of more dilution by way of another large financing.

The termination came one day after CEO Eric Owens released an open letter to shareholders.

The letter explained that Owens, in his own words, “was putting together a financing (with hard-dollar and flow-through portions) expected to raise over $20 million.”

You read that right: Another potential financing for $20 million at a share price likely around the C$0.10 level.

It’ll be interesting to see how the situation at Alexandria Minerals plays out. But in the meantime, let’s highlight a couple of companies that are doing things right and merit a look...

Hannan Metals Ltd. (TSX: HAN) is run by Michael Hudson — the same Michael Hudson who's the chairman and CEO of Mawson Resources, which just secured an $8.1 million strategic investment from Goldcorp.

Hannan Metals is a base metal-exploration company with 100% ownership of the County Clare Zn-Pb-Ag-Cu project in Ireland, which consists of nine prospecting licenses for 32,223 hectares.

I just returned from a site visit in beautiful Ireland to see the project for myself. And I was impressed by the technical team.

Lars Dahlenborg, vice president exploration, is experienced, innovative, and passionate about exploring the high-grade Zn-Pb-Ag-Cu project.

The company recently completed a 41-line-kilometer seismic survey.

Hannan is one of a few hard-rock companies to apply seismic surveying to mineral exploration globally.

The survey will be critical in helping Hannan prioritize drill targets in its effort to make new discoveries.

I had the opportunity to look over some of the most beautiful core I’ve ever seen:

hannan core pic

That core is from hole DH217, which was the most mineralized hole ever drilled at the property.

The intercept returned 3.2 meters at 8.4% Zn, 72.8% Pb, and 388 grams per tonne (g/t) Ag (81.2% Zn + Pb) from 528 meters.

Hannan has 40.2 million shares outstanding and 53 million fully diluted — appropriate for an exploration company.

The project is drilled over more than 1.5 kilometers and is ready to explore and expand within a 40-kilometer strike area.

Prior to Hannan, Lundin completed significant work on the property.

A total of 278 drill holes for 134,000 meters of diamond drilling were completed over the entire project.

The past work is important because it provides a large data set for the company to work with.

Great management, good share structure, a zinc bull market, and a market cap of C$11 million make Hannan one to watch.

Another company that's positioned to capitalize on this base metals bull market is Excelsior Mining Corp. (TSX: MIN).

Excelsior is developing, and awaiting federal permits for, the Gunnison Copper Project — a low-cost in situ recovery copper project located within the copper porphyry belt of Arizona.

The company is targeting production in 4Q 2018 or 1Q 2019 and is on track to be one of North America’s lowest-cost copper producers.

excelsior study results

Based on an initial production rate of 25 million pounds per year using a US$2.75 per lb. copper price, the feasibility study indicates a posttax net present value (NPV) (7.5% discount rate) of US$807 million and an internal rate of return (IRR) of 40% with a payback period of initial capital of 2.8 years.

Using today’s copper price, the NPV jumps to US$1 billion with an IRR of 51%.

Excelsior has 206 million shares outstanding — 223 million fully diluted — and a market cap of approximately C$247 million.

It recently raised approximately US$30 million and has several strategic shareholders that include Greenstone Resources, which is one of the most respected funds in the industry and owns approximately 49% of the outstanding shares.

With feasibility study in hand, industry-leading operating and capital costs, and also copper production scheduled for later this year or for early 2019, Excelsior deserves to be mentioned in the category of companies doing things the right way.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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