Trelawney Mining deal could signify start of acquisition frenzy in junior gold space
Trelawney Mining's (CVE:TRR) recent acquisition deal by Iamgold Corp (TSE:IMG) (NYSE:IAG) could signify the start of a series of buys in the junior Canadian gold space.
Many like Trelawney with significant resources and a low-risk profile will likely increasingly be looked at as potential acquisition targets, with the $585 million deal providing a "wake-up call" for gold producers with cash to spend, says mining research analyst Peter Campbell of Jennings Capital.
Last month, Iamgold said it agreed to buy Trelawney for $585 million in cash, adding the Côté Lake gold deposit in northern Ontario to its mining portfolio.
The deal price was 42 percent higher than Trelawney's closing price the day before the transaction was announced, and also came in at slightly north of $70 per ounce in the ground.
Campbell says that the entire junior gold mining sector is undervalued, as just a few years ago, these transactions would have been priced at around $100 per ounce in the ground, when gold was trading at just $800 an ounce.
"The typical thing in my opinion is for gold producers to look for assets far afield, but the Trelawney deal proves that there are great acquisition opportunities right here in their own backyard," Campbell notes.
Canadian junior Trelawney is developing the 516 square kilometre Côté Lake deposit, where the resource is estimated to contain 0.9 million ounces of indicated gold and 5.9 million ounces of inferred gold, with significant exploration and expansion potential near the current resource.
Campbell says the deal was, in his view, agreed at a "firesale price", as the Côté Lake deposit is "no way fixed in size and has the potential to grow substantially to 8 million ounces."
Mineralization at the deposit has been intersected over a strike length of 1,200 metres, a horizontal width of 100 to 300 metres and a depth extent of more than 500 metres.
"Iamgold is getting a sure thing for $70 an ounce versus all the risk and time involved in making a new discovery on its own - and it's probably going to cost Iamgold about the same amount in the end to bring a new project to the same stage as Côté Lake," says Campbell.
"Right now, with valuations at the extreme low end of the scale,, acquisition costs are very attractive."
Clifton Star Resources' (CVE:CFO) CEO Michel Bouchard says he believes the acquisition of Trelawney also provided Iamgold with a more balanced geographic portfolio, improving its risk profile with assets in a politically stable country that hosts excellent mining infrastructure.
On the negative side, however, buyers of companies like Trelawney will have to wrap their heads around higher Canadian dollar costs, says Campbell, but he adds that many gold producers like Iamgold have low exposure to Canada with operations elsewhere.
Trelawney's Côté Lake is halfway between Timmins and Sudbury - two of Canada's largest mining camps - on a paved highway.
"If you want access to people, engineers, equipment and suppliers, there is no better place to be.
"The price Iamgold offered is easily justifiable based on the 7 million ounce size of the deposit alone, with a strong possibility for a competing bid," Campbell says.
But Campbell notes that Trelawney has been trading right around the offer price ever since the acquisition was announced, signifying that investors believe the deal will take place.
There are several worthy juniors in the Canadian gold space that stand to benefit from this transaction, as many gold producers with a healthy balance sheet could also soon start looking for multi-million ounce, bulk tonnage deposits that will lower their risk profile and boost production.
For example, Newcastle Minerals (CVE:NCM), which actually counts Trelawney as its largest shareholder, is also active in Northern Ontario's Swayze Greenstone Belt, thought to be the southwestern extension of the prolific gold-producing Abitibi Greenstone Belt.
Following last year's successful takeover of Augen Gold, Trelawney now controls a 55-kilometre strike-length of the Swayze Belt.
Newcastle’s 100 percent-owned Swayze belt claims cover an area of 17,000 acres in three separate claim blocks that are either surrounded or adjoin Trelawney's projects.
Within the Swayze Belt, Newcastle's 6,600-hectare Chester project is less than a kilometre away from Trelawney's main Côté Lake deposit. A 1,050 metre drill program at Chester encountered anomalous gold and similar alteration and fracturing as that found at Côté Lake.
Meanwhile, Newcastle's Neville/Potier property comprises 15,480 acres in the middle of Trelawney's land package while its 1,480-acre Mollie River property adjoins the east of Trelawney's Côté Lake.
The junior explorer is planning a spring exploration program in Ontario's Swayze Belt that will include geophysical surveys and diamond drilling to follow up on encouraging prior results.
Another with nearby assets includes Temex Resources (CVE:TME), whose Juby Main Zone contains an NI 43-101 compliant resource of 934,645 ounces of gold in the indicated category, and 905,621 ounces of gold in the inferred category, both at a cut-off grade of 0.40 g/t gold.
The Juby Main Zone forms part of the Juby gold project, located in Tyrrell Township in northeastern Ontario, 100 kilometres south of Timmins - Canada's largest gold camp.
The project is also situated along the southwestern extension of the Larder Lake - Cadillac Fault Zone, between AuRico Gold's (TSE:AUQ) Young-Davidson gold mine and Trelawney's Côté Lake.
Earlier this month, the company said it had started an initial diamond drill program on the recently-acquired Golden Lake property located on strike and to the west of its Juby Main Zone.
With the recent acquisition of the Golden Lake property, Temex now controls 4,500 metres of strike length along the prolific Tyrrell Structural Zone.
The first phase drill program at Golden Lake, planned to be 3,000 metres in around 8 holes, will test the mineralized horizons on and near the Tyrrell Structural Zone along a strike length of 600 metres.
The aim will be to provide sufficient drill data to estimate additional inferred resources, which is expected to ultimately lead to an increase in the NI 43-101 gold resource for the Juby Main Zone.
Jennings' Campbell says that Temex also has the benefit of the Whitney gold project in Timmins Ontario, which is held under a joint venture owned 60 percent by Temex, and 40 percent by gold giant Goldcorp (TSE:G). Recent results from Whitney included 9.37 g/t gold over 5.00 metres, including 57.6 g/t gold over 0.72 metres.
Other notable Ontario gold explorers include Rubicon Minerals (TSE:RMX), with its Phoenix gold project in the Red Lake district, and Treasury Metals (TSE:TML), with its Goliath gold project 20 kilometres east of Dryden.
Rubicon recently announced that its budget for the Phoenix gold project to the end of the third quarter this year has increased by $27.8 million, to $82.8 million.
The gold explorer controls 100 square miles of premium exploration ground in the Red Lake gold district, which hosts Goldcorp’s prolific Red Lake Mine.
Last June, the company received the results of the PEA on its F2 Gold System, part of the Phoenix project, indicating a cash cost as low as US$214 per tonne of processed material.
The report, prepared by AMC Mining Consultants, estimated a net present value of $433 million, at a five percent discount rate, and a pre-tax 28 percent internal rate of return, with a payback period of 3.3 years from the start of production.
Rubicon is carrying out a 12-month $55 million program to optimize some aspects of its preliminary economic assessment. This program, according to the company, contemplates a total of 68,000 metres of drilling, of which, as of late March, 41,000 metres remained to be drilled before the third quarter this year.
Treasury Metals, meanwhile, initiated in January a 20,000 metre core drilling program at its Goliath gold project in Ontario, as the company seeks to test high-priority targets found outside the current resource area.
The property, which rests 20 kilometres east of Dryden, covers the Thunder Lake gold deposit and is host to a number of highly prospective targets that show potential for gold mineralization.
Last November, the company announced an updated NI 43-101 compliant resource estimate for its project consisting of around 1.7 million combined indicated and inferred ounces.
The resource estimate, completed by ACA Howe International, showed an indicated mineral resource of 810,000 ounces of gold equivalent, an increase of more than 200 percent from the July 2010 resource estimate.
In addition, the property is now estimated to host an inferred mineral resource of 900,000 ounces of gold equivalent. Both categories include both potential surface mineable, plus underground resources.
The company has consistently drilled high grade results from the project. In October, highlights included hole TL11-220, which returned 4.0 metres at 8.8 grams per tonne (g/t) of gold in the Western Main Zone, and 3.5 metres at 14.9 g/t gold from the C-Zone.
Campbell's top pick in the region remains Probe Mines (CVE:PRB), which is focused on the Borden Lake gold project located near Chapleau, Ontario that hosts a four million ounce open pit deposit. The discovery also remains open for expansion, he says.
Moving to the Quebec region, Clifton Star Resources (CVE:CFO) is one to watch, according to Campbell, as the company's Duparquet project in Quebec is again a multi-million ounce, open pit deposit with scores of potential.
After almost eight months of hiatus, Clifton started fresh in March, as the company resumed trading with president and CEO, Michel F. Bouchard, at the helm, who took over from former chief executive Harry Miller in November.
Bouchard sees the Trelawney transaction as encouraging, as Trelawney is "maybe a year ahead of Clifton, in terms of work sequence, in determining the deposit it has at Côté Lake." While Iamgold shelled out north of $70 an ounce in the ground for the company, Clifton Star is valued at less than $20 an ounce, leaving significant potential upside.
In February, the company filed an updated NI 43-101 resource report for its Donchester property at Duparquet, which is located along the prolific Destor-Porcupine fault in the Abitibi region of Quebec. Osisko Mining (TSE:OSK) dropped out of the joint venture at the project last year, which saw Clifton resume 100 percent control.
"The company has done a great job in advancing the project from what it was when Osisko left," says Campbell, "and this is going to raise people's attention to the asset."
The NI 43-101 compliant report for Donchester from February gave an inferred resource of 11.01 million tonnes with an average grade of 3.06 grams of gold per tonne for 1.05 million contained gold ounces, at a cut-off grade of 1.5 grams of gold per tonne, and using a top-cut of 8.0 grams per tonne.
Since then, the company has announced robust drill results, and several metallurgical test results that indicate gold recoveries of 93 percent from Duparquet. As well, a new NI 43-101 compliant resource assessment report is due out this month.
The new report, which will be followed by a preliminary economic assessment, will allow for one data bank for the whole project.
The company said that the objectives of the program are to continue to expand the limits of the Eau Claire gold deposit at Clearwater, and test new prospective resource targets.
Estimated potential open pit resources within the Eau Claire and 450 West Zone, as of April 2011, contained 452,000 ounces gold (502,000 ounces gold at 5.72 g/t uncapped) and 115,000 ounces of inferred gold (127,000 ounces gold at 2.83 g/t uncapped).
Also as of April 2011, the company said drilling below the 450 West Zone outlined 130,000 ounces of gold as measured and indicated underground resources at an average grade of 6.46 g/t gold and 905,000 ounces gold as inferred underground resources at an average grade of 7.18 g/t gold.
The current resource, which does not include any drilling post 2009, does not contain the 100 gold-bearing intercepts from the 850 West Zone drilling or high-grade results reported from the Rebecca Collins (RC) Soccer Field trench in 2011.
Drilling this year is currently testing the northern limits of the 450 West Zone, where a stacked series of quartz-tourmaline veins has been intersected north of the estimated open pit resource.
In February, the company said hole ER11-287 from the project returned 13.5 metres of 6.96 g/t gold, including 1.50metres of a whopping 60.49 g/t gold.
Investing in Junior Gold Explorers
Campbell says that for those investing in the junior gold space, they should base their decisions on the quality of the asset as opposed to a suspicion that the company will be acquired.
"Investors should do their due diligence, as you never know what potential acquirers are looking for.
"You need to invest in a high quality asset."
Despite valuations being at an all time low for juniors, and many of them cash strapped, Campbell advises that as long as they execute their plans well and on target, their share prices "ought to eventually reflect this."
The bottom line - there are many junior gold explorers out there that are ripe for picking, providing a “land of opportunity for big producers”, says Bouchard.