As the investment market recovers from years of economic turmoil, finding a bargain in the junior mining and exploration sector is becoming increasingly difficult. The key is to identify companies where residual fear is dominating price action rather than actual development opportunities or assets. One example could be Canadian resource company Indicator Minerals (TSX-V:IME) - speaking with company CEO Bruce Counts, one gets the strong impression that Indicator’s true value isn’t currently reflected in the market.
Indicator’s flagship Nanuq North diamond project had the bitter-sweet experience of producing great drill results and a stream of buoyant news flow at the height of the global recession. Naturally, in those times of thriftiness and low budgets investors massively discounted the market for diamonds, the world’s most sought after gem stone and luxury good, as well as the value of any company whose business model included diamonds.
However, this short term approach ignored the significant supply gap in the diamond market that began to form and is expected to increase significantly over the next few years. For investors looking for bargains ‘trailing’ the market, Nanuq North and Indicator appear to still be valued on a recessionary diamond market analysis that no longer reflects the current market for new discoveries.
The property spans 81,684 acres in the Nunavut Territory, Canada, and is 50/50 funded with joint venture partner Peregrine Diamonds; Indicator being the project operator. Indicator has completed 1,000 metres of drilling across six holes on the property to determine the size and number of phases of the kimberlite deposit – the ‘elevator’ that can bring with it the precious diamonds from deep below the earth’s surface.
The results showed this kimberlite deposit has both a large abundance of diamonds, with good quality, and with a size distribution that indicates the potential for larger, gem quality stones. As a rule of thumb, the economic viability of a kimberlite deposit usually requires at least one stone per kilogram (kg) of material. A 153kg sample taken from this deposit returned 206 stones, around 40% above this requirement.
As Bruce Counts puts it, “we are waiting for the day when we find diamonds big enough to hear them hit the floor when you drop them”. The first 1,000kg of drill samples have already been sent to the lab, with results expected to come through by the end of October 2010. Results for all 4,000kg samples sent to the lab, are expected by the end of this year.
In an effort to offer more shareholder value the company also took advantage of its extensive network of technical, corporate and financial contacts to make a very opportunistic acquisition of a more advanced stage porphyry copper project in Arizona called Mohave.
In a move that diversifies their portfolio Indicator is looking to leverage their technical exploration expertise by pursuing a drill ready, large scale potential deposit that can be worked on year round. This will also ensure a steady year-round supply of results driven news flow. The addition of the project’s lead Chief Technical Consultant Nadia Caira to the Indicator team ensures the company can hit the road running at Mohave.
Once the deal is finalized, Indicator will hold a 100% interest in the property, which covers approximately 4,827 acres of North West Arizona. The project lies in the same deformation zone, and is similar in many respects, to the Bagdad Mine, operated by Phelps Dodge and located 20 miles to the south east.
Over the next 12 months the company will be shallow drilling 4,000 metres across 40 holes, with an additional 1,000 to 1,500 metres of deeper, 300 metres plus, holes, designed to test this sulphide horizon. Further to this, the zone still lies open to the west, and Indicator plans an extension of the IP survey in that direction. Investors can expect to be treated to ongoing and consistent news flow.
Indicator has a management team with over 50 years combined experience and its people can be considered one of the company’s prime assets. President and CEO Bruce Counts, along with their VP of Exploration David Kelsch, were both involved in the first two Canadian diamond mines, Ekati and Diavik, from early exploration right through to production.
As it stands today, with a share price in the region of C$0.08, Indicator’s market cap is around C$8 million. They have approximately C$2 million in the treasury, and although some of this is already set aside to pay for activities at Nanuq North, the company has more than enough cash to fund their planned developments over the next few months.
In the longer term, the added value of the Mohave Project will likely attract additional funding, including the 39 million warrants set to be exercised if and when Indicator’s share price breaks through their strike prices in the range of C$0.15 – C$0.20. Indicator has a track record of running a tight ship, with a low overhead and a low burn rate, dedicated to using cash where it is most beneficial; exploration.
So when can investors expect the valuation of Indicator to better reflect the assets and opportunities in place?
Diamonds are rare, and the discovery of a kimberlite body which contains enough stones of the right quality and size, is one of the most significant hurdles a diamond explorer has to overcome. Indicator has overcome this hurdle, and now their risk profile is, or should be, reduced accordingly. Their recent move into copper has yet to really disseminate into the market, something Indicator intend to actively pursue over the coming months. A significant asset, that is ready to drill, and can produce all year round news flow, could soon begin to attract investor interest.
With these points in mind, Indicator does indeed seem undervalued, and could represent the low hanging fruit investors are seeking coming out of this latest down market.