Mining cycles are Doug Eaton’s stock in trade, which helps explain why the Strategic Metals CEO is remarkably zen given the state of junior mining markets - and his company’s share price.
The veteran Yukon geologist has made a career out of using cycle bottoms to sow the seeds of success before harvesting closer to the top.
In 2011, for example, the market capitalization of the prospect generator surged to $381 million as gold hit US$1900/oz and investors got excited about the discovery of Carlin-style mineralization by ATAC Resources in the Yukon (ATAC is part of the Strategic Exploration Group).
Four years later, investors are haters and the junior mining sector is particularly unloved. Strategic is trading at cash, with no value given to its equity stakes, extensive Yukon claims or valuable geological database built up over decades.
Strategic has its roots in Archer Cathro, the private Yukon-focused geological consultancy that has explored the territory since 1965 and been involved in many of its major discoveries. Eaton has been a partner since 1981 and is now Archer Cathro’s controlling shareholder.
I stopped by the offices Strategic shares with Archer Cathro recently to get a company update from Eaton and VP Communications Richard Drechsler (I own the stock and wrote it up in Resource Opportunities on Sept. 22).
Conversation turned to the markets, and Eaton recalled when you could buy every mining company in the world using the $398-billion market capitalization of tech darling Nortel Networks. That was during the peak of the tech bubble in the summer of 2000.
“It’s probably at that point again, with Google or Apple,” he commented.
I was curious about his off-the-cuff statement so I checked it out after the interview, and Eaton wasn’t far off. According to a recent report by SNL Metals and Mining, the value of the global mining sector has dropped below $1 trillion - less than the combined market capitalizations of Apple and Google. (In 2011, the sector was worth more than $2.5 trillion.)
Presumably, those two companies have a much brighter future than Nortel Networks did: the technology produced by Apple and Google is changing our lives (and requires metals to build and operate).
The dichotomy between tech and mining is illustrated by the number of junior mining companies with solid management trading for cash or less. Strategic Metals is one of them.
When you include marketable securities, Strategic is trading for just 72 cents on the dollar. The company has roughly $23 million in cash, just below its market capitalization, and equity positions take working capital to more about $35 million.
Strategic’s main positions are a 46.6% equity stake in Rockhaven Resources (worth $6.4M at RK’s 13-cent share price) and an 8.6% stake in ATAC Resources (worth $3.85M at a 38-cent share price). Positions in other junior companies including Silver Range and Precipitate Gold round out the balance. Eaton is himself a large shareholder of Rockhaven (he owns 11% plus) and Strategic (3.8%)
One potential catalyst for Strategic shares is Rockhaven's upcoming resource estimate for Klaza, the road-accessible high-grade gold-silver deposit west of Carmacks. The initial resource estimate was released in January and covers 2 of 9 mineralized zones on the property. It shows an inferred resource of 948,348 oz gold, 21.8M oz silver, 121M lbs lead, and 144.3M lbs zinc at average grades of 4.19 g/t Au, 96 g/t Ag, .78% lead and .93% zinc using a 1.5 g/t cutoff. A preliminary economic assessment is planned for next year.
ATAC is advancing several properties in its 1,700-sq-km Rackla gold project, including Tiger - a carbonate-replacement oxide gold deposit - and Osiris and Anubis, Carlin-type gold discoveries.
Eaton had recently returned from the Precious Metals Summit in Colorado, where he said there was some interest in junior mining from private equity groups. However, liquidity remains an issue for them.
“There are large pools of capital waiting for a place to go,” he said.
Strategic owns more than 130 properties and considers about 100 of them core assets. Holding costs in the short to medium-term are zilch because of assessment credits Strategic has built up with the territorial government on its extensive mineral claims, Eaton explained. “We’re as immune to the cycle as you can get.”
He unrolled a claims map of the Yukon, divided into geological belts populated by patches of red, orange, blue and green that correspond with Strategic Exploration Group claims. Strategic is by far Yukon’s largest claims holder - SMD and affiliated companies own almost 18% of the territory’s claims.
The Fraser Institute ranked Yukon the world’s top jurisdiction for mineral potential in its most recent mining report.
“No matter where development takes place, we want to have a few projects in the top 10 in each belt,” he said.
Much attention in the Yukon has been focused on the Klondike belt, where Kaminak Gold’s Coffee deposit is being developed. The neighbourhood also hosts Kinross’s White Gold project and Western Copper and Gold’s Casino deposit (Casino is part of the overlapping Dawson Range Belt that hosts porphyry and epithermal mineralization).
Eaton’s Strategic has some claims in the Klondike that would even benefit from a mine at Coffee - Kaminak’s northern road route would cut right through Strategic’s Eureka claims.
But the veteran geologist is more bullish on the Nadaleen Trend, home to ATAC’s Carlin-style discoveries and large swaths of ground Strategic has staked. In 100 years time, more gold will have been produced out of Nadaleen than Klondike, Eaton predicts.
Eaton rattles off a list of Strategic's Yukon properties that he reckons have high potential for a mineralized discovery. “Those are major projects you could put a drill in right now and not be embarrassed,” he said.
Two of the prospects Eaton likes best are Hopper and Hartless Joe in the southern Yukon. Both have proximity to infrastructure, an important consideration in Yukon.
A 3,200-metre drill program at Hopper, which is road-accessible and 22 km north of a hydroelectric facility, returned promising gold and copper grades including 12.15 g/t Au and .95% Cu over 2.65 metres and 43.6 g/t Au over 1 metre. The geochemical anomalies at Hopper are very similar to those at Western’s Casino deposit, Eaton says.
Strategic also announced a promising surface discovery at its Hartless Joe property 28 kilometres northeast of Whitehorse. A chip sample taken from the discovery outcrop graded 60 g/t gold, 554 g/t silver, 5% lead and .35% copper over 1.2 metres.
On the First Nations front, Strategic is also paving the way for progress when the mood improves. Eaton and Drechsler - who handles FN and community relations - had just returned from a week in Yukon, where they met with several First Nations about their projects. “If you get things going when times are quiet, you’re not held up when things pick up,” he said.
Building relationships with First Nations goes far beyond environmental concerns, they pointed out. One former mine's tailings dam was rejected by a First Nation for social reasons. If you stood in the middle of where the tailings dam would be built, you could see a mountain formation that resembled a mother holding her child. These types of social concerns are important to recognize during early-stage exploration to avoid serious delays at a later stage.
Capitalizing on that “discovery bonus” between grassroots targeting and discovery definition is “always where the bulk of the money is made,” Eaton says. But the money and interest in top prospects has also dried up, he noted: “A junior must be prepared to take a project further through the cycle.”
Market capitalization: $25.3 million
Working capital: $35 million
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Disclosure: Author owns shares of Strategic Metals and Rockhaven Resources and is biased. This article is provided for information purposes only and is not investment or professional advice of any kind. Always do your own due diligence and speak to a licensed investment advisor prior to making any investment decision. Junior mining stocks such as Strategic Metals, Rockhaven Resources and ATAC Resources are incredibly risky and can lose their entire value. Read company profiles at www.SEDAR.com for important risk disclosures. You are responsible for your own trades.