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From the Archives: Bear Markets and the Great Canadian Area Play - Jan-Feb 1995

From the Archives

Originally published January 30, 1995

Kaiser Bottom-Fishing Report: January-February 1995 hardcopy issue

(The following is a classic analysis of the Great Canadian Area Play written by John Kaiser in early 1995 shortly after starting out as an independent newsletter writer. In it he compares two emerging regional "discovery" plays in terms of their potential to evolve into a "Great Canadian Area Play" of the sort he had witnessed with Dia Met's discovery of diamonds at Lac de Gras in late 1991. In it he contrasts the potential of Murgor's Lebel-Sur-Quevillon gold discovery in Quebec and Diamondfields' Voisey's Bay nickel-copper discovery in Labrador, and explains why he has placed his bet on Lebel-Sur-Quevillon. A couple weeks later Diamondfields released the first assays from the Ovoid Zone, which scaled that discovery so far beyond everybody's imagination that the obstacles to a Great Canadian Area Play in Labrador based on the Voisey's Bay discovery were quickly overcome. A few weeks later Murgor released disappointing drill results which killed the essential ingredient for a Great Canadian Area Play, namely confirmation of a world class discovery. John Kaiser abandoned Lebel-Sur-Quevillon and shifted his focus to the Voisey's Bay area play, which delivered some startling price gains among the area play satellites, but never delivered a discovery even remotely comparable to Voisey's Bay. In early 1999 John Kaiser revisited the logic of the Great Canadian Area Play in Express 99-02: Lac Rocher - another Great Canadian Area Play? published on February 11, 1999. Nunisco's Lac Rocher discovery, like Lebel-Sur-Quevillon, proved to be a puddle rather than the lake necessary to create a Great Canadian Area Play, and consequently that area play fizzled. While there have been flickers of possible area plays since then such as Raglan (Canadian Royalties for nickel and PGMs), Otish (first Ashton and Renard for diamonds and then Strateco for uranium), Nunavut (Stornoway and Shear for diamonds) and the restaking of the Athabasca Basin for uranium, none of these wannabe area plays developed the manic speculation that characterizes a Great Canadian Area Play. Since 2003 the junior resource sector has been in the midst of a commodity driven bull market whose metal price driven dynamics differ sharply from the dynamics of a discovery play. When just about everybody was ready to write the Great Canadian Area Play off as an historical artifact, a failed area play in northern Ontario called McFauld's Lake that had focused on polymetallic VMS targets erupted in the midst of a subprime mortgage induced credit crunch with an unexpected high grade nickel-copper-PGM discovery. As of this prologue (October 18, 2007) McFauld's Lake had not yet achieved confirmation of "world class" scale, meaning a discovery with $10 billion plus gross metal value in the ground. But all the other conditions for a Great Canadian Area Play are in place, which makes rereading of this analysis from the archives along with the Lac Rocher analysis essential.)

Special Feature: Bear Markets and the Great Canadian Area Play

Nothing works better in a speculative bear market than a discovery area play. The mood is gloomy. Everything is doomed to failure. Yes, there is potential for trend-bucker deals, but until these deals are clearly bucking the downtrend, they are barely distinguishable from the rest of the pack. By the time you notice them, their market value is growing through sheer promotional effort. Fear that the trend-bucker play may run out of steam and plummet back into the abyss repels the average investor. The need to dream about unlimited upside is intense, the opportunities almost by definition absent. Such a climate is ripe for an area play. Investors, particularly speculators, need to belong to a herd. In a general bear market like this one investors feel very lonely, for what makes it a bear is the absence of any positive consensus. What makes a bull market is a growing consensus that allows the herd to expand as it draws new members into the fold. An area play is a herd phenomenon that works particularly well in a bear market because it is a beacon radiating consensus into the surrounding wasteland. When the right ingredients come together to give birth to a Great Canadian Area Play, huge speculative profits can be made on this island of hope within a sea of gloom. At the moment there are two candidates for a Great Canadian Area Play, Voisey Bay in Labrador and Lebel-sur-Quevillon, one of which could become the hottest thing on the Canadian speculative stock scene in 1995. I have researched and presented this Special Feature to readers of the Kaiser Bottom-Fishing Report as an early bottom-fishing alert to this area play.

The hungry broker scans the ticker, searching for pockets of liquidity that might offer a chance to turn over his accounts and still yield a small profit after commissions. The greater fool game is tight and leaves no margin for error. The sceptical client insists, show me a story with big-time potential that is already an unrecognized reality. The broker investigates further. The mover is a resource stock, a long time dog with a property somewhere in Canada's boonies. The stock continues to rise. He soon realizes that knowledgeable professionals are buying the stock. Not brokers or traders, but geology types who usually pooh-pooh or give lip service to other people's projects but never buy. Something big is going on. The mystery swells. The client goes for it. The ticker registers another blip of activity, adding to the momentum. Other brokers take notice. Investors start to wonder about the stock. Scoping begins. How big? How long before we know? How high if it's for real? Who else is there? What are the chances for something similar? As positive answers filter out, the capacity to dream is rekindled.

What I am describing is the birth of a discovery area play. A major discovery erupts out of nowhere, catching jaded and uncomprehending shareholders by surprise. They sing hallelujahs as they take advantage of this unexpected gift of liquidity. Smart money aggressively accumulates the stock, pushing the price to heights that soon prompt naysaying from the smart but not as quick money that missed the boat. Analysts of the Dr No variety mutter about unrealistic expectations and premature conclusions. The price pulls back to an uneasy compromise level where risk and reward potential are in balance with initial evidence. Professional traders encourage a tug-of-war between believers and unbelievers while everybody waits for the next level of information. Somebody, however, keeps buying.

Almost immediately people close to the discovery move to tie up nearby ground. Usually the first landholders are financially weak. Desperate insiders have the keenest sense of smell. As it becomes obvious that the discovery play has staying power and arguments emerge why this need not be an isolated discovery, stronger companies move in, optioning strategic land positions from prospectors and weak juniors. Then come the sandbaggers, prospectors who stake a giant halo around the discovery and earlybird satellites regardless of geology. They stake on speculation that the discovery play will gain so much momentum that it will draw in the fly-by-night juniors hoping to get some paper off. Much later when the scope of the discovery has been established the majors come knocking on the door, offering to fund advanced work through to production. As the flagship or flagships soar in price, the satellites rise. How high depends on their copycat success potential and/or intensity of promotion.

Canadian Area Plays always emerge in bear markets

Major discoveries are infrequent. Discovery area plays are an even more rare phenomenon. They tend to happen during bear markets. The great Canadian area plays of the past 15 years-Hemlo (1982), Casa-Berardi (1985), Eskay Creek (1989), Lac de Gras (1992)-all took off in the midst of a speculative bear market. There is a basic reason for this pattern. During bear markets action starved brokers and investors gravitate toward discoveries. The need to survive and fear of remaining the only one on the dock compels brokers to pick up the drumbeat. As more supporters join in momentum builds until the area play bursts forth as a massive trend-bucker that finally catches the attention of the mainstream media. During bull markets where the only trend-buckers are the losers, everybody is too preoccupied with their own deals to care about somebody else's discovery.

Not every discovery turns into an area play. Because the Kaiser Bottom-Fishing Report is an early warning system for big speculative gainers, I watch closely for discoveries that may be area play makers. Although many of my bottom-fish are bear market trend-bucker candidates, timing tends to be arbitrary. In contrast, once an area play is underway we are dealing with predictable behaviour. When an emerging area play has been identified, I recommend that a portion of the bottom-fishing portfolio be allocated to strategic participants in the area play.

At the moment there are two candidates for a Great Canadian Area Play: the nickel-copper-cobalt discovery by Diamond Fields at Voisey Bay in Labrador, and the gold discovery by Murgor near Lebel-sur-Quevillon in Quebec. My analysis tells me that the Voisey Bay area play will probably not catch on, but the Lebel-sur-Quevillon play is on the verge of becoming a Great Canadian Area Play.

Voisey Bay:

On November 17 Diamond Fields announced drill hole assays for its Voisey Bay property in Labrador. Hole #2 graded 2.23% nickel, 1.47% copper and 0.123% cobalt over a width of 71 metres of massive sulphides within a layered intrusive complex. Three other holes to the west yielded lower grades but indicated sulphide mineralization over a strike length of 700 metres. Hole #5, a 100 metre stepout to the east of hole #2, intersected 50 metres of mineralization described as disseminated to semi-massive. Hole #7, a 200 metre stepout to the east, intersected 90 metres of massive sulphide mineralization. Assays are pending.


On December 20 Murgor Resources announced surface sampling results for its Lebel-sur-Quevillon property in Quebec. A 100-130 ft wide, steep dipping, shear zone in pyritic magnetite-rich, highly carbonatized-silicified mafic volcanic rock was trenched, blasted and sampled. Chip samples over a 78.65 ft length averaged 0.211-0.42 opt gold. This confirmed earlier grab samples that averaged 0.77 opt gold over 60 ft and 0.346 opt gold over 110 ft. Drilling was scheduled to begin mid-February.

The market has responded very positively to both announcements. A discovery play, however, is distinct from an area play. The market activity in a discovery junior reflects an ongoing debate about the discovery's value as exploration results provide additional information. In an area play the satellites (juniors holding nearby land) also receive the attention of the market. For an area play to develop the consensus must emerge that the discovery is for real and that there is excellent potential for similar discoveries on satellite ground. I must emphasize the word "consensus", which refers to perception and not necessarily reality. The conditions I describe below are what I believe are required for the formation of an area play consensus. The actual potential of the satellite ground is of secondary importance. Here is my checklist of Great Canadian Area Play conditions.

1) Does the discovery have an unexpectedly high value potential?

Initial results must indicate a discovery with a potential size and value well in excess of expectations. There must, of course, be a discovery. The inferred economic value must be high enough to turn heads and constitute a homreun for the discovery junior's shareholders. The Voisey Bay discovery of Diamond Fields in Labrador meets this condition because the high grade and long intersection imply a world class discovery. For an area play to intensify the discovery must progress beyond the question of is it or is not economic, to the question how valuable is it. Voisey Bay appears to be in the economic ballpark, but the value limits are still open. At this stage the Lebel-sur-Quevillon discovery of Murgor consists only of a gold surface showing. The nature of the showing and geology suggest potential for a multi-million ounce gold deposit. While Voisey Bay meets Condition One for a Great Canadian Area Play, Lebel-sur-Quevillon still needs a good drill intersection to confirm the geological extrapolations. The Lebel-sur-Quevillon satellites will remain cheap pending the outcome of a five hole drill program Murgor will start in mid-February. Voisey Bay meets Condition One but the jury is still out on Lebel-sur-Quevillon.

2) Is there an element of surprise that leaves open the possibility for more and even better discoveries?

The discovery should come as a suprise because of one of the following: a) the general area is a frontier that has never before been explored, b) past exploration was superficial or inadequate, c) the area has never been systematically explored for the key mineral or metal in the discovery, d) the discovery implies a new geological model that the focus of past exploration would have missed. Any of these circumstances leaves open the potential for additional discoveries given a proper exploration effort. Diamond Fields' Labrador exploration effort started out as a kimberlite hunt that got sidetracked by the discovery of mineral occurrences and a geophysical anomaly. There is no impression that a systematic exploration effort converged on the discovery, leaving everything else behind as "dead ground". Labrador has been subject to past regional exploration that documented nickel-copper-cobalt occurrences, though nothing of economic significance was ever found. Now that we know the region can host rich nickel-copper-cobalt deposits, optimism can build that more detailed exploration will find similar deposits. Where there is one, there must be more, goes the saying. In the case of nickel-copper deposits hosted by layered ultramafic intrusives, this is especially true. In the case of the Lebel-sur-Quevillon discovery, the area is part of the prolific Abitibi Greenstone belt known for its gold deposits. The area surrounding Murgor's discovery has undergone exploration which has yielded numerous gold showings and several modest gold deposits of about 100,000 ounces. The last wave of exploration occurred during the eighties and was fueled by flow-thru money. How well the money was spent is open to question, because flow-thru money would be raised in December and had to be spent by the end of February. Because the area lacked road access a good portion of the money spent went towards helicoptor support. But it did produce a database with plenty of sniffs that merit followup. The Murgor discovery will provide the impetus for a closer look. Both Voisey Bay and Lebel-sur-Quevillon are open to additional discoveries and meet Condition Two.

3) Is it probable the discovery junior didn't get it all?

The discovery junior cannot tie up so much land that surrounding land is hopelessly out of the running for a similar discovery. How much is too much depends on the nature of the discovery's geology. The Lac de Gras area play had a tough time initially getting off the ground because suggestions that Chuck Fipke "got it all" had an air of plausibility about them. Although Dia Met Minerals staked a block with an unprecedented size of 853,000 acres in an effort to tie up an entire cluster of diamond pipes, the nature of diamond pipes was such that a few did manage to get away. Similarly, the staking rush around Diamond Field's Voisey Bay nickel-copper-cobalt discovery is having a hard time metamorphosing into an area play because Diamond Fields staked such a large 20km by 30 km buffer zone around its discovery. That may yet change as investors become educated about the nature of nickel-copper-cobalt deposits and their geology. For an area play to evolve around the discovery it is critical that the satellites cover geology perceived to be prospective for a major deposit. Frontier discoveries have a harder time evolving into an area play because the discovery junior's isolation in the field gives it plenty of time to tie up the best ground. In such cases the view must emerge that the discovery junior's land grab was guided by a flawed understanding of the discovery's geology. Indeed, management behind some of the juniors which have acquired Voisey Bay land believe that the staking strategy of Diamond Fields may have been premised on a mistaken understanding of the association between the discovery and the host geology.

While investors still need convincing that Diamond Fields didn't get it all, this is not the case in Lebel-sur-Quevillon, where much of the surrounding ground was already owned by juniors before the discovery. Murgor's property is only about 1 km wide and 3 km long. In fact, it is possible that two other juniors, Freewest Resources Canada and Orient Resources Inc, may even have a pieces of the projected strike and downdip extensions of the Murgor discovery. Probing for such extensions became the basis of huge speculative plays in the cases of a satellite called Interlake in the Hemlo area play and Adrian in the Eskay Creek area play. The Lebel-sur-Quevillon discovery is associated with a belt of sheared volcanics that extends well beyond the Murgor property. There are also a series of parallel belts. The entire area play fits within a 20 km by 30 km block, though I am told that blanket staking has now tied up a much larger area. Lebel-sur-Quevillon easily meets Condition Three, but whether Voisey Bay does is questionable.

4) Are there lots of different players with strategic land positions?

Key satellites with strategic land positions must be run by a variety of management groups. The more groups involved, the broader the audience that news of the play will reach. Furthermore, the more groups mounting their own intensive exploration programs, the better the flow of results and potential for making additional discoveries. Nothing gives a flagging area play a boost like evidence of another discovery. The attention of area play speculators can be better maintained if they know lots of focused work being done by many companies could generate surprises that inject fresh life in the play. Area plays where the satellites are all controlled by the discovery junior's management are possible: Murray Pezim was the ultimate master in orchestrating such area plays. But such area plays, Eskay Creek comes to mind, tend to be short-lived because they depend on the fortunes and whims of a few individuals. Better to have six middle-weights pulling the area play than one heavyweight. Best of all is when all the heavyweights latch onto strategic ground. At Voisey Bay about a dozen junior groups have acquired land positions, but so far no consensus has emerged that any of these holdings are strategic. Few of the juniors are particularly strong in the promotion and fund-raising department. Voisey Bay remains a single promoter, single company play. In contrast, I have so far counted 18 distinct groups whose juniors have acquired interests in reasonably strategic satellite ground in the Lebel-sur-Quevillon area. Companies from every Canadian exchange--Vancouver, Alberta, Toronto and Montreal--have a stake in the Lebel-sur-Quevillon play. Investors have heard about Voisey Bay almost exclusively from Robert Friedland and his supporters, whereas they are hearing about Murgor's discovery from promoters and brokers located from coast to coast. In fact, so many different groups have a stake in the Lebel-sur-Quevillon area play that if the Murgor discovery pans out we will have a Great Canadian Area Play on our hands that could do more for the cause of Canadian unity than anything else. Lucien Bouchard and Jacques Parizeau, the two chief exponents of Quebec separatism, are probably cringing over the prospect that, come the time of the separation referendum later this year, the people of Quebec and the rest of Canada will be too busy embracing each other as a result of a multi-million ounce gold discovery in Quebec. We are not, I must stress, there yet, but the stage has been set for the hype to transcend simple greed. Voisey Bay fails Condition Four while Lebel-sur-Quevillon easily meets it.

5) Is it a rags to riches story?

The discovery junior must start out as a penny stock, and many of the satellites must be relatively cheap stocks that offer plenty of liquidity during the early stages of the discovery play. Again, the affinity between bear market and area play is a factor. A bear market exists when investors have come to believe that not making money is what speculative stocks are all about. A real discovery has the effect of drawing money into circulation. The more participants during the ascent, the greater the likelihood of profit recycling in satellites. In a bear market investors tend to shy away from higher priced speculative stocks, preferring to get their feet wet again with low priced penny stocks. In this regard the Lac de Gras play was a classic. An obscure penny stock called Dia Met rocketed from $0.30 to $65 over an 18 month period. Most of the satellites were semi-defunct companies of which investors could have bought all they wanted during the early stages of the area play in 1992. The shares of Dia Met and the satellites traded considerable volume as they emerged from the pennies. During the early stages of Dia Met's rise there was no lack of paper for small investors to buy. Along the way buyers became sellers. Flush with cash and high on the fast buck made, early winners recycled profits in satellites. As the discovery play acquires an egalitarian rags to riches mystique, wannabe newcomers are attracted. In this regard Voisey Bay badly fails the test. Diamond Fields was already a pricey stock ($4 with 20 million fully diluted) whose shareholders were generally of the opinion that the stock was worth a lot more based on its diamond projects. When the discovery news broke in mid-November, the stock gapped up to $8 and within six weeks had peaked at $14.50 before pulling back. Those who sold were happy for the opportunity to exit, and the rest will take their chances. Voisey Bay is not a rags to riches story that restores the faith of investors in general. The man in the street did not participate; his mood, if not resentful about the luck of others, is one of indifference.

In contrast, Murgor was a perennial bottom-fish drifting at $0.20 in November when it acquired the discovery property. The stock crept up to the $0.50 level on word that surface sampling had encountered good values in a broad shear zone, and then took off to the $0.90 level just before Christmas when assays were released. Since then the stock has run above $2, pulled back, and pushed higher on heavy volume. Although the news did not seem overly spectacular to ordinary investors, it caught the attention of geologists who made inquiries and quickly became buyers. The credibility of Murgor's management, which had double-checked the initial results because it couldn't believe how good they were, has been a key factor. When Pat Sheridan plunked down $780,000 of his own money to do a private placement of 600,000 Murgor units at $1.30, the gasps of surprise were more than audible. Sheridan is a shrewd individual whose success has given him deep pockets and who usually sticks to his own deals. That he would invest so much money in restricted paper for a minority stake in a company, all on the basis of a surface showing that half a dozen holes could turn into a flash in the pan, that carried weight. But what is important for a Great Canadian Area Play is that all manner of investors have the opportunity to participate during the early stages of the discovery. A junior company rags to riches story has many participants. It is a story everybody likes to talk and hear about. Voisey Bay fails Condition Five. Lebel-sur-Quevillon will meet it if the rags indeed turn into riches.

6) Is there sharing of information among the insiders of both the discovery junior and the satellites?

Some insiders of the discovery junior should be affiliated with some of the satellites. That is the best way to ensure a flow of information. A major discovery turns the individuals responsible into geniuses in the eyes of the market. If the discovery insiders remain secluded within the confines of their company, as was the case with Dia Met, the satellites can draw neither intellectual nor emotional nourishment from them. Because geology involves a think, search, test, think cycle, exploration benefits from the sharing of information and ideas. Discovery plays all start with ignorance and confusion about the geological nature of the discovery. Blind speculation, which is the main drive early in the area play, may be a powerful force, but it is also volatile and can quickly evaporate. For a speculator to get hooked and forget about playing the inherently unstable greater fool game, he must arrive at an increasingly detailed understanding of the discovery play. Only the sense of understanding can turn a speculator into a true believer. Every speculator is happier if he thinks he knows what he is doing. For an area play to grow, channels must be open for knowledge to flow from the discovery to the satellites to the investors. Dia Met shared nothing with anybody else, a stance adopted by most of the Lac de Gras satellites. The Lac de Gras area play died not so much because of the Tli Kwi Cho bust, but more so because investors realized that they had never really understood what was going on, nor would they ever be permitted to understand until it was of no speculative value anymore. The satellites would like to convince investors that they too will make a major discovery. Their credibility is greatly enhanced if they have on board people associated with the discovery junior. Somebody who just found the motherlode will know how to find the next one, so goes the thinking.

>None of the Diamond Fields insiders are associated with any of the juniors that have picked up land in the Voisey Bay area. It is also hard to imagine Robert Friedland and his associates trading the latest geological gossip with the principals behind the Voisey Bay satellites. They are simply worlds apart. In contrast, just about everybody I contacted among the Lebel-sur-Quevillon satellites claims Murgor's Mac Watson as a long-time friend. And they all ventured that Mac is probably the best geologist in Quebec. What I sensed was plenty of mutual respect among the players that have positioned themselves in the Lebel-sur-Quevillon play. What this means is that news and fresh insights about the Murgor discovery and work by the satellites will circulate quickly. Because exploration results are always open to interpretation, there will be a lively discourse about what it all means. That is what feeds the rumour mills. Voisey Bay fails Condition Six, but Lebel-sur-Quevillon easily passes.

7) Is the market's valuation of the discovery junior such that confirmation of the best case scenario still leaves substantial upside?

Confirmation of the discovery as a homerun must proceed in stages and not too quickly, especially as reflected in market valuation. Voisey Bay was almost immediately valued as a homerun that tacked $200 million onto the market value of Diamond Fields. Right away there materialized front page headlines, rumours of under-the-table buyout offers, newsletter rave reviews, serious interest from major mining companies and poison pills. Even the native Indians rolled into town as if on cue, reminding everybody of their unsettled land claims. The only missing piece needed to dispel any doubts about Voisey Bay being a genuine homerun is for a lawsuit to pop out of the woodwork. All this was accomplished on the basis of a single ore grade intersection (the other holes appear to be subeconomic). Voisey Bay is about as American and un-Canadian as you can get. For a Great Canadian Area Play to evolve, Canadians must have opportunity to doubt the discovery and call the early risk-takers foolhardy. The evidence supporting the discovery's potential must be presented in stages so that the earliest believers face a constant struggle to convert the unbelieving masses. As the evidence builds, so does the strength of the believers, whose zeal captivates the sceptical bystanders. Although scoping out the potential of Murgor's discovery generates target prices in the $20-50 range, Murgor at $2 presently has a market valuation of only about $25 million. That leaves substantial upside if results confirm expectations. Diamond Fields may still have big upside, but it fails Condition Seven because disappointment would mean big downside. At this stage Lebel-sur-Quevillon has more upside than downside if the scoped out potential starts being confirmed.

Scoping out a discovery play

Scoping out a discovery's value potential requires some broad extrapolations of the known data. It is a very crude exercise that allows investors to set expectations and assess the risk-reward potential inherent in a discovery stock. The biggest problem investors have during the early stages of a discovery play is in establishing upside potential. I alluded earlier to the blind speculation that characterizes the early stages of a discovery play. That applies more to investors joining a growing herd simply because the herd is growing and seemingly headed somewhere. Leading the herd are promoters, financiers, and geologists. It is not a case of the blind leading the blind. The leaders may be pointing to the moon, but they also have a pretty good idea about how much rocket fuel their ship has. Here is how some geologists have been scoping the Murgor discovery.

Step One: get a handle on the grade

The first step is to get a handle on the grade. Samples taken from fresh rock exposed by blasting in a trench that cuts across a 100-130 ft shear zone assayed a very consistent 0.3 opt gold over about 20 metres. Grab samples plucked from the surface during an earlier pass averaged 0.77 opt gold over a similar width in the same area of the trench. The conclusion is that a strong hydrothermally driven mineralizing event has brought a lot of gold into the area of the showing and what we are looking at may be just the tip of an iceberg. To be conservative an average grade of 0.2 opt is chosen.

Step Two: get a handle on the tonnage

The second step is to get a handle on the tonnage. This involves figuring out what is controlling the mineralization. In other words, what is the sponge that sopped up the gold and what are the boundaries between the gold soaked sponge and barren rock. The geometry of that sponge leads to the volume, which in turn leads to the tonnage. This is where geologists have a big advantage over non-geologists. I am not a geologist, so I have to go pick a geologist's brain. The geologist points out that hydrothermal systems need a conduit which is usually a zone of structural weakness in the country rock. He notes that Murgor's gold occurs within a silicified shear zone (the shattered and twisted area along a fault) that runs for many kilometres and is about 100-130 ft wide. He notes the high presence of pyrite and magnetite and makes a leap of faith that there is a connection with the gold. Existing geophysical surveys reveal a mag anomaly that intensifies over a 500 metre stretch within the shear zone in the area of the gold showing. The pyrite/magnetite may be responsible, and because of the possible connection with the gold mineralization, may represent the sponge. So we imagine a zone that is 20 metres wide and 500 metres long, grading 0.2 opt gold throughout. But how deep? The news release says a steep dipping shear zone. The geologist remembers that other shear hosted gold deposits in the Abitibi Greenstone belt have persisted to depths in excess of 1,000 metres. So we pick 500 metres as the depth. Simple arithmetic produces the volume: 20 m width x 500 m length x 500 m depth = 5,000,000 cubic metres. This gets converted into tonnage by multiplying the volume by the specific gravity (a specific gravity of 1.0 is equal to 1 cubic metre of water which weighs 1 tonne; the specific gravity represents how many times heavier a cubic metre of rock will be). The geologist suggests a specific gravity of 2.5, which may be too low for a pyrite/magnetite rich mafic volcanic host rock. But, better to be conservative. The result is a resource of 10,000,000 tonnes grading 0.2 opt for a total of 2 million ounces of gold.

Step Three: get a handle on the value

The third step is to get a handle on how much such a deposit might be worth. 2 million ounces of gold bullion in a vault are worth $1 billion in Canadian dollars. But 2 million ounces in the ground are nowhere near worth that much. It costs time and money to get that gold out of the ground. That is obvious, but it never ceases to amaze me how many investors get fooled by talk about the gross value of in situ reserves. The real value of a deposit is the present value of the cash flow possible at the optimal production rate. Mining engineers have an advantage here because their business is figuring out the highest production rate with the lowest operating cost for the size, nature and grade of deposit. By checking the numbers for similar gold deposits in Quebec and Ontario we come up with a rate of 3,000 tpd (1,000,000 tonnes per year) and a cost of about US$50/tonne. At a grade of 0.2 opt such a mine would produce 200,000 ounces annually at a cost of $250 per oz. At $385 gold that works out to a profit of $135 per ounce produced or $27 million per year. Convert that into Canadian dollars and we have annual earnings of $37 million. Without getting into details of capital cost and time until startup, at a 12% discount rate and a mine life of 10 years this stream of cash flow would be worth about $200 million. Alternatively, if Murgor has doubled its issued stock to 20 million shares to bring the deposit into production on its own, its cash flow would be $1.85 per share. At a gold stock cash flow multiple of 20:1, Murgor would down the road be trading at $37 per share.

At this stage these figures are all fantasy, but they are nevertheless important because they give shape to our fantasy expectations. The scoping model is also very crude. No way will Murgor's gold showing turn out to be a nice homogenous, rectangular gold deposit. Grade and geometry will vary. There has also been some mumbling about a cross structure. If it exists and is related to the gold mineralization, it could limit the strike extension possibilities. Drilling is needed to expand this discovery from a surface showing to a major zone.

Voisey Bay is well on its way to being established as a major discovery. Lebel-sur-Quevillon is still in its infancy. A staking rush has tied up all the land surrounding these discoveries. By the end of March Lebel-sur-Quevillon could be dead, the surface showing a freak of nature. Voisey Bay will be galloping or plodding along as drilling outlines an orebody. The Voisey Bay satellites will plod along until they individually come up with something that makes the market notice. Lebel-sur-Quevillon is not by any means a sure thing, but based on my analysis, it is the best bet for a Great Canadian Area Play. Watch it closely or take a chance on the key satellites.

Lebel-sur-Quevillon Strategy

The discovery: The flagship, Murgor Resources Inc (MUG-V $2.05), is the best buy for immediate market action. Drilling will quickly answer the first question: what does the shear zone look like below the surface? The first five drill holes will probe the shear structure downdip and along strike not too far from the showing. Field reports will quickly tell the market whether or not mineralized structure has been intersected. An affirmative will kick off a speculative breakout that could take Murgor to $3.50 with volatile swings. During this phase the nearby satellites may perk up a bit, but they will not ignite until assays confirm that Murgor's gold zone has depth and length. If Murgor's discovery is confirmed to have big-time potential, all hell will break loose in the Lebel-sur-Quevillon area.

Immediate strike and downdip extensions: The best stock to own is Freewest Resources Canada (FWR-TM $0.73). It has interests ranging 30-50% in all the ground adjoining Murgor's 100% owned property except for the Mazarin block to the east. This gives Freewest exposure to downdip and strike extensions. Freewest has $3 million working capital and a large portfolio of projects in Ontario and Quebec. The stock is currently depressed because shareholders view it as the residue left over after Harker-Holloway was spun off to Hemlo Gold. Trend possibilities: The belt of mafic volcanics that hosts the Murgor discovery has a northeast-southwest trend that shows up as a regional magnetic signature. There are also several parallel belts. Past exploration has shown all of them to host gold mineralization. To maximize exposure at minimal cost I would at this stage pick Urbana Corp (URB-T $1.00), Cons Oasis Resources (CSI-M $0.23), Orient Resources (ORR-M $0.20), Cane Corp (CQN-C $0.23), and Sharpe Energy (SHG-V $0.60). I would also recommend Beaufield Cons Resources (BFD-V $0.33) because of its extensive regional experience.


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