Bottom-Fish Comment - January 26, 2017: Recommendation Strategy for Adamera Minerals Corp
Adamera Minerals Corp is a new bottom-fish accumulation target below $0.10 for the 2016-2017 Bottom-Fish Edition based on a target generation breakthrough the junior achieved late last year on its Cooke Mountain land package in northeastern Washington. Adamera is a former bottom-fish recommendation I gave up on at the end of 2015 due to the junior's poor balance sheet and its failure to produce market attention grabbing results. Adamera is the successor to Mark Kolebaba's vehicles for diamond and uranium exploration in Canada's Arctic, Diamonds North and Uranium North, which were merged and rolled back in early 2013. Diamonds North had successfully tracked down the sources of good diamond indicator minerals through till sampling and geophysics, but promising micro diamond results failed to translate into meaningful macro grades for the Amaruk kimberlite pipes. Uranium North, spun out to exploit the uranium bubble, had less success.
As the resource sector bear market that began in 2011 worsened, it became impossible to fund grassroots exploration in expensive remote regions such as Canada's Arctic, and so Kolebaba refocused the merged company onto the much more accessible gold-silver mining districts associated with the Torado and Republic Grabens in northeastern Washington. This region had yielded high grade gold-silver epithermal deposits as well as skarn/replacement style gold deposits of which the most recent was the Crown Jewel deposit discovered by a Canadian junior in the early nineties and finally developed by Kinross in 2006 as an underground gold mine which will have churned out 1.4 million very profitable ounces by the time it shuts down in Q1 of 2017. The region had not seen much exploration since the late nineties because the market's focus was on large, multi-million ounce open-pittable gold deposits that offered wonderful upside optionality if the $3,000 plus gold predictions of industry leaders such as Pierre Lassonde and Robert McEwen ever became a reality without accompanying inflation that preserved the marginal economics of these low grade deposits. In addition, as Kinross discovered before switching in 2002 to an underground mining plan for what became the Buckhorn Mine, Washington had made it clear that it was not interested in approving open pit mines. There was also the perception that if there was anything left to be found it might be high grade but pitifully small deposits not worth developing.
Kolebaba, however, recognized several factors that made him much more optimistic about reviving this old frontier. First of all, the 2,000 tpd Kettle River mill, which Echo Bay built to handle the ore from its Overlook, Lamefoot and Key underground gold mines, would still be a functional asset after depletion of the Buckhorn Mine which operated at 900 tpd and trucked its ore 70 km to the Kettle River Mill (the Crown Jewel deposit is in the Torado Graben while the mill and other earlier found skarn/replacement style deposits were in the Republic Graben). Secondly, Kinross was not conducting any exploration in the surrounding area to keep the mill fed with ore from new discoveries. Thirdly, while other modern nations such as Canada have developed claim staking and assessment work filing systems that have enabled digital compilation of reams of geological data, America pulled the plug on its prolific US Bureau of Mines in 1995, absorbing it into the US Geological Survey whose mandate was more oriented to environmental and earthquake issues. No company which stakes public lands in the United States is required to file any assessment information, with the result that whatever exists is either in old non-digital USBM archives or in private hands. Kolebaba figured that it was much more within the means of a junior during a bear market to dig through archives, drive 5 hours to northeast Washington from Vancouver to conduct exploration work, and rethink the potential from the perspective of recent geological models and exploration technologies. He figured that the bar for success where shareholders are rewarded with a buyout was much lower because it made sense for Kinross to acquire any new deposit to feed its Kettle River mill. And he figured that this depleted mining frontier still had potential for high grade discoveries that were economic at prevailing gold prices and large enough to be developed as standalone underground mines.
This is what I initially liked about Adamera, but the junior could not get any market traction because its balance sheet, which included a liability for cleaning up diesel fuel caches in Nunavut, was never flush with cash and worsened as the management team accrued its salaries, the shoestring budgets involving winkie drill programs amounted to hunting with a pellet gun, and the results failed to confirm Kolebaba's models in a compelling manner. During H1 of 2016 Adamera bit the bullet with a private placement of 15.6 million units at $0.025 with a full five year $0.05 warrant as prescribed by Jabba the Warrant Hutt. This financing cleaned up the balance sheet and gave the company staying alive capital. The surprise market turnaround last year as gold climbed enabled Adamera to do another private placement of 12 million units at $0.05 with a full $0.10 warrant but only an 18 month term with an acceleration clause if the stock trades above $0.20 for 10 continuous days. The result is 87 million shares issued and 134 million fully diluted. The presence of the cheap warrant overhang, whose unnecessary five year term displays a predatory mindset with little confidence in fundamental success, makes Adamera a difficult junior to like from a structural perspective. However, on Friday January 20, 2017 I was stunned by Mark Kolebaba's presentation at the Metals Investor Forum.
The MIF is a type of mini-conference where the presenting companies have to be covered by one of the speakers who all have to be subscriber fee based newsletter writers, not the free newsletter types who get "sponsored" by companies to "like" their stories which they do until the sponsorship is ended. The audience is drawn from the readerships of the speakers, with a registration cap beyond which new registrants are put on a waiting list. The venue is small and can only accommodate about 400 people. 12-15 companies present per day and have only 10 minutes to pitch their story. The goal of the presentation is to hook the audience's attention with a story; not convince the audience of the story's validity. The convincing gets done afterwards when one visits the company's table outside the speaking hall and gets a more detailed interactive presentation. Although Adamera was the cheapest stock at the MIF conference, Kolebaba's presentation was the best of those that I saw. Afterwards I spent an hour with Mark going through a more detailed version and getting my head around the story. When MIF publishes the YouTube version of Adamera's presentation, I will post the link here.
Adamera's focus during the past few years has been the Oversight property next to the former Overlook Mine which yielded about 500,000 ounces gold at 5 g/t plus from a 2-15 m thick horizon of replacement style massive sulphide mineralization at the contact between Permian carbonates and younger Triassic sediments. These deposits form laterally near structures that cut the stratigraphy and serve as fluid flow conduits. The Chinese Getang deposit is an example of this style of sediment hosted gold deposit. The Republic Graben is a "valley" of down-dropped rock within which there is a central uplifted block. The western and eastern blocks are host to the deposits. Inconveniently, they have undergone post-mineral folding and faulting, which means that finding these blind deposits is not a function of grid drilling near inferred structures (not only is the prospective contact horizon usually covered by unprospective younger rocks, but the region is also overburden covered), as Adamera discovered at Oversight where it turned out that the target horizon had been completely folded over so that it was upside down. Because magnetite is associated with deposits such as Overlook and Lamefoot, magnetic surveys were used by previous explorers to generate targets, but this proved not effective because there is a lot of magnetic noise in this region. Kolebaba and his geophysicist Martin St. Pierre wondered if there were any other geophysical methods that might enable the known deposits to stand out, and decided to conduct a VTEM survey in late 2016 on 100 metre spacing on the eastern and western blocks of the Republic Graben. The question they asked, is there an EM conductor associated with the known systems, and, if so, are there other coincident Mag-EM anomalies in the region that have not been properly tested?
The Adamera technical team was shocked by the results. The Lamefoot, Overlook, Key West and Key East deposits all lit up as Mag-EM anomalies; only the Belcher deposit did not (there is always at least one deposit which defies the model). Furthermore, 6 new anomalies were established in the eastern block: one similar to that of Overlook next door at Oversight, meaning that more work is required at Oversight, a pair further south in a valley that looks like a structural zone, and another three even further south. In the western block which hosts Lamefoot they found a 2 km curved anomaly they call the Big Banana; they are not sure what to make of this anomaly because it is too big for the known scale of the replacement type gold deposits that have already been found and mined out in this region. Graphite is a common explanation for an EM conductor, but the company does not think graphite is the cause because the regional rock type is not the sort that develops graphite beds. In addition Adamera collected soil samples from the survey areas to see if there is any geochemical support for these targets; the company is assessing the samples in house with the help of an XRF machine to look for pathfinder elements (gold is not detected by XRF). These results are just starting to come in, and, although Adamera already has a strategic land position, the junior is currently panic staking additional ground and stalling with the release of the MIF video and corporate presentation.
Adamera's strategy is to drill two scout holes into each anomaly to a depth of about 200 metres, which the junior hopes to complete in Q2 of 2017 and cost no more than $500,000. That is a bit of a problem because the company has only half that amount left in the treasury; it would like some of the five cent warrant holders to exercise rather than conduct another dilutionary private placement which is unlikely to attract any buyers who do not also insist on a full warrant. This scout drilling program is unlikely to deliver an ore grade discovery hole because the company does not know the bedrock geology; its purpose is to demonstrate that anomalous gold in the right target host rocks is associated with the anomalies, which sets the stage for financing a major drill program seeking several million high grade ounces that command a buyout in excess of $500 million, which would translate into a $2-$3 price target. The consolation prize would be to find another Overlook deposit of 500,000 ounces which Kinross acquires for $50-$100 million to feed the Kettle River mill. Kinross has reached an agreement with the local community to keep the mill on care and maintenance for five years after it shuts down. Adamera now holds the keys to the revitalization of this old mining frontier. If the scout drilling demonstrates that the anomalies are all associated with barren sulphides, the company's Plan B is to return to its Flag Hill and Empire epithermal targets, as well as checking out an unusual magnetic low in the northeasten part of the eastern block which could be the center of an epithermal system that destroyed all the local magnetite. Adamera is an excellent example of discovery exploration that rethinks an old mining district by applying different exploration technologies to detect blind deposits.