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 Thu Jul 20, 2000
Tracker 2000-42: Ascot - Cori Huarmi - is she a bust or isn't she?
    Publisher: Kaiser Research Online
    Author: Copyright 2000 John A Kaiser

 Kaiser Bottom-Fish Tracker 2000-42

Copyright 2000 John A Kaiser

July 20, 2000

Ascot Resources Ltd (AOT-V: $0.22)

Tel #: (604) 684-8950
Web Site: www.bmts.bc.ca/aot/

Cori Huarmi: is she a bust or isn't she?

Ascot Resources Ltd (AOT-V: $0.22)
has collapsed back to bottom-fish levels following the release of disappointing results for the first hole drilled by Cardero Resource Corp (CDU-V: $0.45) on the Cori Huarmi prospect in Peru. This is yet another case of a mineral play spec cycle interrupted at a very early stage. Last March Cardero scooped an option on Cori Huarmi from under Barrick's nose with a deal that allows the junior to earn 60% by paying US $600,000, issuing 600,000 shares, spending US $3.5 million, and delivering a bankable feasibility study within a 52 month period (4 years). This was a hot prospect on whose heels other juniors including Peruvian Gold Ltd (PVO-V: $0.76 halted) were snapping. (Bottom-fishers, there is really good news coming on Peruvian Gold!) Cardero can acquire the vendor's remaining 40% by converting it to a $30 per ounce produced royalty that at current prices amounts to a 10% NSR. Cori Huarmi is a high sulphidation epithermal prospect (ie Pierina style) with a 1 km by 4 km alteration system that has yielded sporadic gold grades in vuggy silica outcrops. The system consists of a stack of tuff units within a volcanic centre cut by breccias related to porphyry stocks and dykes that have intruded the system and which on surface appear to be associated with gold mineralization. The target model was a horizon of vuggy silica containing gold mineralization. Support for this hypothesis was provided by a CSAMT survey that indicated a 3,000 m by 500 m resistivity anomaly that coincided with a surface gold anomaly and was interpreted as a 100-300 metre thick horizon of vuggy silica. As such Cori Huarmi is very similar to the Cofradia prospect David Lowell brought to Pacific Rim Mining Corp (PFG-T: $4.75) in early 1999. Cofradia turned out to be a bust when drilling failed to encounter a thick and continuous zone with a sufficiently high gold grade to justify underground mining or offset the cost of stripping a barren cap. Cofradia, which had a balloon payment style option, was quickly dropped and replaced by the much more promising low sulphidation Luicho prospect. Pacific Rim has stretched out the spec cycle for the Luicho play through an extensive surface sampling program that in the market's eyes has almost made a drill program redundant. Cori Huarmi in contrast looked much more like the Cofradia prospect and consequently demanded a drill-to-kill program.

Initial hole resembled surface geology but assayed no gold

Cardero was indirectly bankrolled by John Toffan, who took down a $1 million debenture convertible into Ascot units at $0.15. Ascot in turn invested the money in a private placement of 3,333,333 Cardero units at $0.30, making it the biggest Cardero shareholder on a fully diluted basis. A 12 hole drill program was started early June. Both Ascot and Cardero share prices popped up a week later when the juniors reported that the first hole had had been drilled to a depth of 350 metres and that the "geology and mineralization encountered in the drilling to date confirms surface observations". The market's reaction was brutal when on June 27 Ascot reported that the hole had assayed no significant gold values. Ascot's Ken Carter has been to the property to assess the situation, but is not saying much at the moment. Five holes have been completed and full assays are expected in a couple weeks. Partial assays are in hand and under wraps, but the market is reading between the lines that they also stink. Hole #1 was a big disappointment because it cut the same suite of geology that carried gold on surface and was disseminated with sulphides throughout, but virtually barren of gold. The lack of correlation between gold values and sulphides in hole #1 is a source of puzzlement to management. The absence of gold snippets is an even bigger mystery, and in my view seems to suggest that the first hole represents extremely bad luck. How the next holes compare should be interesting. The drilling also failed to encounter a thick horizon of vuggy silica that would have explained the resistivity anomaly. Silica flooding was encountered at the base of the hole, but was not accompanied by gold values.

Toffan's use of Ascot and Cardero to hedge finance Cori Huarmi

Carter would not say if a similar situation prevailed in the other holes spaced widely throughout the alteration system, but he did emphasize that he does not yet understand the structural controls for the gold mineralization, and that the information so far has not killed the prospect's potential for a significant gold deposit. That may be true, but such statements are also notorious as geological doublespeak for a dud so overwhelming the geologists can hardly believe it. The market, which drew an awful lot of encouragement from Carter's initial assessment of the first hole, seems to think Cori Huarmi is toast. And if geologically it isn't, the market's mood raises the question of additional financing. This type of mineral play requires good news early on that justifies financing at prices higher than the first round. Additional funding could come through the exercise of the $0.60 Cardero warrants held by Ascot, which itself is not flush with cash. Therein lies the problem for Ascot, which may have to let others finance Cardero at cheap prices. I can't think of any good reason why outsiders would invest money in Ascot so that it can exercise Cardero warrants, so the only plausible route by which Ascot can stay in charge of Cardero's funding is for Ascot's key shareholder, John Toffan, to reach into his pocket for some more of those Stikine profits if any are left. Toffan has structured his investment in Cardero in a very clever manner. He has made a $1 million loan to Ascot convertible into $0.15 units that include a warrant exercisable at $0.20 for two years. By converting the debenture into paper and exercising the warrants Toffan would end up with a control block of about 16 million Ascot shares. Ascot in turn would end up with majority control of Cardero, which could be turned into a vehicle for another project if Cori Huarmi is dropped. With a bit of luck Ascot might recover the investment it has made in Cardero despite a poor outcome.

Ascot still a low priority bottom-fish but with a big opportunity cost and timing risk

From a bottom-fishing perspective Toffan's indirect financing approach spells opportunity cost for Ascot bottom-fishers, because while it may be a good long term strategy for Toffan to manage his risk, for bottom-fishers it means being stuck in a rut unless Cori Huarmi miraculously comes through with hot results. Bottom-fishers should take their cue from Ascot insiders Ken Carter and Ron Nichols, who took down 334,000 units at $0.45 in the RRSP accounts. In other words, Ascot will not die, but it may take a long time to flourish. For American readers, an RRSP is the Canadian equivalent of an IRA retirement account. Toffan has converted the debenture into stock and according to his latest insider report owns 8,984,696 shares and 9,166,666 warrants that include 2,500,000 warrants exercisable at $0.25 until October 8, 2000. Including options Toffan controls 49% of Ascot's 38,436,838 fully diluted capitalization. Apart from its Cardero block, 3,333,333 shares representing 43% of Cardero's 7,770,224 issued shares (55% on a fully diluted basis of 12,168,557 that includes Ascot's $0.60 warrants), Ascot's only asset is a 75% stake in the Victoria Island diamond project that Major General is very close to reducing to a 50% stake on which Ascot has no plans to spend more money. The only reason Ascot still qualifies for bottom-fish status is its strong structure, that is, Toffan's big equity stake in the company. Toffan's stake in Ascot has cost him big bucks, and consequently I am reluctant to downgrade the stock from its current status as a low priority bottom-fish buy in the $0.10-$0.19 range to "bottom-fish dud - avoid". At current prices it is a technical hold. Toffan is a professed devotee of mineral plays, and can afford to keep Ascot alive until we are back in a strong junior resource market. A good portion of Ascot's float is on the books of Canaccord broker Doug Varley, a long time supporter. The main drawback offsetting the good structure is the large number of shares outstanding, which requires a very big story to command prices yielding our 500% bottom-fish gain target. How long are you willing to wait for a gain that is not likely to be a big percentage number? With the amount of money Toffan has into Ascot (at least $2 million), he may be happy for a play simply gets him back his money.

For better timing risk swap Ascot for Cardero

If you own Ascot and wish to reduce your opportunity cost and timing risk, you might consider switching out of Ascot into Cardero if the latter sinks below $0.50. Cardero is very thinly traded and could pop back over $1 very quickly if Cori Huarmi comes back to life or Cardero is steered into another project. Keep in mind that Cori Huarmi represents a multi million ounce gold target, and given its small capitalization, would easily hit double digits with a confirmed discovery. Reading Ken Carter's "voice" I would normally infer that Cori Haurmi is a bust, but the mineral play market is so bleak and it's been so long since Carter has ridden a big winner that you have to be careful about equating stoicism with futility. Cori Huarmi was held in high esteem by a lot of geologists, and a handful of widely spaced holes will not be enough to kill the play, especially if these holes furnish evidence that the zonation may have vertical controls instead of horizontal controls. The first three holes covered a strike of 1,400 metres and were all drilled at the same angle and direction. After the geologists have sketched out the 3-dimensional geology based on these holes, and consumed a few martinis, the light may go on as they suddenly recognize the system's geometry and the likely structural controls for gold mineralization. Cardero is sufficiently funded to complete the remaining 7 holes of the budgeted program. With much of the downside already in our face, it's best to wait and see.

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