SVH Tracker - January 12, 2017: Recommendation Strategy for Eastmain Resources Inc
Eastmain Resources Inc was downgraded effective December 30, 2016 from a Good Relative Spec Value Buy recommendation to a bottom-fish accumulation target in the $0.50-$0.75 range. Eastmain underwent a management coup in April which ousted Don Robinson and Cathy Butella in favor of the management team behind Integra Gold Corp which is redeveloping the Sigma-Lamaque Mine near Val D'Or. Eastmain, which has spent over $30 million trying to figure out the controls of the Eau Claire system of en echelon quartz-tourmaline gold veins, was working on a PEA for an open-pit mine along the lines of 1,500 tpd before the coup. I described the outlook in my Feb 5, 2016 Tracker, but when I privately ran a DCF model the outcome was not very promising, at least while gold remained below $1,300 per oz. My own view was that Eastmain should aggressively explore the rest of the 7 km of prospective geology to see if there was something better than the Eau Claire zone while we waited for a higher gold price to drag the resource into the money. The new group promptly raised $17 million of which the new CEO Claude Lemasson earmarked $7.7 million for a 63,000 metre drill program consisting mainly of infill drilling but which did include some exploration drilling on the new Snake Lake zone to the east. The stock price did respond to the new management but turned tail in late September as gold's rally fizzled. Eastmain along with Goldcorp and Azimut Exploration Inc did mount a 5,000 m drill program on the Eleonore South prospect, namely the southern half of the Cheechoo intrusion that Sirios Resources Inc almost turned into a major new discovery during 2017, but, like Sirios, the JV was unable to deliver evidence of a continuous medium to high grade gold zone that could be developed as an underground mine that feeds ore to Goldcorp's Eleonore Mine. The story is not yet over for the Cheechoo gold system, but hopes for anything more than a bulk tonnage gold system that needs a better gold price have diminished. What we were left with at the end of 2016 was a "more of the same" vision for Eau Claire, raising money for drill programs to bring ounces into resource categories while waiting for a gold bull market to explode. Given that there are now nearly 200 million shares fully diluted, a project that needs a stronger gold price to be worth developing, and a custodian management team appointed by Bay Street, it is hard to stay interested in Eastmain. The most likely future for Eastmain is to be absorbed by Integra Gold, though probably when Integra's stock price is considerably higher than that of Eastmain. Integra already has mine infrastructure in place to handle the ounces it is developing, but it also has the bluesky potential of the Lamaque Deeps target, the hypothesized intersection of the Sigma and Lamaque structures. A pilot hole drilled to a depth of 1,900 m in 2016 will be used to drill wedge holes to probe for potential very high grade gold zones. Bay Street is touting Integra as a takeover target, but I suspect it will be Integra which takes over smaller Quebec-Ontario gold juniors such as Eastmain, but only after its stock price has reached levels where a bigger producer is unlikely to be interested unless Lamaque Deeps is a homerun. Eastmain could surprise us with new gold zones, but I suspect it will be absorbed by Integra before that happens, which is why I can no longer justify recommending Eastmain as an SVH buy. Eastmain does, however, remain interesting enough for patient bottom-fishers looking for a gold optionality play, which is why I closed out the SVH recommendation and converted Eastmain into a bottom-fish buy in the $0.50-$0.75 range.