Bottom-Fish Comment - March 22, 2017: Recommendation Strategy for Mineral Mountain Resources Ltd
Mineral Mountain Resources Ltd is a new bottom-fish accumulation target between $0.20-$0.29 based on its potential to discover a smaller version of the Homestake gold deposit in the Rochford district of South Dakota. The Homestake gold deposit was discovered in 1874 and produced over 40 million ounces from 152 million tonnes at an average grade of 8.4 g/t from 1876 until 2001 when mining stopped due to a low gold price and the high operating cost of this underground mine which had chased ore to a depth of 2,400 m. Homestake apparently spent $70 million on exploration within the 70 km by 10 km "Homestake Trend" from 1980 onwards in an attempt to find additional banded iron formation hosted high grade ore closer to surface. Other majors and a few juniors also explored in the area, but no zones remotely comparable to the Homestake deposit were ever found. In the final years Homestake retreated to the minesite and engaged in brownfields exploration, leaving a diaspora of geologists to obsess about "unfinished business" beyond Homestake. After Barrick took over Homestake in 2002 it pulled the plug on the mine and allowed it to be turned into the Sanford Underground Research Facility where physicists monitor the Large Underground Xenon Experiment for WIMPs, evidence for the dark matter postulated to constitute the majority of the universe. Nothing has been seen so far, though the physicists entertain themselves with tracking the sparks of neutrinos as a way of calibrating the cauldron for the day when a Wimp dares to make a splash. There is an intriguing parallel between the strategy of the particle physicists and the exploration strategy adopted by Mineral Mountain whereby it is wiping out the pretenders to set the stage for the "arrival" of the Son of Homestake.
The Black Hills have not seen much exploration since 2001, in part because of the area's fragmented ownership which hampered the exploration efforts of Homestake and other majors such as Getty, WMC and Noranda. Mineral Mountain started assembling claims in the Rochford District about 26 km south of Homestake during 2012, first by staking as the bear market forced owners to let claims lapse, and more recently by acquisition as long time holders capitulated. The junior's CEO Nelson Baker spent $600,000 on the first ever airborne Mag/EM geophysical survey over the southern half of the Homestake Trend, got hold of about $20 million worth of historical data, and recruited Dr. Robert ("Broz") Brozdowski to conduct a 3D digital compilation in an effort to understand why past exploration sniffed out only cigarette butts instead of fat Cuban cigars. In the process Mineral Mountain has become something of a refugee camp for geologists who once worked in the Homestake Trend and now see this junior as the vehicle for completing unfinished business. After crunching and spinning the data "Broz" is convinced that there is room and supporting geological context for Homestake style "cigars", not approaching the 40 million ounce threshold of Homestake's 11 "ledges", but well within a 10-15 million ounce target range that qualifies as Son of Homestake.
There remain a couple holes within the land package, notably claims associated with the Cochrane deposit and some very much down-plunge from the Standby Trend. In the Cochrane case these claims have seen extensive drilling to a depth of 150 metres and represent the unsmoked stub of potential plunging "cigars". The company owns the interpreted down-plunge projection of the iron formation zones that are the primary gold host in the Homestake Trend. It also owns a few additional "trends" inferred from the data compilation as thickened synclinal iron formation fold hinges, a couple of which intersect with deformation structural zones mapped at surface.
Mineral Mountain is only a bottom-fish recommendation at this stage because after conducting a 5:1 rollback on April 8, 2016 and grinding out a couple million dollar financings the balance sheet is finally out of the red but still well short of the $5 million management wants to spend on 20,000 metres of drilling in the Rochford District. Broz, who totally gets that the era of farmouts, where majors and juniors lock up majority interest in a project and spend $1 million setting up a sniper kill-shot that inevitably misses or nicks something of who knows what, is anathema for the junior exploration sector, is adamant that Mineral Mountain go all in for the Rochford project, that it raise the $5 million from parties who understand that the $5 million is the price to set up a true kill-shot for a semi world class prize which may require additional capital. Broz believes that Mineral Mountain's Rochford project has district scale and that he has assembled evidence for an exploration story as to why the best remains to be found. This type of story is in fact the new rage among gold producers who are looking for sizable medium to high grade discovery potential within geological settings that have established world class potential. The geological question is whether what happened at the northern end of the Homestake Trend was a freak occurrence or is perhaps just the most intense manifestation of what affected the entire belt of rocks. The argument is that the Rochford District has a striking geological similarity to the Homestake District, that iron formation hosted gold mineralization within much of the Homestake Trend is evidence of pregnant fluid flow not just in the vicinity of the Homestake deposit but throughout the trend, and that the complexity of the geology which underwent multiple waves of folding and subsequent deformational wrenching, not to mention the much later uplift of the Black Hills, is such that the exploration work done so far has left plenty of plausible room for 5-10 million ounce golden cigars like the best "ledges" of Homestake.
There is thus a reasonable chance that Mineral Mountain within the next couple months will attract an equity financing from a producer, ideally at a premium to market with no warrants, that allows the junior to test its new interpretation of the Rochford district. Should such a financing occur, I would consider turning Mineral Mountain Resources Ltd into a Good Relative Spec Value Buy Recommendation. For now Mineral Mountain is a bottom-fish accumulation target.
The company's journey has not been a cake walk. Mineral Mountain went public through an IPO on June 30, 2010 with a token Sedex prospect in southeastern British Columbia, that fountain of properties of "merit". It was the new exploration venture for Nelson Baker who in 2005 joined Rainy River Resources Ltd to lead exploration of a major gold-in-till anomaly in western Ontario that the Ontario Geological Survey and "overburden sampling specialist" Stu Averill generated in the late 1980's and which Nuinsco explored during the 1990's after winning a staking rush. Nuinsco apparently spent $11 million tracking down the bedrock source but concluded it was too low grade and small to merit further work. Baker became aware of Rainy River in 1999 through his friend Stu Averill and helped a new group secure title from Nuinsco in 2005. Both Baker and Averill believed that the deposits found by Nuinsco did not fully explain the soil anomaly; Baker led an exploration program which in late 2006 delivered higher grade results which established that the Rainy River system had potential to become a bulk mineable deposit. After delivering several resource estimates, setting the stage for the project to begin the sort of feasibility demonstration work a then optionality obsessed Bay Street loved to finance, Baker stepped aside in 2010 for Ray Threlkind as the new CEO who took the stock to a peak of $13.50 in early 2011 before it was eventually acquired by New Gold Inc on Oct 16, 2013 for $343 million. Rainy River currently has a resource of 6.4 million ounces gold which New Gold intends to develop into a 21,000 tpd mine producing 325,000 ounces gold annually.
Nelson Baker returned to Ontario through Mineral Mountain but became discouraged over the growing social license problems involving First Nations and shifted his attention to the Homestake Trend in 2012. His initial deal was a 75% option on the Holy Terror project at the southern end of the Homestake Trend which hosted a dozen former small mines. The company spent about US $6.9 million of which $4 million represented exploration and the rest acquisition costs in stock and cash. By 2012 the bear market was well underway and the market proved unresponsive to drill results. The junior did a disastrous financing of 28,605,000 units at $0.05 in 2014 with Kjeld Thygesen's Global Resources Investment Trust whose first incarnation a decade earlier had been timely and lucrative for both investors and companies. Essentially the junior issued shares in exchange for shares in a closed end fund that was to list on London's AIM market where investors could buy shares in a diversified resource portfolio. The juniors would get cash indirectly by selling their GRIT shares on the AIM market. Unfortunately the resource bear market went from bad to worse, and the GRIT portfolio included a couple illiquid Russian oil deals so that the juniors ended up with only a fraction of the cash value of the shares they issued to GRIT while ending up with ugly GRIT owned stock overhangs. It made a Mineralfields flow-through financing look attractive in comparison.
On April 8, 2016 Mineral Mountain undertook a 5:1 rollback and not long after received a default notice from the Holy Terror vendor who proved unwilling to renegotiate the option terms for the stressed junior. After considering the proximity of the Holy Terror project to Mount Rushmore, and the probability that no regulator would risk allowing mine blasts that just might coincide with George Washington suddenly losing his nose, management decided to abandon the Holy Terror project in October 2016. Fortunately in 2012 Nelson Baker had also started working on Black Hills Plan B, which involved staking claims in the Rochford District to the north of the Holy Terror project. The Rochford District had a couple very small scale mines during the early Homestake days, and did undergo a flurry of exploration from 1980-1996 by majors that included Homestake, but the fragmented land ownership made it difficult to launch a systematic program that did not risk blowing the cost of privately held claims through the roof.
Exploration activity in the Black Hills subsided after the Homestake Mine closed, and failed to revive during the gold rally of 2005-2011 so that when Baker arrived in 2012 many unpatented claims had lapsed. Mineral Mountain went on a staking spree in 2012, and again in 2016 when it also did 100% option deals with some key landholders. Most importantly, in early 2013 Mineral Mountain flew an airborne Mag/EM geophysical survey of the southern 40 km segment of the 10 km wide Homestake Trend on 25 metre spacing. This $600,000 investment was not intended to light up any gold targets, because the geology is loaded with conductive graphite and unmineralized magnetic iron formation. However, Baker figured the geophysical data would come in very handy in mapping the fold structures which is key to identifying the thickened synclinal hinges of the folded iron formation which are the best hosts for high grade gold mineralization. This gambit has paid off with the recent acquisition of historic exploration data worth some $20 million in today's dollars.
After descending into bear market hell Mineral Mountain has emerged in 2017 with the former Plan B as a new Plan A enhanced by the arrival of Robert Brozdowski as the new exploration VP who has digitized all the historic data and established potential locations for thickened synclinal iron formation hinge folds. Curt Hogge, who ran past exploration programs in the region and has emerged as a stakeholder in the Rochford District, is becoming the chief geologist. Kevin Leonard, who has been project manager since 2012, is continuing in that role. Rick Bachmann, who ran Homestake's exploration program and is now president and chief creditor of an insolvent pink sheet junior called Dakota Territory Resource Corp which holds the appropriately named Blind Gold project at the northern end of the Homestake Trend where the favorable geology plunges, has opined that the work Homestake did at Rochford which included drilling a deep pilot hole with wedges qualifies as unfinished business.
So what is it that makes the Homestake gold deposit special and what is it about the 70 km by 10 km belt of rocks which cuts through the Black Hills that allows it to be called the "Homestake Trend"? The Homestake deposit is, of course, special because over more than a hundred years it yielded over 40 million ounces of gold from 11 "ledges" averaging 7-9 g/t gold from a gold system that plunged to a depth of 2.4 km along a strike of 3 km. The Homestake deposit is said to have still millions of ounces at similar to mined grade in place at depth which are not economic for the same reason that tens of million gold ounces in South Africa's Witwatersrand Basin are worthless because the heat generated by sulphide ores at these depths requires remote controlled underground mining technology similar to that used for the Athabasca Basin's high grade uranium ores. The difference is that the $300-$600 per tonne rock value of the deep Homestake and South African gold ore pales against the $10,000 plus per tonne value of the Athabasca Basin uranium ore.
The Homestake deposit is a banded iron formation style of deposit found in Archean and Proterozoic rocks and it qualifies as the world's biggest in terms of size and grade. Archean versions include Lupin in the Northwest Territories and Musselwhite in Ontario. In the case of Homestake, between 2.1-1.8 billion years ago the area was the site of an extensional rift basin which spewed volcanic smoker material into a marine environment that presumably included a gold payload. Seawater at the time was saturated with dissolved iron. The banded iron formation evolved within a marine setting during a quiet period when bacterial activity in the seawater generated a surplus of oxygen which caused the iron to chemically precipitate into beds of iron oxide in the form of magnetite or hematite. The "bandedness" arises from layers of iron poor, often fossil rich shale or chert, which reflected cycles of oxygen content. In the case of the Homestake deposit the basin evolved a stratigraphy starting with the basement Poorman Formation consisting of meta-sediments derived from a variety of sources, the Homestake Formation consisting of biogenic derived banded iron formation, followed by "clastic" sediments of the Ellison Formation. In the case of the Rochford District the basement rocks are called the Nahant schist, followed by the BIF Rochford Formation, and then the Poverty Gulch Phyllite, a further metamorphosed form of slate.
The diagram below starting with a simple layer cake illustrates the three major stages of the Homestake Trend. The first was the creation of the layer cake within the basin rift setting during its various chemical environments. Around 1.8 billion years ago the suture of three cratons resulted in the Trans-Hudson Orogeny which created north-south compression of the basin stratigraphy that resulted in folding as shown in the second stage of the diagram below described as the F1 folds. At this point the geologists go mumble-rotate-mumble and proceed to describe another wave of compression from an east-west direction. The relatively thin banded iron formation, which had formed a series of synclines and anticlines with east-west fold hinge axes, now gets squashed so as to form a secondary set of north-south striking fold hinge axes. The resulting north-south synclinal hinge axes thicken while the anticlinal axes thin, apparently because the relatively higher density of the banded iron formation causes a downward gravitationally driven flow of this material. The result is a flotilla of plunging canoes with thickened keels whose material is from what was once a thin flat horizon of banded iron formation.
Keep in mind that at this stage the only gold in the system is what was present as background gold or introduced into the basin through volcanic activity, in neither case representing ore grade forming capacity. Following 1.6 billion years ago the Black Hills area became tectonically quiet. Not shown in the diagram are the younger Paleozoic rocks of the appropriately named Deadwood Formation that piled up on top. Some time after God hurled an asteroid at the Yucatan Peninsula to wipe out a reptilian Sodom and Gomorrah, during the Tertiary period of the last 66 million years, something happened about which geologists again offer an explanation along the lines of mumble-mumble to describe an uplift that created the Black Hills, which happened to contain that 70 km stretch of double-squashed Proterozoic rock called the Homestake Trend.
The uplift may have had an intrusive engine, which created the gold deposits west of the Homestake deposit now operated as the Wharf Mine by Coeur Mining, but it played no role in the formation of the Homestake deposit. That took place around 1.6 billion years ago when the F2 Fold compression engine reached its folding limit and began to inflict metamorphic changes onto the "Homestake Trend" whose outcome included deformation of the double-squashed stratigraphy that resulted in wrenching, effectively "shear" structures propagating sub-parallel through the sequence of north-south oriented synclinal and anticlinal iron formation hinge axes. The BIF material had a "ductile-brittle" nature, meaning that some components stretched while others cracked, creating a host of dilated and broken iron formation rocks with plunging cigar-like shapes that also happened to have the right chemical composition to encourage gold and sulphide precipitation. It is not enough that a plunging iron formation canoe be present; the canoe must have been subjected to shearing in order to make it receptive as a sponge for soaking up gold. It is these sheared portions of the BIF canoes that became the "ledges" of the Homestake deposit. The simplified map above of the Rochford District reveals where deformation zones have been mapped at surface and where the synclinal iron formation hinges have been inferred at depth.
When you review the academic literature about these BIF systems there is general concurrence that the physical sequence just described is indeed what happened. But when you ask the more important question, when and how did the gold end up at Homestake, explanations are all over the map. Broz offers the view that during or after deformation structurally prepared the plunging BIF canoes something triggered deep fluid flow pregnant with gold similar to what happened in the Motherlode Belt of California's Sierra Nevada and in the Abitibi Greenstone Belt. In the case of the Homestake Trend the ascending "mesothermal" fluids encountered the structurally prepared portions of the thickened BIF canoes which became flooded with quartz veining and sulphides including gold. The result was the Homestake deposit whose "ledges" or gold zones represent those sheared portions of a giant canoe.
Nelson Baker's team has put together a case that the Cochrane and Standby "deposits" discovered through surface exploration are the upper portions of plunging BIF canoes whose down plunge gold potential has not been killed by historical drilling. Past exploration work was guided by surface mapping that without drill holes defining geology in the third dimension does not reveal much about what might be going on at depth. The Homestake deposit happened to outcrop and lent itself well to an exploration strategy of "follow the zone". Following the zone at Cochrane and Standby, and pretty much everywhere else in the Homestake Trend, did not pay off with ever more gold enriched ore. One problem is that these "canoes" are not nicely engineered linear boats as the metaphor suggests; they can twist and turn so that a drill hole aimed at the keel can completely miss the target. The reliability of sniper kill shot attempts worsens the deeper one drills. The deep drilling done by Homestake and WMC was pretty much spotted at best guess locations which required an iterative process of vectoring in on an orebody based on what the initial holes did or did not hit. Neither company had the budgetary stamina to persist in the Rochford District and to some degree the fragmented third party land ownership further undermined the will to persist. Mineral Mountain has solved most of the fragmented land ownership problem, and through its 3D compilation of historical data has assembled the most detailed geological context an exploration team has ever had at its disposal in the Rochford District.
None of this means that 10-15 million ounces of Homestake grade gold ore is present, but if they are, the junior has a coherent strategy for finding them, one that requires a minimum $5 million drilling commitment. The cartoon above simplies the strategy of finding the Son of Homestake in the Rochford District. Just as the physicists are spending taxpayer money hurling neutrinos at their xenon cauldron deep in the old Homestake Mine, setting the stage so that when a WIMP finally arrives they can recognize it as such, Mineral Mountain proposes to spend $5 million of shareholder money through a dynamic drilling strategy that wipes out possible locations for a major gold zone. The stock will initially undergo price appreciation not because a barnburner hole shows up, though that is not impossible, but because the drill results keep refining the most likely location for an enriched gold zone. The initial drilling focus will be the Standby Trend as demonstrated by the somewhat more detailed cartoon below. With only 58.4 million shares fully diluted, a 100% interest and a $0.26 stock price, the Rochford project has an implied value of only $15 million which offers substantial upside of 10-20 times in the event of a discovery confirming at least one Son of Homestake is present. The low current valuation reflects a market view that Homestake is childless. The bottom-fisher's bet is that this perception will change as the realization we are in a discovery exploration bull market widens. The future Spec Value Hunter bet will be that the science Nelson Baker's team of Homestake Trend refugees has brought to bear in the Rochford District will deliver a Son of Homestake. And should that appear to be underway within the sort of discovery market I see on the horizon, speculators may start thinking of a son named Zeus who eclipsed Chronus.