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 Wed Mar 29, 2017
Bottom-Fish Comment: Bottom-Fish Recommendation Strategy for Alto Ventures Ltd
    Publisher: Kaiser Research Online
    Author: Copyright 2017 John A. Kaiser

Alto Ventures Ltd (ATV-V: $0.08)

Bottom-Fish Comment - March 29, 2017: Bottom-Fish Recommendation Strategy for Alto Ventures Ltd

Alto Ventures Ltd was recommended on December 31, 2015 as a bottom-fish accumulation target below $0.10 based on its 100% ownership of the Destiny gold deposit in Quebec which qualified as a gold optionality play, the technical team of CEO Rick Mazur and President Mike Koziol who have run Alto since taking charge in 2004, and their efforts to find a diamondiferous pipe-sized source for indicator minerals on the GEFA project adjoining North Arrow's Pikoo diamond discovery in the La Ronge district of northern Saskatchewan. One of those reasons, namely the GEFA diamond project, is no longer relevant for two reasons: 1) North Arrow's discovery has fizzled as too small, and, 2) Alto's effort to outdo North Arrow has failed with zero kimberlite. The recent bad news, however, enables Alto to move forward with its gold projects which justifies taking a fresh look at Alto Ventures Ltd as a bottom-fish.

To recap, North Arrow Minerals Inc discovered a kimberlite dyke in late 2013 at its Pikoo project whose micro diamond distribution curve indicated a macro grade of 100 cpht or better. This generated a staking rush despite North Arrow's discovery having resulted from an earlier regional till sampling program by Stornoway that sterilized much of the surrounding area. The GEFA block adjacent to the Pikoo project, however, had been staked earlier for its gold potential, and thus had a shot at hosting kimberlite targets not available to North Arrow. Alto conducted till sampling in 2014-2015 which yielded indicator mineral trains that highlighted a number of geophysical targets which the junior finally drilled in Q1 of 2017. The targets proved to have non-kimberlitic explanations, leaving the indicator mineral trains unexplained. However, Alto is in danger of defaulting on the terms of the 60% GEFA option by mid 2017, and it may be unwise to seek renegotiated terms in light of the disappointment North Arrow suffered at Pikoo where drilling failed to establish meaningful tonnage. This northern part of the Saskatchewan Craton may once have had high grade diamond pipes, but these seem to have been eroded away, leaving behind only narrow dykes.

There are four reasons for my renewed interest in Alto. 1) Rick Mazur and Mike Koziol have completed a decade plus apprenticeship at the helm of a resource junior pursuing a discovery exploration based wealth creation strategy that has been at odds with what the market wanted - feasibility demonstration and optionality speculation - but whose relevance is making a big comeback. 2) Management is rethinking the high grade potential of the Destiny deposit and considering a potential farmout to a well-heeled partner with the will to drill until this gold system's potential has been fully illuminated. 3) Through the 100% owned Oxford Lake project Alto is tackling a 40 km by 10 km segment of one of the last major greenstone belt frontiers of the Superior Province. 4) Alto has attracted the support of an ambitious investment banking boutique that needs a full-blown winner rather than yet another opportunity to demonstrate clip and flip cleverness.

I am comfortable with the first three reasons because those are things Alto's management controls, but as far as any Bay Street entity is concerned one can only cross one's fingers and hope. Alto does not currently qualify as an SVH recommendation because financially it is still weak and it will not be in a position to make a big discovery until 2018. Oxford Lake is not going to deliver a discovery in 2017 because exploration work will only involve dressing up targets for a winter 2017-2018 drill program, though we may see growing interest in Manitoba's Oxford Lake-Knee Lake greenstone belt into which the Manitoba Geological Survey has sunk considerable effort since 2012. A recent staking rush to the northeast of the Oxford Lake project has been triggered by the discovery of micro diamonds, but these seem to have been sourced from the same sort of rocks Pele Mountain pursued in the Wawa region which exhibited tremendous micro diamond counts but yielded very low macro diamond grades. What I suspect will happen is that the glamour of diamond exploration, despite big recent market valuation disappointments such as Eric Friedland's Peregrine Diamonds Ltd whose Chidliak project into which more than $50 million already sunk has translated into a pitiful valuation below $70 million, will attract exploration dollars that indirectly illuminate the gold potential of this part of central Manitoba. Alto should benefit from a growing buzz about central Manitoba, especially if Yamana Gold gets lucky on a drill program it has underway near the Oxford Lake project.

While Oxford Lake is the bluesky for Alto, Destiny is the bread and butter. The Destiny gold system has potential to reveal deeper high grade zones amenable to underground mining, with a consolation prize in the form of a bulk mineable 1 million ounce plus gold deposit worth mining if gold develops a sustainable real price uptrend. Currently Destiny, into which $7 million exploration work has been sunk, represents no value for the junior; a farmout to a committed partner would "create" a $5-$10 million value or $0.10-$0.20 per share based on 53.1 million shares fully diluted. Speculative value for the Oxford Lake discovery potential would stack on that base. I always regarded Destiny as bottom-fish Alto's ace in the hole. We are a bit ahead of the curve with regard to Oxford Lake style discovery exploration, which is why I like Alto's Destiny project as an unrecognized baseload value engine. Bottom-fishers who decide to bet on Alto Ventures Ltd absolutely must understand it as a bet on management's discovery exploration talent hedged by the possibility that something happens which causes the price of gold to soar or Alto does secure an aggressive farmout deal for Destiny.

Alto management, Oxford Lake and Destiny are all big positives for this bottom-fish, but what about its Bay Street backers, are they not big negatives the junior must overcome? Gravitas Securities Inc is a Bay Street investment banking boutique headed by Robert and David Carbonaro which rebranded itself in 2016 and has merchant banking ambitions. Gravitas and a similar Bay Street boutique called Accilent Capital, which manages several resource sector flow-through funds, teamed up in December 2016 to provide the first financial sector sourced financing for Alto since early 2011, the start of a 5 year resource sector bear market that ended in late January 2016. These two firms have raised $800,000 at $0.05-$0.07 in hard and flow-through dollars via 15 million units which represent 48% of Alto's 53.1 million fully diluted capitalization. One can look at this as a nasty overhang Alto management will have to digest, or the incentive Gravitas and Accilent need to support Alto.

Alto is not a new story for me. I had followed Alto as a bottom-fish in the 1994-97 cycle when Gary Zak was running the company and it had properties in the Windfall district of Quebec which eventually turned into a 50:50 JV with Noront on the Windfall Lake project. The junior underwent a 3.5:1 rollback on December 11, 2001 and dropped off my radar until 2004 when Rick Mazur decided he was tired of being a consulting geologist for juniors such as Southwestern Resources Corp and Aurora Platinum Corp, needed to suffer a new form of punishment, and accepted an invitation to take charge of Alto.

Mazur had privately secured an assignment option from Cameco Gold on its 70% option of the Despinassy gold project (now called Destiny) from Commander Resources Ltd, a successor to Major General Resources Ltd which in 1990 under the leadership of Dick Atkinson had acquired the Canadian portfolio of Umex Inc, the subsidiary of a Belgian mining company called Union-Minere SA. Cameco Gold optioned Destiny in 1997 and drilled 63 holes until 2001. In 2004 the uranium parent decided to get rid of the Canadian gold projects and spin out its stake in the Kumtor gold project in Kyrgyzstan as Centerra Gold Inc. Rick Mazur got a fairly sweet deal and Commander decided to waive its right of first refusal. At the same time Mazur had hooked up with John Prochnau and Ken Judge of AIM-listed Hidefield Gold plc which was connected to LSE-listed Anglo Pacific Group. Hidefield and Anglo Pacific sold a portfolio of projects including Oxford Lake and Coldstream to Alto for a dominant stock position and helped secure financing from Philip Richards' RAB Capital Special Situations fund. Six months later Mike Koziol who had spent his career with Cameco and run the Destiny exploration program joined Alto as exploration VP. Koziol and Mazur have since become the key people behind Alto.

Alto focused on Destiny from 2005-2008 and delivered an underground mining scenario based medium grade 43-101 resource estimate in 2007 that was less than impressive: 103,000 oz indicated and inferred at 5.22 g/t gold. In 2008 Alto acquired Commander's 30% stake in Destiny for stock. Alto ended up without a financial backer after RAB Capital blew up in 2008. As an orphaned junior Alto shifted to a farmout strategy, optioning 60% of Destiny in September 2009 to Harry Barr's Pacific North West Capital whose River Valley platinum-palladium project was stuck in limbo. Pacific North West spent about $1.5 million on Destiny which resulted in a new 43-101 resource estimate in 2011 based on an open pit mining scenario: 19,155,900 tonnes of 1.0 g/t gold indicated and inferred at a 0.5 g/t cutoff. The technical report presented the resource at various cutoff grades which showed little improvement from the 2007 resource at 3 g/t cutoff, prompting the writer to declare "that there is little potential to identify a higher grade core within the deposit". Mazur and Koziol will need to make a case that this is not so.

In December 2010 and January 2011 just as the resource equities were peaking Alto managed to raise $3.5 million through units at $0.05 from 118 placees drummed up by a variety of small time brokerage firms most of whom no longer exist. Gold itself peaked a little later in August 2011 and Alto's investors ceased to be appreciative of the optionality value of Destiny's 612,000 ounce resource at 1 g/t gold. Alto responded with a 10:1 rollback on December 21, 2011. Pacific North West dropped its Destiny option in August 2012. Alto had also farmed out 70% of its Coldstream project in the Moss Lake area to a junior in June 2011 to whom it sold its remaining stake for stock in February 2012. The project is now owned by Wesdome Gold Mines Ltd which has consolidated much of the ground surrounding its Moss Lake gold deposit in western Ontario.

Perhaps recognizing that the gold bug narrative was being undermined by the success gold bugs were having with their austerity prescriptions, Mazur and Koziol decided that discovery exploration was ready for a comeback and took a fresh look at the Oxford Lake project in Manitoba on which little had been done since 2004 because of its remote location and the comparative "drive-to" appeal of Alto's Destiny, Coldstream and Geraldton-Beardmore area projects (Miner Lake). Alto still holds several claims in the Geraldton-Beardmore area where Premier Gold and Centerra have a 50:50 JV called Greenstone Gold Mines whose purpose is to develop the Hardrock Extension and Brookbank deposits. This region has the potential to yield very flashy gold grades as Kodiak managed to do at the "Golden Mile" within its Hercules project that enabled it to raise over $50 million in December 2007 whose expenditure delivered the equivalent of Alto's high grade Destiny.

The Oxford Lake project straddles an old Hudson Bay Company trading route which started at Norway House on Lake Winnipeg and passed through Oxford House on its way to Hudson Bay. The area attracted some gold exploration early in the 20th century and base metal exploration during the sixties and seventies. The last serious wave occurred in the late eighties when Noranda explored the Oxford Lake region for base metal deposits and ended up discovering the Rusty gold zone in the middle of a large magnetic anomaly associated with a banded iron formation it was testing with very widely spaced drill holes. The Rusty Zone, which is under the lake and thus an underground mineable target, yielded a historic resource of 800,000 tonnes of 6.0 g/t gold (154,000 oz) and pretty much sucked up Noranda's attention until it stopped work in 1992. Noranda never did any work on the western part of the iron formation due to difficult access and a forest fire caution in that area. The Rusty Zone resource was too small to be worth developing, and the Oxford Lake project "disappeared" when Noranda reorganized itself.

Alto conducted a VTEM survey in 2011 and a drill program in 2012 whose results failed to impress the market. Alto went into hibernation mode in 2013 at the end of which it attempted to option Oxford Lake to a CSE-listed zombie junior before giving up in mid 2014. In an effort to keep the lights on Alto sold its 0.5% NSR in the Windfall project to Virginia Mines for $750,000 in Virginia stock which subsequently got absorbed by Osisko Gold Royalties Ltd. That royalty was all that remained of what was once a 50:50 partnership with Noront on an erratic high grade gold deposit that today is the focus of a 400,000 m drill program by Osisko Mining Inc.

All that remains of the Windfall District is the small Alcudia project which Alto drilled in 2011 while Eagle Hill worked on the Windfall deposit it had acquired from Noront. That drilling focused on IP targets in the southeast corner of Alcudia which proved to be non-gold bearing sulphides. Targets remain in the swampy northwest corner of Alcudia, which might prove of interest to Osisko. The GEFA diamond play option showed up in 2014 and was the main focus until Alto wiped out the key geophysical targets with a drill program in early 2017. The principals behind Gravitas and Accilent understood in December that GEFA was business that had to be finished so that Alto can turn its focus to the unfinished business called Oxford Lake. They are backing Alto because of management's long term vision of putting central Manitoba on the gold map.

During 2012 the Manitoba Geological Survey started a mapping program in central Manitoba over what it calls the Oxford Lake-Knee Lake greenstone belt. The MGS is arguing that this region has the same type of "synorogenic clastic basins" associated with the Timiskaming conglomerate hosted gold deposits in the Timmins District of Ontario. Central Manitoba is traversed by several crustal scale faults of which the Stull-Wunnummin Fault passes through the Oxford Lake project. The most significant gold deposit associated with this crustal break is the Monument Bay deposit (3.6 million oz 1.3-1.5 g/t gold) 150 km to the east now controlled by Yamana Gold. Although the region is remote and deserves names like "god-forsaken" rather than "God's Lake" unless you subscribe to the wrathful God of the Old Testament, the Oxford Lake project is accessible from Norway House by a 20 km winter road and is within 40 km of a hydro power line. The region also has First Nation settlements which could become an important source of manpower. It just isn't a great place to conduct grassroots exploration just as was the McFauld's Lake region before it exploded into the Ring of Fire frenzy in late 2007. Alto has been careful to cultivate a social license with First Nations stakeholders in the region who perhaps are more accustomed to trade and commerce thanks to the Hudson Bay trade route through their territory.

Alto sees potential for three deposit types on its property. The first is a banded iron formation gold deposit of which the Rusty Zone deposit with a single mineralized BIF horizon is Exhibit A and the Blue Jay Zone 2 km to the east with multiple zones of BIF hosted mineralization is Exhibit B. This would be the Archean aged version of the Proterozoic aged Homestake deposit I described in Bottom-Fish Strategy for Mineral Mountain Resources Ltd - Mar 22, 2017. The Archean aged analogue would be the Musselwhite deposit in Ontario (35 million tonnes of 6 g/t gold - 6.6 million oz) now operated by Goldcorp, or the Back River deposits (28.2 million tonnes 5.87 g/t - 5.33 million oz) in Nunavut Sabina wants to develop as open pit mines. The key will be to determine those parts of the 30 km long BIF unit that have undergone shearing so as to make them receptive to gold deposition. The Rusty and Blue Jay zones are such sheared portions of the BIF on which Noranda focused its attention. The "Carrot River" and "Carghill Island" segments of the BIF unit have seen the least exploration and will be the focus of a 2017 summer prospecting and mapping program because they are on land.

The second type of deposit target is a Timiskaming-style conglomerate hosted gold system for which Alto sees potential in the Hyers Island area and for which the MGS is making a strong case for the Oxford lake-Knee Lake greenstone belt. The third target type is a copper-zinc VMS system possibly enriched with gold and silver, of which a small copper deposit (360,000 tonnes of 2.56% copper - historic) owned by a private party already exists on Hyers Island and a gold-silver enriched zinc showing exists at Cat's Eye Bay. Alto has identified numerous VTEM conductors in the area between Hyers Island and Cat's Eye Bay. Much of the property is under Oxford Lake and will ultimately have to be mapped with a drill bit. This also means that any discovery will have to be sufficiently high grade to support underground mining. Alto has budgeted $253,000 for this summer program and would like to conduct a $1.5 million winter drill program. The Oxford Lake project is already juicy with "unfinished business", so it is unlikely the summer work will generate results which visibly expand the potential for a major discovery. However, if I am correct that we are in the second year of a 3-5 year discovery exploration bull market, there should be a much stronger market appetite for district scale frontier exploration plays such as Oxford Lake by the end of 2017 that enables Alto to raise money for the winter drill program at much better prices. The wild cards are a farmout deal that injects value into the Destiny gold project and possibly the sale of the Alcudia to an Osisko eager to mop up loose ends in the Windfall District. I am confirming that Alto Ventures Ltd is a bottom-fish accumulation target below $0.10.


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