Big micro-miner ambitions

Benj Gallander and Ben Stadelmann
Friday, September 20, 2013

Is there any truth to the old proverb that it is always darkest before the dawn? One might wonder given the mood of despondency at the Toronto Resource Investment Conference we attended last week. We have participated in several of these Cambridge House sponsored events over the past few years and they are very well organized, educational events. It offers a forum for us to tell investors a bit about what we do and chat with subscribers who drop by, while also an opportunity to take the temperature of the sector.

In 2011 these shows had an almost carnival atmosphere as the booths crackled with the excitement of success stories amid the frothy price of precious metals. Last year there was apprehension in the air as it was clear speculators were moving on to other ideas and the well of capital for new mining projects was drying up. The worst of these fears has now become a reality.

How bad is it? In a recent article commentator Mike Kachanovsky opined, “The current down cycle has been the worst for junior mining stocks in 100 years”. That seems overstated, besides, how would you make such a comparison? In our view, the current malaise is more mundane, and is characteristic of a period when larger miners shift their priority from growing production to concentrating on their most efficient operations in order to control costs. The lack of investment in exploration eventually causes a drawdown on reserves and causes commodity prices to rise. Depending on the health of the overall economy, that can take a while, so the challenge for juniors is to find enough money to stay afloat until conditions improve.

Challenging it is. Banks are leery about loans for early stage development and investors have little appetite for new share issues. Another option is to start small, keep capital expenditure on a shoe string and use cash flow to bootstrap the operation. This is the approach that Tim Gallagher, CEO of Excalibur Resources (XBR-CNSX) explained in a pitch. Call it “micro-mining”, a midpoint on the continuum between junior producer and a guy swishing flecks of gold from silt in a pan. It has much of the flavour of Discovery Channel’s Gold Rush series, but with less facial hair and nice suits.

The idea is to focus on small, shallow, high grade deposits using low-tech extraction equipment in the historic gold and silver district of central Mexico. So far Excalibur has invested about $2.7 million into exploration and development for a 49 percent interest in the Catanava mine. Ore has been accumulated and now awaits the completion of the installation of a new crusher recently arrived from China.

With the current tiny workforce, about 50 tons of ore can be mined per day. The company plans to add extra shifts over the next couple of months to triple that extraction rate. With the anticipated grade this capacity would work out to a recovery of about 5000 ounces of gold and 160,000 ounces of silver per annum.

If it all works out, that would produce sufficient cash flow to ramp capacity in a virtuous cycle. Excalibur’s presentation has lofty goals, envisaging the production of 1- to 2 million ounces of gold, new acquisitions, a dividend and a move to the TSX Venture exchange. At this point that aspiration looks a bit like climbing Mount Everest, but heh, we all have to start somewhere. For investors with a yen to participate in some micro-mining without donning coveralls, the shares currently trade at $0.19 giving Excalibur a market cap of $15 million.

Historically the exposure to mining and resources in the Contra the Heard portfolio has waxed and waned in opposition with market conditions. At this point, that relative weighting is quite low. We accept the difficulties facing the juniors as a positive contrarian signal and note that the commodity-related companies on our Watch List warrant careful examination during this autumn’s tax loss selling season.