Yesterday Teuton Resources (TOU-X) announced they would spin off the Tennyson project into a Newco partially owned by Hunter Dickinson Inc., and funded $7.5 million by Hunter Dickinson.  The market was reserved on the news, and for good reason.  It wasn’t a great deal for the shareholders, and I’m not sure why Teuton did it.

You see, we shareholders like to believe in a property.  We love to be passionate about how we’re going to be early investors in the next big find.  In Tennyson’s case, it was just south of, and on trend with, Seabridge’s KSM deposit, a huge 30 million ounce discovery in the Golden Triangle of British Columbia, Canada.  Clearly in Teuton’s case many investors are investing in Tennyson.

The deal is structured so that Teuton gets a partial interest in the Newco, and it’s not even clear how much of an interest.  The deal effectively removes Tennyson from Teuton’s portfolio.  If investors now want to invest in the Tennyson property, they would buy have to buy shares of the Newco, not Teuton Resources, which justifies the decline in the share price.  Why didn’t they just joint venture the property the traditional way and let shareholders keep the direct interest in the property?

Copper Fox Metals is a small fish in a big pond.  Investors have been waiting a long time, but it look like 2012 might be the year things happen.

The Schaft Creek deposit in northern B.C. was explored by various parties since the 50′s.  For the last several decades, it was in the hands of Teck and its predecessors.  It’s a porphyry deposit, which means gold is dispersed in a former lava flow which picked it up from somewhere.  As with most porphyries, Schaft Creek was large but low grade, therefore it sat around and received limited exploration while ‘better’ mines got the go-ahead.

With grades of 0.27% copper, you can see why.  But on flip side, it’s also very, very big.  The limits of what is considered the deposit contain 1.3 billion tonnes of rock which is the same size as a cube of 700 m x 700 m x 700 m (the deposit isn’t a cube of course).  This is not quite on the scale of the biggest mines of the world, but it might be top 10.

So to continue the story, in 2003, a Calgarian, harvard educated geologist who worked on the property in the 1970′s, Guillermo Salazar, decided to make Teck an offer.  The basic gist of it is, if he could prove the economics of the deposit, and Teck would want to build the mine, he (or technically, his company) would get 25%.  Teck accepted and thus Copper Fox Metals was born.

Salazar has since retired and a new CEO has taken over, but the objective still remains.  The agreement says that after Copper Fox produces a feasibility study, Teck has 120 days to decide whether to “back-in” for 75%.  There are several other levels of back-in, for 60% and 40%, but I’m not sure why Teck would want to do that.  I believe it will be 75% and build the mine or walk away.

Unfortunately, the recession caused a slight delay in progress, but things are firing on all cylinders out at Schaft Creek now.  Tetra Tech WEI, the engineering consultant for the feasibility study, says it will be ready by the end of March 2012.  Last year saw a big delay from one of the other engineering consultants but they are no longer working on the project.

I, as an engineer, have scrutinized the project in depth and I believe that Schaft Creek will be a mine.  I have compared it to other mines, read the scoping study and feasibility study, analyzed the metal price sensitivities, and I am confident that when a decision needs to be made, it will be a positive one.

I have already made money handsomely on this stock, having invested again at the bottom of the recession.  My original target was $10.00 before the major financing at the bottom of the recession, which is equivalent to $3.00 now.  So my target is $3.00.

Today’s drill results from Galore Creek seem quite encouraging.  All of them were infill holes which means there are other drill holes around them, they shouldn’t create too many surprises.  But they seemed to have significantly higher gold values than the main deposit.  This bodes well for the deposit.

As some may know, Galore Creek was being constructed during 2006-07, but skyrocketing prices caused the construction to be halted.  If I recall correctly, the original approved expenditure was $3 billion, and it had escalated to about $7 billion when they pulled the plug.  Of course, this was due to market factors more than anything else.  Anyone who remembers that time will recall that everything increased in price, houses, gold stocks, backhoes, you name it.  In the latter half of 2008, it corrected hard.

Galore Creek is a bit of a bellwether for the Golden Triangle because if the owners Teck and Novagold decide to build the mine, they will be drawing a line in the sand as to what is viable there.  Seabridge’s KSM deposit and Pretium’s Brucejack deposit appear to be assumed by investors to be economically feasible.  KSM has overall grades of about 0.94 g/t gold over 2.8 billion tonnes of rock, and Seabridge trading at $21.  Pretium’s Brucejack property runs 18.9 g/t gold over 12 million tonnes, so it is a higher grade deposit that is difficult to compare with the others.  Since Galore Creek is at about 1.27 g/t gold equivalent over about 815 million tonnes of rock, it is higher grade but 3-4 times smaller than KSM.

I would be willing to bet that Galore Creek will become a mine.  I have been a bit perplexed as to why the Teck/Novagold partnership hasn’t put a priority on reassessing it since they halted construction, particularly with the Northwest Transmission Line now being built by the B.C. Government which will take $400 million off the construction cost.  Novagold is now looking at buyers for their 50% stake but the president of Novagold, Rick van Nieuwenhuyse, is still a vocal supporter of the project.

Today Copper Fox announced that they purchased some land north and south of the Schaft Creek deposit, and also at their Mess Creek claim which is 20 km or so to the northwest and unconnected.

Clearly Copper Fox is accumulating more land every year.

These are not minor purchases.  Last year they purchased some pieces that were in the interior of the Schaft Creek claim, although not directly over the deposit but very close, i.e. you never know what complications would arise down the road.  This year they have extended the Schaft Creek claim to the south and north.  They have been consolidating lots of other mineral claims into the Schaft Creek claim as well over that time so it is becoming a truly huge mineral claim.  If proven economic, this will be a district, not a single deposit, and all kinds of options would exist to partially develop, spin off, or joint venture the multiple deposits now called Schaft Creek .

I am particularly happy about the southern purchase.  The deposit seems to go to the south and in my opinion, this is where another “main zone” is most likely to be found.  I know the southern border of the main zone has been defined by drilling, but the limit of the property was not far away and the in-and-out nature of the deposit suggests the new area is worth looking at.  The geophysics also bears out the potential.

Importantly to the investor, this is a potentially market moving area because of the topography.  If they have another main zone, or anything like it down there and sink a drill hole grading 0.5% copper over 400-500 m, the stock will probably double.

I am intrigued by the Mess Creek purchase.  This is a property they have always had but didn’t do anything with.  Now that they have added to it I am wondering if Copper Fox is slowly morphing into more than a one-trick pony.

I actually missed the release of the feasibility study for Yellowhead Mining’s (YMI-X) Harper Creek property on March 2 because they must not have sent the news release through the media channels that I get.  Nonetheless, I have been following this stock for a couple of years and I was eagerly awaiting this one.

As with all feasibility studies, they seem to have good numbers.  Metal prices are higher than they used to be and there are many projects out there that are viable at today’s metal prices that were well under water a decade ago.  Harper Creek is one of those.

Harper Creek is about the same size as Novagold’s Galore Creek deposit, 700-800 million tonnes, but half the grades.  Galore Creek is probably right on the edge of the economic threshold, having been under construction during the boom years of 2006-2007 and then having been halted and not yet resumed.  But the CEO (now moving to NovaCopper) Rick van Nieuwenhuse has stated many times he believes in it, and I think his move to the spinout is an endorsement of Galore Creek.

The question is, does Harper Creek’s major infrastructure advantage make up for the lower grades?  It just might, because the Capex for Harper was estimated at $839 million versus Galore Creek’s roughly $3 billion (Original Capex was $3 billion;  The plug was pulled after it escalated to $6.5 billion, but today I would suggest it’s probably closer to the original number).  Harper Creek is located on a forested, rolling hill with the Yellowhead highway at the bottom.  Power is a few kilometres away, although it might have to be upgraded, but the presence of an old paper mill on the highway suggests its got some industrial capacity already.  Galore Creek, in comparison, has to build a 50 km access road, all of it through very rugged terrain, complete with a 4 km long tunnel and major bridge over the Iskut River.

I am impressed with a couple of things.  Firstly, the metal prices were not very aggressive at $2.50/lb copper (although the gold might have been, at $1,250/ounce, but it doesn’t make that much difference).  And secondly, the downside appears quite low.  The breakeven point appears to be somewhere in the range of $1.50 – $2.00 copper, which we actually saw in 2008 when the boom went bust.

As with most of these, it is a “borderline” deposit, and I have to qualify that term.  If the mine could be built and metal sold at today’s prices, it would be very profitable.  But the value of an asset is what someone will pay for it, and majors will look very, very hard before getting into this.  It takes years to build a mine and then you are committed to operating it for, in this case 28 years, so a breakeven metal price of $1.50 is still somewhat concerning.  Most of the last 28 years the copper price was well below that.

So where does that leave Yellowhead Mining?  With a market cap of $32 million, it’s not likely they will be able to raise the $839 million required to build the mine themselves, nor am I a big believer in juniors doing this.  They must shop this feasibility study to a major who might take a 75%-ish operating interest, or a junior that can afford to build it as a joint venture, an option which would include major dilution for YMI.  They could attempt to explore further and find a new extension, or they could infill drill to move some of the 815 million tonnes of resource into reserves (then the deposit would look alot like Copper Fox Metal’s Schaft Creek, in size and grade, but far better Capex).

If a major wanted to invest in a new mine, other large, low grade deposits like Seabridge’s KSM, or Copper Fox’s Schaft Creek, or Galore Creek, you would have substantial infrastructure risk because I think everyone is looking at Galore Creek and wondering what the Capex really is.  They are the only ones to have tried building into the rugged mountains of the Golden Triangle and pulled the plug half-way.  Seabridge is now just starting their construction, including twin, 23 km long slurry tunnels, and we’ll see how that goes.  Harper Creek’s Capex is not going to contain that risk, and majors like that.

At $32 million market cap, I like this stock.

One effective strategy for investing in junior gold is to find the best junior producers.  With small companies that have a producing asset, and thus cash flow underpinning the share price, you can still take part in large share price gains with limited risk.  In this article, I will present a list of ten junior gold producers.

1. B2Gold (BTO-X):  The former management and geological brains of Bema Gold, which was built from scratch and sold to Kinross for about $3 billion in 2008, have started over again.  With about 140,000 ounces of yearly production from two mines in Nicaragua, it’s the big development pipeline that’s the attraction, but they’ve got the cash flow to limit dilution for the development of the bigger projects.
2. Aurcana Corporation (AUN-X):  Aurcana was a junior silver exploration company in Mexico until they purchased the La Negra mine in 2006.  It was on care and maintenance at the time.  They have since put it into production and purchased another mine, the Shafter Mine in Texas, which has just entered production.  Anticipated yearly production is as much as 4 million ounces of silver.
3. Avion Gold (AVG-X):  Avion should produce more than 200,000 ounces in 2012. The only catch is that it’s in Mali, where the military coup of March 2012 ensures that investors must have a tough stomach.  At today’s gold price, however, Avion is making insane amounts of money (hundreds of millions) and this allows them to purchase future production that will lower the risk profile.  The new mines being planned in Burkina Faso should do just that.
4. Golden Band Resources (GBN-X): With 10,000 ounces of production, this is really an explorer that can cover $17 million worth of exploration per year without dilution.  That’s a pretty healthy sized exploration program for free.
5. Impact Silver (IPT-X):  Slow and Steady wins the race.  With revenue climbing every year from 2006 to 2012, from $5 million to $25 million, this one’s a keeper.
6. Yukon-Nevada Gold (YNG-X):  Production from an old mine in Nevada is funding exploration at several promising properties without dilution.
7. Atna Resources (ATN-X):  With the restart of a small mine in California, Atna is producing 50,000 ounces per year and hoping to parlay that cash flow into a mid tier mining company.  If they’re successful, their share count could stay low.
8. Great Basin Gold (GBG-X):  One of the success stories of the Hunter Dickinson group, Great Basin Gold has two mines producing about 140,000 ounces per year, and trades under a buck.
9. White Tiger Gold (WTG-T):  The merger with Century Mining added some gold production to reach about 50,000 ounces/year over three mines.  Not alot, but neither is the share price.  In this gold price environment, it’s a cash cow nonetheless.
10. High River Gold (HRG-T):  Two producing mines in Russia account for 150,000 ounces per year, which puts them on the verge of “mid-tier producer” status.  Good development projects in Africa give this one some decent upside.

Just before christmas, Copper Fox Metals released their long awaited Feasibility Study for the Schaft Creek deposit. This “ground breaking” deposit puts the company on the forefront of defining viability in the so called “Golden Triangle” in northern Canada. No doubt many eyes are watching the next steps.

The golden triangle is in the northwest corner of British Columbia. It has two big hindrances: Low grade deposits and very rugged, mountainous terrain. In fact, nobody would want to explore there if it wasn’t for one big advantage: The deposits are massive. Just to give you an idea, Seabridge Gold’s (SEA-X) KSM deposit contains 42 million ounces and counting, and there’s just as much copper as gold too.

There are two juniors in the golden triangle who are well advanced, Seabridge Gold and Pretium Resource (PVG-T). Both are located south of Schaft Creek. Also, Novagold and Teck have a 50/50 joint venture for the Galore Creek deposit to the west of Schaft Creek. They attempted to begin mine construction in 2007 as prices were heating up and decided to pull out mid-way, due to escalating costs. Schaft Creek is planning to use their partially built access road.

So let’s get down to business.  The feasibility study looks like this:

• Capex:  $3.256 billion
• IRR: 10.13%
• NPV @ 8%:  $513 million
• Payback Period:  6.48 years

Metal price assumptions:

• Copper:  $3.25/lb
• Gold:  $1,445/ounce

The resource:

• Proven and Probable: 941 million tonnes grading 0.27% copper and 0.19 g/t gold
• Measured and Indicated:  1,229 million tonnes grading 0.26% copper and 0.19 g/t gold.
• Silver and Molybdenum will add another 5%-10% more metal

Annual Production:

• 274 million pounds of copper
• 237,000 ounces of gold
• 1,229,000 ounces of silver
• 8,420 tonnes of molybdenum

What’s next?

Copper Fox has an agreement with Teck Resources whereby Teck can “back-in” to the project with a 75% stake, leaving Copper Fox with 25%.  Clearly Teck has a right of first refusal.

If they back in, they will begin the process of constructing the mine and Copper Fox is left as a semi-passive partner.  In this scenario, starting in 2020 Copper Fox will be a mining company with 69 million pounds of copper production and 59,000 ounces of gold production, or 205,000 gold-equivalent ounces.  With 420 million shares outstanding, this positions the company very favourably.  It would produce 1/2,000 ounce per share, a level similar to Eldorado Gold which trades at about $13.

If Teck does not back in, Copper Fox would be free to search for other partners.  Everything is, of course, wide open in this scenario.

My analysis

So what do I think?  Here are a few thoughts for a Copper Fox investor, or potential investor, to consider.

1. The market is terrible right now.  Not just bad, but terrible.  It is unlikely that Teck will back in and commit to a $3.2 billion expenditure for only 75% of the production under these market conditions.  That being said, if market conditions improve Copper Fox could be a good “threshold play” with potential massive upside.
2. Teck’s Highland Valley mine near Kamloops, BC (500 km south) is producing copper at a similar grade to Schaft Creek.
3. Teck is still counting reserves from its Galore Creek property.  Thus, the implication is that they believe the project is economic, at the right time, and under the right circumstances.  If Galore Creek is economic, Schaft Creek probably is as well.  Investor’s have talked at length about a possible combination.  Besides the shared access road, I don’t see alot of synergies because they are 50 km apart, across several mountains, and will require their own processing.  Synergies will be minor at best.
4. If metal prices increase Teck is in a position to become the major producer in the region (Galore Creek plus Schaft Creek).  This is an advantage I would not want to give up if I was them, and based on long term metal prices this is probably an important possibility.
5. Big, company making deposits for majors are becoming very, very scarce.  Barrick’s CEO highlighted the lack of new “super-majors,” defined as 20 million ounces plus, at the LBMA conference a few months ago.  The golden triangle has at least three super majors, Schaft Creek being one of them (well, it’s very close on a gold-equivalent basis).  The only question is how to mine it economically.
6. If Teck does not back in, Copper Fox will search for options, and eventually find a partner when the copper price moves beyond $4.00, possibly on more favourable terms.

My final analysis is this:  Schaft Creek will be a mine.  There could be some jostling because Teck might not actually back in.  They could take an equity stake, or the agreement could be renegotiated.  Maybe they will indeed walk away, but with long term worldwide trends the way they are (depletion of resources, increase of metal prices) big deposits like this are almost a necessity for a junior gold investor.  One would, of course, hope they back in and this is a very decent possibility.

Good luck.