By Chris Berry
Two brief but significant updates today on companies we are following. I am the Chair of the Industrial Minerals Lithium Supply and Markets Conference in Montreal this week, but will be available for any questions on these companies or anything else.
Arianne Phosphate (DAN:TSXV, DRRSF:OTCBB)
Good news out of Arianne Phosphate (DAN, TSXV, DRRSF:OTCBB) with the announcement of a mineral resource estimate on the Nicole Zone of the Lac à Paul phosphate project.
As a refresher, the Lac à Paul project hosts several distinct zones and the addition of the inferred resource on the Nicole Zone should be beneficial to the company as it can positively affect the already promising project economics. As a refresher, here is the initial research I wrote on DAN and an overview of the phosphate market I published can be viewed here.
Below is a map showing several various zones, some of which could presumably be combined into a single larger pit to gain efficiencies from scale.
Source: DAN Press Release
Additionally, the inferred mineral resource on the Nicole Zone…
Source: DAN Press Release
...coupled with the resource estimates for the Paul and Manouane Zones….
…dictate that this project has potential to get much larger and can help spread out the capital and operating expenditures through increased P2O5 production (set at 3M tpy currently) and a longer mine life. More work will be done to solidify the resource.
I continue to reiterate that this unique igneous deposit must be on the radar of end users such as Mosaic, PhosAgro, OCP, or Ma’aden.
And speaking of the major phosphate producers, the vertically integrated nature of this business is a key selling point for DAN as a reliable source of supply. A close examination of what the “big boys” are publicly saying is a key to your evaluation of this opportunity going forward.
PhosAgro CEO Andrey Guryev recently commented (Bold font ours):
“We have maintained near 100% capacity utilisation throughout 1Q 2014. Favorable market conditions and higher demand have enabled us to increase substantially our sales of both concentrated fertilizers and NPKs to Latin America and Russia, where our year-on-year sales volumes to these markets increased more than 100% and over 30%, respectively, in 1Q 2014. We changed our product mix in response to demand at the beginning of the year, increasing production of DAP/MAP after a sharp recovery in prices following the very low price floor we saw in 4Q 2013; we subsequently increased NPK production and sales in February and March after the stabilisation of potash and NPK markets.
“Looking forward to 2014, we believe that the effects of Uralkali’s decision to stop export sales through BPC on the whole market have subsided, and we are seeing prices for key phosphate-based fertilizers normalise on normal market supply / demand conditions, backed by solid farmer economics on the demand side and increased cash costs on the supply side, given recent substantial sulphur and ammonia price increases.”
This can be interpreted as good news for companies like DAN with assets exhibiting a potential low cost profile that could integrate into existing phosphate global supply chains.
Despite the tough time DAN’s share price has had YTD in 2014 (see below), this is a fact worth remembering. The breakdown in the share price appears to be due more to the general breakdown in the small cap markets rather than anything specific to the company, so I am content to still hold my share position. Many other price charts for junior mining companies (uranium plays, in particular) look strikingly similar.
Lowest cost producers always win and this is a major selling point for DAN. The published BFS demonstrated a cost of $93.70 per tonne and an assumed average selling price of high quality P2O5 of $213 per tonne at the port.
Source: Bloomberg
The bottom line is that this is a big deposit with straightforward metallurgy. Security of supply is the way to think about the prospects for this deposit as the need for a high quality supply of phosphate rock plays itself out in the coming years. This deposit is substantially de-risked on the back of a published bankable feasibility study and coupled with a sound share structure, these are two facts that the market is currently overlooking.
Terraco Gold (TEN:TSXV, TCEGF:OTCBB)
I have always liked TEN because I never truly viewed it as a traditional “junior miner”. This is because while TEN is involved in gold exploration, the more valuable portion of their business (in my opinion) is the royalty portfolio CEO Todd Hilditch has constructed.
The company’s vision to focus on royalty collection has proved to be prescient as the majority of gold exploration plays – regardless of jurisdiction – struggle to come up for air in a market where the price of gold – the real lever for project economics – continues to struggle itself.
We have written many times in the past on the royalties TEN holds on Midway Gold’s (MDW:TSX, MDW:NYSEAMEX) Spring Valley deposit. As a brief refresher, this is a 70/30 JV between Barrick Gold (ABX:TSX, ABX:NYSE) and MDW which ABX has spent $38M on to earn the 70%. Spring Valley hosts the following NI 43-101 resource:
Source: MDW website
Given this unique situation I found it interesting to read MDW’s recent announcement of ABX’s 2014 budget for Spring Valley which calls for $13.3M broken down as $8.3M for project development and $5M for exploration. The goal is to advance the project to prefeasibility and according to the press release ABX has mobilized one R/C drill rig and two core rigs.
To be clear, we don’t know the drilling plans and can’t be certain as to whether ABX is planning drill targets on land where TEN owns a royalty. This exemplifies the speculative nature of the junior markets, regardless of the macroeconomic backdrop. That said, the fact that a large gold producer is planning on pushing forward with the development of a property in an era where the majors are not in expansion mode is a significant development for both MDW (an undervalued opportunity in itself) and TEN.
Source: Bloomberg
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