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 Thu Jan 11, 2001
Tracker 2001-02: Solitario - Top Priority Bottom-Fish for 2001
    Publisher: Kaiser Research Online
    Author: Copyright 2001 John A Kaiser

 Kaiser Bottom-Fish Tracker 2001-02

Copyright 2001 John A Kaiser

January 11, 2001

Solitario Resources Corp (SLR-T: $0.90)

Tel #: (303) 534-1030
Web Site: www.solitarioresources.com

Solitario: Top Priority Bottom-Fish for 2001

Solitario Resources Corp (SLR-T: $0.86)
completed its plan of arrangement with Altoro Gold Corp on October 18, 2000, issuing about 6.5 million shares on the basis of 1 Solitario share for every 3 Altoro shares. Prior to the merger Solitario traded at a 30-40% premium to Altoro, but afterwards the merged company not unexpectedly sagged to Altoro's trading range as some Altoro shareholders cleaned out their numerically reduced positions. Solitario's chart has now developed a bottoming pattern and the fundamentals are in place to drive the price higher. However, because Solitario's parent (41%), Crown Resources Corp (CRO-T: $0.55), has not yet resolved the problem of an unfunded US $15 million debenture that comes due in August 2001, and whose settlement could result in a significant ownership change for Crown and thereby Solitario, we will not see Solitario show market leadership in the short term. We will see an upwards drift as bottom-fishers accumulate Solitario, but any significant upside movement will probably be on the coattails of Rockwell Ventures Inc (RCW-V: $0.85), the new PGM vehicle for the Hunter-Dickinson group. Rockwell is earning 60% of Solitario's Pedra Branca project in Brazil, which management is packaging as a PGM district play. Although Rockwell will be drilling in 2001, the story has been crafted so that hot holes are not required to keep the play alive during the next 12 months. Pedra Branca hosts a shallow dipping PGM bearing chromitite horizon related to the Pedra Branca ultramafic layered intrusive complex. The marker horizon's surface exposure has been inferred over a 45 km strike length. Previous drilling and trenching has yielded both high grades and thick intersections in known outcrops, though not in combinations sufficient to constitute orebodies. The Hunter-Dickinson approach will be similar to how it handled Farallon's Campo Morado project in Mexico, which it promoted in 1996 as a high grade massive sulphide district play with a significant gold credit even as it milked the known mineralized zones for all their promotional worth. The zones at Pedra Branca are less developed than at Campo Morado, but the combination of extensive soil sampling and structural mapping has left the Hunter-Dickinson group optimistic that previous operators did not pick off the best zones within the 45 km long system. Rockwell, which has 37.3 million shares out, is raising $3 million through a brokered private placement of 4.5 million units at $0.65, will end up with 45 million shares fully diluted. Rockwell must spend US $7 million over 4 years to vest with a 60% interest. At that point Solitario has the option to convert its 40% Pedra Branca interest into an equity stake representing 40% of Rockwell's market cap less any cash and short term assets. This is a smart deal for Solitario because it ignores the value of any other projects Rockwell might acquire and effectively forces Hunter-Dickinson to dedicate Rockwell to making or breaking Pedra Branca. Rockwell and Pedra Branca are poised to become a Hunter-Dickinson power play of the sort we haven't seen for a few years from this group. Do the math and you will see that based on Rockwell's market cap Solitario's 40% stake in Pedra Branca is worth about $27 million. Solitario also has about $10 million working capital, an uncapped 2% net smelter royalty in strategic Yanacocha ground that slides to 5% above $400 gold, and a 35% net interest in the advanced Bongara zinc project operated by Pasminco. Solitario has 23.3 million shares issued and 25.3 million fully diluted. Its cash breakup is $0.43 per share and the Pedra Branca project has an imputed market value of $1.16 per share (before the Hunter-Dickinson promotion is even underway!). In the top priority bottom-fish buy range of $0.75-$1.00 for Solitario you get the value of the Yanacocha NSR and Bongara stake for nothing. To top it off, Solitario is also actively involved in PGM exploration in Latin America. Altoro's David O'Connor has teamed up with Solitario's exploration staff and together they have a pretty good handle on the PGM potential of South America. Ross Beaty is now also a stakeholder in Solitario and if platinum group metals keep heating up may take a break from flogging a dead horse called silver. There is a very good chance that Solitario will come up with a new flagship PGM play, and perhaps even upgrade the status of its Rincon del Tigre PGM play in Bolivia. The only reason Solitario is available at bottom-fish prices is the uncertainty associated with the financial future of its parent, Crown Resources Corp. With the takeover of Battle Mountain by Newmont now done we may see changes in the tense relationship between Crown and the unvested operator (Battle Mountain) of the Crown Jewel project. With platinum and palladium prices soaring into the stratosphere we are approaching a market flashpoint where investors start viewing exposure to PGM plays as a must-have. Solitario should be first on the bottom-fishing list.

Reread Tracker 2000-40 on Altoro for background on Solitario and Crown

Altoro Gold Corp, which merged 1:3 into Solitario, was recommended as a top priority bottom-fish buy in the $0.20-$0.29 range on December 11, 1998 in the November-December 1998 issue of the Kaiser Bottom-Fishing Report, and upgraded on January 5, 2000 as a Top 20 Resource Sector Bottom-Fish Buy in the $0.30-$0.49 range. My enthusiasm was premised on the strength of Altoro's management team (David O'Connor and Ross Beaty) and its focus on platinum group metals exploration in Latin America. In February 2000 Altoro optioned its flagship PGM play, Pedra Branca, to Rockwell Ventures Inc, behind whose scenes lurked the Hunter-Dickinson group. I analyzed the Rockwell deal in Tracker 2000-03 (Feb 24, 2000) and a Bottom-Fish Action Report (Mar 6, 2000). In July Altoro announced a merger plan with Solitario, a 57% owned subsidiary of Crown Resources Corp that operated as Crown's Latin American exploration arm. I published a detailed analysis of Solitario in Tracker 2000-40 (July 15, 2000) and endorsed the merged company as a top priority bottom-fish. I have not commented on Altoro or Solitario since then, and would now like to re-emphasize the merged company as a top priority bottom-fish for 2001 in the $0.75-$1.00 range. My analysis of Solitario and its parent Crown in Tracker 2000-40 is pretty much still up to date, and I urge anybody interested in Solitario to reread this Tracker. Over the past year there have been three very important developments that make Solitario a no-brainer bottom-fish buy. Here is a review of the key points.

PGM prices approaching a market flashpoint

Number one, the prices of platinum and palladium have continued to climb in the face of strong industrial demand and continuing supply problems from Russia's Nor'lsk Mine. During the past week palladium has climbed above US $1,000 per ounce while platinum has held steady above $600. Although there has been talk about switching to substitutes, the incremental cost of the palladium in a car's catalytic converter remains small relative to a car's total cost, and the consensus seems to be that the supply problem is a temporary anomaly the automakers simply have to endure. At current prices platinum and palladium are approaching a market flashpoint where investor interest in the PGM story can escalate into high gear. In other words, the price of palladium has gone so ridiculously high that investors are starting to rethink their dismissal of the high prices as a temporary aberration. There does not appear to be any short term solution to the supply squeeze, so we are in no immediate danger of seeing palladium plunge back below $500. But even if it does, this level is five times the price of palladium that prevailed until the past few years. If you are concerned about the psychological effect of a downtrend in the price of palladium, I suggest that you think of the late seventies when gold soared from the $100 level to $800 before retrenching and developing a trading range of $300-$400 that proved quite profitable for new gold discoveries and extraction technologies like heap leaching. Once investors have gotten themselves hooked on the concept of long term high prices for platinum and palladium, any dampening effect created by actual price declines would be mitigated by speculative notions that the platinum group metals are destined to play an important role in future applications. Fuel cell technology and electronics are two growing areas that could eclipse catalytic converters as a source of industrial demand. If we make it through the flashpoint, the market will develop the belief that it is the decline which is temporary, quite the opposite of the current belief that the increase is temporary. I am not arguing that this makes sense, just suggesting that market psychology could evolve in this direction. Currently PGM is produced primarily from medium to high grade but narrow reef deposits in South Africa and as a byproduct of nickel sulphide deposits such as the Sudbury mines in Ontario and the Nor'lsk deposit in Russia. However, the presence of PGM in layered ultramafic intrusives in North and South America has been well documented, but rarely delineated as orebodies, and only commercially exploited at the Stillwater and Lac des Iles deposits in Montana and Ontario. This situation can be attributed to the fact that the palladium grade is generally higher than the platinum grade, which is the opposite of the case in South Africa. To make matters worse, any PGM mineralization where it looked like some tonnage could be put together typically had a combined PGM grade substantially lower than that of the South African reefs. Given a historical platinum price 3-4 times higher than palladium, the higher palladium grade in the Americas was mainly of academic interest. The idea of platinum and palladium price parity, let alone a higher palladium price, is a very recent concept whose economic implications have just started to stimulate PGM exploration, and certainly have not yet translated into production decisions that promise to flood the market with new palladium supply. The market may have problems understanding the nature of PGM deposits and their metallurgical issues, but I think we are approaching a "tipping point" where everybody will be scrambling to become a PGM expert just as they did with diamonds in the early nineties. Perhaps a better example might be the Internet, about which nobody knew anything five years ago, but which everybody endeavored to figure out as dot-com valuations soared beyond the wildest optimist's fantasies. I think it is time for bottom-fishers to have PGM exposure, and I think Solitario represents a fabulous entry point.

Hunter-Dickinson to turn Pedra Branca into a PGM district power play

The second important development over the past year has been the emergence of Pedra Branca as the new flagship PGM play for the Hunter-Dickinson group. HDI jumped onto the PGM bandwagon in late 1999 by going to the production hotspot for platinum, South Africa itself. Another of my bottom-fish, a Hunter-Dickinson shell called Anooraq Resources Corp (ARQ-V: $0.50), optioned the Platreef project and drilled it with mixed results. Anooraq's spec cycle collapsed in 2000 when the Platreef horizon failed to deliver an economic combination of thickness and grade. The Hunter-Dickinson group had also acquired control of another shell called Rockwell Ventues Inc (RCW-V: $0.85), and in early 2000 they talked Altoro into farming out its flagship play to Rockwell. Altoro was caught on a dilutionary funding treadmill as it tried to raise money for what was effectively a grassroots play involving metals investors viewed with suspicion. At the same time Altoro's chief financial backer, Ross Beaty, was distracted by the job of trying to keep the Russians from screwing Pan American Silver over the Dukat silver project. Weak promotion and a tough sell story that needed hot intersections forced Altoro to hitch its wagon to the Hunter-Dickinson promo-machine. Unfortunately, the Hunter-Dickinson machine was limping along on one cylinder in 2000. While Rockwell dealt with regulatory paperwork, management concentrated its exploration effort in 2000 on detailed mapping and sampling of the Pedra Branca system that did not provide the sort of discovery information flow needed to sustain market attention. Altoro and previous operators (Rio Tinto and Gencor) had identified a number of mineralized occurrences in a chromitite horizon associated with a an ultramafic layered intrusive. This shallow dipping, PGM bearing horizon appears to be associated with a pyroxenite-gabbro unit that has been traced over a strike of 45 km. Whereas Altoro and the others concentrated on outcrops that looked like they might have a high enough grade and thickness to represent orebodies, and ended up drilling zones with modest economic potential, the Hunter-Dickinson group has taken a district approach on the assumption that there is no reason why the exposed outcrops of the marker horizon should have the best potential. While Rockwell did follow up on the Esbarro zone, its exploration strategy in 2000 was designed to flesh out the bigger picture through soil sampling rather than try to drill off more tonnage near the known zones. That pretty much killed the potential of a spec cycle in 2000 for Altoro and Rockwell, much to the disappointment of Altoro shareholders. In mid November the Hunter-Dickinson group came out of the closet and officially took charge of Rockwell, which plans to release the results of its 2000 program in late January. Rockwell is completing a $3 million private placement financing to fund a minimum $2 million program for 2001 that will include drilling of known zones as well as new targets suggested by the soil sampling results. Rockwell can earn 60% by spending US $7 million over four years, and once Rockwell is vested, Solitario will have the option to convert its 40% stake into a 40% market cap based stake in Rockwell. This would effectively turn Solitario into Rockwell's largest shareholder and put 100% of Pedra Branca into a single company that could be shopped around for a takeover bid by a major. Alternatively, Solitario can keep its 40% working interest and require Rockwell to fund it through debt financing or by purchasing equity in Solitario. Pedra Branca is only one of Solitario's assets, but it is the only story for Rockwell which the Hunter-Dickinson group is gearing up to turn into a power play similar to Farallon's Campo Morado massive sulphide district play that the market loved in 1996. This time the fuel for the promotional engine is the soaring price for platinum group metals and the need for the industrial world to secure production sources outside Russia and South Africa. By packaging Pedra Branca as a district play Hunter-Dickinson have relieved themselves of the pressure to produce near term hot discovery holes to keep the story alive. The story has been scripted for the long haul.

Asset rich Solitario well positioned to pursue its Latin American PGM initiative

The third important development over the past year was the merger of Solitario's robust asset base with Altoro's sexy Latin American PGM initiative. Solitario sold its Yanacocha project in Peru to Newmont in early 2000 for US $6 million and an uncapped NSR sliding from 2% below $320 gold to 5% above $400 gold. The Yanacocha district, which surrounds the Solitario project, is now estimated to contain 40 million ounces gold. Through this deal Solitario swapped a somewhat promotable story for cash and a long term royalty asset. Solitario also owns 100% of the Bongara zinc project in Peru, in which Cominco had an option to earn 65% by spending US $27.5 million and producing a bankable feasibility study. Cominco had spent about US $14 million when in August 2000 it transferred the option to Australia's Pasminco in exchange for an NSR royalty, certain back-in rights and future payments tied to the deposit size. The market greeted the arrival of Pasminco, a major zinc producer, with mixed feelings because on the one hand Cominco bailed out and on the other hand an equally substantial newcomer was willing to give it a shot. In any case, Solitario's role is passive. Solitario had started a PGM exploration initiative in 1999 and on occasion its team had rubbed elbows with Altoro's team headed by David O'Connor, particularly in Brazil. Solitario wanted to acquire Pedra Branca and was disappointed when first Altoro scooped it and then handed it off to Rockwell. Cash-rich Solitario correctly identified Altoro's weak financial condition and initiated a friendly takeover bid that for technical reasons was converted into a plan of arrangement. Although Solitario's CEO Chris Herald won't admit it, I suspect an additional reason for the merger was to dilute parent Crown down from its 57% stranglehold on Solitario. Not surprisingly the arrival of a retail shareholder base via a rollback knocked Solitario's stock price down from its illiquid level of $1.30-$1.50, but for the long run Solitario acquired a latent promotional force in the form of retail shareholders whose enthusiasm will eventually offset the sluggishness of Solitario's largely institutional shareholder base. The structure of Solitario is now very potent. The only fly in the ointment is the risk that Crown's debenture holders might force Crown into a dilutionary reorganization that shifts control of Solitario into the hands of a new group. Right now both Crown and Solitario are orphans in the sense that they are managed by people with tiny equity stakes in either company. For an analysis of Crown's situation I strongly suggest you reread Tracker 2000-40 (July 15, 2000: "Altoro to merge 3:1 with Solitario"). Crown is itself a bottom-fish buy whose debt and permitting problems could resolve themselves over the next six months. Crown's new partner, Newmont, may work out a deal with Crown that allows it to escape Battle Mountain's vesting requirement of a minimum 3,000 tpd mining scenario that entails an open pit operation it is now clear will never get permitted. Part of the deal could involve a purchase of the $15 million debenture at a deep discount and its conversion into Crown stock at a substantial premium to market in conjunction with a renegotiation of the option deal so that a smaller scale underground mining permit can be pursued. In making Solitario a top priority bottom-fish buy I am making the assumption that Crown's debt problem will have a favourable resolution that will not jeopardize Solitario's independence and Latin American PGM initiative. Because the Crown bond holders will be pressuring Crown to liquidate assets such as Crown's Soltario control block, there is no urgency on the part of Solitario's management or any potential buyers to see the market value of the Solitario control block inflated. Solitario is cheap for a structural reason that is short term.

Due Diligence buzPak link for Solitario
 
 

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