Bottom-Fish Comment - April 12, 2017: Recommendation Strategy for Eskay Mining Corp
Eskay Mining Corp is a new bottom-fish accumulation target in the $0.30-$0.49 range based on a fresh exploration strategy to find the source of the Lulu zone discovered in the heat of the Eskay Creek discovery play of 1989-92. The junior owns 80% of the SIB-Lulu property southwest of the depleted Eskay Creek deposit and is awaiting finalization of a farm-in agreement whereby Silver Standard Resources Inc can earn up to 60% of the property, leaving Eskay Mining with a net 20% interest carried for the next $14.6 million exploration over 3 years which vests Silver Standard for 51%, and the cost of delivering a PEA or additional drilling of at least 23,000 m if Silver Standard elects to go to 60%, and then another $10 million. Given that Silver Standard's goal is to discover Eskay Creek Two, that spending requirement should be enough to rule out any future contribution by Eskay Mining because it will either be bought out by Silver Standard or the SIB-Lulu property will be dead.
The size of the optioned claims is only 4,823 hectares with a fairly narrow focus on the extension of the Eskay stratigraphy that hosts the Eskay Creek deposit from which 2.5 million tonnes were mined from 1995-2008 that yielded 3.5 million ounces gold and 180 million oz silver plus zinc and copper credits from ore that averaged an astonishing grade of 43 g/t gold and 2,208 g/t silver. The Eskay Creek deposit is a zinc-copper volcanogenic massive sulphide system that has been extraordinarily enriched with gold and silver. It was discovered in 1989 by Murray Pezim's Calpine team when a substantial stepout hole, #109, intersected 205 m of 27.2 g/t gold and 30.2 g/t silver in what became the 21B Zone. The discovery took place in the midst of a resource junior sector bear market and bore an eerie resemblance to 1982 when Pezim's persistence with Corona resulted in the Hemlo discovery which ultimately yielded 20 million ounces from underground mined medium grade gold ore. As in 1983 an area play dubbed the "Golden Triangle" exploded in this unusually mineralized part of northwestern British Columbia but faded away after 1991 when the socialist NDP party came to power in BC and imposed draconian anti-mining policies during its decade long reign. By 1992 the market had become distracted by the diamond discovery in the Northwest Territories, followed by the opening of third world frontier exploration in the wake of the Soviet Union's collapse, and then the Voisey's Bay nickel discovery in 1995 accompanied by the fraudulent Busang gold discovery by Bre-X in Indonesia.
Eskay Creek ended up under the control of Homestake which put the deposit into production in 1995 on a simple basis of underground mining, crushing and direct shipping of ore to smelters, and disposing of tailings in a couple of barren lakes, one of which, MacKay Lake, was named after Tom MacKay who staked the Eskay Creek claims in 1932 on behalf of Stikine Resources which went from $0.25 to $60 in a takeover battle that Placer Dome lost to Corona. Barrick operated the mine after it acquired Homestake in 2001 and closed the mine in 2008. After the NDP government was kicked out in 2001 interest in the Golden Triangle returned but focused mainly on past discoveries such as Galore Creek, Shaft Creek and Red Chris which the China driven super cycle seemed to have dragged into the money. A few juniors such as Eskay Mining Corp's predecessor explored in the Golden Triangle during the super-cycle decade but no major new earth-shattering discoveries emerged. The most notable developments were the rethinking of the KSM (Sulphurets Kerr) porphyry system by Seabridge and the high grade Brucejack system by Pretium, both of which have boosted appreciation for the extraordinary precious metals endowment of this region. During the past couple years there has been a revival of interest in the Golden Triangle from an exploration perspective, led by Ron Netolitzky whose Skeena Resources Ltd has assembled unfinished business such as the Spectrum, GJ, Idaho Porter and former Snip Mine. The greatest unfinished business, however, is the Lulu Zone.
The Eskay Creek deposit is located 4 km from the SIB-Lulu property boundary and the Lulu Zone is about 6-7 km from the deposit. The photos above give a good sense of the region while the one below reveals how closely spaced were holes trying to make the Lulu Zone bigger; one can explore more using Google Earth. The Lulu discovery hole yielded 14 m of 14.4 g/t gold and 1,059.5 g/t silver in 1991 when Silver Butte and American Fibre, then headed by Lou Starck and Lew Dillman (hence the name "Lulu"), operated a 50:50 JV. Followup drilling failed to establish any strike or downdip extent to the Lulu Zone, dashing hopes for Eskay Creek Two. The Lulu Zone has been tackled without success by several groups since then, with the most recent attempt in 2008-2010 when Eskay Mining Corp earned 80% from St. Andrew Goldfields (now Kirkland Lake Gold Ltd).
However, a 3D compilation of all this work has led to a new understanding of the geology underlying the Lulu Zone, the interpretation that the Lulu Zone is a "tip" detached from its "iceberg" by a local thrust fault called the Coulter Creek Thrust Fault, and the realization that the past strategy of drilling through the hanging wall in search of Lulu's footwall source was hopelessly complicated by the sub-vertical orientation of the mudstone units within the Salmon River Formation that host the Eskay Creek deposit as well as the Lulu Zone.
The plan view above shows the historical drilling in the vicinity of the Lulu Zone and the section view below shows the interpretation of the geology. Note hole 91-100 which was collared in Bowser Lake sediments but terminated early. Also note hole 02-113, a shallow angled hole that managed to stay within the hanging wall.
Eskay Mining's consulting geologist Charlie Greig walked me through the plethora of presentations and graphics on the company web site which, frankly, is absolutely confusing to a non-geologist such as myself. But with Charlie's help I was able to extract those images which reveal the story and I have presented them here so that KRO members can appreciate the new strategy Silver Standard's Carl Edmunds plans to deploy. Incidentally, Edmunds was involved with Homestake's efforts to find Eskay Creek Two within the Eskay "rift" belt right up to the SIB claim boundary, an effort that included deep drilling whose results are not in the public domain but are firmly lodged in Edmunds' head. If Silver Standard finds Eskay Creek Two early on in the $14 million initial earn-in program (the amount above $11.7 million assumes Kirkland Lake contributes its 20% share of Silver Standard's program rather than dilute down in Eskay Mining's favor), it will be due to Carl Edmunds' deep understanding of the Eskay Creek geology.
The new exploration strategy endorsed by Silver Standard exploration VP Carl Edmunds involves drilling 1,000-1,500 m long holes collared in the Bowser Lake sediments (younger aptly named "woof woof" rocks in the Golden Triangle) west of the Coulter Creek thrust's limit, angled so as to traverse the footwall rocks beneath the thrusted hanging wall rocks. The simplified section above is intended to illustrate this approach. The implicit interpretation is that unlike in the Eskay Creek deposit area where the stratigraphy has been folded to form an anticline with a NE-SW axis, the stratigraphy in the Lulu area is tilted without the presence of an anticlinal axis. Imagine the section below from the Eskay Creek deposit as tilted on its side. Note the added complication of the normal faults that have locally displaced the stratigraphy.
The idea is to map out the geometry of the blind "Eskay Rift" belt rocks that host Eskay Creek and Lulu by intersecting them at a near perpendicular angle so that the source of Lulu can be tracked down and then delineated with focused holes through the hanging wall. The farm-in deal stretches over 3 years and totals nearly $12 million because the drilling will be technically difficult, expensive and must be completed in its entirety to make or break the hypothesis that Lulu is the detached tip of an iceberg that qualifies as Eskay Creek Two. The plan view below of the new drilling strategy envisions 5 fences of 3 easterly angled holes from the west in the vicinity of Lulu. The westerly oriented fences to the north and south are likely necessary because the thrust plane in those areas is too deep to push the holes through the footwall from the west. Carl Edmunds is undertaking a brute force attempt to isolate the pieces of a jigsaw puzzle within which may sit a 2-3 million tonne collection of lenses with Eskay Creek grades.
If this were late 2016 I would wait until the agreement has been formalized before publishing this report. But since Eskay Mining announced the letter of intent on January 26, 2017 there has been a sea change on Bay Street and among the producers with regard to discovery exploration which is evident in the aggressive equity based investments producers have made in juniors with district scale projects that already host mineralized systems, and in the financings done by Bay Street for juniors such as those with exposure to the Windfall district in Quebec. Since Mac Balkam took charge of Eskay Mining in late 2009 at the behest of disgruntled shareholders his efforts to convince investors of the merit of funding the Hunt for Eskay Creek Two have largely fallen on deaf ears, a task not helped by a crippled balance sheet that qualified the junior for zombie extinction. But Balkam has managed to repair the balance sheet, and, in the process of attracting Silver Standard as a farm-in partner, has attracted sufficient eyeballs to the new exploration strategy Silver Standard plans to deploy that direct equity funding would materialize at current or higher prices should Silver Standard not close the deal. Balkam, still shell-shocked from the past 8 years, is terrified the Silver Standard deal will not close, but I think it does not matter. We are in the second year of a 3-5 year exploration bull cycle whose retail audience has only started to trickle into the stadium. The big guys get this, so I am afraid the Silver Standard deal will close. Bottom-fishers should assume the Silver Standard deal closes but not worry if it does not. The Hunt for Eskay Creek Two will awaken a blast from the past in which I was immersed as a brokerage firm analyst in Vancouver a quarter century ago.
In an effort to understand the upside potential for Eskay Mining Corp I have visualized an outcome equivalent to the Eskay Creek deposit and "mined" it at 700 tpd with direct shipping ore as was the case with most of the Eskay Creek mine life (Eskay Mining - SIB-Lulu OV). The result is an after-tax NPV of CAD $3.2 billion at an 8% discount rate with a 409% IRR as an ultimate outcome which translates into an ultimate price target of $5.38 per share for Eskay Mining Corp based on a 20% net interest and 118 million shares fully diluted. At the current target testing stage the fair speculative value range is only $0.05-$0.13 per share which is where the stock spent much of its time since the bear market began in 2011. At the current $0.31 price the implied project value of $183 million is well above the CAD $32-$79 million fair spec value range, but that is to be expected for two reasons: 1) if the deal closes and Silver Standard starts drilling in mid June, a footwall discovery hole could be in hand as early as mid summer, in which case S Curve action would kick in and drive the stock towards $4 per share, and, 2) Eskay Mining owns 80% of additional ground surrounding the SIB-Lulu claims, and 100% of the Corey property farther south covering the Salmon River Formation, both of which would become prospective for Eskay Creek Three if work at SIB-Lulu shatters the perception that Eskay Creek One is a solitary freak.
Because the Silver Standard deal is not yet finalized Eskay Mining Corp has not published a map depicting the subset of the 80% owned SIB lands that will be the subject of the Silver Standard 60% earn-in deal. The claims carved out for the Silver Standard deal represent only 15% of the 33,000 hectare SIB JV between Eskay Mining and Kirkland Lake in which Eskay Mining earned 80% by spending $3.98 million pursuant to an option struck in May 2008 just before financial crisis hit. Mac Balkam took charge of Eskay Mining in late 2009 and, despite a market exclusively focused on low grade optionality gold plays pumped up by ideologues braying about an imminent financial apocalypse that somehow was supposed to make the adjacent geochemical anomaly worth developing, managed to get Eskay Mining vested for 80% of a very strategic land position by January 2013, without delivering any results that qualified as a new discovery. To his credit he has since then served as the junior's guardian, waving off recommendations from the cartels to wipe out minority shareholders with a brutal rollback followed by cheap five year warrant private placements with monkeys on his back urging him to spend the money on public relations campaigns so that they can get their nickels back and enjoy a free lunch. The last rollback Eskay Mining did was 3:1 in 2001, and despite the life-style nature of past management, it is amazing that this junior with 118 million shares fully diluted has come back from death's door without a rollback.
Of note is the 1,200 hectare Mitchell block to the east of the Eskay Creek hunting grounds just north of Pretium's Valley of the Kings. If the "proof is in the mining results" showdown between Strathcona and Pretium works out in Pretium's favor, the Mitchell ground could become an interesting exploration sideshow. In addition Eskay Mining owns 100% of the 22,000 hectare Corey property to the south of SIB-Lulu where the prior management spent over $20 million looking for Eskay Creek Two. This work generated a lot of geological information but does not seem to have been guided by the sort of constantly reinterpreting geological vision that characterizes the truly creative entrepreneurial spirits of the junior resource sector. At the moment the market views the Corey work as a tax loss carry forward of value to a future owner of Eskay Mining Corp, but if Silver Standard encounters Eskay Creek style smoke in the SIB-Lulu footwall suggesting a fire that might be Eskay Creek Two, the glass for the southern extension of the "Eskay rift belt" of Salmon River Formation rocks will switch from empty to half full with regard to the potential for hosting Eskay Creek Three. Almost overnight those dots in the assessment files will become valuable starting points for additional exploration work that vectors in on a prize viewed as an elephant rather than a unicorn. If the future of Eskay Mining Corp boils down to what Silver Standard finds at SIB-Lulu, the upside limit is $3-$5 per share, but that assumes a repeat of the extraordinary Eskay Creek discovery in 1989. A lower grade version of Eskay Creek is a more realistic potential outcome, but until Silver Standard is done at Lulu, the market will be inclined to hold its breath. However, on the 100% owned Corey ground an Eskay Creek equivalent discovery would be worth $27 per share. At the current target testing stage the fair speculative value range is $0.27-$0.68, at the lower end of which the stock is currently priced. A lower grade version of Eskay Creek would support a price target above the $3-$5 limit for SIB-Lulu optioned to Silver Standard.
What intrigues me about Eskay Mining Corp as a bottom-fish, and even as a potential Good Relative Spec Value Buy at current prices, despite the current price representing poor speculative value for a fantastic Eskay Creek Two outcome still at the target testing stage, is the leverage the Silver Standard deal creates for Eskay Mining Corp being able to raise capital to fund exploration work on its 80% or 100% owned ground. The real bet is not that the SIB-Lulu play delivers Eskay Creek Two, but that the deployment of a coherent drilling strategy that will track down an elephant if it exists on SIB-Lulu will enable Eskay Mining Corp to raise capital at current or better prices to fund exploration of the substantially larger surrounding area to test the possibility that while SIB-Lulu delivers only Eskay Creek One Quarter, Eskay Creek Two may lurk further south on the 100% owned ground.
The bet is thus that Mac Balkam's "consultants" such as Tom Weis and Charlie Greig will assemble a technical team to intelligently spend new capital the street throws at the junior in an effort to get a stake in Silver Standard's potential success. The structure may look like crap with insiders owning only 16% of the 118 million fully diluted, but what is not so clear is that during his eight year journey through a bear market wilderness Mac Balkam has assembled an army of disciples as a shareholder base which would rather lose all its investment than sell too soon. There are no people on board who boastfully quote Ben Baruch's dictum about making all their money selling Bre-X too soon. Eskay Mining Corp already has a cult foundation, and thanks to my familiarity with the history of Eskay Creek, I predict that this Blast from the Past will prove a gateway for a revival of retail speculation in discovery exploration.