Bottom-Fish Comment - May 15, 2018: Recommendation Strategy for Eskay Mining Corp
Eskay Mining Corp was introduced as a bottom-fish accumulation target in the $0.30-$0.49 range on April 12, 2017 based on an aggressive drilling strategy by SSR Mining Inc (formerly Silver Standard) on the 60% optioned SIB property in the Golden Triangle of British Columbia. SSR's goal was to find the elusive "iceberg" from which the Eskay Creek style mineralized Lulu zone "tip" found in 1991 was detached by the Coulter Creek thrust fault. The Lulu Zone was on strike to the southwest of the Eskay Creek deposit, a zinc-copper-lead VMS system overprinted with very high grade gold and silver which operated as a lucrative underground mine from 1995 until 2008. The original Eskay Creek property was optioned by Skeena Resources Ltd from Barrick in late 2017 with the goal of demonstrating that the remaining lower grade 21C Zone could be profitably mined at today's gold price, especially if it proves feasible to blend 21C Zone ore with higher grade ore from Skeena's Snip deposit (see SVH Tracker - Jan 16, 2018). The southwest extension of the Eskay Creek host stratigraphy received considerable exploration work before mining stopped, enough to tell SSR's Carl Edmonds that somewhere farther south on the SIB claims there could be a second Eskay Creek deposit related to the Lulu Zone.
I introduced Eskay Mining Corp as a bottom-fish in 2017 with the hope that SSR might get lucky with the first wave of its blind target vectoring strategy. Last year I also introduced Mineral Mountain Resources Ltd as a bottom-fish based on its proposed vectoring drill strategy for the Rochford project in South Dakota where the prize sought is a variation of the 40 million ounce Homestake gold deposit to the north. Neither SSR nor Mineral Mountain got lucky and delivered a discovery hole with their initial rounds of drilling, though both programs have provided geological context legitimizing their vectoring strategies. Mineral Mountain has resumed with the rest of its 12 hole drill program, and SSR is gearing up for a second round of drilling at SIB-Lulu starting in June. Patience is required for this type of discovery exploration play.
This year Eskay Mining Corp is more interesting as a bottom-fish for two key reasons: SSR is returning with another $4 million program that builds on the geological understanding created in 2017, and Eskay Mining is planning a geophysical and prospecting program for the historically ignored western part of the 100% owned Corey property adjoining SIB to position itself for a wave of market interest should Garibaldi Resources Corp deliver a success rather than a bust in 2018 on its neighboring Nickel Mountain (E&L) project. The SIB project is a bet that SSR will track down an Eskay Creek style source for the Lulu Zone in 2018. The Corey project is a bet that Garibaldi will not be a $0.35 stock at PDAC in 2019 as newsletter writer Brent Cook predicted this year when he showed Ken McNaughton's Camino Minerals Corp and Greg Hahn's Arizona Silver Exploration Corp as examples of juniors which crashed and burned when their "discoveries" failed to make the tonnage and grade combo needed to support their anticipatory price runups. Garibaldi is trying to prove that a geological context supporting the formation of a world class scale magmatic nickel system is present in the Golden Triangle, an idea rejected by most big picture geologists. If Garibaldi during 2018 is successful in demonstrating that the high grade nickel zones at Nickel Mountain are substantially more than smallish localized zones that will never hang together to form a minable deposit whose value supports the current stock price, it would have positive implications for the western part of the Corey property to which the market is currently assigning zero speculative premium. In other words, owning Eskay Mining Corp would be a good way to hedge against a Garibaldi short position going very wrong later this year.
During 2017 SSR spent at least $3.7 million on a 12 hole drill program of which all but 2 holes were drilled eastwards in an effort to map the stratigraphy beneath the thrust fault. The 2017 drilling was generally to the north of the Lulu Zone and delivered smoke interpreted as peripheral to an Eskay Creek style deposit; in other words, the area drilled in 2017 did not generate anything resembling the Lulu Zone. The good news is that the Salmon River formation stratigraphy favorable for an Eskay Creek style VMS deposit was intersected in all holes. The bad news is that the grades were underwhelming. The first and southernmost hole, #141, came up empty, and the remainder were anomalous though of the right pathfinder suite. SSR now benefits from a first time ever understanding of how the tilted Salmon River Formation stratigraphy behaves beneath the thrust fault. Earlier drilling done through the thrust fault rather than underneath it would have intersected the tilted stratigraphy on a sub-parallel basis which makes it hard to sort out what is going on at a local level. The SSR holes would have penetrated the horizons at an angle closer to the perpendicular which would have allowed mapping of the geology in three dimensions. Eskay Mining reported on January 22, 2018 that SSR would return during the summer with a followup drill program to the west and to the south the 2017 drill area. This is a puzzling development because it calls into question the initial hypothesis of a thrust fault having detached the Lulu Zone from its host stratigraphy and displaced it westward. If the 2017 drilling confirmed the thrust fault hypothesis, SSR should be targeting the area to the east of the Lulu Zone along strike and at depth beneath the thrust fault. The area to the west and south of the 2017 drilling is covered by Bowser Lake sediments which have zero mineralization potential but could be sitting on prospective Salmon River Formation rocks. "Target generation" is underway, which likely means additional geophysical surveys are being done on the SIB claims to illuminate blind targets under cover rocks in an area which would not have received any prior attention. Whatever SSR learned in 2017 appears to be different from what was expected, but intriguing enough to justify a second season of exploration costing $4 million.
The SIB-Lulu Outcome Visualization I did last year modeling what an Eskay Creek clone discovery would be worth remains valid as a guide for speculators. Because the value implied at $0.23 for 127.2 million fully diluted and a 20% net interest is $146 million, well above the $30-$76 million range that counts as fair speculative value at the target drilling stage for a $3 billion outcome, Eskay Mining represent poor speculative value in terms of the SIB farmout alone. However, this year bottom-fishers have an additional reason to be long Eskay Mining Corp ahead of the summer drill program.
Nearly every junior discovery play that had a big rally in 2017 without delivering the goods came back to earth except for one, Garibaldi Resources Corp, whose Nickel Mountain project has captured the imagination of Eric Sprott as the next big nickel-copper discovery. Formerly called the E&L project, this property was, ironically, at one time owned by SSR Mining Inc when the junior was called Silver Standard.The E&L property was explored by Silver Standard during the sixties and seventies during which it outlined a historic resource of 2.9 million tonnes of 0.8% nickel, 0.62% copper, 0.34 g/t gold and 6.8 g/t silver (see BC Ministry of Energy and Mines Minfile No 104B 006 for background). Silver Standard held the property for decades before dropping it, allowing Garibaldi to acquire it in 2016. The gabbro intrusion hosted zones of magmatic massive sulphide mineralization are unique for the Golden Triangle region of northwestern British Columbia and have been historically dismissed as a geological curiosity lacking a large scale geological context to support the formation of a large high grade nickel-copper system worth developing as an underground mine. Garibaldi has recruited a nickel expert called Peter Lightfoot to champion the idea that the collisional setting that characterizes the Eskay Rift in the Golden Triangle is similar to that of the Central Asian Orogenic Belt in China that hosts a range of magmatic nickel deposits with grades as high as 15%. Lightfoot outlines his interpretation in his NW BC's First Nickel-Copper Rich Massive Sulphide Discovery! brochure. Lightfoot argues that Nickel Mountain is host to a giant magma chamber within which high grade massive sulphide zones of magmatic style nickel-copper mineralization formed. Whereas Silver Standard focused on just one portion that resulted in the historic resource which is too small and low grade to be worth mining, Garibaldi is using geophysical surveys to assess the entire magma chamber on the premise that there are many high grade massive sulphide pockets waiting to be found.
Garibaldi's disclosure methods make it difficult to understand the story and its potential, a reason the Nickel Mountain project has had a hostile reception from the geologist and analyst community. The story has, however, attracted a cult audience of pumpers who are reliving the failed glory of Noront's Eagle discovery in Ontario's Ring of Fire in late 2007 when we witnessed the last iteration of a Great Canadian Area Play. The high grade Eagle mineralization intersected near surface was thought to be the tentacle of a giant Voisey's Bay Ovoid equivalent octopus. At the end of the day the Eagle deposit delivered a respectable resource of 19,955,000 tonnes of 1.48% nickel, 1.05% copper, and 4.5 g/t platinum group metals (less than half the grades of the 30 million tonne open pittable Ovoid), but its geometry requires underground mining and the location today remains plagued by remoteness and First Nations issues. Despite extensive regional exploration driven by geophysics the Ring of Fire area play delivered no other discoveries (the chromite deposits had already been found) and never recovered from the 2008 financial crisis. This was also a period when nickel prices soared to $24/lb before China unleashed the nickel pig iron solution to the nickel supply problem which to this day plagues conventional nickel sulphide and laterite deposits. The market's attitude today is that if somebody finds something really good, it will be confined to that company's property, and so forget about area play logic.
During Garibaldi's charge to $5.27 in October 2017 while the junior dragged out the arrival of assays as long as possible the market ignored Eskay Mining Corp and its adjacent property though it did take a shine to the Kirkham project of Metallis Resources Ltd to the south of Nickel Mountain. Garibaldi, which had about $13 million working capital left as of October 31, 2017, recently raised another $13 million through a flow-through private placement at $2.40, $5.2 million of which was taken down by Eric Sprott who now owns 19.5 million shares of Garibaldi. At $3.21 and 120 million shares fully diluted Garibaldi with 100% of Nickel Mountain has an implied value of $385 million, a staggering valuation for a project that is still at discovery delineation stage but without a mineralized zone for which one can visualize an outcome worth billions of dollars. The diagram above from Eskay Mining shows the southern part near what it calls Red Lightning where nickel values have been obtained in stream sediments within what the junior calls the Ni-Cu-Ag-Co Trend, while the diagram below shows the area on which Eskay Mining plans to spend about $300,000 in 2018 conducting geophysical surveys and prospecting. What I like about the lower graphic is how it shows the SIB claim optioned 60% by SSR in contrast to the E&L play about 10 km to the west. Which one will deliver a multi-billion dollar winner in 2018? Garibaldi's stock price is clearly in S-Curve territory whereas at $0.23 and 100% the Corey project is sporting an implied value of $29 million, which one can assign to either the possibility that the Nickel Mountain mineralization has district wide scale or to the possibility that the Salmon River Formation south of the SIB claims still has potential for an Eskay Creek style discovery.
Eskay Mining Corp announced on May 11, 2018 that it is conducting a private placement of 2 million flow-thru units at $0.30 (1/2 warrant for 2 years at $0.40) and 2 million units at $0.25 (full warrant, same terms) to raise $1.1 million. The warrant has an expiry acceleration clause whereby if the stock trades at $0.60 for 10 consecutive days by the end of the 4 month hold or later the warrant becomes exercisable within 30 days. CEO Mac Balkam indicates that the flow-thru is already spoken for but the hard dollar unit is not yet full. If this financing closes and Eskay Mining spends part of it on geophysical surveys in the western part of the Corey claims it will be in a position to benefit from exploration results which confirm that Garibaldi's Nickel Mountain play is a winner rather than a bust. The Red Lightning play is just a side bet that costs nothing; the real bet is that SSR delivers an Eskay Creek style discovery in 2018 on the SIB claims. Eskay Mining Corp is an even better bottom-fish accumulation target in the $0.20-$0.29 range today than it was last year in the $0.30-$0.49 range, even with today's bear market conviction that all discovery exploration plays are doomed to disappoint.