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 Wed May 18, 2016
Bottom-Fish Comment: Canalaska options Athabasca Kimberlite Project to De Beers
    Publisher: Kaiser Research Online
    Author: Copyright 2016 John A. Kaiser

 
Canalaska Uranium Ltd (CVV-V: $0.55)
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Bottom-Fish Comment - May 18, 2016: Canalaska options Athabasca Kimberlite Project to De Beers

Canalaska Uranium Ltd announced on May 18, 2016 that it has optioned up to 90% of its original 17,400 hectare diamond project in the Athabasca Basin to De Beers for CAD $20.4 million exploration over 7 years. For background on the Athabasca Kimberlite Project see my Bottom-Fish Comment - March 16, 2016. On the surface the deal looks bad because it appears to allow De Beers to vest for 51% by spending $1.4 million during the first year, and then have the option to go higher or put Canalaska on the dilution treadmill by sticking with a 51:49 joint venture. This would be a bad deal structure because it is very unlikely that within one year we will learn more than that some of the 75 targets are kimberlites, what their diamond indicator chemistry looks like, and possibly micro-diamond content which will only excite the market if it is suggestive of a macro grade of 100 cpht or higher. However, Canalaska's CEO Peter Dasler has explained to me that the deal requires De Beers to spend $3.4 million over 3 years, at which point Canalaska can elect to form a 70:30 JV, or require De Beers to spend another $3 million in the following year, at which point Canalaska can again elect to form an 80:20 JV or require De Beers to spend $14 million over the subsequent 3 years, at which point De Beers vests for 90% and normal joint venture dilution clauses apply. If Canalaska makes elections that require De Beers to go all the way to 90%, De Beers earns nothing unless it has met all the interim spending deadlines and spent $20.4 million within the required time frames. There are some additional details about time frames for Canalaska to make its decisions, but these do not matter. The gamble done by Canalaska is that De Beers will spend $3.4 million very quickly and establish that the Athabasca Kimberlite Project hosts a kimberlite field with decent sized pipes with meaningful macro grade potential requiring more expensive mini-bulk sampling for whose 30% share Canalaska should be able to attract equity financing at a good valuation. If my understanding is correct, this is a pretty good deal, though I would have liked to see De Beers spend a lot more to go to 70%.

The $1.4 million first year spending requirement is intriguing because it suggests that De Beers will act very quickly to determine whether or not we have an exciting new diamond play in Canada. The Athabasca Basin is an unpleasant terrain of marsh and lakes that does not lend itself well to indicator mineral sampling, so it is likely that the 2016 summer program will first involve visiting each target to see if anything sticks out of the ground to explain the magnetic anomaly. Unlike the Slave Craton where the softer kimberlites that punched through the harder Archean country rock recessively weather and end up hidden beneath overburden or water, kimberlites do outcrop in other terrains such as Alberta's Buffalo Hills where geophysical anomalies spotted by an oil company led Ashton to the pipes, or Chidliak on South Baffin Island where pipes also outcrop. Since the existence of Canalaska's kimberlite targets was not known until a 2011 government geophysical survey, and nobody has had reason to look for anything in the Athabasca Basin other than radioactive boulders, there is a chance that De Beers' field crew will land their helicopter on top of outcropping pipes. Failing that, De Beers will collect till samples down-ice and ship them off for analysis whose results will not be known until late 2016. According to Dasler De Beers will also conduct an airborne survey with followup ground geophysical surveys over the priority targets, which should provide De Beers with some insight about the claims Fjordland Explorations Inc staked around Canalaska's "postage stamp" sized claims. The deal includes an area of interest clause that allows Canalaska to participate in any deal De Beers might strike with Fjordland, or, for that matter, whoever blanket staked all the ground Wednesday morning after the news came out. The geophysical surveys will allow De Beers to prioritize the targets for drill testing. Given that winter is the best time to test kimberlite targets in a watery setting, and that a modest sampling program and geophysical survey will cost less than $1.4 million, there is reason to be optimistic that De Beers will conduct a winter scout drilling program on the best targets to confirm not just that they are kimberlites, but also obtain samples that allows indicator mineral analysis and micro-diamond recovery which confirm whether or not it is game on for a new diamond area play.

If Canalaska had punted the project to another diamond junior or kept it for itself, it is unlikely that little more would be accomplished in the next 12 months other than field visits to the targets, some sample collection, and maybe some more detailed geophysical surveys. So not only does this deal fast-track this diamond play, it is being fast tracked with the expertise of De Beers, whose arrival is something of a surprise to the market. This "positive" surprise is clearly evident in the online staking rush that has grabbed all the open area in the northwest corner of the Athabasca Basin (the cross-hatched claims in the Saskatchewan MARS Map above). Canalaska did not include in the De Beers deal the 81,000 ha block west of the Athabasca Kimberlite Project on the Alberta side of the Athabasca Basin area it acquired as a permit on April 12, 2016 to cover the western edge of the Rae Craton. The block stops short of the area to the south where caribou protection measures limit exploration activity to only a few months. According to Canalaska's Peter Dasler and Karl Schimann old geophysical data is suggestive of kimberlite style targets that require follow up. When I asked Dasler if he had any interest from other diamond juniors, he confirmed that there was interest, but none had much of a mandate to apply risk capital to what is still largely a conceptual diamond play. One has to wonder if De Beers acted because it is sitting on a stack of data about regional potential or simply made a strategic decision to risk $1.4 million in order to avoid letting yet another Canadian diamond mine be found by a junior rather than the world's most sophisticated diamond company. Should the reaction of online stakers prove to be smarter than in the case of North Arrow's Pikoo discovery east of the Athabasca Basin a couple years ago, Canalaska will be sitting pretty with its large 100% owned block.

With the diamond story in the hands of a competent major planning an aggressive work program to make or break this diamond play, Canalaska is returning its focus to its uranium projects of which West McArthur optioned 60% to Cameco has the greatest potential to send Canalaska's stock price sky-rocketing in the near term. Cameco drilled a hole in April just to the south of the star on the map above not far from EL-007 drilled by Canalaska when Mitsubishi was its partner. The older EL-007 punched through 400 metres of intensely silicified and altered sandstone before abruptly transitioning to unaltered sandstone and bottoming in basement rocks at 800 m depth. Peter Dasler suspects that the upper part of the hole represents post mineral thrust faulting, which may explain why Cameco stepped its new hole back from the interpreted trace of the C10 conductor that is associated with its Fox Lake zones nestled along a 4 km stretch of the C10 conductor 4 km east of the Canalaska boundary. Cameco's Fox Lake deposit (386,700 tonnes of 7.99% U3O8) which sits at the unconformity depth of 800 metres, the same basement depth as West McArthur, is regarded by Cameco as a top tier development candidate ($7 million earmarked for 2016 exploration), but needs more tonnage and ideally better grade to move forward. The most likely area for the additional tonnage is on Canalaska's property near the continuation of the C10 conductor. Canalaska reported on April 25 that Cameco had completed the hole and has indicated that an update should be available within a week or so. Because Cameco utilizes downhole gammaprobes to obtain eU3O8 assays, unlike promotional juniors which bleat "off-scale" readings from a hand-held scintillometer to pump up the market while waiting a couple months for geochemical assays, we already know from the absence of any news that West McArthur has not yet yielded a discovery hole. If Cameco's hole intersected high grade uranium mineralization it would be material to Canalaska and we would have seen a prompt press release with eU3O8 assays. What we hope to learn in a week or so is that this Cameco hole has shed light on the geology in this area and set the stage for follow up holes that allow Cameco to vector in on a uranium zone. Although Canalaska has performed well as a bottom-fish since mid February when I added it to the list, the stock to head higher needs evidence that Cameco plans to continue drilling holes this summer in the Grid 5 area of West McArthur.

To help KRO members understand the potential market impact of West McArthur turning into a high grade uranium discovery I have prepared an Outcome Visualization which imagines Cameco finding a McArthur River clone of 1 million tonnes of 16.5% U3O8 at West McArthur. The exercise did yield a very sobering revalation, namely that at the current US $28.50/lb U3O8 spot price nothing in the Athabasca Basin is worth developing into a mine, including high grade deposits such as Cigar Lake and McArthur River. However, when I used the current $43/lb long term contract I get a USD $1.1 billion after-tax NPV with a 23.4% IRR using a 10.5% risk-adjusted discount rate, and, when I boost it to the USD $65 per lb being used as the base case in economic studies by uranium juniors such as Laramide and Fission Uranium, the after-tax NPV explodes to a staggering USD $3.1 billion on a 100% ownership basis. In fact, for 2020 onwards Cameco uses $64 per lb as a long term price assumption. Based on the $43/lb uranium price my OV translates into an ultimate target price of CAD $22.56 per Canalaska share assuming no further dilution, a 40% net interest and 26.2 million shares fully diluted. In terms of S-Curve market action Canalaska at the target testing stage could command a stock price in the $0.55-$1.09 range, and escalate into the $1.09-$16.39 range if Cameco pulls a very high grade discovery hole at West McArthur this summer. Should uranium's spot price make its long-awaited move back into the $50-$70 per lb range where long term contracts once again get written, the upside price action potential for a junior like Canalaska that has a high grade Athabasca Basin discovery play on its hands is too embarassingly high to describe.

KRO Members who 1) believe uranium prices will return into the $50-$70/lb range, 2) assume market enthusiasm for high grade Athabasca Basin uranium discoveries will remain high in the wake of Fission and NexGen, and, 3) dislike geochemically blind exploration targets supported only by geophysics, should very carefully read my SVH Tracker: February 16, 2016 and understand the implications of a drill program getting underway at the geochemically supported Outer Ring target later this summer. Uravan Minerals Inc has closed its $300,000 private placement, a geophysical survey is now underway on the ORX geochemical anomaly at Outer Ring, and, in what is probably a first for CEO Larry Lahusen, Uravan has retained Louis Morin and his Montreal group to conduct IR on behalf of Uravan. Morin's group, incidentally, was retained in late 2015 by Sirios Resources Inc to help finance the Cheechoo project for which results are pending and a 10,000 m drill program is slated to start soon. Sirios has evolved from a bottom-fish buy below $0.10 to a Good Relative Spec Value Buy at $0.43 on the expectation that the upcoming drill program will reveal Cheechoo as a rival to the nearby Eleonore Mine which Goldcorp bought for $750 million in 2006, or at least a source of high grade mill-feed for Eleonore. Uravan has been an SVH recommendation for several years based on its development of a geochemistry based exploration method that I believe will be the key to prioritizing deep geophysical targets in the Athabasca Basin leading to multiple high grade uranium discoveries. Uravan has been a poor performer because it has relied on the prospect-generator farmout model to get its targets drilled; now that management is taking its destiny into its own hands with a decision to fund its own program in the style Andre Gaumond did with Eleonore and embrace stock promotion as an essential tool its profile will expand substantially. I consider Canalaska as a candidate for becoming an SVH recommendation, but I need confirmation that Cameco plans to push hard with exploration of West McArthur. As we head into the summer doldrums one should look for juniors whose story is not dependent on general market sentiment or metal price trends. That means focusing on discovery exploration juniors with big S-Curve potential.

 
 

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