Quinto: An Embarrassment of Wealth
Quinto Mining Corp (QU) [web] is one of those companies which has been flitting around so long under the radar scope that it just hasn't found any investor attention. For a whole bunch of reasons that's about to change. I was supposed to meet with its President and CEO Tyrone Docherty at the San Francisco Gold Show in November but that's the week Vancouver got socked in with heavy snow. We did meet up at Joe Martin's show in Vancouver ten days ago and what I learned about Quinto shocked me because it has an embarrassment of wealth and excited me because I was going to get to see several of the properties up close and personal. The weather gods cooperated for a day and allowed us a short window to inspect part of Northern Quebec.
Quinto has been around for thirty years without a rollback but there were management issues in the past. Tyrone Docherty stepped in to clean up the place in 1997. Under his management, he has managed to put together a team almost unparalleled in mining. He has former 1991 Prospector of The Year, Phil Boudrias, feeding top quality properties into Quinto. His two top mining experts are legends in the industry, Bryan Nethery and Michel Robert. Mr Nethery served for over six years as project manager for the giant $340 million dollar Pogo Gold project in Alaska. Michel Robert was a senior VP for Pan American Silver from 1995 to 2001. Both men have over 30 years in the industry in top management positions worldwide.
The company has a whole slew of projects in Quebec, arguably the best mining location in the world. I'll digress for just a minute. Resource investors cheered as prices for all commodities soared in the past few years. But government actions in such various jurisdictions as Venezuela, Peru, Ecuador, Bolivia and Mongolia should give rise to investors at least thinking about sovereign risk. As prices have climbed, more and more governments are changing the rules of the game, never in favor of mining companies. In my view, Canada is the most safe mining country and Quebec the most mining-friendly province.
Quinto's lead property in Quebec is the Peppler Lake Iron property, subject of a March 2006 scoping study. The scoping study assumed a 250 Mt resource of 28.2% iron producing 22 Mt of iron ore a year feeding an 8.3 Mt per year pellet plant. The Capex of the project would be about $1.35 billion dollars and based on an 8.5% interest rate, would have a $630 million dollar Net Present Value. (NPV)
The $630 million NPV is interesting especially in light of a current market cap of about $17 million for Quinto. Obviously the market doesn't get it. And while I really like the company, the management and the projects, their ability to communicate their value to prospective shareholders is dreadful at best. The website is both confusing and "busy" with lots of facts and no conclusions.
However it is possible for an outside observer to compare a similar company in the same region with a similar project. Consolidated Thompson Iron Mines has the nearby Bloom Lake Iron project with about 650 Mt of iron ore grading about 29.7%. Consolidated Thompson (CLM) has 33.3 million shares outstanding selling for $3.20 a share for a $106 million dollar market cap. CLM is about 100 Km further from the port than is QU so their shipping cost is slightly higher. And Consolidated Thompson has a different business model. In the interest of having a far lower Capex, CLM will produce 5 Mt of 66% iron concentrate a year [pdf] with a Capex of only $270 million and a barn burning Internal Rate of Return (IRR) of 40.2%. Using the same 8.5% assumed cost of capital as QU, the Bloom Lake Project has a similar NPV of about $550 million.
Bloom Lake has a lower Capex and higher rate of return than does Peppler Lake but Quinto is adding value (at a higher Capex) by producing iron pellets worth perhaps 20% more than iron fines. So Quinto has a lower IRR but a higher NPV than Consolidated. None of which is reflected in the market.
In my view, with the strength of iron today and the continuing demand for iron and steel from China forecast to continue well into the future, even CLM has an absurdly low market cap. Based on a project like Bloom Lake with a NPV of $550 million, Consolidated Thompson should be selling for more than $106 million. And if selling for 20% of NPV is absurd, the situation of QU selling for 2.6% of its NPV is screaming "buy me, buy me." And I have.
Iron is an interesting commodity. It's a bulk commodity and the projects tend to be far bigger than most precious metals investors are used to. It requires lots of energy and transportation is expensive. Projects MUST be located near sea freight. The cost of energy often kills projects. Quebec, with its numerous ports and cheapest power in the world, is an ideal location for a iron mine and a pellet plant. Quinto is conducting a massive drill program this year to increase the target resource to a more attractive-to-a-major 850 million tons. It has everthing, cheap power, railroad nearby, not far from a port and right on a highway. Iron projects don't get any better.
But the Diamond in the Rough which has been completely overlooked by the market is the Lac Gueret graphite property of Quinto located in Quebec near highway access, about 200 Km from shipping ports. Graphite is one of those interesting commodities which we all use but really don't know much about. First discovered in England around 1500, graphite is a form of carbon formed under great pressure and temperature from the remains of vegetation. It's similar to coal but without the volatiles which make coal burn.
Worldwide, graphite mines average about 8% graphite. Quinto has near surface intercepts of over 45%. The 20 million ton Lac Gueret deposit contains the highest grade and most valuable graphite ever discovered. And the company has a $17 million dollar market cap. This is a story well worth telling.
For some ultra-high grade military applications, graphite can sell for as much as $50 a gram. Or $20,000 US a pound. But common low grade graphite sells for about $1000 a ton making Quinto's ore worth as much as $450 a ton if all you did with it was produce nasty and cheap pencils.
Canada only produced about 12,000 tons of graphite last year. If Quinto produced only that much and the other graphite mine closed completely, Quinto would have a 1600 year supply with the small amount they have outlined so far. But Quinto is in a unique position of potentially being the swing producer in the world for graphite. That means they can change production and pricing so they determine both supply and demand. As owner and operator of a giant, ultra-high grade deposit, they control price. And this is almost certainly a product where demand is far more based on potential supply than price.
Here's what I mean by that. In aviation, it costs you fuel to carry weight. Over the life of an average commercial jet, it might cost 10,000 pounds of fuel to carry each pound of weight. With the cost of jet fuel above $4 in most locations, it means that each pound of aircraft saved is worth about $6000 in fuel saving over the life. So aircraft manufactures are doing everything in their power to lower weight. And a couple of the most important qualities of carbon fiber are its light weight (SG of 2.2) and high strength. If Boeing and Airbus had access to high quality carbon fiber graphite, the demand could soar.
If you own a Burger King on a highway corner and you want to increase sales, you need to see if you can interest someone into opening a MacDonalds across the way. Strange but true. Supply creates demand. It's called Say's Law by economists. While China supplies over 75% of the graphite being produced today, their mines average about 8% graphite and it's of a low quality.
Making money out of the Lac Gueret graphite property is far more of a marketing issue than a mining issue. Quinto has already outlined a giant resource which begins at the surface. Mining graphite is about as difficult as falling off a bike. You don't even need to blast it, you can break up the soft material with a D-9 ripping it. Graphite is concentrated by crushing it and running it though a flotation plant. While Quinto has yet to complete a feasibility study (scheduled for 2007) they could produce over 20,000 tons a year by doing about 60 tons a day. That's tiny and the cost would be tiny, a few million in Capex at most.
My suggesting to Tyrone was to hire some young MBA right out of school and hand him some options. If he couldn't make himself (and Quinto shareholders) a fortune in a year or two figuring out how to maximize the value of the high grade carbon fiber graphite, he wasn't worth the price of his MBA. I'd be sitting down right now with Boeing and trying to figure out how to supply them with more material. Graphite is one of the most important manufacturing materials today given the reality of Peak Oil and will only get more important.
It's hard to fix a price on the value of the graphite deposit. 20,000 tons a year at $1000 a ton is worth $20 million in sales. Without any doubt, Quinto could produce however much they can sell. So selling is the important issue. But with only one other graphite mine in North America, Lac Gueret is the most important strategic mine I know of. With all the tension in the world today, it's easy to see how the Chinese could cut off sales of graphite in an instant. They don't need the money nearly as much as the US needs the graphite. Up until now, the Chinese literally had the US over a barrel. With this project at the feasibility stage, that situation no longer exists and I can see a situation where the US might guarantee a certain level of sales just to have a source of high grade supply.
So a NPV of $500 million for the project is tiny. In my mind, $100 million in market cap wouldn't even begin to value the project appropriately. Today you can buy the company for about $17 million. I don't expect that situation to last for long.
Tyrone and I arrived in Sept Iles at the end of last week. Tyrone got in on Wednesday and it was 20 degrees below zero. I arrived on Thursday and it was a balmy -8 degrees below. By the time we made our fly-over of Quebec on Friday, it was a toasty -3 degrees. We left on Saturday and in Toronto, it was back to -22 degrees and a wind chill factor in triple digits. We were treated well by the weather gods, with both good temperatures and clear skies most of the way.
We didn't get to see the third significant Quinto property, the Lac Brule titanium (TiO2) project with a feasibility study completed in 1975. Unlike most titanium projects in the world, Lac Brule is a hard rock, high-grade (up to 31.6%) form of titanium. Used mostly for a paint base, TiO2 from hard rock carries a substantial premium to the lower grade titanium from sand.
The previous owner of the property outlined a historical 10 million ton resource of high grade material and estimated up to 25 million tons going down no more than 100 feet. Those are not 43-101 figures which would need drill verification but the project has already been to the feasibility stage in 1975.
The closest company I could find with a project similar to that of Lac Brule would be White Mountain Titanium with a larger 116 Mt project in Chile. Albeit with a far lower grade of TiO2 of 2.1% compared to a cut-off grade of 20% for Lac Brule. Even though White Mountain has less TiO2, the company has a market cap of about $11 million Canadian, nearly as high as for all of Quinto. So while the Lac Brule project doesn't appear to carry any weight with Quinto investors, a similar project at another company is worth 2/3 of Quinto's entire market cap.
I don't know how much more I would need to say to convince investors of the inherent value in Quinto. I know that when I first heard of the company and the projects last fall, I felt it was so undervalued that I bought shares even before talking to management. (and that was based on information from a website that frankly, sucks) I have participated in a private placement with the company and my visit last week convinced me it's still pretty cheap.
Quinto has a slew of other nice projects including uranium and nickel which are attractive that they have entered into some pretty nice joint ventures which have great potential for contributing to the value of the company in the future. At present, they are being tossed in for free.
Promotion is part and parcel of any product. Pencil or graphite deposit. If any product isn't worth promoting, it isn't worth owning. Up until recently Quinto management hasn't done even the least effective job of promotion. But they have created a handful of world class mining projects and a world class mining team. I also must say their Board of Directors is not your average Vancouver rubber-stamp, who-are-these-guys board. The board is as high grade as any I have ever seen in a junior. I would only hope that Quinto would do as good a job at promotion as they have with everything else.
But the key is marketing. They have the goods, now they need to market them. Once that is done, this company will be a world leader in several commodities and will be a force to be reckoned with. Worth 15-20 times what it is worth now.
We own shares, Quinto is an advertiser, I am biased. You don't send me part of what you make in capital gains so do some research yourself. It's your money, invest it wisely.