Getting in a Lucky Shot
Three and a half years ago I visited a company in Alaska named Full Metal Minerals. (FMM) I wrote about them at the time. Full Metal has good management and projects but doesn't get much respect from the market. They use a model of picking up a lot of projects, doing basic geology to advance the project to an attractive stage and then they JV the projects out.
It has not been a successful model for them or for many others. Eagle Plains uses the same model and to a certain degree Novagold does. Investors won't pay a premium for anything past a project or two. FMM was $2.30 then with 30 million shares and are $.20 with 90 million shares now.
I did visit their Lucky Shot project that was their lead project. Their intent was to drill the project to define a minable resource and then put it into production. They never got around to production and the market has spanked them.
The Lucky Shot mine went into production in 1921 and averaged a grade of 1.48 ounces to the ton gold. They produced 250,000 ounces before being shut down in 1942 due to World War II.
In November of 2009 Full Metal Minerals announced a deal with Harmony Gold (of Canada) (H.H) where Harmony will pay Full Metal $2 million in cash, issue 4 million shares and incur $8 million in expenses to both further explore the Lucky Shot and to put it into production. It's a brilliant deal for both companies.
Harmony Gold and Full Metal Minerals announced incredible drill results last week. The best hole was 1.2 ounces of gold over 7.3 meters. This is a very rich mine and it needs to be put into production.
For better or worse, FMM is an exploration company. At present, the market doesn't value exploration stories. Harmony is obviously playing off the Harmony of South Africa name but they are a Canadian junior, not in any way connected with Harmony of South Africa. Harmony wants to put the Lucky Shot into production as soon as possible. Harmony is a production story and for that, the market will pay in spades.
The deal with Full Metal Minerals calls for an additional 8 million shares based on production of a bulk sample and the project going into production and another $500,000. So at the end of the day, Harmony will have paid FMM some $2.5 million to earn 60% of the Lucky Shot, spent $8 million advancing it and will have issued 12 million shares of stock.
It's a brilliant deal for both companies.
Right now FMM has a tiny market cap of only $18 million. They will get $2 million cash right away and over time about $6 million in Harmony shares and will still retain 40% of the Lucky Shot. That 40% of the Lucky Shot will still be worth almost the present market cap of FMM. Investors in FMM are getting the rest of the projects for free.
FMM has what could be a massive Carbonate Replacement system in the 40 Mile District with silver, lead, zinc and some copper. Carbonate Replacement systems tend to be very large. While they are advancing that project, investors are getting it for free.
President and CEO of Harmony, Craig Engelsman intends to have the Lucky Shot in production within 13 months. It will take between $15 and $20 million to advance it to full production of 250 tpd. FMM doesn't have the management bandwidth or expertise. Harmony does.
Harmony's board includes Dr Alan Carter, Robert Harrington, Dr John Mark Staude, David Drips and has Andrew Lee Smith of True North Gems and Canaco Resources as an advisor. This is a well-qualified board, not a bunch of family friends carrying rubber stamps for the CEO. This group can and will get the Lucky Shot into production.
Craig plans on driving in a production ramp to the ore body at Lucky Shot. That will take about 10 months and will cost about $8.5 million. The Lucky Shot has been permitted for a bulk sample of 12,500 tonnes. While driving the ramp, Harmony will also be assembling the gravity circuit gold system for its mill. That will cost about $2 million. When both the ramp and mill have been completed, Harmony will begin processing the bulk sample.
Craig's goal is to have the Lucky Shot in production in 13 months with about 50 million shares outstanding and producing 75,000 ounces a year. Those figures seem reasonable and possible to me.
With all the news lately about Greece and the rest of the PIIGS on the verge of a credit default, I want to point out to my readers that this is all part of the 600 trillion dollars worth of derivatives problem I have been harping about for years. There is more debt in the world than there is money to pay it.
We cannot afford the level of government we have in place. That's not just the United States, that's across the world. Promising benefits that you cannot afford is a wonderful way to get voters to vote for you but at the end of the day, you cannot afford it. While tax revenues are plummeting in the United States, the size of government increases daily and we are fed a constant diet of "We have to spend our way out of the hole we spent our way into." That's insane.
At the end of the day, we will have to balance what we can afford with what we provide. When it costs American taxpayers $1 million apiece per year to send soldiers to Afghanistan to fight in a country that has never been conquered in history, maybe we should rethink our priorities. With 47% of Americans not paying a cent in taxes, we have gotten to the point we cannot afford the government we have.
Everyone in debt is going to default. Greece may follow Iceland down the path but in turn, Spain, Ireland, England, Japan and even the US are all doomed to default. Mathematically the debts cannot be repaid and must be written off. When all currencies have been destroyed, gold will still shine.
Gold production stories will be the new Google. Harmony is planning on surfing the wave and they are taking Full Metal Minerals along for the ride.
I was an investor in the recent Harmony Gold private placement. And when I though about the effect of the deal on Full Metal Minerals, I picked up some of their shares on the open market. I happen to really like the deal. It's good for the shareholders of both companies. I like the deposit. It's a high-grade gold deposit, near surface and easy to get into production.
Naturally I have a bias that you need to consider. Harmony or Full Metal Minerals could become advertisers. The companies have nice people working for them so feel free to visit their websites and to call them for more information. Please take responsibility for your own due diligence.
Full Metal Minerals