Home   Links   Contact   Editorials

When Ounces Don't Count

Bob Moriarty
August 7, 2006

By March of 1997, a Canadian mining junior called Bre-X claimed to have discovered a vast gold deposit containing upwards of 200 million ounces of gold in the sweltering jungle of Borneo. Actually, 200 million tons of hot air would be more likely. The company collapsed, destroying billions of dollars of market capital in the process. They were salting the samples and got caught, eventually.

In response, the Canadian government issued a new set of guidelines concerning disclosure in 2000 called 43-101. These guidelines carefully laid out just what a mining company could and couldn't say. And it required someone, a Qualified Person, to put his license and reputation on the line with every disclosure. As with all government decrees, 43-101 has its good points and its bad points.

We haven't had another Bre-X since 1997 but no one doubts we will have one eventually. Mark Twain may have been the first person to put into writing his version of 43-101, "A gold mine is a hole in the ground with a liar standing next to it." But for certain, he wasn't the first to think that. We still have lots of gold mines and lots of liars and one day, no doubt the twain shall meet.

I deal with hundreds of mining companies and the way they comply with 43-101 varies as does night and day. Often you can go to a company's web site and be totally baffled by trying to figure out just what business they are it. Many times they just don't say and I've had arguments with mining company executives who actually believe 43-101 means they can't say anything but drill data. (and if there is anything on earth more boring than drill data, keep it for yourself) I know of a silver/lead/zinc company in Mexico which was in production for months before their investors suspected something was going on. Their financials showed income and the investors couldn't figure out how that could possibly happen. I know management quite well and I was pretty baffled myself.

We own shares in a mining company in Ireland which was supposed to have a mill up and running last quarter. When I called to ask them the status, they flatly refused to tell me anything, saying that 43-101 meant they couldn't tell anyone if they were in operation or not. That left me clueless as to the status but I felt better knowing they were just as clueless. I don't think 43-101 is quite that strict.

But if there is a giant negative to 43-101 it has to be in how the Vancouver financial houses treat resources. It seems to me that they believe if there isn't a 43-101, there aren't ounces. In other words, until you have an official government stamp of approval, ounces don't count.

Which is hogwash, of course. For many centuries, miners have mined without knowing just how many ounces they have. Actually until drilling started, all they could do is guess. Myself, I'm of the Mexican school of mining, drill until you find ore and then drift. You need at least one hole.

When you are dealing with projects with millions of ounces of gold or hundreds of millions of ounces of silver, if you treat 43-101 as if it came down the mountain with Moses, you risk spending all your money on drilling and by the time you make the production decision (which after all, is the whole purpose of this exercise) your stock is so diluted that your shareholders can't make any money no matter how many ounces you count.

With the exception of the 5-10 brokers who actually have a mining background, stock brokers are pretty lazy. I've seen the good and the bad on trips. Everyone wants to act as if they know as much as the chief geologist but they would be a lot better off admitting they don't know much. And when it comes to the significance of counting ounces, Vancouver penny dreadful brokers just don't get it.

Two years back I went to Brazil to see the Jacobina project of what was Desert Sun at the time. As I recall, the gold was contained in a perfectly vertical structure about 10 meters thick and something like 120km long. They could drill as many ounces as they wanted. The deposit has been mined for 400 years and for all I know, it may be in production 400 years from now. Who cares how many ounces there are? They aren't going to be mined in your lifetime or mine. Counting ounces beyond what you can reasonably be expected to mine in the next few years is pretty much a waste of time. In the case of Desert Sun in Jacobina it was obvious that at some point 43-101 ounces were perfectly meaningless. You could figure out how high the structure was, what the thickness was, the length and the specific gravity and have a real good idea of how many tons they had. All you had to do from there is come up with a reasonable guess as to average grade and you could figure out how many ounces they had on a map.

Full Metal Minerals

I just came back from a fascinating two week trip to Alaska and the western reaches of Canada where I visited some really interesting projects. The first two I am going to lump together because they are both gold mines, both have been in production, both will be going back into production and in both, the 43-101 ounces are a meaningless number.

Rob McLeod of Full Metal Minerals (website) invited me to Alaska to visit their flagship gold property called Lucky Shot. It's located via excellent roads some 110 kilometers north of Anchorage. Lucky Shot was an existing mine in production until the events of 1942 prompted the government to shut down all existing gold mines since the miners and equipment were needed for the war.

The Willow Creek district traces its gold history back to 1897 when placer gold was found. In 1906 a miner named Bob Hatcher discovered hard rock gold. From 1906 until 1942, the Willow Creek district produced more gold than any district in Alaska except Juneau. Officially, (and you know how government figures are) the district produced 652,000 ounces while the Lucky Shot produced about 250,000 ounces of that total at an average grade of 1.5 oz/ton gold.

When gold and silver began their meteoric rise in 1979, oil companies started getting into the business. After all, if you have seen one hole in the ground with a liar standing next to it, you have seen them all. There may be more sure ways of losing money but I know of no faster way then to watch oil guys try to pan gold for a living while tearing up $100 bills.

Ensearch Exploration of Houston dropped $40 million into a few of the local mines and built a 100 ton per day mill. That doesn't sound like much but the Lucky Shot ore averages about an once and a half per ton based on past production. The Lucky Shot was and will one day again be one of the richest gold mines in North America.

There was lots of gold there but guys running oil companies almost always fail when they attempt the gold business. Ensearch drove a 500 meter drift below the Lucky Shot mine and drilled over 3100 meters but couldn't make the mine work economically. They produced but 7,000 tons prior to bailing out of the project in 1985.

Full Metals Minerals
click images to enlarge

Lucky Shot Mine

Old ore cart

Drill core with VG & that travelling bear

Fog stops play

Full Metal Minerals was formed in 2004 with the intention of being a major player in Alaska. They have picked up twelve major projects in the state and are trying to cover all the bases. They have a major gold play called the Lucky Shot deposit which I visited but also they are drilling this year for zinc in the 40 Mile district and drilling a 3,000 meter drill program for uranium in a JV with Triex Minerals in the Nome area this season. They are targeting multiple copper-gold porphyry and epithermal gold prospects on 1.4 million acres of native-owned land on the Alaska Peninsula, funded by JV partner Metallica Resources. They also have what they call the Pebble South land package just adjacent to Northern Dynasty's Pebble project, the largest undeveloped copper/gold project in North America. Pebble South has a 2,000 meter drill program scheduled for 2006.

Their business model calls for them to acquire good projects and joint venture them out, taking a small position in the companies they joint venture with and letting their partners spend their money. Lucky Shot is the exception to the rule but Rob McLeod, VP of exploration, knew what Lucky Shot was and used their chips wisely to drill their top project as a 100% owned deal.

When I got to Anchorage, I stayed at Full Metals in-town house. A young wildly enthusiastic geologist, Andy Angel was going to drive up the next day so I arrived a day earlier than I had planned. Going a day early turned into good fortune. I spent the first day wandering around the property.

The Lucky Shot property is one of those properties where you can see the general outline of the deposit from a hill top a mile away and it becomes very easy to figure out rough limits to the deposit. Believe me, Full Metal doesn't need to drill every ounce to be able to figure it out. they have outlined the general faults which control the deposit and have a real good idea of the ultimate potential. Ounces don't count here, production does.

Full Metal Minerals according to Rob McLeod, does not intend to even try to count every ounce of gold in the hopes of attracting a big brother takeover. They want to count enough ounces for a bankable feasibility study and to go into production. Back of the envelope figures show production of 160,000 ounces per year with a capex of somewhere in the $35 million dollar area with cash costs of $160 per ounce. Rob and his smooth running team have commenced environmental baseline and engineering studies with the hope of getting into production in about 24 months.

Exploration companies in Alaska run into a problem every year. Investors go to sleep in May and don't even start to wake up until at least September. You can come out with the most outstanding drill results in July and you are lucky to change the volume of the snoring. Or worse. On June 27, Full Metal announced incredible results; 51.8 grams to the ton over 4.53 meters true width. That's just short of two ounces to the ton. The stock dropped 7% over the next three days. On July 18th they made another blockbuster announcement, 3.48 meters of 32.8 gram gold. And the shares dropped for two days. You can drill through solid gold bars in Alaska in the summer and no one cares.

But they will, September is just around the corner, and the story is beginning to be understood. The Vancouver sharks may not understand when ounces are important and when they are meaningless but I'd be quite happy to see a production decision made with half a million ounces in the till. I've seen the deposit, there are a lot more ounces waiting to be mined.

The original plan for Lucky Shot for the 2006 season called for a 10,000 meter drill program with 60 holes. Their success so far in both grade and dimension of strike has encouraged Full Metal management to increase the program to 15,000 meters in a minimum of 80 diamond core drill holes.

I was lucky to have gotten the one day of great weather. We got up on the following day and found a blanket of fog covering the entire area. I was really looking forward to a helo flight over the area but time ran short and I had to skip it.

There are probably 15 or so parameters I think about when looking at deposits. The most important in my view is management. Michael Williams is president and CEO of Full Metal Minerals. He is about as experienced in promotion and marketing as anyone in the business even though he's still in his 40s. Rob McLeod is the perfect offset for Michael, Rob was born with a rock hammer in his hand and has the ease of communication when talking about mining that takes a hundred years of experience. His family, the McLeods, go back generations in mining and it's literally in his blood. I know of few mining companies with such a perfectly balanced management team.

The project is near power and infrastructure, the grade is amazing, they hope to have the richest mine in North America. 450 tons per day production will be all it requires to produce 160,000 ounces per year with one ounce gold ore. That keeps the capex down. And the ore is free gold, easy to crush and recover via gravity devices. If they can avoid the need to use cyanide, they can save a lot of money and avoid environmental issues. Historic gold recoveries commonly exceeded 90% recovery (which is damn high) using simple gravity recovery.

If I sound enthusiastic, it's because I am. I loved the project and I love the company. All you are ever buying when you buy a junior is a lottery ticket and you pray for a big payoff. Lucky Shot has already shown the gold potential. Drills are turning as I write on the uranium and the zinc properties and by the end of the summer, the most blasé investor will be blaséd out of his seat with the results.

The stock is up and down like a bride's nightie. I liked it enough to want some shares but the price shot up after my visit and I hate chasing stocks. But a couple of weeks later it got reasonable and I picked some shares up at what I think is a good price. With a $60 million dollar market cap, there is not a lot of downside but there is a lot of upside. Think Exall or Silvercorp.

Tagish Lake Gold Corp

While on the same two week trip, I managed to fit in a quick visit to another beckoning junior gold, Tagish Lake Gold (website). Tagish is located about 40 miles south of Whitehorse just inside the Yukon. Headed by 30 year mining industry veteran Bob Rodger, Tagish has consolidated the entire Skukum District with claims covering 178 square km. Three known and past producing mines have a resource of 1.1 million tons with 7.99 g/t gold and 153.2 g/t silver.

This district isn't as rich as the Willow Creek area owned by Full Metal. You are looking at about 1/4 of an ounce per ton for Tagish as compared to an ounce per ton at FMM. Tagish hopes to be in production by 2008, they have an existing 300 tpd mill which they want to expand to 900 tpd. They require about the same Capex as FMM, $31.3 million.

But to even a greater degree than Full Metal, the stock has slipped under the radar scope of investors and is selling for a give-away $.16 a share. I used to love buying the penny dreadfuls, you could double your money in a week or two. But there aren't many left. Tagish, with a $10 million dollar market cap, is a gimmie.

Tagish Lake Gold Corp.
click images to enlarge

Tagish Lake Gold offices

gold/silver sulfide ore & Ted

Bob Rodger

300tpd mill

Bob at adit

Underground drill

Tagish plans on production in 2008 of 30,000 ounces of gold and 518,000 ounces of silver. This will climb to 110,000 ounces of gold and 920,000 ounces of silver by 2011.

Tagish has spent almost $1 million this year putting in a 350 meter access drift. And there isn't a bit of news in spending that much money to put a hole in the ground. But the 2006 extension allows them to drill from underground and they have a continuous drill program going which will continue to generate drill results.

Drill results bore me, I like seeing vision. In comparison to FMM. Tagish is a base hit while FMM is a home run. But Tagish is $.16 and won't be there for long. Throwing in the return for silver credits, their gold cash costs are about $220. FMM will be a lot lower. But Tagish has a lot better leverage to the price of gold. If you believe as I do that the price of gold is headed higher, much much higher, Tagish could turn into, well, into a gold mine.

We own shares of both companies because we like both companies. The management team at Full Metal is the best I have seen in quite a while. Tagish is loaded with experience and should smoothly make the transition into full production. We are not paid to produce these pieces, we do it because we enjoy it. Before spending your money on anything, including stocks, understand that it's your money and your responsibility.

We are owners and as such are biased. My favorite indicator, the XAU/gold chart has turned positive and I think you can buy precious metals shares with both hands right now. Come September-October, there is an excellent chance that the Gang of Fools in Washington will have started a nuclear war based on the war plans of Paul Wolfowitz in his "Clean Break" written for Israel in 1996. Of course we will lose the war and it will be the end of the US dollar. All I can do is try to warn people. Do your own research and I suspect you will come to the same conclusion as I have.

Full Metal Minerals
FMM-V $2.30 Canadian (August 4, 2006)
29.6 million shares outstanding
Full Metal Minerals

Tagish Lake Gold Corp
TLG-V $.165 Canadian (August 4, 2006)
64.2 million shares outstanding
Tagish Lake Gold

Bob Moriarty
President: 321gold

321gold Inc