This article was first published on http://www.criticalinvestor.eu/, a platform for junior mining investors.
1. Introduction
Operating in the Golden Triangle, a prolific zone for copper/gold exploration/production in British Columbia, IDM Mining (IDM.V) is in the process of advancing its small but high grade Red Mountain project in thorough fashion. President and CEO Rob McLeod, member of the well-known mining family McLeod, is running the show near Stewart, the same place he grew up. Coincidentially, Red Mountain was one of the first projects he ever worked on after graduating from college as a geologist. After revamping the predecessor Revolution Resources in 2014, McLeod couldn't resist integrating some family legacy into IDM Mining, as IDM stands for Ian and Don McLeod, Don being his father and Ian his uncle. Other notable names among management and directors are Executive Chairman Michael McPhie and director David Parker.
The company is advancing Red Mountain towards a Feasibility Study (FS) in January 2017, and recently published an updated PEA this month. I'm convinced that FS economics and especially LOM can improve substantially, as I will try to show in this analysis.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.
2. Company
IDM Mining is a gold development and exploration company, which is developing its flagship Red Mountain gold deposit in British Columbia, Canada. The company also holds an extensive portfolio of promising, early stage Yukon exploration claims which once belonged to well-known prospector Shawn Ryan. As the company focuses its attention on Red Mountain, I will not discuss the Yukon portfolio in this article for now.
Red Mountain is a relatively small but high grade underground deposit, with a 0.55Moz @ 7.83g/t Au Measured, Indicated and Inferred resource. The company recently released an updated PEA, with decent economics: the after-tax NPV5 came in at $69M, and the after-tax IRR was actually very good at 32.3%, based on a price of gold of $1250/oz. The issue I had with the updated PEA was the short LOM (5 years) and the relatively high capex compared to NPV. I will discuss the updated PEA later on, including possible improvements for the upcoming Feasibility Study (FS), which is expected in Q1, 2017. Red Mountain has seen C$45M spending to date by various mining companies.
IDM Mining did a relatively large financing of almost C$11M in April this year, as it almost meant as much as the then current market cap at the time, and a doubling of the share count as well unfortunately. However, the resulting treasury of C$10M at the moment provides enough cash to bring Red Mountain through FS and permitting, with sufficient working capital remaining to explore high potential targets at Red Mountain, and to have a look at their Yukon claims (recently acquired extensive Shawn Ryan portfolio) as well. The Environmental Assessment (EA) and permitting on Red Mountain are well advanced, the EA certificate is expected in Q3, 2017. Construction could start by then as well, production is estimated to start in this case in Q3 2018.
Because of this financing, the number of shares is substantial at 220.48M shares outstanding (330.1M F/D), with 7.2M options and 103.3M warrants of which about half are in the money. The company has some impressive shareholders like Osisko Mining (14%), Delbrook Capital (9.8%), Sentry (9.7%), Tahoe Resources(6.6%) and Premier Gold Mines (6.5%).
The current share price is C$0.205, resulting in a market cap of C$45.2M.
As can be seen, the stock performed well on higher gold, and the recently published updated PEA took it to C$0.26. Directly after this there was selling of warrant holders and Osisko Mining selling a small percentage of its huge position, causing downward pressure. In my view this represents a beautiful opportunity to initiate a position or add to it, as the fundamentals didn't change, and if any, got even stronger with exciting sampling news out on July 19, 2016. Management is planning on improving economics in various ways, bringing Red Mountain into production asap, and build out the company from there with internal cash flow.
IDM Mining is operating in a safe, mining friendly jurisdiction, with excellent infrastructure, and is backed by JDS Energy and Mining, an experienced mining advisory firm.
3. Project
The flagship Red Mountain project consists of several deposits (JW, AV, Marc, 141 and 132 zones) containing gold and silver mineralization, in mountainous terrain, located in British Columbia, Canada. The updated 2016 resource estimate defines a resource of 0.44Moz @8.36g/t Au Measured and Indicated (M&I) ounces, and 0.11Moz @ 6.1g/t Inferred (Inf) ounces at a cut-off of 3g/t.
Ownership
The company is on its way to gain 100% ownership of the project this year. On April 15, 2014, IDM Mining entered into an option agreement for the Red Mountain gold project with Seabridge.
The claim title is currently under Seabridge. Upon satisfaction of the option terms, the title will be transferred to IDM. Seabridge owns 100% of the property claims, which are subject to two royalties. Barrick Gold Corporation (Barrick) holds a 1% Net Smelter Return (NSR) royalty, and a 2.5% NSR royalty is payable to Wotan Resources Corp. A $50,000 advance royalty is payable to Wotan annually.
Under the terms of the Option Agreement, IDM issued 4,955,500 common shares and paid $2M in cash and is required to incur $7.5M in exploration and development expenditures over three years by June 4, 2017 ($2.5M per year) to earn a 100% interest in the Red Mountain gold project. IDM has the right to extend the deadline for expenditure of the final $2.5M by one year upon payment to Seabridge of $250,000. At the time of writing (7-24-2016), IDM has incurred expenditures of over $6 million and is expected to fulfill the option requirements by the end of the summer of 2016.
Upon the commencement of commercial production, IDM will make an additional one-time $1.5M cash payment to Seabridge, and Seabridge will also retain a gold metal stream on the Red Mountain gold project to acquire 10% of the annual gold production from the Property at a cost of $1,000 per ounce up to a maximum of 500,000 ounces produced (50,000 ounces to Seabridge). Alternatively, Seabridge may elect to receive a one-time cash payment of $4M at the commencement of production in exchange for the buy-back of the gold metal stream.
Mineralization
The mineralization is described by northwesterly trending and moderately to steeply southwesterly dipping gold and silver bearing iron sulphide stockworks. Pyrite is the predominant sulphide; however, locally pyrrhotite is important. The stockworks zones are developed primarily within the Hillside porphyry and to a lesser extent in rafts of sedimentary and volcaniclastic rocks.
The stockwork zones consist of pyrite microveins, coarse-grained pyrite veins, irregular coarse-grained pyrite masses and breccia matrix pyrite hosted in a pale, strongly sericite altered porphyry. As pyrite can complicate recoveries, this is one of the reasons that current recoveries stand at 89.1%, and not at the more standard 92-95%. Another reason for this is the chosen way of processing in the updated PEA: a flotation/regrind/leach circuit was selected due to estimated lower operating costs of approximately 15%, similar capital costs and slightly lower recoveries when compared to a whole-ore leach plant.
Red Mountain has seen a large amount of drilling over the last 3 decades up to now, about 135,000m. Only 54,373m is used for the latest resource, considering quality issues regarding drill results before 2000. Because of this drilling, understanding of and confidence in the current resource is high. Spacing of the Measured and Indicated resources varies between 25 and 50m which is good for this type of deposit. There has been considerable underground development in the past, as can be seen on this map of the project:
The central decline functions like some kind of necklace, with the deposits on a string. The decline goes down from the existing portal at the Marc Zone to the JW Zone, as can be seen here in the updated PEA mine plan:
Besides the existing decline, a new incline will be added during construction. Mining will start with the Marc deposit, followed by AV, JW and 141. The highest grades are found in Marc, and starting with this has a positive influence on economics. Two underground mining methods were selected based on deposit body geometry and grade of the mineralised zones:
- Longhole stoping (LH) for mining blocks steeper than 55°, which represents about 70% of mineable tonnage.
- Drift and Fill (D&F) for mining blocks with dips of less than 55°, which represents about 22% of mineable tonnage. This is also a selective method, based on a horizontal passage underground (a drift), which follows the ore.
The remaining 8% of the potentially mineable tonnage comes from access and stope cross-cut development.
Cemented and uncemented rock fill will be used as backfill to maximise mining recovery. The initial mine design was based on basic assumptions to generate lower limits for cut-off grades (COG) for the two planned mining methods. A value of 3 g/t Au was determined as the COG for longhole stoping and 5 g/t Au for drift and fill mining.
As mentioned earlier, the resource isn't very large at 0.55Moz Au, and the company is fortunate to have all these underground workings completed. This way they can perform relatively cheap underground drill programs to increase and/or infill drill resources. Step out drilling has been completed, and indicated a large extension of the JW zone:
Looking at the pink mineralized envelope, I'm using the 800m length used by the company, with a width of 200m and an average true width of 2m and an average gold grade of 5 g/t, resulting in about 0.13 Moz Au. IDM also discovered a parallel, towards the decline located, lower grade, thick mineralized 141 Zone, crossing the incline at a distance of about 150m:
Most intercepts have decent grades and are comparable to the already delineated zones, but the 141 Zone needs much more drilling to define more resources, as only a resource of 33koz Au Ind & Inf along 150m strike is defined. Sampling and drilling already indicated a strike length of the 141 Zone of 1500m, and could lead to a much longer life of mine (LOM) in the future. According to management, an updated resource estimate is planned for November 2016.
Underground drilling commenced on July 11, 2016:
There is also much more exploration potential on the claim package of 17,125 hectares, especially with the nearby glaciers retreating at a speed of about 100m per annum on average:
Sampling results of newly exposed areas like McAdam, Lost Valley and Lost Mountain have been published earlier this week, and the results were amazing. The average gold grade was 10.5g/t for all 66 grab-, channel- and float/subcrop samples, also containing on average 81g/t silver and 0.17% Mo. Management was very excited, and an experienced geologist I spoke to who took part in the sampling program couldn't remember such a high grade hit rate on his other projects. Sampling doesn't often correlate directly to actual mineralization, but the first indicators of something potentially very interesting are confirmed.
Maybe a little Brucejack or Deep Kerr in the making as these deposits ultimately showed up after glacial retreats as well in the past? Red Mountain could even serve as a starter mine in order to develop something much larger with internal cash flow later on. Who knows as it is still early days, but I'm looking forward to the drilling of these targets with a lot of interest. Management told me that this would start at the end of August, so the assays could be in 4-6 weeks later. After this project description to get the big picture, it's time to zoom in on the center piece of this article: the updated PEA and the possibilities to improve it.
4. Updated PEA
In order to compare studies, I lined up the 2014 PEA and the 2016 updated PEA in this table:
An after-tax IRR of 32.3% at a gold price of $1250/oz is not bad at all, in fact it is actually very good as mentioned, and to provide some insight in economics at higher prices, I put together this sensitivity analysis:
Things look very robust at first sight, no doubt. However, there are a few figures in the 2016 PEA that caught my attention. For starters, the resource increased since 2014, but the short LOM of 5 years stayed the same. For reference: a decent LOM usually starts at 8 years, as the concept of rolling reserves with a short LOM doesn't really appeal to financiers these days anymore as they like derisked assets. Instead the company increased the annual gold/silver production, which in turn increased capex as well. The capex ($88.9M) remained below the $100M threshold of small projects which should be easier to finance, but it is actually quite a bit bigger than the Net Present Value ($69.3M) at a discount of 5% (NPV5), which is normally a no-go for financiers for precious metals projects. Again for reference: base case after-tax NPV should at least equal capex for a precious metal project. Another issue is the low recovery as mentioned, due to several reasons, as comparable recoveries come in at 93-95% for gold, now they stand at 89.1%.
Besides this, I was wondering if the shift from a 9 month mining/processing schedule in 2014 towards a 8 month mining schedule and a 12 month processing schedule in 2016, increasing the mining equipment with 50% to 1500tpd mining capacity, had a big impact on initial capex.
When looking at capex and sustaining capital, a few items stood out:
Enlarging the mining capacity meant just leasing 50% more mining fleet, which meant an increase of about $5M. Underground mines always have a substantial sustaining capital component, as there is a lot of underground development going on. It isn't unusual for sustaining capital to equal or even surpass initial capex for underground operations. In this case the existing underground development saves a lot of capex/sustaining capital, plus the LOM was short and most ounces could be reached in the 2014 mineplan without having to develop a lot of new underground workings. In the 2016, a lot more underground development is needed because of the mining of much more ounces which are located away from the existing developments. Despite all this, I did believe that the 2014 PEA was very light on sustaining capital, for sure on the part assigned to "Mine".
Other questionmarks were the absence of site development in the 2014 PEA, the very low Indirect/Owners Costs and very low Closure costs, even net of salvage value. Furthermore a current 10% contingency item for a PEA of an underground mining project in mountainous terrain with winterbreak conditions seems low. A standard PEA has a general 25-35% margin of error with a 15-20% contingency, so it seems appropriate, although this PEA is much more advanced than a standard PEA, to apply a 15% contingency in my view.
All this were a lot of remarks and questions, so I asked management about it.
They readily admitted that the 2014 PEA was light on a lot of items notwithstanding smaller production and lower costs compared to the 2016 PEA. For example they added to sustaining capital, site development and owners cost, and besides this, worked out much more engineering, which could possibly shave 6 months off the engineering and development schedule. Management wanted to bring this updated PEA very close to PFS level, so they can go quickly to FS without too much adjustments. This is also the reason they feel confident using intentionally a 10% contingency, and therefore I will use this figure as well for my own estimates later on.
Initial capex items have gone up in costs in the last 6 months or so, when the price of gold ran up quite a lot during that period. The 50% increase in mining rate didn't result in a large increase as the mining fleet is leased, so this contributed to about $5M increase. Improved currency exchange rates didn't help IDM for initial capex, as most items are bought in the US in USD. They are very focused to buy used equipment, but can't use this in economic studies of course.
Biggest eye opener for me was the change of mine plan. Management separated the mining and processing part, in order to increase production, as it wanted to increase annual production, and later on LOM as well as much more mineralized potential is ready to be defined into R&R. This separation was done as the cold climate provided only for 8-9 months of operation at elevation, where the mine portal, mill, processing plant and tailings facility were planned in the 2014 PEA.
In the 2016 PEA, the portal remains elevated but the mill, plant etc is located at a lower elevation where it can run all year at the same capacity. The mining capacity is still restricted at 8 months because of heavy snowfall and avalanche danger during the winter period, so this is increased to 1500 tpd instead of the earlier 1000tpd, in order to provide ore all year to the plant, by stockpiling during mining. By relocating the mill, processing plant and tailings to a lower location, operating time increases but ore trucking time, fuel consumption etc increases too, but the trade-off was easy according to management.
The company did identify the following opportunities to enhance economics, as mentioned in their updated PEA news release:
1. In the spring of 2016, IDM signed an MOU with Bridge Power Corp., an independent power producer with run-of-river hydroelectric generation rights to Bitter Creek. The companies are committed to sharing environmental baseline data, and potentially capital costs for construction of the access road and powerline. This would result in substantial potential cost savings to the Capital and Operating Costs at Red Mountain;
2. Additional Inferred Resources in the JW zone and down-dip tail zones could be potentially converted into mineable ounces through infill drilling;
3. The main mineralized trend is open for expansion along strike to the northwest of the JW Zone, where the mineralized horizon has been traced through drilling for an additional 800 meters. The AV and JW tail zones are open for expansion down-dip, and the 141 Zone is open for expansion to the northwest and southeast. Additional drilling in these areas could potentially expand the resource base;
4. Exploration potential on the property has been greatly enhanced since 1994 by glacial recession surrounding the deposit. A considerable area that was previously under ice is now exposed for the first time and available for exploration proximal to the Red Mountain gold/silver-bearing sulphidation system;
5. The purchase of used processing equipment, which is presently available from several sources, would lower capital costs and shorten engineering, procurement and construction timelines;
After talking to management, and going through the available data, I made the following assumptions on how these opportunities could pan out:
1. I assume $7M cost savings on construction of the access road and powerline, and as fuel is usually 10-15% of cash costs, a $30/oz reduction of opex, resulting in a capex of $81.9M and cash cost of $388/oz, and to account for other unforeseen costs a slightly lower AISC of $550/oz;
2. 130koz added mineable ounces as calculated earlier for the JW extension would result in 480koz gold production;
3. Another conservatively estimated 80koz added mineable ounces for the 141 Zone would result in 560koz production, and an 8 year LOM @70,000oz Au pa;
4. I don't assume any mineable ounces from these new exploration targets;
5. I assume $12M cost savings on used processing equipment, and an increase of $5M for mining fleet leasing, resulting in a capex of $74.9M;
A 10% contingency would result in an initial capex of $82.7M.
These improvements will form the basis of the hypothetical FS in the next paragraph.
5. Hypothetical FS
After making assumptions for several project parameters, it's time to gather all available data and start calculating. This resulted in the following project economic parameters:
The following DCF table generated the new NPV5:
This is the corresponding IRR tabel:
It will be clear that a longer LOM, slightly lower capex and opex make a big difference in case of Red Mountain. The project would go from just above average (taking the very short LOM into account) with a good IRR to industry leading IRR for 50-100koz per annum gold production peers in good jurisdictions with decent LOMs. Purely hypothetical, if it could manage to find even another economic 300koz after an aggressive Integra style multiple rig drill program in let's say a 6-9 month timeframe, it would be truly world class as a 100+ koz pa project. 100 koz pa production is an important threshold for large institutional investors and mine financiers. Such a drill program could cost $5-8M if the same type of mineralization could be found, within 250-300m from surface. For now this is all wishful thinking of course, and obviously all focus is on the upcoming resource update and FS.
When varying the price of gold, this sensitivity analysis is the result:
Such an increase in NPV5 would have big implications for targets, as the NPV would double. An after-tax NPV5 of $137.4M translates into C$178.4M, whereas the current market cap is C$55M. At a gold price of $1350/oz, close to current levels, the NPV5 increases to C$220M. In general, the market cap of a junior with an FS stage precious metals project in a good jurisdiction with excellent economics could easily be valued at 0.5-0.6 times NPV5, and could even fetch a premium when LOM and IRR would indeed become world class, and the new targets McAdam, Lost Valley and Lost Mountain start generating good drill results. Sentiment on gold and the TSX Venture also plays an undeniable role in all this.
6. Conclusion
In my view the updated PEA was a bit disappointing when looking at items like short LOM and relatively high capex vs. NPV, but after the explanation of management I'm convinced they didn't only overhaul the old PEA in every aspect, but also set up Red Mountain with a larger production rate and increased annual production, to accommodate a longer LOM and much better economics in the upcoming FS. I believe that IDM Mining has enough opportunities to indeed succeed in all this, and I am looking forward to the results of the updated resource estimate which is anticipated in November 2016, and the FS in January 2017, to see if they can live up to my expectations or even beat them.
Based on this, the strong management team, cashed up treasury until the end of 2017, the prolific Red Mountain claim area with lots of recently indicated and very exciting exploration potential, and the prospective Yukon claim portfolio which I didn't even discuss, IDM Mining looks very interesting as a long term hold, and could also very well turn out to be an attractive buy out target for the likes of Osisko Mining, First Mining Finance or Premier Gold after the FS comes out.
I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter on my website www.criticalinvestor.eu, and follow me on Seekingalpha.com, in order to get an email notice of my new articles soon after they are published.
Disclaimer:
The author is not a registered investment advisor, and currently has a long position in this stock. All facts are to be checked by the reader. For more information go to www.idmmining.com and read the company’s profile and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.
