The most important factors for mining investors to consider are (in no particular order): Location (jurisdiction risk/infrastructure), grade of resource, size of resource, management team, shareholder structure, price (valuation).
Over the years I have found price and location to be absolutely critical from an investment standpoint. However, the other factors are close behind. When I was looking at new potential investment opportunities in the gold space a couple of months ago a company called Eastmain Resources (TSX: ER, OTC:EANRF) came across my radar and I was immediately impressed by the quality of the company’s project portfolio relative to its market cap. Checkmarks on location, size, and grade. Now it’s time to dig deeper and figure out what’s going on with Eastmain and why it appears to be so cheap and what could get the market's attention and move the needle for Eastmain shareholders in 2019.
Eastmain has 3 primary projects:
- Clearwater Property: EAU CLAIRE: Robust PEA and predevelopment work in progress; PERCIVAL: New gold discovery.
- Éléonore South JV (w/ Goldcorp and Azimut): Moni Trend discovery within a large gold system with high-grade veins; Follow-up includes extensive trenching and drilling.
- Eastmain Mine: Updated mineral resource estimate.
These 3 projects span 533 square kilometers and they are located in an area of Quebec (James Bay) with good infrastructure and in close proximity to Goldcorp’s flagship Eleonore Gold Mine.
Goldcorp’s Eleonore Mine has defined 8+ million ounces of high grade gold (average grade of 6.3 g/t gold) and it sits roughly 50 kilometers north of Eastmain’s flagship Clearwater Property consisting of Eau Claire and Percival. In 2019 alone Goldcorp plans to produce 360,000 ounces of gold at Eleonore, its largest producing gold mine. Eleonore is one of the most profitable gold mines in the world and Eastmain’s gold grades at Eau Claire are comparable to Eleonore’s (more than 6 grams/tonne gold).
Eastmain’s 2018 PEA only considered a stand-alone mill scenario at Clearwater with Eastmain constructing its own mill as part of its capex outlay. There is a potential scenario which would involve shipping ore to Goldcorp’s Eleonore mill which is operating well under its 7,500 tonnes per day capacity. However, even with the assumption that Eastmain will construct its own mill the May 2018 PEA outlined robust economics including a 27% after-tax IRR over a 12 year mine life at a US$574 per ounce all-in sustaining cost (AISC):
The Eau Claire PEA outlined 1 million mineable ounces (70% measured & indicated/ 30% inferred) even though Eau Claire’s updated mineral resource estimate showed 853,000 measured & indicated ounces grading 6.18 g/t gold and an additional 500,000 inferred ounces grading an average of 6.53 g/t gold.
One million mineable ounces grading more than 6 grams/tonne gold is already a very attractive resource, however, it’s Eastmain’s recent Percival Prospect discovery which could be the real game changer for Eastmain. Simply stated, project economics depend greatly upon the production during the early years of the mine life. A substantial economic discovery could mean that Eastmain could ship ore from Percival to Eau Claire (14 kilometers) and potentially double output during the early years of the mine life. And any resource at Percival wouldn’t even have to be that large as long as it was a pretty good grade and near surface.
In November, Eastmain announced two impressive drill intercepts at Percival which caused the market to stand up and take notice. Both intercepts were near surface (beginning 16 meters downhole and 28 meters downhole) and encountered economic grades (1.46 g/t and 2.35 g/t) over a substantial length (78.5 meters and 87 meters). Eastmain CEO Claude Lemasson commented:
“The mineralized zone at Percival represents a brand new discovery. We’re very encouraged by this shallow gold discovery which encompasses a wide mineralized zone with extension potential remaining open to the east and west, as well as at depth. With two additional holes already drilled at Percival with assay results pending, our objective is to continue drilling to expand this discovery and better understand its relationship with another Prospect, the Serendipity zone located 7 km to the north.”
Percival stands to be a game changer for Eastmain and the company has not wasted any time in deciding to aggressively explore this prospect. In December Eastmain announced a three-month, 20-hole (5,500 meters), focused drilling campaign which is set to begin in two weeks. This program is designed to expand on the Percival discovery while further identifying gold mineralization controls and distribution within the argillite-mudstone sedimentary package at Percival. Assuming the Winter 2019 drill program is successful, a second extensive drilling campaign will be planned for the second half of 2019 and will include additional drilling of the discovery area and test additional targets delineated along the KS Horizon (Knight-Serendipity Volcano Sedimentary Horizon), using newly acquired geophysical and soil geochemistry information.
Eastmain is following a well thought out plan to advance Eau Claire to a construction decision by the end of 2021. This plan includes permitting and a bulk sample program in 2020:
Once all mining and environmental permits are received by mid-2021, a construction decision will be made in 2H 2021. Once a positive construction decision is made, production could begin as soon as one year later.
At Eastmain’s current share price of C$.18 the company has a C$40 million market cap and a price to net-asset-value (P/NAV) of .15 based solely on its Eau Claire PEA NAV, not giving the company any credit for its #2 and #3 assets, Eleonore South JV and Eastmain Mine:
This undervaluation can be partially explained by the fact that only about 25% of Eau Claire’s gold resource is open-pit mineable which means that the company will have to go underground to get to the bulk of the gold in the ground - this will be more expensive and take more time, meaning the underground ounces will be extracted later in the mine life (making them less valuable in current dollar terms). However, with a new near surface discovery at Percival, Eastmain now has the potential to add open-pit mineable ounces that can be extracted early in the mine life, substantially improving project economics.
Given Eau Claire’s excellent location and top tier jurisdiction using a US$100 per ounce value for the mineable ounces at Eau Claire is fairly conservative. If we use a $1.30 USD/CAD exchange rate and only base our valuation on 1 million ounces at Eau Claire and give Eastmain zero value for its other assets (which is surely being too conservative) investors would still be looking at more than 200% of upside from current levels. Imagine what could be possible for Eastmain shareholders in the event there is more exploration success at Percival or Eleonore South. The potential upside is considerable and the downside is fairly limited from current levels in my estimation.
In 2019 Eastmain’s objectives are to continue regional exploration at its Clearwater Property (Eau Claire and Percival) while continuing exploration at its Eleonore South JV in order to better understand the 5km corridor between the JT and Moni Prospects (exploration plans for 2019 at Eleonore South will be finalized by the end of the month). Drilling will begin at Eau Claire by the end of January and lots of exploration results will be coming out over the next few months - investors can also expect news on Percival (assays and updated maps) by the end of next week.
Eastmain Resources (TSX:ER, OTC:EANRF)
Shares outstanding: 221.8 million
Options: 12.4 million
Warrants: 6 million
Recent Share Price: C$.175
Market Cap: C$39 million
ER.TO (Daily - One Year)
Disclosure: Author is long Eastmain shares and may buy or sell at any time without notice. The author of this article has not been compensated by Eastmain or any other party to write this article.
The article is for informational purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. Readers of the article are expressly cautioned to seek the advice of a registered investment advisor and other professional advisors, as applicable, regarding the appropriateness of investing in any securities or any investment strategies, including those discussed above. Eastmain Resources is a high-risk venture stock and not suitable for most investors. Consult Eastmain Resources' SEDAR profile for important risk disclosures.
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