This article went out as a Flash Alert to Resource Opportunities subscribers Monday morning. Arcus shares rose 57% to 11 cents Monday, but I believe the stock still has multi-bagger potential at these levels. Subscribe to the newsletter this week to take advantage of a CEO.CA members' special: a 1-year subscription for just $99 (regular price $299 for 1 year and $449 for 2 years). Subscribe at www.resourceopportunities.com and use coupon code SPECIAL to get the discount.

Resource Opportunities Flash Alert
Initiating coverage: Arcus Development Group (ADG-V)

Many Yukon junior mining companies are poised to benefit from Goldcorp’s entry into the Northern territory, in a variety of ways. But perhaps no company is better positioned to do so than Arcus. The company’s Dan Man gold property borders on Coffee’s northern boundary and has drill-ready targets immediately north of the Coffee mineralization.

I’ve had my eye on Arcus since visiting the Yukon last summer and discovering through some digging just how prospective -- and how close to Goldcorp’s recently acquired Coffee project -- their properties are.

But I held off on recommending the stock because Arcus was running on fumes and I expected a long and inactive Yukon winter. Then, Monday morning, Arcus CEO Ian Talbot announced a surprise private placement with Goldcorp that will see the gold mining giant acquire 19.9% of Arcus’s outstanding shares (27.2% including warrants).

Arcus will raise almost $1.4 million through the sale of flow-through and non-flow-through units, priced at 10 cents and 7.7 cents respectively. Proceeds will be used to explore Dan Man and for general working capital. Goldcorp retains the right to maintain its pro rata ownership percentage in Arcus during future financings.

Let’s cut to the chase before zeroing in on some details: Goldcorp’s $520-million takeover of Kaminak and its Coffee gold deposit put a target on Arcus. Goldcorp has now secured a foothold in Arcus, and at a very low price. It’s probably only a matter of time before Goldcorp purchases either the rest of Arcus or Arcus’s Dan Man property, where mineralization extends right to Coffee’s northern boundary.

I believe Arcus shares at these levels offer significant upside potential, and I purchased some Arcus shares Monday morning. I’m a bit surprised at the market’s muted reaction to this deal -- the stock opened at 9.5 cents, traded between .085 and .10 and closed at .11. But the Yukon winter is long. The stock also has some liquidity and catalyst challenges, so patience will be required.

The Arcus financing is similar to the buy-in deal Goldcorp did with Resource Opportunities portfolio company Independence Gold (IGO-V), which is exploring the Boulevard property to the west of Coffee. But there’s one important difference: Goldcorp does not have the right to match any offer for the Dan Man property, as it does with Independence Gold’s Boulevard.

Your author at Goldcorp's Coffee project in July 2016

And there are more synergies between Arcus and Goldcorp. The company’s northern road route from Coffee to Dawson is expected to run directly through Arcus’s Touleary property, which is just across the Yukon River from Dan Man and Coffee. Touleary is a VMS project that saw limited drilling in 2011, as did Dan Man.

Arcus CEO Ian Talbot is a lawyer and exploration geologist who founded the company in 2007. Prior to that he was in-house counsel for BHP Billiton World Exploration until BHP shut down its Canadian office in Vancouver. Arcus IPOed in the fall of 2007 with an exploration project in B.C.’s Golden Triangle and subsequently optioned some projects in Mexico before shifting focus to Yukon’s Dawson Gold district.

Early in his career, Talbot worked at Archer Cathro, the Yukon geological consultancy that has been run for decades by Doug Eaton, the Strategic Metals (SMD-V) CEO. Years after that, Talbot and Eaton met at a social event -- Talbot subsequently became chief operating officer of Strategic Metals and Arcus became part of the Strategic group.

In June 2009, while White Gold fever was high in the Yukon, Arcus optioned 50% of four projects -- the Dawson Gold properties -- from ATAC Resources (ATC-V). One of them, Green Gulch, was completely surrounded by the claims of Underworld Resources, whose White Gold discovery had sparked a modern-day Yukon staking rush (The following spring, Kinross snapped up Underworld’s gold deposit for $139 million). At Green Gulch, some trenching and an airborne magnetometer survey failed to turn up much gold mineralization.

However, limited 2011 drill programs at both Dan Man and Touleary hit pay dirt, albeit in very different ways. Arcus had identified gold-in-soil anomalies in four different zones near Dan Man’s southern boundary with Coffee. Two of the zones were tested with about 1,600 metres of shallow drilling, and Arcus hit gold mineralization at both. Hits in the Kambaa zone included 1.55 metres of 1.18 g/t gold and 4.39 metres of 2.08 g/t. At Kwazulu, Arcus intercepted 37.24 metres of .22 g/t Au and 8.62 metres of 1.63 g/t. All drilling was within about 100 metres of surface. The Rooibos and Bengal zones (see below) were not drill-tested but have promising targets.

As for Touleary, Arcus announced the discovery of the first volcanogenic massive sulphide (VMS) system in the White Gold district in October 2011. About 1,000 metres of drilling took place in a 100m by 300m area within a 1,200-metre zone of coincident geophysical and gold-in-soil geochemical anomalies. Each of the five drill holes intercepted copper-zinc-gold-silver mineralization.

Highlights included:

  • 2.25 metres of 7.18% copper, 4.03% zinc, 3.55 g/t gold and 116 g/t silver
  • 14.15 metres of 1.44% copper, .29% zinc, .77 g/t gold and 16.5 g/t silver.

A cluster of VMS deposits in an area 450 km southeast are hosted in the same stratigraphy as Touleary. The most well-known is Yukon Zinc Corporation’s Wolverine deposit, which has a measured and indicated resource of 4.46 million tonnes grading 12.14% zinc, 1.16% copper, 1.7 g/t gold and 354 g/t silver. Wolverine shut down in January 2015 due to low metal prices.

Despite the promising 2011 hits at both Dan Man and Touleary, the price of gold had already begun its long fall from US$1,900/oz. Arcus shares quickly followed, aside from a short-lived bump in the first two months of 2012. Like many juniors, Arcus went into care and maintenance mode. And that’s where things stood until August 2.

That’s when Arcus announced it was taking full control of Dan Man and Touleary by optioning the other 50% of the properties from ATAC Resources. The price was 10.87 million Arcus shares and 5 million share purchase warrants -- a bit more than $2 million at current prices. Until Arcus’s deal with Goldcorp, the agreement gave ATAC about 19.99% of Arcus’s outstanding shares. ATAC also retains a 1% NSR on any future production from the four Dawson Gold properties.

How close is the mineralization at Arcus's Dan Man project to the Coffee property boundary? Closer than a football field length, closer than a tennis court length. “Spitting distance” might be an exaggeration but not by much.

At Bengal and Rooibos, the two soil anomalies that have yet to be drill-tested, the surface mineralization runs literally to the Coffee boundary. And the hydrothermal gold structures that host the main Coffee deposits -- Supreme, Latte and Double Double, as well as Macchiato, Cappucino and Arabica -- run north-south very close to Dan Man, as illustrated by the map below. That’s very significant -- Coffee is a large 150,000-acre land package.

So Arcus now has some cash, but the days are getting shorter quickly in the Yukon and the long winter looms. Dan Man is an advanced exploration project in the sense that the important groundwork has already been done. Talbot told me in a conversation several months ago -- before Arcus had secured the other 50% of the properties from ATAC -- that he knows exactly what targets he’d like to drill at Dan Man.

But without further news between now and drilling season, there could be little upward pressure on Arcus shares, which are quite illiquid. So chasing Arcus shares will drive the stock up -- it’s one of the conundrums of finding unloved, undervalued junior mining companies.

However, for patient speculators with an eye on long-term value, Arcus’s shares may offer handsome upside potential. Arcus will have 72,178,065 shares out post-Goldcorp financing, and it’s a tightly held play with good insider ownership. Here are a few of the significant shareholders (ownership percentages based on post-closing share totals):

  • Goldcorp 19.9%
  • ATAC 15.8%
  • Arcus CEO Ian Talbot 3.3%
  • Arcus director Gary Paulson 5.2% (Paulson runs Falcon Drilling)
  • Strategic Metals 4.6%

While drilling at Dan Man and Touleary has been limited so far, it’s fair to say that no Yukon exploreco should benefit as directly as Arcus from Goldcorp’s purchase of Kaminak’s Coffee gold deposit. That has yet to be reflected in the share price. Goldcorp executives have described the company’s move into the Yukon as a district play; the foothold deals with Independence Gold and now Arcus demonstrate that approach.

I would be very surprised if Goldcorp does not eventually purchase Arcus, although I don’t know when or at what price that may occur. Goldcorp’s market cap is above $17 billion and Arcus’s is below $6.5 million, so Arcus would be an appetizer even at multiples of the current share price. In the meantime, Arcus has juicy drill targets and is now cashed up for some 2017 drilling -- but only after that long and dark Yukon winter ends.

Arcus Development Group (ADG-V)
Price: .11
Shares outstanding: 57.8 million (72.2 million post-Goldcorp financing)
Market capitalization: $6.36 million
Working capital: $17,700 as of April 30
www.arcusdevelopmentgroup.com

Disclosure: Author owns shares of Arcus Development Group and Strategic Metals is a Resource Opportunities sponsor. Readers are advised that the material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. Junior mining stocks are volatile and unsuitable for many investors. Do your own due diligence.