By The Gold Report

Source: Adrian Day for Streetwise Reports   09/06/2018

Money manager Adrian Day looks at three resource companies in his portfolio with joint-venture announcements.

Evrim Resources Corp. (EVM:TSX.V, 1.31) announced that Newmont Mining had made a strategic investment in the company, buying 4.8 million shares at C$1.50 per share, with 80% of the $7.3 million proceeds earmarked for work on its new discovery, Cuale in Jalisco, Mexico, allowing Evrim to advance the project without a partner or earn-in option.

Big win for Evrim

It’s a great deal for Evrim. It brings its total cash to a little more than C$12 million—some old warrants were exercised earlier in the year—and allows it to advance Cuale without diluting its interest in that property. That is a very healthy balance sheet for a prospect generator exploration company, and provides Evrim with lots of flexibility in advancing the property. The dilution at the company level, around 6%, is modest. Newmont has no rights to the property or the company (other than a Right of First Offer—a ROFO—meaningfully different and less significant than the better-known Right of First Refusal—ROFR). A joint technical team will be established and this could be significant, since Newmont has wide experience in high sulphidation systems; Evrim retains the final say.

Newmont gets a seat at the table and a microscope on the property, potentially influencing the direction of exploration, with no future obligations, as well as the ROFO which could set the timing of a takeover battle (we are getting a little ahead of ourselves here) to its advantage.

There are the usual restrictions on resale of the shares, rights to participate in future equity offerings, and limitations on additional purchases in the market. Newmont and Evrim already work together on a regional generation alliance.

Short delay in exploration

As mentioned earlier (see here for an review of Cuale and here for more on Evrim), the drill permit for Cuale required a small environmental study and more time, leading to the entire exploration program, including trenching, soil sampling and geophysics, being delayed. That work, however, is now well underway, with results expected in stages this month, and drilling (following anticipated receipt of the permit) now expected later in October.

Royalty dispute to be settled?

Other company projects are also advancing. Results of a drill program at the Axe copper-gold porphyry project in British Columbia, funded by its partner Antofagasta, are expected shortly. And Harvest Gold has approved a drill program at Cerro Cascaron, in which it has earn-in rights. Lastly, and perhaps significantly, First Majestic announced it is working to settle the dispute with Evrim over the Ermitano property, adjacent to First Majestic’s Santa Elena Mine and on which Evrim has a royalty interest. This has the potential for relatively near-term cash flow for Evrim.

All the market’s focus at present is on Cuale, but positive developments at other projects—particularly a resolution of the Ermitano dispute—all add value to the company. At a market cap of around C$110 million, there is clearly downside if Cuale proves disappointing, but there is still plenty of upside on positive drill results, and other assets to support the price, while the odds of a bust are relatively low. If you do not own it, Evrim remains a buy.

Nevsun battle begins to pick up

Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT, US$3.78) continues to advance development of the Timok property in Serbia, though Lundin Mining’s hostile bid and moves by Nevsun to find a white knight dominate investor focus as the shares begin to slowly move up above the Lundin bid price.

Friday it was announced that China’s Zijin Mining had won the tender to buy 63% of the Bor mining complex, including the country’s only copper smelter, for $1.26 billion. This potentially has ramifications for Nevsun, though they are purely speculative.

Nevsun is thought to be behind schedule for the 2020 deadline of a full feasibility and associated work necessary to convert its exploration license to an exploitation license. (Nevsun disputes this.) Though it might seem difficult to conceive that Nevsun would lose its license, nonetheless it has already had a one-year extension and the government may take a less lenient approach on further delays, especially with Zijin in the country and hungry for more ore to feed the Bor smelter.

At the minimum, this could be one added factor to get Nevsun motivated to sell. Zijin is believed to be one of the companies that is talking with Nevsun about an agreed takeover of the entire company. Five companies are understood to have made firm proposals for an interest in the company—most likely at 19.9%—with four of those at prices above that represented by the current Lundin bid. Several are understood to be potentially interested in the entire company, with two in more advanced talks.

Significant change in shareholder base

Lundin’s current bid of C$4.76 has been rejected by Nevsun and is widely considered inadequate by Nevsun shareholders, though, as we have discussed, some of the larger institutional holders would be happy with the price for their own peculiar interests. There has also been considerable shuffling of major holders, with London’s M&G and Vanguard reducing their holdings, while Fidelity as well as some hedge funds including Cobas and Passport have added considerably, with many others adding incrementally. Regulatory filings for the end of August, to be released within the next 10 days, should shed more light on this and tell us if these assessments are correct. If M&G—the erstwhile second-largest holder—and Vanguard—the erstwhile sixth largest—have sold, then we might infer that the cap on the stock price has been removed.

Given the floor presented by the Lundin bid—which under Canadian law can only be withdrawn on certain narrow conditions—and the potential upside of a competing bid or raised Lundin bid, the risk-reward in buying Nevsun is very positive. We would continue to buy, always subject to continuing developments.

Newmont to earn into high potential project

Miranda Gold Corp. (MAD:TSX.V, 3—3.5 cents) announced a long-anticipated option agreement on its Lyra project in Colombia with Newmont, which, by spending $600,000 over 18 months, will earn 51%. It will have the right to take its interest to 70% by spending another $7 million over the subsequent four years.

The Lyra project consists of 14 concessions that could offer an extension to Continental’s Buritica deposit, in which Newmont last year acquired a 19% interest. Although very early stage, the project certainly is prospective and Newmont’s interest in the district keen.

And another financing

No sooner had the announcement of the option hit the wires than Miranda announced another $1.5 million private placement. This follows a highly controversial placement at the beginning of the year by which the company paid bonuses to directors and officers to purchase shares in the placement, somewhat negating the point of an “equity raise.” The equity was issued all right, but the “raise” part of the equation was less than initially announced. So with cash down to $600,000 at last quarter end (May 31), another financing was no surprise.

The market did not take well to it, however. After moving up for a couple of hours after the Newmont news, it fell back closing barely above where it has traded before the news. The shares to be issued represent almost 30% dilution—before taking into account the new warrants (and that follows 25% dilution in March). The units have been priced at 4 cents, which may be difficult in the current market.

Alaska project on hold

Separately, Gold Torrent has failed to complete a financing to bring the Lucky Shot project into production, and went into default on an agreement with its largest shareholder. Miranda owned a 30% equity interest and rights to purchase a 3.3% royalty (with monthly installment payments). Now, Miranda has agreed to sign over its equity interest to the new owners, Cartesian Capital, though it retains rights to the royalty. The future is unclear; Cartesian is an investment company not a miner, while Miranda is not in a position to put more money into the project. At minimum—and perhaps in entirety—it holds only part of the royalty (currently 0.4%) on a project that has been postponed indefinitely. We expect further developments on the project, however, as Cartesian looks to recover what it can of its investment and finds someone to take over the project.

At minimum we can say that the early 2017 announcement that financing for Lucky Shot “had been secured” with an expected end-2018 production start was overly optimistic and premature. The nirvana of a self-financing exploration company is also clearly gone.

The Newmont-funded Lyra project is very prospective, so we are holding Miranda for now awaiting exploration work and results. We want to see the financing complete before looking at further decisions.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Evrim Resources and Nevsun Resources. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Evrim Resources, Nevsun Resources and Miranda Gold. I determined which companies would be included in this article based on my research and understanding of the sector.
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( Companies Mentioned: EVM:TSX.V,
MAD:TSX.V,
NSU:TSX; NSU:NYSE.MKT,
)